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||Neutral Citation Number:  EWCA Civ 679
||Case No: A3/2013/1316
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CENTRAL LONDON COUNTY COURT
Her Honour Judge Walden-Smith
Claim No: 2 CL10343
||Royal Courts of Justice
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE RIMER
LORD JUSTICE SULLIVAN
LORD JUSTICE KITCHIN
|| ASHFAQ AHMED SPAUL
||- and -
||(1) MUSHTAQ SPAUL
(2) A&M PROPERTY CONSTRUCTION SERVICES LIMITED
Peter Knox QC and Asela Wijeyaratne (instructed by Southfields Solicitors) for the Appellant
James Holmes-Milner (instructed under the Bar Council's Direct Access Scheme) for the Respondents
Hearing date: 6 February 2014
HTML VERSION OF JUDGMENT
Crown Copyright ©
Lord Justice Rimer :
- This appeal, brought with the permission of Lewison LJ, is by Ashfaq Spaul, the claimant ('Ashfaq'). The respondents/defendants are his brother, Mushtaq Spaul ('Mushtaq'), and A&M Construction Services Limited ('A&M'). The appeal is against paragraph 2 of an order of 25 April 2013 made by Her Honour Judge Walden-Smith in the Central London County Court dismissing Ashfaq's claim for the re-transfer to him of 50 of the 100 issued shares in A&M that he had transferred to Mushtaq in November 2006. His pleaded case was that there had been a failure of consideration for such transfer, with the consequence that the 50 shares were held on a constructive trust for him.
- The judge found that the shares were not transferred to Mushtaq pursuant to any agreement and that there was thus no failure of consideration. She held that the shares were the subject of a voluntary disposition that could not be set aside, including by reason of any mistake.
- Peter Knox QC and Asela Wijeyaratne, for Ashfaq, neither of whom appeared below, submitted that the judge was wrong to refuse to accept that Ashfaq's claim was established. They submitted that, on the facts found by the judge, Ashfaq was entitled to the return of the shares because their transfer to Mushtaq unjustly enriched him, alternatively because it was vitiated by a mistake that justified its being set aside. It is apparent that Mr Knox argued Ashfaq's case to us in a way that bore little relation to the way it was argued below. James Holmes-Milner, for Mushtaq, who did appear below, submitted that the judge's decision was unimpeachable.
- The facts are extraordinary. Ashfaq's actions leading to the litigation were inexcusable. If they have cost him dear, he has no-one but himself to blame.
The Chancery Division proceedings
- I start with the judgment delivered by Kevin Prosser QC, sitting as a Deputy High Court Judge, in earlier proceedings in the Chancery Division commenced in March 2008. Mushtaq and A&M were the claimants and Ashfaq and AA Property and Constructions Services Limited ('AA') the defendants. The trial took place on 18 and 20 November 2009 and the judge delivered his judgment on 18 December 2009 ( EWHC 3275 (Ch)). There was apparently a further hearing on 25 May 2010, when the judge added to paragraph 29 of his judgment that 'the current ownership of the share capital [of A&M] was not in issue before me and I make no finding about it'.
- The judge explained that in August 2003 Mushtaq and Ashfaq agreed to carry on a property development and letting business through A&M, of which each was originally a director and held 50 of A&M's 100 £1 issued shares. Mushtaq provided A&M's initial funds by a loan of £15,000. He did so in September 2003, when A&M had no bank account. He drew his cheque in favour of A&M and handed it to Ashfaq before going to Pakistan on business. A bank account for A&M was opened in October 2003 but Ashfaq did not pay the cheque into it. He instead paid it into a bank account held by AA. AA is a company he wholly owned and controlled.
- The claim by Mushtaq and A&M was, in part, for the recovery of the £15,000. Ashfaq and AA defended it on the basis of assertions that Mushtaq had agreed that Ashfaq could pay the money into AA's account, alternatively that the claim was 'exhausted' by Ashfaq's subsequent expenditure incurred on behalf of A&M. After hearing oral evidence from the brothers, the judge preferred Mushtaq's evidence on the first point, for reasons explained in paragraphs 17 to 19 of his judgment. He dealt with Mushtaq's 'exhaustion' point in paragraphs 24 to 30 and held there was no substance to it. By paragraph 2 of his order of 12 January 2010, he ordered the payment to Mushtaq of £15,000 with compound interest at 4% from 30 September 2003.
- The other question in the proceedings, of more present materiality, arose out of A&M's purchase in April 2004 of a freehold property at 209 Clapham Road, London SW9 ('No 209') for £505,000, a purchase financed in part by a loan from the Bank of Cyprus secured by a charge over No 209 and also by guarantees from Mushtaq, Ashfaq and AA. The dispute followed A&M's transfer of No 209 on 21 November 2006 to AA for no consideration. That transfer had been procured and executed by Ashfaq in his capacity as, by then, the sole director of A&M, Mushtaq having resigned as a director on 1 September 2004. No 209 was registered in AA's name on 23 November 2006. AA later paid off the Bank of Cyprus loan with a loan from National Westminster Bank Plc ('NatWest') secured by a new charge over No 209. Further claims in the Chancery proceedings by Mushtaq and A&M were for a declaration that AA held No 209 on trust for A&M and for remedies against Ashfaq for breach of trust and fiduciary duty in effecting the transfer to AA.
- Ashfaq's and AA's defence to that claim was, or had been, that the brothers had orally agreed to the transfer to AA, which Mushtaq denied. Events at the trial took a significant turn, however, following the raising by Mr Holmes-Milner in his skeleton argument for A&M of the point that, irrespective of any such alleged agreement (as to which the judge made no finding), the transfer to AA was void because as at 21 November 2006 A&M had no distributable reserves and so could not lawfully transfer No 209 to AA for no consideration.
