B e f o r e :

LORD JUSTICE BROOKE LORD JUSTICE MANCE and MR JUSTICE PARK ____________________

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(Transcript of the Handed Down Judgment of Smith Bernal Reporting Limited, 190 Fleet Street London EC4A 2AG Tel No: 020 7421 4040, Fax No: 020 7831 8838 Official Shorthand Writers to the Court)

Michael Ashe QC & John Robson (instructed by Arbeid, Golstein & Oshry) for the Appellant Tim Lamb QC (instructed by Clyde & Co) for the Respondents ____________________

HTML VERSION OF JUDGMENT AS APPROVED BY THE COURT ____________________

Lord Justice Brooke :

This is an appeal by the second defendant Kenan Vural Akyuz (“Kenan”) against an order of Master Miller dated 15th February 2001 on an assessment of damages whereby he ordered that Kenan was only entitled to nominal damages not to be assessed.

The dispute between the parties arose in this way. The claimants were the insurers of a company called Reg Ellis Warehousing Ltd at the time that that company’s warehouse premises were damaged in a serious fire on 4th May 1991 The various owners of the stored goods made claims in respect of their alleged losses, and the claimants dealt directly with them in settling their claims. In particular, they paid Kenan’s company Vural Ltd (“Vural”), who are the first defendants, £406,637.41 in respect of clothes stored at the warehouse at the time of the fire.

Police inquiries then led to the arrest of Mr Reg Ellis, and on 6th August 1997 he was convicted at the Central Criminal Court of conspiracy to commit arson. The master said that he believed that a dishonest loss adjuster, who had been concerned with 14 fire damage claims (but not Vural’s), was convicted of an offence or offences of dishonesty on the same occasion. The claimants then came into possession of the documentation on which the prosecution had relied in the criminal proceedings, and in their proceedings against Vural and Kenan they alleged that they had paid Vural about £260,000 in consequence of frauds which they particularised in their pleadings, and about £147,000 in relation to a claim in respect of what they now said were non-existent garments from Turkey. The claimants made their claims, for restitution of the money paid and/or damages, against both Vural and Kenan jointly and severally.

On 6th October 1997 Mance J granted an ex parte Mareva injunction in favour of the claimants, and the master’s inquiry into damages arose out of undertakings given by the claimants to the court on that occasion, and also on a later occasion when the terms of the original order were varied by consent on 5th January 1998. These undertakings were in the following terms:

In March 1999 the claimants were given leave to discontinue their action. This discontinuance gave rise to the inquiry into damages which followed.

It is now necessary to say something about the defendants and their affairs. Kenan is Turkish. His evidence was given through an interpreter. At all material times prior to 31st October 1997 he was the sole director of Vural, in which he owned nearly all the issued shares.

Vural carried on a business of making up and finishing clothing. The company’s factory was at 143 Broad Lane, which was described by a valuer in 1998 as a “somewhat obsolete industrial building in a secondary/tertiary location in Tottenham”. Kenan bought these premises in 1991 for £700,000 and originally rented them to Vural at a rent of £120,000 a year for a three-year term, after which Vural held over as tenants without any new lease coming into existence.

Kenan suffered from diabetes and high blood pressure, and for all practical purposes Vural’s business was managed between 1992 and 1997 by his son Yildrim Akyuz (“Yildrim”). Yildrim also gave evidence to the master, who said that he was obviously an erudite and well-educated young man who had large business ideas and who had already achieved considerable financial success.

Eventually Kenan decided that he wished to move to Turkey, dispose of all his UK assets, and retire from his business. To this end arrangements were made whereby Vural would cease to trade as at 31st October 1997, and its assets would be transferred to a new company called Vural (1997) Limited. The two companies would then swap their names, so that the company now carrying on the business would have the benefit of its predecessor’s name and goodwill. We are not concerned with the fortunes of the new company. As part of these arrangements it was decided that Kenan would sell all his interest in the factory at 143 Broad Lane to the new company. The master found that before the end of 1997 father and son had agreed a price of £1 million for the purposes of this sale (even though this agreement would not have been legally enforceable). He also found that the open market value of these premises on a transaction conducted at arms’ length would have been £600,000.

