England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE CCRFT 1998/1332/1

(HIS HONOUR JUDGE WAKEFIELD )

Royal Courts of Justice

Strand

London WC2

Friday 16th July 1999

B e f o r e:

LORD JUSTICE SEDLEY

MR JUSTICE COLMAN

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BETWEEN:

DAVID BIRKETT

Appellant

AND:

ACORN BUSINESS MACHINES LIMITED

Respondent

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(Transcript of the handed down judgment by

Smith Bernal Reporting Limited, 180 Fleet Street,

London EC4A 2HD

Tel: 0171 421 4040

Official Shorthand Writers to the Court)

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MR A HILL-SMITH (Instructed by BrookStreet des Roches) appeared on behalf of the Appellant

MR J DAVIES (Instructed by Silverman Sherliker) appeared on behalf of the Respondent

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J U D G M E N T

(As approved by the Court )

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©Crown Copyright

Mr Justice Colman:

The claimant appeals against the judge’s dismissal of his claim on the grounds of illegality.

The claim arose on the following facts.

The claimant was an estate agent. In 1993 he acquired a Canon photocopier from MEL Ltd. This he did by entering into a leasing agreement with Lombard Equipment Leasing Ltd (“Lombard”) under which he hired the equipment from Lombard for a period of 5 years. He also entered into a maintenance agreement with MEL under which MEL agreed to maintain the Canon.

In 1994 the defendants, who are office equipment suppliers, took over MEL’s business, including its maintenance agreements. They were an expensive commitment, as equipment covered by them needed greater maintenance attention with the passing of time. The defendants therefore circularised their customers in order to encourage them to replace their old copiers and fax machines “free of charge, under existing costs”.

The claimant had a meeting with Mr Johnson of the defendant on 7th October 1994. It was agreed that the defendant would supply a new photocopier and that the claimant would return the Canon to the defendant. The claimant would take the new machine under a lease agreement for 5 years but the rental would be higher than that under the Lombard agreement. However, it was calculated that the increased rental would be off-set by the increased number of free photocopiers provided by the defendant. The claimant would also enter into a sale form and service plan agreement with the defendant under which the letter would provide maintenance services for the new machine and provide copying materials.

The only major issue at the trial was whether, as the claimant claimed, the defendants by Mr Johnson agreed at that meeting to pay to Lombard whatever was due from the claimant in respect of the premature termination of the Lombard agreement. Lombard subsequently claimed £5,250 plus VAT from the claimant. Mr Johnson denied that any such agreement had been made, but the judge rejected his evidence and held that the agreement included a term to that effect. There is no appeal by the defendants against that decision.

The judge dismissed the claimant’s claim on the grounds that the agreement between the claimant and defendants was illegally performed to the knowledge of both of them. The issue of illegality arose in the following way.

At their meeting on 7th October 1994 it appears to have been agreed that the claimant would take on lease from a finance house a Panasonic photocopier to be supplied by the defendants at a rental of £560 per quarter. It was, I infer, implicit that the whole transaction would be subject to the availability of a hire agreement with a finance house. The defendants decided to approach Mercury Assist, an associated company of Mercury Communications. They invited the claimant to complete a hire agreement with Mercury Assist and on 7th October 1994 sent him a blank form to be signed. It described the equipment to be supplied as one Panasonic and stated:

“Your signature below confirms that you make this Hire Agreement in the course of your business, that you have selected the Equipment, and we have not inspected it. You request us, Mercury Assist to purchase the Equipment and to enter into this Hire Agreement upon the terms set out above and overleaf. You understand that this Hire Agreement will commence on the Commencement Date notified by us to you but will not be binding on either of us until that time.”

In the lower right hand corner were spaces for the insertion by Mercury of the Commencement Date, the Hire Agreement Number and a signature accepting the agreement on behalf of Mercury.

On about 27th October 1991 the claimant signed and returned this agreement to the defendants.

The effect of this negotiation was that the claimant entered into an agreement with the defendants that the defendants would supply a Panasonic photocopier to the claimant by means of a hire agreement between the claimant and Mercury Assist, that the claimant would return the Canon to the defendants and enter into a maintenance agreement with them for the Panasonic and that the defendants would discharge Lombard’s charge for premature termination of the Landlord agreement by the claimant. This agreement was clearly conditional on Mercury accepting the hire agreement with the claimants for, if Mercury rejected the agreement, the whole foundation of the agreement to supply the Panasonic would go.