- Ashfaq and AA conceded the correctness of that assertion at the trial and also admitted the claimants' entitlement to a remedy for breach of trust and fiduciary duty. In consequence of their concessions: (i) paragraph 1 of the judge's order declared that AA held No 209 on trust for A&M absolutely; (ii) paragraph 3 directed an inquiry as to Ashfaq's and AA's dealings with No 209 and required them to account to Mushtaq and A&M accordingly, in particular for all rents and other profits received in respect of No 209; (iii) paragraph 4 entered judgment for A&M against Ashfaq for damages for breach of trust and fiduciary duty, to be assessed; and (iv) paragraph 5 referred the inquiry and damages assessment to the Master for directions. A transfer of No 209 to A&M was executed by AA and sent to A&M on 11 March 2010, but because of a continuing dispute between the brothers, it has not been registered and No 209 remains vested in AA: the dispute is as to what is required to redeem the NatWest mortgage so that A&M can take free of it.
The County Court proceedings
- These are the proceedings with which the appeal is concerned. They were brought by Ashfaq, who issued his claim against Mushtaq and A&M on 29 March 2010. He asked for the partial setting aside of a transfer of all 100 issued shares in A&M he had made to Mushtaq, namely as to 50 such shares: he does not dispute that the other 50, even when held by him, always belonged beneficially by Mushtaq. It is relevant to see how Ashfaq pleaded his claim.
- Paragraph 1 pleaded the incorporation of A&M in August 2003. Paragraph 2 asserted that 'the intention was that [it] would be run as a quasi-partnership with both brothers being Directors and equal shareholders with equal rights to take part in the management of [A&M]'. Paragraphs 3 and 4 pleaded how each brother became a director and held 50 of A&M's 100 issued shares. Paragraph 5 pleaded A&M's purchase of (a) No 209, and (b) 244 Haydons Road, Wimbledon SW19 ('No 244'). Paragraph 6 alleged Mushtaq's transfer to Ashfaq on about 1 September 2004 (by when Mushtaq had resigned as a director) of his, Mushtaq's, 50 shares in A&M, the pleaded reason being that Mushtaq 'did not wish to show his shareholding as one of his assets in connection with [his then pending divorce] proceedings.' I add that Mushtaq disputed that assertion: his case was that Ashfaq had forged the transfer of his 50 shares. Whatever the truth about how all 100 shares came to be held by Ashfaq, neither Mr Prosser in the Chancery proceedings nor Judge Walden-Smith in the county court proceedings made any finding about it.
- I should set out paragraphs 7 and 8 in full:
'7. During 2005 it became apparent that [Ashfaq] and [Mushtaq] could no longer agree in connection with the management of [A&M] and that there would have to be a division of the properties between them. It was agreed in principle that [Mushtaq] should have [No 244] (the more valuable property) and [Ashfaq], [No 209]. However, it was clear that accounts would have to be taken so that the necessary financial adjustments could be made based on the contributions the brothers had made.
8. [Ashfaq] and [Mushtaq] could not agree about the sums respectively due to them. However, in November 2006 they agreed that [No 209] should be transferred to a company controlled by [Ashfaq], namely [AA]. It was also agreed that [Ashfaq] would transfer his entire shareholding in [A&M] to [Mushtaq].'
The paragraph 7 allegations are of particular relevance to the appeal.
- Paragraph 9 pleaded that '[p]ursuant to that agreement' (a reference to the agreement alleged in paragraph 8), Ashfaq transferred No 209 to AA, which was registered at HM Land Registry on 23 November 2006. That was the transfer that Ashfaq had conceded in the Chancery proceedings to be void.
- Paragraph 10 pleaded that on about 28 November 2006, by a stock transfer form of that date, Ashfaq transferred the 100 issued shares he held in A&M to Mushtaq and that he then resigned as a director of A&M 'on or before the 2nd January 2007'. Paragraph 11 pleaded that the stock transfer form wrongly stated the consideration for the transfer to be £100, whereas 'in fact the consideration for [it] was the transfer by [A&M] of [No 209] to [AA].' I add that, on 30 November 2006, Mushtaq consented to his re-appointment as a director of A&M.
- Paragraphs 12 to 14 pleaded Mushtaq's denial of 'the aforesaid agreement' with Ashfaq (again, a reference to the paragraph 8 agreement), and also pleaded the Chancery proceedings and their outcome as regards No 209, namely a declaration that AA held No 209 upon trust for A&M absolutely. Paragraph 15 pleaded that, upon the request of the solicitors for Mushtaq and A&M, Ashfaq's solicitors had sent them a Land Registry Form TR1 transferring No 209 to A&M. Paragraph 16 alleged that it followed that the consideration for the transfer of No 209 to AA had wholly failed in so far as it related to 50 of the A&M shares. Paragraph 17 pleaded the defendants' refusal to effect a re-transfer of the 50 shares and their assertion that Mushtaq was beneficially entitled to the entire shareholding. Paragraph 18 alleged in the alternative that Mushtaq held 50 A&M shares on a constructive trust for Ashfaq. The prayer asked for a setting aside of the transfer of the 100 shares in A&M as regards 50 of them, and/or an order for a transfer of 50 shares to Ashfaq, and/or an order under section 125 of the Companies Act 2006 rectifying the register of members of A&M so as to show the brothers as each entitled to 50 shares.
- There is no need to refer to the Defence as fully, but it is at least relevant to note that it denied the agreement 'in principle' pleaded in paragraph 7 of the particulars of claim, the 'agreement' pleaded in paragraph 8 and Ashfaq's claimed right to have the 50 shares re-transferred to him.
The judge's judgment
- We do not have an approved transcript of the judgment: we were told that the tapes of the proceedings had been wholly corrupted. Nor, therefore, do we have a transcript of the proceedings themselves, which might have been helpful when considering some of the arguments on the appeal. All we have is counsel's agreed note of the judgment, approved as revised by the judge. It is an apparently excellent note.
- The judge had before her for trial not just Ashfaq's shares claim, but also the determination of the outstanding issues in the Chancery proceedings, which had been transferred to the county court, namely, the inquiry, account and damages assessment ordered in paragraphs 3 to 5 of Mr Prosser's order (see paragraph 10 above).