The order obtained by the claimants in the first week of October 1997 put the family’s plans in some jeopardy. Although there was over £500,000 in Vural’s bank account at that time, £250,000 was earmarked for Kenan’s pension fund, and it was said that there would be untoward tax consequences if these pension arrangements could not go ahead. The master set out in some detail the correspondence which passed between the parties’ solicitors after the injunction came to the defendants’ attention. He found that Kenan was generally aware of the effect of the court order, but that Vildirim, although not actually a party to the action, was in effect the person who masterminded the defendants’ attempted resistance to the order and their efforts to alter its terms. I refer to their “attempted resistance” because although they contended through their solicitors that the order should never have been made, and issued a summons to this effect on 27th October 1997, they did not pursue this form of relief after Toulson J had varied Mance J’s order by consent on 5th January 1998 at a hearing when there was insufficient time for him to hear the defendants’ application, which was resisted by the claimants.

By this time the defendants had made disclosure of their assets, and the claimants were satisfied that the property at 143 Broad Lane would provide them with adequate security. The consent order, which contained the undertaking numbered (ii) in paragraph 1 above, was in these terms, so far as is material:

In due course the order made on 7th April 1999, which gave the claimants leave to discontinue the proceedings and removed the inhibition against the title of the Broad Lane property, was made expressly:

The Broad Lane property was eventually sold to Vildirim’s new company in July 1999 for £711,000. In these proceedings Kenan claimed that he had lost about £625,000 as a consequence of the orders obtained by the claimants in October 1997 and January 1998 which had had the effect of inhibiting his sale of the property at that time at a much higher price. He conceded, however, that he would have to give credit for the rental payments he would not otherwise have continued to receive. His claim was made up as to about £252,000 as a net loss of capital which would have been achieved by the thwarted sale, about £56,000 for mortgage interest payments which he had to go on making, and as to about £316,000 being the interest he would have achieved by investing the sale proceeds of £1 million in a Turkish bank called Esbank between December 1997 and July 1999 at a net annual interest rate of 20%. The master recorded that although the defendants’ solicitors had said they were carrying out inquiries to determine the amount of tax, if any, that Kenan would have had to pay in Turkey on that interest, there was no detailed evidence provided to him as to Kenan’s tax affairs in Turkey.

In addition to his findings as to the family’s agreed sale price of 143 Broad Lane and its market value in December 1997, the master also made the following further findings:

Mr Ashe QC, who appeared with Mr Robson on behalf of Kenan on the appeal, argued that the master had misdirected himself as a matter of law. He submitted that once the court was satisfied that the loss of an agreed sale was the kind of loss the parties to this litigation would have reasonably foreseen when the original undertakings were given, then Kenan was entitled to recover damages based on the lost opportunity of achieving that sale, even if it was at a price higher than the market price, and the claimants did not know of the special price that had been agreed.

In developing his submissions Mr Ashe referred us in particular to Smith v Day (1882) 17 Ch D 421, 425; Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528, 539; Wroth v Tyler [1974] Ch 30, 60F-62E; Hoffmann La Roche v Trade Secretary [1975] AC 295, 361E-F; and Brown v KMR Services [1995] 2 Lloyds Rep 513, 543 and 556-7. He argued, in short, that the master was obliged to assess damages on the basis that the claimants had undertaken that they would not prevent the defendants from doing that which they were restrained from doing by the terms of the injunction, and that the loss of a sale at £1 million, albeit a price £400,000 higher than the market price, was the kind of loss that was undoubtedly foreseeable.

In the event, we did not need to call upon Mr Lamb QC, who appeared for the claimants, because it became clear when we examined the evidence during the course of Mr Ashe’s submissions that in addition to paying Kenan £1 million, the new company was to take over from Kenan the obligation to pay the mortgage of £350,000, so that the true sale price was £1,350,000.

It also became clear during the course of the hearing that the agreed sale consideration for the freehold property also embraced part of the consideration for the value of the first defendants’ net assets, including the value of its goodwill as a going concern and the benefit to the new company of being able to carry on trading at the factory with no break in continuity such as would have occurred if Kenan had sold the factory to a third party. Vildirim explained the make-up of the purchase consideration in paragraph 4 of his second witness statement, in which he explained that it was more tax efficient for Kenan to be paid in this manner, as opposed to being paid more for his interest in the first defendants.

It follows that the price of £1,350,000 was not only more than twice the market price of the factory, but that it also contained significant elements which had nothing to do with the value of the factory, but which related to other features of the arrangements by which Kenan was concerned to liquidate all his interests in the country in order to obtain the advantages of tax exile. In those circumstances the master was clearly right to base his judgment on the market price of the factory, and to find that Kenan had suffered no loss.

In these circumstances it was unnecessary for us to consider Mr Ashe’s interesting challenge to the master’s finding on mitigation, or to the likelihood that the sale proceeds would have been invested in Turkey in US dollars at a remarkably high rate of interest.

For these reasons I would dismiss this appeal.

Lord Justice Mance:

I agree.

Mr Justice Park

I also agree.