On 28th November 1994 Mercury informed the defendants that the agreement was unacceptable because they would only finance telecommunications equipment, such as a fax machine.

Mr Johnson then telephoned the claimant, told him the bad news. In his witness statement he said this:

“I telephoned David Birkett on or about 28 November 1994 and advised him that the only people who would finance the deal were Mercury Assist and that Mercury Assist would only finance telecommunications equipment. I explained that the only way around this was for the agreement to state that the equipment was a photocopier/facsimile machine. David Birkett said that he wanted the machine and that I should proceed on that basis.”

Later that day the defendants sent to the claimant a new Mercury hire agreement for signature. In the description box were the words:

RICOH FACSIMILE/PHOTOCOPIER

MV 715 (G4-150W)

The defendants’ covering letter stated:

“Further to our recent telephone conversation please find enclosed revised Mercury Assist documentation.

As discussed, the document enclosed for signing is for 1 x Ricoh fax/photocopier, but the equipment you will receive will be the Panasonic Photocopier and one free Mercury One2One mobile phone as originally agreed with Mr Joseph Johnson.”

Mr Johnson’s evidence in his witness statement was as follows:

“The agreement enclosed with the letter 28 November stated on it, as set out in the covering letter, 1 x Ricoh fax/photocopier. David Birkett signed and returned this Agreement which I submitted to Mercury Assist.”

The claimant duly signed and returned the new Mercury agreement to the defendants.

The agreement then brought into existence between the parties differed from that made on 7th October 1994 to the extent that the claimant was to apply to Mercury for the hire of a Ricoh photocopier fax machine but was still to be provided by the defendants with a Panasonic photocopier. The rental was the same. The original agreement was to that extent varied.

It is to be observed that in the form of hire agreement the claimant expressly confirmed by his signature that he had selected the equipment described. This was clearly untrue and in the course of his cross examination the claimant, when asked whether he was concerned that he was stating this to Mercury, said that he was concerned, but that he desperately needed the equipment for his business [Transcript pages 4A-B, 4F-5B].

In the course of his judgment the judge said (page 12 of the transcript):

This is a case of illegality in the performance of a contract. The relevant contract was the oral contract made on 7 October, whereby the defendant would discharge the Lombard debt. The contract would be performed on the claimant’s part by signing the relevant documents and giving up the old machine. The substantial part of the consideration was signing a leasing agreement with a third party, namely, Mercury. A substantial part of the consideration is, therefore, tainted with the agreement between Mr Johnson and the claimant to practise a deception upon Mercury.”

He further observed that although he had not seen the sale invoice in respect of the sale of the equipment to Mercury, the contract reference number on the statement of account issued by Mercury to the claimant corresponded with that inserted by Mercury on the Ricoh hire agreement signed by it. He concluded that there could be no reasonable doubt that Mercury were under the impression that they were being sold a Ricoh machine. There was therefore illegality in performance and relief must be refused.

If it were the case that the claimant and the defendant had by 28th November 1994 entered into an agreement which by its terms provided that either or both parties were to practice a deception on Mercury, that would be an agreement with an object which was, at least in part, illegal. It would involve procuring Mercury to pay to the defendants the price of a Ricoh photocopier fax so as to enable the defendants to supply such equipment to the claimant to give effect to the Mercury hire agreement when in reality the defendants would supply a Panasonic.

There can be no doubt on the evidence that the claimant understood that the finance agreement which he was being asked to sign was to be used for the purposes of deceiving Mercury into payment to the defendants of the price of equipment which was never to be delivered to him. His admitted concern is otherwise inexplicable. There is no evidence that Mr Johnson ever indicated to him that this was mere paperwork exercise for Mercury’s own cosmetic purposes. The absence of any such explanation by Mr Johnson either in his statement or his oral evidence gives rise to a very strong inference that this was not the case.

Accordingly, if the oral agreement made between Mr Birkett and Mr Johnson had been committed to writing it would unavoidably have stated that Mr Birkett was to sign a false document for presentation to Mercury to induce it to provide finance. Such an agreement would aptly be described as ex facie illegal.