- The judge said that, as regards Ashfaq's claim for the recovery of 50 shares in A&M, his case was advanced on the basis of a total failure of consideration or on the basis that he was the beneficial owner of 50 shares. In paragraph 5, she said there was 'no claim, or no pleaded claim, by [Ashtaq] that Mushtaq was unjustly enriched by the transfer of the shares'. In addition to there being no pleaded claim, nor was there any reference to unjust enrichment in Ashfaq's counsel's opening skeleton argument. Paragraph 58 of his closing submissions, to which I come later, did however suggest that Ashfaq's case could be made on the grounds of unjust enrichment.
- The judge outlined the background, explaining the commencement of A&M's operations in the autumn of 2003 and the saga in relation to the £15,000. In paragraph 9, she described the purchase by A&M in November 2003 of No 244 for £354,000 plus costs of some £12,400, a purchase financed as to £121,400 by A&M and £245,000 by a loan from Barclays Plc secured by a charge. In paragraph 10, she described A&M's purchase of No 209 for £505,000 plus costs of £33,108, financed as to £118,000 by A&M and £420,000 by a loan from the Bank of Cyprus secured by a charge (figures which appear to leave £108 unaccounted for).
- The judge said that on about 1 September 2004 Mushtaq transferred his 50 shares in A&M to Ashfaq, who asserted that this was with a view to concealing Mushtaq's shareholding from his first wife, and that 'Mushtaq says that Ashfaq was making free with the business.' In paragraph 13 she described how the Bank of Cyprus charge over No 209 was redeemed in 2006 following the making of two substantial payments totalling £446,891.90 by AA prior to a re-mortgage to NatWest. In paragraph 13, she referred to the transfer of No 209 to AA on 21 November 2006 and its registration in AA's name on 23 November. I add that it is not suggested that Mushtaq knew anything about that transfer until, on 19 January 2007, Ashfaq wrote a letter to Russell Cooke, Mushtaq's solicitors, in which he said he had made that transfer, although he did not say when he had done it. Nor did he there say anything about having transferred all the A&M shares to Mushtaq; and it is also not suggested that Mushtaq knew anything about such transfer until about late January 2007.
- The judge dealt in paragraphs 15 to 42 with the breach of trust and fiduciary duty matters remitted to her in the Chancery proceedings, with which this appeal is not concerned. I record, however, that they resulted in an order for the payment by Ashfaq and AA to A&M of £229,616, including interest, by 9 May 2013, none of which has been paid. Nor have Ashfaq or AA paid A&M any of the 80% of the costs of that part of the claim (or the £18,000 on account) the judge ordered them to pay, any more than Ashfaq has paid the costs he was ordered to pay in respect of his claim for the shares.
- The judge turned to Ashfaq's claim for the recovery of 50 shares in A&M. She summarised his pleaded case, noting that although he had pleaded that the consideration for the transfer of the 100 shares to Mushtaq was the transfer to AA of No 209, Ashfaq had conceded in the Chancery proceedings that the transfer was void. In paragraph 46, she said that Mushtaq's defence was that there was no agreement between the brothers for the transfer of No 209 to Ashfaq and of No 244 to Mushtaq and that Ashfaq had 'jumped the gun'. She said that Mushtaq's case was that:
'46. There were communications where both [brothers] recognised that the relationship had broken down and that they needed to divide the assets between them but they had not come to a final agreement as Mushtaq wanted his capital investment out of the company. That was the stumbling block.'
- I now set out the remainder of the material part of the judge's judgment, which summarised her findings of fact and reasons for her conclusion:
'49. Ashfaq's case is that in 2006 there was plainly a lot of movement between the parties when their relationship broke down. AA discharged the Bank of Cyprus mortgage on [No 209]. The void transfer of [No 209] to AA took place for nil consideration. At about that time the 100 issued shares were transferred to Mushtaq. Ashfaq resigned as a director of A&M by January 2007. The consequence, Ashfaq says, is that Ashfaq and AA were in possession of [No 209], then unencumbered by the Bank of Cyprus loan, which was in his control. [No 244] was in the possession of A&M and Mushtaq which, with all 100 shares in Mushtaq's name, was in his control. It was said to be a clean break between brothers where the relationship couldn't continue. It is, as has been said by counsel for Ashfaq, entirely logical.
50. The difficulty for Ashfaq is that the evidence available including evidence in the High Court bundle establishes that while the parties were grappling to find resolution to their differences so that they could walk away each enjoying part of the assets, no concluded agreement had in fact been reached. The pleading of Ashfaq suggests that there was no concluded agreement until one comes to the point where [in paragraphs 7 and 8 of the particulars of claim] it is said that they agreed to transfer [No 209]. In my judgment paragraph 7 is likely to be correct. Paragraph 8, however, the next step, is not supported by the evidence available. In my judgment there was no concluded agreement for the properties to be transferred in the manner suggested. The brothers were edging towards some sort of settlement involving a division of the assets or potential sale. The letter from Russell-Cooke of 28th September 2006 which set out proposals for settlement suggests that Mushtaq was unaware his 50% shareholding had been transferred to Ashfaq.
51. A meeting of the board of directors took place on 4th January 2007. It is clear from the letter of [Ashfaq] dated 19th January 2007 that agreement could still not be reached at that time. It says at the end of the letter "… you will recall I left …". The draft minutes of the meeting drafted by Sarah Jamieson, the solicitor acting for Mushtaq, sets out a proposal for sale of both properties. It is clear from that correspondence and the document that the position was not in fact as said in paragraph 8 of the Particulars of Claim, ie a concluded agreement. I find, as suggested on behalf of Mushtaq, that Ashfaq had indeed jumped the gun. He transferred [No 209] to himself because he saw that as the best way forward. The difficulty for Ashfaq is that Mushtaq was not agreeable. The determination with which Mushtaq was dealing with the recovery of his own money was plain from his oral evidence. It became a repeated mantra: "what happened to my money?"
52. In Ashfaq's letter of January 2007 he refers to a potential agreement for the transfer of property but as I have said no concluded agreement was ever reached. The transfer of [No 209] was void. The transfer of shares to Mushtaq made by Ashfaq in light of the transfer of [No 209] was a voluntary disposition of the shares. There was no consideration for the disposition of [No 209]. Nothing in the documents before me or evidence of Mushtaq or Ashfaq suggests that Ashfaq would retain an equitable interest in the shares after transfer. As a voluntary disposition of the shares Ashfaq may well have been acting under the mistaken belief that it was necessary.
