Case No: 2001 0787 A3
 Neutral Citation Number: [2001] EWCA Civ 1446

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE QUEEN’S BENCH DIVISION
(COMMERCIAL COURT) (Mr Justice Andrew Smith)
Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 10th October 2001

B e f o r e :

LORD JUSTICE POTTER
and 
LORD JUSTICE LONGMORE
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	Eastgate Group Ltd	Claimant
	
	-v-		
	Lindsey Morden Group Inc 

and
Smith and Williamson (a firm)	Defendant/Part 20 Claimant

Part 20 Defendant	

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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)
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ANTHONY BOSWOOD Esq QC, BANKIM THANKI Esq and HENRY KING Esq
(instructed by Linklaters for the Defendant/Part 20 Claimant)
JOHN MARTIN Esq QC and JONATHAN SEITLER
(instructed by Barlow Lyde and Gilbert for the Part 20 Defendant)

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Judgment
Lord Justice Longmore: 
Introduction
1	The question on this appeal is whether a defendant vendor of shares in a company, who is sued by the purchaser for breach of the warranties in the share sale agreement, can seek a contribution, pursuant to section 1 of the Civil Liability (Contribution) Act 1978, from the purchaser’s investigative accountants on the basis that those accountants are also liable to the purchaser in respect of the same damage as the vendor of the shares.
2	The company sold was Hambro Legal Protection Ltd (HLP), which derived its income from the sale and administration of legal expenses insurance (which might itself be part and parcel of larger insurance cover).  Policies would be issued to members of the public by institutions such as travel agents and the cost of administering such policies might be incurred by HLP soon after issue.  There would from time to time be declarations of bundles of policies made by the institutions and, only on such declaration, would HLP be able to calculate amounts due to them from the institutions (eg. premiums including their own commission) and amounts due from them to underwriters (eg. by way of premium after deduction of commission).  As a result of this way of doing business, HLP’s monthly management accounts and their audited annual accounts included estimates of amounts due from the institutions as debtors to HLP and due to underwriters as creditors of HLP.  One of the issues in the proceedings is whether the Claimant purchasers were aware (or were to be deemed to be aware) of this practice of preparing accounts on an estimated basis.  The defendant vendors say that even if the Claimants were not aware themselves, this practice was something of which their accountants (brought in to investigate HLP for the purpose of the purchase and sale transaction) were aware or ought to have been aware.
3	I can take the other underlying facts from the judgment of Andrew Smith J.  Under the share purchase agreement of 30th November 1998,  Eastgate Group Ltd (“Eastgate”) agreed to purchase and Lindsey Morden Group Inc (“LMG”) agreed to sell the whole of the share capital of HLP for a consideration of £51 million.  The agreement contained warranties by LMG (1) that the annual accounts showed a true and fair view of the state of affairs of HLP as at 31st March 1998;  (2) that the management accounts from April 1997 to September 1998 (inclusive) were prepared with due care and attention in accordance with substantially the same accounting policies as the annual accounts;  and (3) that since 31st March 1998 there had been no material alteration in the nature, scope or manner of business of HLP, nor any material deterioration in their financial position or turnover.
4	Eastgate contend that LMG were in breach of each of those warranties because, in essence, (1) HLP’s accounts were inaccurate and misleading and did not present a true and fair view of the state of affairs of the company;  (2) the accounts failed to disclose both the extensive use of estimates in calculating HLP’s income and turnover and the extent to which those estimates were inaccurate or left uncorrected;  and (3) there had been a material deterioration in the turnover and financial position of HLP between 31st March 1998 and 30th November 1998.
5	Eastgate claim damages from LMG in the following terms:
“a.	As damages for breach of warranty Eastgate claims the difference between the value of the business as warranted (being the price paid by Eastgate) and the value of the business in fact.
 b.	The price paid by Eastgate for the business was £51 million . . .”