The effect of the authorities was summarised by Bingham J. in Bank of India v. Trans Continental Commodity Merchants [1982] 1 LR 427 at page 429. The judgment of Sir David Cairns in the Court of Appeal with which Waller and Kerr LJJ. agreed is to the same effect. If a transaction is on its face, that is to say merely by looking at its terms and without additional evidence, manifestly illegal, the Court will refuse to enforce it, whether or not either party alleges illegality. If a transaction is not on its face manifestly illegal but there is before the Court persuasive and comprehensive evidence of illegality, the court may refuse to enforce it even if illegality has not been pleaded or alleged. The principle behind the court’s intervention of its own notion in such a case is to ensure that its process is not being abused by inviting it to enforce sub silentio a contract whose enforcement is contrary to public policy. Thus, in In re Mahmoud and Ispahani [1921] 2 KB 716 at page 729 Scrutton LJ. observed:

“In my view the court is bound, once it knows that the contract is illegal, to take the objection and to refuse to enforce the contract, whether its knowledge comes from the statement of the party who was guilty of the illegality, or whether its knowledge comes from outside sources. The court does not sit to enforce illegal contracts. There is no question of estoppel; it is for the protection of the public that the court refuses to enforce such a contract”.

The application of these principles in a case where evidence or allegations of illegality emerge for the first time at the trial require particular care. The claimant may be taken by surprise and may be unable to adduce additional evidence for the purpose of rebutting an inference of illegality which the court might be entitled to draw. As was made clear by Devlin J. in Edler v. Auerbach [1950] 1 KB 359 at 371, in such a case the court should not act on unpleaded facts “unless it is satisfied that the whole of the relevant circumstances are before it”. The reason for that qualification is obvious: notwithstanding the court’s duty to decline to enforce illegal transactions, it must not take that course unless it is satisfied that to refuse enforcement on the grounds of the perceived illegality would not involve any palpable risk of injustice to the claimant by reason of his inability to rebut the illegality by adducing additional evidence or making more comprehensive submissions. The court should not exercise its discretion against enforcement unless there is no material risk of injustice in this sense.

In the present case the judge considered whether on the whole of the evidence it might be shown that Mercury was not in truth deceived and he concluded that there was no room for any doubt about that.

In my judgment, whether Mercury was or was not deceived is irrelevant. The fact is that, so far as Mr Birkett was concerned, the agreement was indisputably one under which Mercury was to be deceived. It was therefore an agreement with at least one illegal object and that object rendered it contrary to public policy that it should be enforced. In these circumstances the judge was under a duty to decline to enforce it.

In my view, the judge therefore reached a conclusion, albeit by a somewhat different route, which was the correct conclusion in this case.

If and in so far as it is relevant to consider whether Mercury was indeed deceived, the inference of deception in this case presents itself to me as so strong on the primary evidence that I do not consider that there was any material risk of injustice to the claimant in refusing to enforce the agreement. This appeal should therefore be dismissed.

Lord Justice Sedley:

With misgivings, but in the end without doubt, I agree. Because this is one of those cases where (at least in my view) law and justice part company, I will set out my reasons.

Colman J. has set out in his judgment how the present issue arose, and with gratitude I adopt his account. My misgivings arise from the fact that the defendant, in full possession of all the material facts (and indeed the author of most of them), failed to plead the illegality as part of its case. Instead its counsel insinuated the issue into the evidence with his first few questions in cross-examination of the plaintiff and then left it to the judge to act as investigator, prosecutor and jury.

The evidence with which the judge found himself presented was without doubt to the effect that the two parties had agreed on 28 ^th November 1994 to make a misrepresentation on the forms submitted to Mercury Assist so as to present the Panasonic photocopier as a Ricoh fax/copier in order to satisfy what the defendants had told the claimant was Mercury’s requirement for a telecommunications facility in the equipment which they were to finance. The contract of 7 ^th October was in my judgment varied on the 28 ^th November to include this element, so that the case was one of illegality of agreement, not (as the judge held) of performance.

But the effect of the taint, if it is operative, will be to relieve the defendant of a liability of more than £5,000 which on the judge’s finding it unequivocally undertook in order to get the plaintiff to make the purchase. It is not a happy situation. It is made worse by the fact that it was the defendant which undertook the liability to pay off the old charges in order to rid itself of a costly contract and the claimant who agreed to the defendant’s subterfuge simply because he was at his wits’ end with repeated breakdowns of the old machine the defendants had supplied to him.

For reasons which appear clearly from the authorities cited by Colman J., it is only where the court can eliminate any possible answer with complete confidence that an unpleaded case of illegality should be allowed to succeed. But equally, if this position is reached, the court’s overriding duty to the public interest supersedes the interests of the parties in the litigation; and this in turn is why the judge had no option but to go through the door the defendants had opened..