53. But a mere disposition of property, including shares, by mistake is not sufficient to give rise to jurisdiction to set aside the disposition. Something more is required so as to undermine the gift. This principle has been dealt with most recently by the Court of Appeal in Pitt v. Holt  Ch 132 with reference to the test in Ogilvie v. Littleboy (1897) 13 TLR 399. In the judgment in Ogilvie Lindley LJ said at 13 TLR 400:
"Gifts cannot be revoked, nor can deeds of gift be set aside, simply because the donors wish they had not made them and would like to have back the property given. Where there is no fraud, no undue influence, no fiduciary relation between donor and donee, no mistake induced by those who derive any benefit by it, a gift, whether by mere delivery or by deed, is binding on the donor. …
In the absence of all circumstances of suspicion a donor can only obtain back property which he has given away by showing that he was under some mistake of so serious a character as to render it unjust on the part of the donee to retain the property given to him."
54. The test was formulated in Pitt (at paragraph 210) thus:
"I would therefore hold that, for the equitable jurisdiction to set aside a voluntary disposition for mistake to be invoked, there must be a mistake on the part of the donor either as to the legal effect of the disposition or as to an existing fact which is basis to the transaction. (I leave aside cases where there is an additional vitiating factor such as some misrepresentation or concealment in relation to the transaction, among which I include Dutton v. Armstrong.) Moreover the mistake must be of sufficient gravity as to satisfy the Ogilvie v. Littleboy test, which provides protection to the recipient against too ready an ability of the donor to seek to recall his gift. The fact that the transaction gives rise to unforeseen fiscal liabilities is a consequence, not an effect, for this purpose, and is not sufficient to bring the jurisdiction into play.'
55. In this case in my judgment Ashfaq has been caught by his own anxiety to move things along in the way he wished, dictating terms to his brother without Mushtaq's consent or agreement and thereafter gifting shares which should have been held 50/50 but were all in Ashfaq's possession due to an earlier transfer to himself. The transfer of 100 shares was something he did to move forward ignoring the fact that the issues were not resolved particularly regarding the recovery of Mushtaq's initial investment.
56. In my judgment, given the manner in which his claim is put, Ashfaq cannot now seek to have the share transfer set aside and cannot seek to impose a constructive trust upon [the shares]. He gifted them and has to stand by that fact. In consequence I refuse Ashfaq's claim for the return of the shares.'
- Mr Knox, for Ashfaq, advanced the appeal on two grounds. First, he said the judge was wrong to characterise the transfer of Ashfaq's 50 shares to Mushtaq as a gift. She had found the transfer to have been made in light of the agreement 'in principle' pleaded in paragraph 7 of the Particulars of Claim and thus in exchange for No 209. In the circumstances, the transfer of the 100 shares was made on what Mr Knox said was a 'failure of basis', so entitling Ashfaq to have it set aside, or rescinded, as regards 50 shares. He said that any such setting aside should be declared to be with effect either from 30 January 2007 (when Mushtaq, by then the sole director of A&M, signed a share certificate that acknowledged him as their holder), or at the latest from 20 November 2009 (the second day of the Chancery trial), when the concession was made that the transfer of No 209 was void. He also said that there should be a declaration that the 50 shares were held from either date on a constructive trust for Ashfaq. The need for that was, said Mr Knox, in case at some point since the transfer A&M had declared dividends in respect of the shares, on which Ashfaq did not wish to miss out. Although No 209 has still not been re-vested in A&M, because of the dispute as to what is payable to NatWest to redeem the mortgage, Mr Knox said that had no relevance to Ashfaq's claim for the re-transfer of the shares: that dispute had to be resolved by the taking of an account. It was also said to be irrelevant that Ashfaq had not satisfied the money judgments in favour of A&M that the judge had made against him. That is probably formally right, since we are concerned with the correctness or otherwise of the judge's dismissal of the shares claim, to which Ashfaq's defiance of her other orders cannot be material.
- In developing this submission, Mr Knox referred us to how Ashfaq had pleaded his case in the particulars of claim, although in my view they include nothing of any help to it. Whilst the judge found proved the paragraph 7 'agreement in principle' that Mushtaq should have No 244 and Ashfaq No 209, that agreement was not alleged to have said anything about the transfer of shares in A&M; and Mr Knox accepted, as he had to, that the judge rejected the making of the agreement alleged in paragraph 8, namely one for the transfer of No 209 to AA in exchange for a transfer of Ashfaq's 50 shares to Mushtaq. Although Mr Knox advanced temperate submissions to the contrary effect, it is clear that the rest of Ashfaq's pleaded case proceeded on the basis that he and Mushtaq had made the paragraph 8 agreement, whereas the judge found they had not. When, therefore, paragraph 16 pleaded a total failure of consideration for the transfer of the shares (because the transfer to AA of No 209 had been held to be void), what was being pleaded was a total failure of the consideration for such transfer under the non-existent paragraph 8 agreement. The judge proceeded on the basis that, as Ashfaq had failed to prove that agreement, his claim that there was a total failure of consideration for the share transfer must also fail. He was thus left only with a submission that his transfer of the 50 shares was a voluntary disposition, or gift, that should be set aside on the basis that it was made under a mistake. The judge, however, held that it could not.
- Mr Knox's submission in response to that was that judge made the error of moving from her rejection of any paragraph 8 agreement to the false conclusion that the only remaining explanation of the transfer was that it was a gift. He referred us to Halsbury's Laws of England, 5th Edition, Vol. 52, where at, paragraph 201, a gift between living persons is explained as a transaction where something is voluntarily and gratuitously transferred by one person to another with the full intention that the thing shall not return to the donor. He said the notion that, given the acrimony between these brothers, either would have given his shares in A&M to the other was pie in the sky. Ashfaq may, as the judge found, have sought to dictate what was to happen and thus have 'jumped the gun'. But this did not mark the end of Ashfaq's case.