6	LMG now claim that they are entitled to look to Eastgate’s accountants, Smith & Williamson (“S&W”), to contribute to whatever damages they (LMG) may have to pay to Eastgate in respect of their liability under the warranties in the share agreement.  Before 1978, only joint tortfeasors could claim contribution from one another, but, since then, recommendations of the Law Commission have resulted in the Civil Liability (Contribution) Act 1978;  now any person liable to someone who has suffered loss can claim contribution from another person who is also liable to the sufferer of the loss, but it is a requirement of the Act that the liability of that other person must be “in respect of the same damage”.  So the first question that arises in this case is whether S&W, on the assumption that they would be liable to Eastgate for negligence in their investigation, are liable in respect of the same damage as are LMG.  It has been held that the fact that a defendant’s liability is contractual (and thus strict) does not mean for that reason only that it is not liability for the same damage as that of the potential contributor where that liability is a tortious liability in negligence;  see eg. The Carnival [1994] 2 Lloyds Rep. 14 where contribution was ordered between the owners of a colliding ship and the charterers of the damaged ship whose liability was the (strict) contractual liability for ordering the ship to an unsafe berth.  It has also been held that a party liable in negligence is not prevented from recovering a contribution by the fact that the contributing party is liable in restitution to the person suffering the loss, provided that the damage suffered is, in fact, the same, see Friends’ Provident Life Office v. Hillier Parker [1997] QB 85 where Auld LJ (103A) said of the statutory words:
“It is difficult to imagine a broader formulation of an entitlement to contribution . . .  The Act was clearly intended to be given a wide interpretation . . .”
7	One accepted restriction on the width of the statutory wording is that a person who is liable to a Claimant in debt cannot seek contribution from a person who is liable to the Claimant in damages.  That is partly because it is difficult to say that someone who is a mere debtor is liable in respect of damage at all;  but if and to the extent that he is liable in respect of damage eg because his failure to pay the debt causes damage to the Claimant, that is different damage (viz the loss arising from non payment of a debt) from damage caused by negligence or breach of duty on the part of eg a valuer or an accountant, see Howkins & Harrison v. Tyler [2001] Lloyds Rep PN 1.  Another result of the wording of the Act is that the defendant and the potential contributor must be liable to the same person, otherwise they are not liable for the same damage.  So if the defendant is liable to the Claimant, he cannot obtain contribution from a person who is liable to some other party altogether, even if the Claimant could himself have claimed contribution from that other person.  The Act thus envisages a tripartite, not a multi-partite, situation, see Birse Construction v. Haiste Ltd [1996] 1 WLR 675.
8	In the present case the judge first decided that S&W are not liable to Eastgate in respect of the same damage as that for which LMG are liable.  He arrived at this conclusion essentially because LMG were liable to compensate Eastgate (if at all) for the difference between the value which HLP would have had if the warranties had been correct and the actual value of the company as bought, while S&W were liable (if at all) for the price paid for HLP (if Eastgate would never have entered into the transaction on the giving of prudent advice) or the difference between the price paid and what they would have paid after receipt of prudent advice.  He regarded the damage in the one case as different from the damage in the other.  This may be described as the “Same Liability Issue”.  Secondly the judge decided that, quite apart from his conclusion that the two potential liabilities were not liabilities for the same damage, LMG’s claim against S&W was not even capable of being a claim to which the 1978 Act could apply because it failed a threshold condition for such applications said to have been laid down by this court in Howkins & Harrison v. Tyler.  This may be described as the “Mutual Discharge Issue”  The judge, for these reasons, struck out or set aside the Part 20 claim to contribution since it was “plain and obvious” that it did not come within the Act and the court had, therefore, no jurisdiction to entertain it.  S&W had also argued that it was plain and obvious that, even if the court had (or arguably had) jurisdiction to entertain the application for contribution, LMG would be unjustly enriched, if any such claim were to succeed.  It would not, therefore, be “just and equitable” within section 2(1) of the Act for LMG to receive contribution and this was also so “plain and obvious” that the Part 20 claim for contribution should be set aside at this stage.  This may be called the “Just and Equitable” issue.  The judge said that if he had not decided the two earlier points in favour of S&W, he would not have been in their favour on this point and would have allowed the Part 20 claim to proceed to trial.