At the end of the hearing before us, it seemed possible – indeed likely – that Mercury Assist or its successor would still have its file on this transaction. It was just possible that the file would reveal, however unexpectedly, that Mercury knew of the misrepresentation and were prepared to collude with it. On the attenuated state of the documentation, for which the defendant is principally responsible, it was conceivable that the defendant had got the claimant to collude in the misdescription of the equipment because it knew that Mercury would be unconcerned so long as the purchaser was reliable and the documentation showed a machine with a telecommunications facility. If (as we were told without objection) Mercury Assist was the finance arm of a large telecommunications group, it would make sense that while its parent company wanted its activities directed towards purchase of telecommunications equipment, its own interests were equally well served by financing other equipment provided the purchaser was reliable and the documentation apparently in order. Somewhat to my surprise, the outcome of the inquiries made in haste during the hearing has now been confirmed to us; it is that no further documents can be traced. That there must have been a relevant file is clear from, among other things, the production by the defendants of their copy of the order form which contains the misrepresentation. Yet the defendants have not produced their sales invoice to Mercury, so that we still do not know what machine they were purporting to sell. We do have their letter of 28 ^th November 1994 to the claimant which encloses the revised documentation and says:

"As discussed the document enclosed for signing is for 1 x Ricoh fax/photocopier, but the equipment you will receive will be the Panasonic Photocopier and one free Mercury One 2 One mobile phone as originally agreed with Mr. Joseph Johnson."

Unless it is merely evidence of remarkable naivety, the letter is at least consistent with knowledge or belief on the defendants’ part that what they were doing did not call for concealment.

A case such as this presents the judge with a peculiar and invidious task, so that anything which leaves open a genuine possibility that the apparent illegality may not in reality have occurred is enough to prevent the making of the finding. A defendant, accordingly, who conducts his case in the way this defendant did cannot complain if anything but a seamless case of fraud is rejected.

Here, the defendant’s trial counsel in his skeleton argument described the course taken as follows:

"The point was mentioned briefly by counsel for the defendant in opening, and the witnesses had the opportunity to give evidence on the matter.

In closing, although the point was at first reserved by counsel for the defendant ... the learned judge was invited by him to take the illegality point himself. The point was then developed by the learned judge with counsel for the defendant ... "

Thereafter, of course, the issue became the major topic of argument. But because it had not been pleaded and was first raised in cross-examination of the plaintiff, there had been no prior opportunity to explore the point on the plaintiff’s behalf. This is not a fair or proper way in which to conduct litigation. When it throws up an issue of illegality, moreover, it presents the trial judge with a task which should not be his and for which he does not possess the powers or the equipment for investigation. Here it was presented to him by the party which was the admitted instigator of the illegality and was therefore now relying on its own wrong to defeat an otherwise well-founded claim.

If the issue were whether Mercury were in truth deceived, I would not consider the evidence sufficient to prove it. To the objection that the possibility of an explanation which fell short of actual deception is fanciful, there are not only by way of answer the unexplained gaps in the defendants’ documents and the inexplicable want of any corresponding materials from the party allegedly defrauded; there is also the wise caveat of Megarry J. in John v. Rees [1970] Ch. 345, 402:

"As everybody who has anything to do with the law well knows, the path of the law is strewn with examples of open and shut cases which, somehow, were not; of unanswerable charges which, in the event, were completely answered; of inexplicable conduct which was fully explained; of fixed and unalterable determinations that, by discussion, suffered a change."

If therefore the question were, as the judge took it to be, one of illegality of performance, I would hold the evidence to be insufficient to meet the peculiarly high standard demanded by authority and principle. But the first question was not this: it was whether the contract itself was tainted by illegality. On the material before the judge it undoubtedly was. The claimant had agreed, at the defendant’s instigation, to lie about the make of photocopier in order to obtain finance. It follows that the contract between these two parties was founded upon an intended fraud on a third party, and this, I agree, was enough to render it unenforceable.

The inexorable conclusion that this appeal must fail does not do substantial justice between the parties, although it may be that costs can do something to redress the balance. But the policy of the law and the public interest in having a legal system which refuses to lend its aid to the enforcement of contracts which aim to defy the law determine that the appeal must fail.

ORDER: Appeal dismissed. The respondent in this court to pay the appellant's costs of the county court proceedings. No order for costs between the parties in this court.

(Order not part of approved judgment)