- In seeking to make that good, Mr Knox accepted that the 'agreement in principle' did not go beyond a general agreement to divide Nos 209 and 244, and did not extend to the transfer of the A&M shares. But he said that even though the share transfer was the consequence of Ashfaq's dictation of his own terms to Mushtaq (of which, at the time, Mushtaq knew nothing), Ashfaq was nevertheless entitled, in the events as they happened, to recover the shares on the ground of the failure of the basis upon which Ashfaq had transferred them. In identifying that 'basis', Mr Knox said it was legitimate not just to look at the events of November 2006 (when No 209 was transferred to AA and the shares were transferred to Mushtaq), but also to those of January 2007 when Mushtaq (a) was told by the letter of 19 January of the transfer of No 209 to AA, and (b) accepted the 50 shares by signing the share certificate on 30 January. So, it was said, by February 2007 Mushtaq must be taken to have accepted the basis on which Ashfaq transferred the shares to him.
- Mr Knox referred in support of his submission to this general statement in The Law of Unjust Enrichment, Goff & Jones, 8th Edition, at 12-01:
'… The core underlying idea of failure of basis is simple: a benefit has been conferred on the joint understanding that the recipient's right to retain it is conditional. If the condition is not fulfilled, the recipient must return the benefit. The condition might take one of a variety of forms. For instance, it might consist in the recipient doing or giving something in return for the benefit (hereafter referred to as "counter-performance"). Alternatively, the condition might be the existence of a state of affairs, or the occurrence of an event, for which the recipient has undertaken no responsibility. Failure of basis is, therefore, to be distinguished from unjust factors that focus on whether the payment is truly voluntary (such as mistake, duress, etc). In failure of basis cases, the claimant's intention to confer the benefit is genuine, but it is conditional.'
- Mr Knox also referred us to the succeeding paragraphs 12-10 to 12-15 in Goff & Jones; to the obiter observations of Lord Goff of Chieveley in Westdeutsche Landesbank Girozentrale v. Islington Borough Council  AC 669, at 683C to G; and, perhaps more pertinently, to the decision of the High Court of Australia in Alexander Garnet Roxborough & Ors v. Rothmans of Pall Mall Australia Limited  HCA 68, where Gleeson CJ, Gaudron and Hayne JJ said in their joint judgment for the majority:
'16. Failure of consideration is not limited to non-performances of a contractual obligation, although it may include that. The authorities referred to by Deane J, in his discussion of the common law count for money had and received in Muschinski v. Dodds (1985) 160 CLR 583, at 619-620 show that the concept embraces payment for a purpose which has failed as, for example, where a condition has not been fulfilled, or a contemplated state of affairs has disappeared. Deane J, referring to "the general equitable notions which find expression in the common law count", gave as an example "a case where the substratum of a joint relationship or endeavour is removed without attributable blame and where the benefit of money or other property contributed by one party on the basis and for the purposes of the relationship or endeavour would otherwise be enjoyed by the other party in circumstances in which it was not specifically intended or specially provided that that other party should so enjoy it". In the case of money paid pursuant to a contract, it would involve too narrow a view of those "general equitable notions" to limit failure of consideration to failure of contractual performance.'
- Mr Knox also referred us to what Gummow J, also in the majority, said on the topic:
'101. The term "failure of consideration" is used in the law to mean several things. The point was made as follows by Stoljar, The Doctrine of Failure of Consideration, (1959) 75 Law Quarterly Review 53, at 53:
"First, a consideration fails because the defendant's promise is insufficient or illusory or formally void, the failure thus being an initial invalidity preventing a contract being formed. Secondly, we say that the consideration fails where a promisor fails to perform; the failure is now simply a breach of contract, though usually a substantial or important breach. But thirdly, failure of consideration has also a much older and specialised sense, one that describes a specific remedy when, upon the collapse of a bargain, the promise seeks to recover money had and received by the promisor. Thus failure of consideration specifies not only a claim, but also the particular basis of that claim". (footnotes omitted)
102. It is the third meaning with which this litigation is concerned. But what is meant here by the term "consideration"? It is important to appreciate that, although this often is the case, the "bargain" referred to in describing failure of consideration need not be contractual in nature. For example, in Martin v. Andrews (1856) El & Bl 1 [119 ER 1148], the Court of Queen's Bench upheld a declaration for money had and received to recover conduct money tendered with a subpoena ad test where the case was settled before trial. Lord Campbell CJ said:
"The consideration has failed. The money is paid for the purpose of defraying the expences [sic] of the witness's journey: if there is no journey there is no expence [sic], and the consideration fails; and then an action lies for money had and received. There is indeed no express authority: but the general principles upon which that action is maintained are applicable."
The references to "purpose" and to "general principles" are significant.'
- Mr Knox emphasised that the judge had made no finding of fraud or dishonesty against Ashfaq. He said that, if there had been an agreement for the exchange of No 209 against a transfer of the shares, there would be no doubt that, upon the realisation that the transfer of No 209 was void, Ashfaq would be entitled to have the agreement unscrambled by the return of his 50 shares. Why, he asked, in circumstances in which the shares were transferred pursuant to an 'agreement in principle', on a basis which also wholly failed, should Ashfaq not equally be entitled to their return? For what he suggested was a supporting analogy, he referred us to William Lacey (Hounslow) Ltd v. Davis  1 WLR 932, in which Barry J said, at 939:
'I am unable to see any valid distinction between work done which was to be paid for under the terms of a contract erroneously believed to be in existence, and work done which was to be paid for out of the proceeds of a contract which both parties erroneously believed was about to be made.'
- Mr Knox said the judge was therefore wrong to hold that the transfer was a gift; and wrong to hold that this was not a case in which an obligation should have been imposed on Mushtaq to return the shares. In addition, Mushtaq freely accepted the shares in the knowledge of the basis upon which the transfer was made and advanced no complaint about the transaction until over a year later.