9	LMG now appeal on both points which the judge decided against them, while S&W cross-appeal on the latter point.  It is time to set out the relevant provisions of the 1978 Act:-
Section 1(1):	“Subject to the following provisions of this section, any person liable in respect of any damage suffered by another person may recover contribution from any other person liable in respect of the same damage (whether jointly with him or otherwise)”.
Section 1(6):	“References in this section to a person’s liability in respect of any damage are references to any such liability which has been or could be established in an action brought against him in England and Wales by or on behalf of the person who suffered the damage; . . . . . .”
Section 2(1):	“. . . in any proceedings for contribution under section 1 above the amount of the contribution recoverable from any person shall be such as may be found by the Court to be just and equitable having regard to the extent of that person’s responsibility for the damage in question”.
Section 2(2)	“. . . the court shall have power in any such proceedings to exempt any person from liability to make contribution, or to direct that the contribution to be recovered from any person shall amount to a complete indemnity”.
Section 2(3)	“Where the amount of the damages which have or might have been awarded in respect of the damage in question in any action brought in England and Wales by or on behalf of the person who suffered it against the person from whom the contribution is sought was or would have been subject to-
(a)	any limit imposed by or under any enactment or by any agreement made before the damage occurred;
(b)	any reduction by virtue of section 1 of the Law Reform (Contributory Negligence) Act 1945 or section 5 of the Fatal Accidents Act 1976;  or
(c)	any corresponding limit or reduction under the law of a country outside England and Wales;
the person from whom the contribution is sought shall not by virtue of any contribution awarded under section 1 above be required to pay in respect of the damage a greater amount than the amount of those damages as so limited or reduced”.
Section 6(1)	A person is liable in respect of any damage for the purpose of this Act if the person who suffered it . . . is entitled to recover compensation from him in respect of that damage (whatever the legal basis of his liability, whether tort, breach of contract, breach of trust or otherwise).”
Mutual Discharge Issue
10	If the judge was correct, which I think (as a matter of precedent) he was, in holding that it was necessary for the Mutual Discharge Issue to be decided in favour of the Part 20 Claimant as a necessary but not sufficient condition of his application for contribution, it is logical to consider this issue first.  That requires a consideration of this court’s decision in Howkins & Harrison v. Tyler [2001] Lloyds Rep PN 1.  In that case both parties were alleged to be liable to the Alliance and Leicester Building Society (“the Society”);  the Claimants were liable, as negligent valuers of a property in Rugby, on the security of which the Society had lent money to a borrower;  proceedings had been brought by the Society against the valuers which they had settled for £400,000.  The Defendant, Mr Tyler, was liable to the Society as principal debtor under a restructured loan agreement, pursuant to which the Rugby property continued to stand as security for the loan.  Mr Seitler (junior counsel before us for S&W, but in that case appearing for the valuers) appears to have argued (a) that it was possible for someone liable in debt to contribute to the sum for which a party was liable in damages and (b) that, in any event, a debtor was liable for breach of contract in failing to pay his debt and that the damage stemming from liability for breach of the contract of loan made with the Society was the same damage as that which stemmed from the valuers’ liability for breach of the contract of valuation which they had made with the Society.  This Court held that, even if it were possible to treat the liability of Mr Tyler as a liability in damages for breach of contract to pay his debt, the damage stemming from that liability was not the same damage as that which stemmed from the liability of the valuers from breach of their contract to value the Rugby property properly and carefully.  In dealing with Mr Seitler’s primary argument, however, Sir Richard Scott V-C (with whom Aldous and Sedley L.JJ. agreed) laid down a simple test to identify a claim “capable of being one to which the 1978 Act can apply”:-
“That test is this:  Suppose that A and B are the two parties who are said each to be liable to C in respect of ‘the same damage’ that has been suffered by C.  So C must have a right of action of some sort against A and a right of action of some sort against B.  There are two questions that should then be asked.  If A pays C a sum of money in satisfaction, or on account, of A’s liability to C, will that sum operate to reduce or extinguish, depending upon the amount, B’s liability to C?  Secondly, if B pays C a sum of money in satisfaction or on account of B’s liability to C, would that operate to reduce or extinguish A’s liability to C?  It seems to me that unless both of those questions can be given an affirmative answer, the case is not one to which the 1978 Act can be applied.  If the payment by A or B to C does not pro tanto relieve the other of his obligations to C, there cannot, it seems to me, possibly be a case for contending that the non-paying party, whose liability to C remains un-reduced, will also have an obligation under section 1(1) to contribute to the payment made by the paying party.”