- Mr Knox's second, and subsidiary, submission was that, if the transfer was correctly categorised as a gift, the judge was wrong to conclude that it could not be set aside as made under a mistake. The mistake was he said, as the judge found in paragraph 52, that the transfer of the shares was 'necessary'. Further, she had held, in paragraph 51, that Ashfaq had found that the course he adopted was 'the best way forward', whereas Mr Knox said it obviously was not (just look at what happened). The essence of his point was that Ashfaq was said to have mistakenly believed that the share transfer to Mushtaq had to be made in exchange for what he had believed was a valid transfer by A&M to AA of No 209. A third mistake was, suggested Mr Knox, that Ashfaq believed that A&M had the power to transfer No 209 to AA, although he acknowledged that the judge made no finding as to that. He referred us to the decision of the Supreme Court in Pitt and another v. Holt and another  2 AC 108, which post-dated the judge's decision, in particular to the conclusion of Lord Walker of Gestingthorpe as to the basis on which the court's jurisdiction to set aside a transaction on the basis of a mistake arises. After referring to proprietary estoppel, in relation to which Lord Walker said that 'the fundamental principle that equity is concerned to prevent unconscionable conduct permeates all the elements of the doctrine. In the end the court must look at the matter in the round', Lord Walker continued:
'128. In my opinion the same is true of the equitable doctrine of mistake. The court cannot decide the issue of what is unconscionable by an elaborate set of rules. It must consider in the round the existence of a distinct mistake (as compared with total ignorance or disappointed expectations), its degree of centrality to the transaction in question and the seriousness of its consequences, and make an evaluative judgment whether it would be unconscionable, or unjust, to leave the mistake uncorrected. The court may and must form a judgment about the justice of the case.'
- Mr Holmes-Milner, for the respondents, reminded us of the nature of Ashfaq's pleaded case in particular paragraph 7, which was an agreement in principle as to outcome, not as to the method by which it might be achieved: the paragraph 7 agreement was therefore no more than an expression of hope; and the last sentence of paragraph 7 asserted that accounts would have to be taken so that financial adjustments could be made based on the brothers' respective contributions to A&M. Paragraph 16 alleged a total failure of consideration only under the agreement alleged in paragraph 8, which was not established.
- Ashfaq's transfer of the shares to Mushtaq was not, therefore, pursuant to the paragraph 7 'agreement in principle', nor did the judge find it was. Whilst she found that that such agreement was made, it said nothing about a transfer of shares, which in paragraph 52 the judge said was 'made by Ashfaq in light of the transfer of [No 209 and] was a voluntary disposition of the shares.' They were not, therefore, transferred under the 'agreement in principle' or any agreement. There was no agreement in relation to the transfer of the shares such as to provide a foundation for Ashfaq's case to us that there was a 'failure of basis' for their transfer.
- Mr Holmes-Milner referred to the ways in which Ashfaq's case had been made to the judge in opening and closing in counsel's skeleton arguments. The opening submissions included the following:
'50. As a division of the spoils pursuant to an agreement for the same this all makes sense. It is Ashfaq's case that this is precisely what happened – as set out in his particulars of claim … If this is correct, his transfer of the entire shareholding between the brothers as to the division of the properties in which they had jointly invested, or in the alternative it was the product of a more definite agreement to the same end, the consideration for each side being the transfer of ownership of property and/or shares to the other. …
54. It follows that the evidence discloses that the share transfer was pursuant to an arrangement between the brothers to provide for rough equality between them. Whether as a contract for which consideration has failed, requiring the transfer to be set aside insofar as it relates to 50 of the shares, or as a constructive trust based upon the agreement, arrangement or understanding of the brothers, it is submitted that where the anticipated transfer of [No 209] for the benefit of Ashfaq has proved to be void, the contract or arrangement has failed and equity should intervene to provide the relief sought by Ashfaq. To do otherwise would be to leave Mushtaq beneficially entitled to [one and a half] properties and Ashfaq just [half] a property, which appears to confound both analysis of the surrounding circumstances and equity.'
- That was the case made before the evidence was examined at the trial. Insofar as it was implicit in it that there had been an 'agreement, arrangement or understanding' between the brothers for a transfer of No 209 to Ashfaq in exchange for a transfer of Ashfaq's 50 shares in A&M to Mushtaq, there was none. Counsel's closing submissions included the following propositions:
'53. Furthermore, it appears to be common ground that the events of 2005-6 took place against a breakdown in relations between the brothers. It is in the circumstances hard to imagine why Ashfaq might wish to make a gift to his brother of the shares, and therefore the property, and far easier to imagine the division of the spoils alleged by him. …
58. It is then asserted that there was no intention that Ashfaq should retain an interest in the shares. That is indeed correct, provided he acquired the interest for [AA] in [No 209]. That "consideration" (in the loose sense) having failed, an essential element of his agreed disposition of his interest is removed. The shares were accordingly received by Mushtaq in circumstances where his share of the bargain, or agreement arrangement or understanding (on Ashfaq's case) was not fulfilled. Whilst unjust enrichment has not been specifically pleaded, there is a clear case to hold that he retains 50% of those shares upon trust for Ashfaq.
63. … Having received advice and paid very substantial sums indeed to redeem the Bank of Cyprus mortgage, Ashfaq proceeded as he did on the mistaken understanding that as a quid pro quo for the disposition of a valuable shareholding, carrying with it the valuable asset of [No 244], he would be entitled through [AA] to the beneficial interest in [No 209]. As matters transpired he was not so entitled: this clearly satisfies the test of a mistake on the part of the donor either as to the legal effect of the disposition or as to an existing fact which is basic to the transaction. The fundamental basis of the transaction was, bluntly, wrong.
65. It is accepted that as the evidence has emerged it is unlikely that the arrangement between the brothers can be held to take effect as a contract for which consideration has failed. Accordingly, Ashfaq turns to equity and claims a constructive trust of the shares. Where the anticipated transfer of [No 209] to [AA] for the benefit of Ashfaq has proved to be void, the agreement or arrangement has failed or the transfer of the shares was made under a mistake that was so fundamental that equity should intervene to provide relief sought by Ashfaq. To do otherwise would be to leave Mushtaq beneficially entitled to 2 properties and Ashfaq none at all, which appears to confound both analysis of the surrounding circumstances and equity.'
- Paragraph 65 reflected Ashfaq's recognition, at the conclusion of the evidence, that he was unlikely to make good his paragraph 8 case. In that event, it was said that equity's jurisdiction to relieve for mistake could be invoked. Mr Knox's 'failure of basis' case was, said Mr Holmes-Milner, therefore a new case, which was anyway flawed because there was no joint understanding, let alone agreement, that No 209 should be transferred to AA in exchange for Ashfaq's shares. There was therefore no factual foundation for it. In any event, the submission was materially misconceived, because even if Ashfaq is entitled to restitution on the basis that Mushtaq was unjustly enriched by the share transfer, a remedy for a failure of basis can only be a damage-based award for restitution of the value by which the share transfer unjustly enriched Mushtaq, not a return of the shares themselves.
- In that connection, Mr Holmes-Milner referred us to what A&M's accountants had said about A&M's solvency in a letter of 30 June 2006 to Ashfaq. The letter reflected their understanding that the brothers were contemplating winding A&M up and transferring its properties out of the company to each of them. It referred to A&M having 'showed an insolvent position at 31st August 2004' and advised that any transfer out of A&M of either property would have to be 'at the market value at the date of the transfer otherwise both you and your brother would be charged tax on the difference between the market value and transfer price.' Whilst the letter referred only to A&M's financial position some two years earlier, Ashfaq's own position explained in a witness statement he made on 15 October 2010, in relation to the circumstances at the time of the transfer of No 209 to AA, was that:
'No Bank was prepared to advance any monies to A&M Ltd as the company did not have any assets. I could easily have let [Bank of Cyprus] wind up A&M, auction both [Nos 209 and 244] where [Mushtaq] was living with new wife rent free! … Had it not been my own portfolio with [NatWest] A&M Ltd would have become insolvent'.
- What that was all about was hardly explored before us, but Mr Holmes-Milner's point was that Ashfaq was there himself asserting that A&M was either insolvent or at best of little worth; and, if he was right, the shares he transferred to Mushtaq (following his misappropriation of No 209) must also have been of little value at the time of the transfer. If Ashfaq is entitled to a remedy in unjust enrichment on a 'failure of basis' foundation, he is entitled to no more than the value of the shares he transferred to Mushtaq at the time of the transfer – but not to a proprietary remedy by way of a return of the shares. For that submission, Mr Holmes-Milner cited Cobbe v. Yeoman's Row Management Limited  1 WLR 1752, at , per Lord Scott of Foscote; and A Restatement of the English Law of Unjust Enrichment, Burrows, 166/167.
- To the extent that it was part of Ashfaq's case on the appeal that there was 'free acceptance' by Mushtaq of the 50 shares, Mr Holmes-Milner said this was not argued before the judge. He said that, once Mushtaq learned in 2007 what had happened, the dispute moved towards litigation. I did not understand him to suggest that Mushtaq repudiated the share transfer, or ever offered to return any shares, but what was going on between the brothers, or their respective advisers, following January 2007 and leading up to the litigation is not in evidence and we do not know what it was. Mr Holmes-Milner also emphasised that the shares were transferred after the transfer of No 209 to AA: they were not, therefore, transferred to Mushtaq in circumstances in which he could regard the transfer as made in the expectation of the conferring by him of a benefit on Ashfaq. The judge made no finding about 'free acceptance', as no such case was advanced to her. Nor was she asked to consider the value of the shares at the date of the transfer; whether Mushtaq was unjustly enriched by the transfer; whether it would be unconscionable for him to retain them; or whether he had a defence to a claim for unjust enrichment: none of these matters was in issue.
- As for Mr Knox's alternative 'mistake' case, Mr Holmes-Milner said that Ashfaq had pleaded no case based on mistake, although the question of relief by reason of alleged mistake was argued before the judge in the closing submissions. Contrary to Mr Knox's submissions, the judge did not find that Ashfaq regarded it as 'necessary' to make the share transfer: she found no more than that he 'may well have been acting under the mistaken belief that it was necessary', which fell short of finding what Mr Knox attributed to her. Nor did she find that Ashfaq mistakenly believed he had the 'power' to do what he did. Ashfaq had said nothing in evidence as to whether he made a mistake, still less what it was. The only mistake asserted in his counsel's closing skeleton argument was that he 'proceeded as he did on the mistaken understanding that as a quid pro quo for the disposition of a valuable shareholding, carrying with it the valuable asset of [No 244], he would be entitled through [AA] to the beneficial interest in [No 209].' Mr Holmes-Milner said that the likelihood was that the only mistake made by Ashfaq was that he believed he would get away with his unlawful scheme. If so, that was a mistake in the nature of a 'misprediction', which is not the type of mistake that will justify the setting aside of the transaction.
Discussion and conclusion
- This is a thoroughly unsatisfactory appeal. Mr Knox's primary case is that we should allow it on a 'failure of basis' unjust enrichment case that was not made below. This court will only allow an appeal against the judge's decision if satisfied that it was 'wrong' (CPR Part 52.11(3)(a). I do not understand how the judge can be said to have been 'wrong' not to find in favour of Ashfaq on a 'failure of basis' argument not put to her. Ashfaq's counsel's closing submissions disclose that, at the end of the evidence, he had no confidence that the judge would find the paragraph 8 agreement established. But he did not advance the argument that Mr Knox did in reliance on the paragraph 7 'agreement in principle'.
- In any event, I regard Mr Knox's 'failure of basis' argument as without basis. The text books and authorities to which he referred us show that in such a case the claimed unjust enrichment must, if not occasioned by the failure of a contract, at least be occasioned by the failure of some joint endeavour of the parties. If, therefore, in this case Ashfaq and Mushtaq had come to an informal arrangement, falling short of a binding contract, that Ashfaq could have No 209 in exchange for Ashfaq's shares in A&M, then, when it was realised that No 209 could not be transferred to AA, Ashfaq might have had an unjust enrichment claim in respect of the shares he had transferred to Mushtaq on the faith of the failed arrangement.