11	Sir Richard Scott V-C went on to hold that Mr Tyler’s debt was not reduced or discharged by the payment already made by the valuers because the damages payable by the valuers “ought to have taken into account the amount of the debt recoverable” by the Society from Mr Tyler.  This was because the value of the borrower’s covenant is traditionally (and logically) taken into account in any claim against a valuer for negligently valuing a property which is to be security for money lent.  The Howkins & Harrison case thus became the foundation stone of the threshold argument by Mr Martin QC for S&W in the present case which was that, while any recovery from LMG would reduce any claim brought against S&W, any recovery from S&W would not reduce the claim brought against LMG for breach of warranty.  If that argument is correct the necessary condition for contribution would not be met.
12	The judge accepted this argument.  Relying on Nykredit plc v. Edward Erdman Group Ltd [1997] 1 WLR 1627, he held that if it came to assessing the damages which Eastgate could recover from S&W, it would be wrong to ignore the value of the warranties given by LMG on the acquisition of the company by Eastgate.  It therefore followed that any sum actually paid by S&W could not reduce or extinguish the damages payable by LMG for breach of warranty.  No doubt this conclusion follows from the premise but Mr Boswood QC for LMG attacked the premise.  He argued that Nykredit was no authority for the proposition that a firm of accountants, in breach of duty to their principals, could take advantage of the warranties given in a share sale agreement.  He also submitted that it would in any event be an impossible (or, at least, wholly speculative) exercise, since it would be necessary in proceedings against the accountants to predict not merely the extent to which the vendor was likely to be solvent but also the extent to which he had defences to the claims of the purchaser.
13	In Nykredit it was necessary for the House of Lords to decide the time from which interest should run for the purposes of a successful claim being made by a bank or building society against a valuer for negligence.  A similar question arises if it is necessary for a court to decide whether a claim against a valuer is statute-barred, see DNB Mortgages v. Bullock & Lees [2000] 1 EGLR 92.  Both questions require the court to decide the time at which the cause of action arises.  On the basis that the policy of the law is to advance rather than retard the causes of action ([1997] 1 W.L.R. at 1633D), it is held that the cause of action may arise well before the security on which the bank relies is actually enforced eg when the loan is made on the faith of the negligent valuer’s report.  But if the buyer’s covenant to repay the loan is a good covenant, there cannot be any immediate loss to the bank.  For this purpose, therefore, it will be necessary to value the buyer’s covenant.  That is the context in which Lord Nicholls made the remarks on which the judge relied (1631 E-F):-
“Frequently, but not always, the plaintiff would not have entered into the relevant transaction had the defendant fulfilled his duty of care and advised the plaintiff, for instance, of the true value of the property.  When this is so, a professional negligence claim calls for a comparison between the plaintiff’s position had he not entered into the transaction in question and his position under the transaction.  That is the basic comparison.  Thus, typically in the case of a negligent valuation of an intended loan security, the basic comparison called for is between (a) the amount of money lent by the plaintiff, which he would still have had in the absence of the loan transaction, plus interest at a proper rate, and (b) the value of the rights acquired, namely the borrower’s covenant and the true value of the overvalued property.”