- That, however, is not this case. The attempt to elevate the paragraph 7 agreement to a relevant 'agreement in principle' is hopeless. That agreement amounted to no more than an expression of hope that, subject first to the making of agreed adjustments between the brothers to reflect their respective contributions to A&M, No 244 could be distributed to Mushtaq and No 209 to Ashfaq. The agreement said nothing as to how that hope might be achieved. In particular, it said nothing to the effect that Ashfaq could help himself to No 209 and that, in exchange, Mushtaq would then have all the shares. The agreement amounted to no sort of joint endeavour towards doing what Ashfaq decided to do. It therefore provided no 'basis' for what he did. There was therefore no relevant 'failure' in respect of the share transfer when he found that he was not, after all, entitled to appropriate No 209 to himself.
- That, in my view, is all there is to it. The stark facts are that, without a shred of justification, Ashfaq carried out a unilateral act that was entirely of his own conception and which, to put it bluntly, amounted to the equivalent of the theft of No 209 from A&M. He then, again acting unilaterally, decided to attempt to justify such action by transferring his A&M shares to Mushtaq, even though, on his own evidence, he cannot have regarded them as worth much, if anything.
- Mr Knox was anxious to make clear that the judge did not find that Ashfaq had acted dishonestly. Nor did she find that he had acted honestly. It is not for this court to make findings as to Ashfaq's honesty or otherwise, although I cannot refrain from marvelling at how he could (if he did) have regarded himself as entitled to do what he did. He has accepted that not only was the transfer of No 209 void, but also that his actions in procuring it amounted to a breach of fiduciary duty and trust, for which the judge imposed a heavy compensatory obligation upon him, which he has failed to honour. If Ashfaq has even a modest understanding of the duties of directors, he would have understood that his actions in relation to No 209 constituted a flagrant breach of them. It is a matter of concern that someone who is prepared to breach his duties as a director in this way, or else who is simply unaware of such duties (and which alternative applies, I do not know), should be entitled to act as a director of a limited company.
- In my view, therefore, the 'failure of basis' case advanced to us is not one that the court can accept. Further, to the extent to which reliance in making it good was based on what was said to be Mushtaq's acceptance of the shares when he learnt of the transfer in late January 2007, I also feel unable to accept that part of the argument. Nothing of the sort was argued before the judge, who made no findings on it, and so the development of Ashfaq's case to us in this way was simply the development of what was anyway a new case. This court is a court of appeal, and it is no part of its function to make, or attempt to make, findings of fact about matters not ventilated before the court below.
- As for the alternative case based on mistake, Mr Knox advanced this as very much a subsidiary argument. His difficulty is that a case based on mistake was also not the way in which Ashfaq had pleaded, or advanced, his case below. His evidence, therefore, did not explain what, if any, mistake he made. True it is that there was some discussion of mistake in the closing submissions, although the judge made no finding as to what, if any, mistake Ashfaq made. She did not, contrary to Mr Knox's submission, find that he believed it was 'necessary' to make the transfer; she said no more than that he 'may well have been acting under the mistaken belief that it was necessary', which is not the language of a finding of fact.
- It is of course the case that, having referred to the possibility of a mistake, the judge directed herself by reference to Pitt v. Holt in the Court of Appeal, whereas the relevant inquiry in a 'mistake' case must now, since Pitt v. Holt in the Supreme Court, be carried out on a broader basis than she identified. I have considered whether, in view of this, there might be a justification for a remission of the case to the county court for a re-consideration, in light of the new guidance from the Supreme Court, of whether Ashfaq is entitled to have the share transfer set aside by reason of mistake.
- I have decided that it would not. As I have said, Mr Knox hardly developed the mistake case (which was not surprising, as he had no material with which to do so). It was advanced on the basis of generalised assertions as to what Ashfaq's mistake or mistakes might have been, whereas, for reasons given, there was no evidence as to what his mistake or mistakes, if any, was or were. Mr Holmes-Milner may well be right that his only mistake was that he thought he could get away with his outrageous conduct; and, if so, I would regard that as an unpromising basis for a successful mistake claim. If, however, Ashfaq was mistaken in some other material respect, we do not know what it was because he did not seek to prove it. To remit the case to the county court for a re-trial on the question of mistake would be to allow him to make a new case that he did not seek to make below. There is no justification for that.
- For these reasons, I would dismiss Ashfaq's appeal.
- I add as a postscript that after we had reserved judgment on the appeal, Mushtaq, whose case at the hearing was advanced with conspicuous ability by Mr Holmes-Milner, decided that he could usefully add to it and chose to send an undated manuscript letter to the court, which it received on 21 March 2014, accompanied by various documents. His letter, in upper case throughout, read:
'At the end of the hearing on 6th February 2014 the panel of honourable judges were looking puzzled. Ultimately, one of the honourable judges said, he did not get clue of the claim.
Its reason is because not enough claim related information was provided in the bundle served to the court.
In view of this, broad based supplementary information is provided by the respondents to get clues of the claim.
Absolutely, this is the only objective.'
- Whether or not the panel were looking puzzled, I cannot say. I have no recollection of any of us saying he did not 'get clue of the claim' or words to that effect. As regards Mushtaq's thought that we would be helped by further documents, it was by then too late for him to put in such documents, and it is also not apparent from his letter that he thought it appropriate to serve copies on the appellant's lawyers. Mushtaq continued, I presume, to be represented by Mr Holmes-Milner in the appeal; and if he wanted to make further representations the way to do it, if it was to be done at all, was via Mr Holmes-Milner.
- I have not read the documents he provided: I have done no more than make a superficial glance at them, which shows that they consist in the main of his explanations of financial matters in relation to Nos 209 and 244, which, even if they are reliable (as to which I know not), are irrelevant to the issues on the appeal. I have not taken any account of Mushtaq's documents in arriving at my conclusions. The court, in case Mushtaq did not provide them to the appellant, has passed copies of them to the appellant's counsel, indicating that it wanted no submissions on them. Mushtaq should not have written to the court.
- As I have said, I would dismiss the appeal.
Lord Justice Sullivan :
- I agree.
Lord Justice Kitchin :
- I also agree.
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