14	The logic of this approach is that, when damages fall to be assessed against a negligent valuer, the value of the buyer’s covenant to repay must be brought into account to reduce the claim against the valuer.  That was done by Devlin J in Eagle Star Insurance Co v. Gale & Power (1955) 166 E.G. 37, approved in the dissenting judgment of Sir Denys Buckley in London and South of England Building Society v. Stone [1983] 1 W.L.R. 1242.  But it does not follow that the same approach is correct for cases not of a borrower’s covenant to repay his loan but of breach of contract eg by a vendor of a business.  The vendor’s liability is to compensate the Claimant for the loss suffered by his breach of warranty.  This is a liability for damages not a covenant to repay a debt;  as a matter of ordinary principle (whereby a Claimant is entitled to compensation for loss actually suffered) any actual diminution of the buyer’s loss would normally have to be taken into account in assessing the buyer’s claim against the vendor.  It cannot be the case, merely because a valuer can require a Claimant, who brings an action for damages against him, to bring into account the value of a borrower’s covenant to repay a debt, that therefore any party liable to a Claimant for professional negligence can require the Claimant to bring into account the value of his claim against any other contractor for breach of warranty.  This is due to the essential difference between a claim for repayment of a debt (to which there can ordinarily be no substantive defence and in respect of which a Claimant does not have to prove loss) and a claim for damages for breach of contract (to which there may be many defences and in respect of which the Claimant must prove his loss).  If a Claimant’s loss has, in fact, been diminished, that diminution must be brought into account in a claim for damages for breach of warranty.  Thus the valuation cases (which decide that, in claims against valuers, the worth of the mortgagor’s covenant must be brought into account and that the debt is not reduced by any payment made to the creditor by the valuers) are not in point when the question is whether any claim against a person in breach of contract falls to be reduced by any payment made by a person liable for breach of professional duty (whether a valuer, accountant or other professional person).
15	In my judgment, therefore, Andrew Smith J was wrongly persuaded by Mr Martin to follow Nykredit and the judge should have followed the ordinary rule that any actual diminution of a Claimant’s loss should be brought into account in assessing his claim for damages (see British Westinghouse Co v. Underground Railway [1912] A.C. 673, 689-690).  If he had adopted this approach, he would then have held that LMG succeeded on the Mutual Discharge issue and that LMG’s claim for contribution was at least “capable of being one to which the 1978 Act can apply”.  The question still remains whether the claim is, in fact, a claim for the same damage as that for which LMG is liable.
The Same Liability issue
16	The judge treated this issue separately from the Mutual Discharge issue and held that, in any event, the damage for which S&W were liable was not the same damage as that for which LMG were liable.  As I have said, his reasoning was that LMG was liable for the difference between the value which HLP would have had if the warranties had been fulfilled and its actual value, whereas S&W were liable for the difference between the price paid for HLP and whatever Eastgate would have paid on the receipt of proper and careful advice.  As an exercise in the assessment of the amount of damages recoverable by Eastgate from LMG on the one hand and S&W on the other this is, no doubt, correct;  but, as the judge himself recognised, the fact that Eastgate may recover different sums by way of damages does not mean that LMG and S&W are not liable for the same damage.  The damage can be the same even though the amount recoverable by way of damages may vary according to the cause of action which Eastgate is seeking to enforce, see Birse Construction v. Haiste Ltd [1996] 1 W.L.R. 675, 682C per Roch LJ and Jameson v. CEGB [1998] QB 323, 353C per Auld LJ.
17	To my mind, LMG and S&W are liable for the same damage viz the loss arising from the fact that Eastgate have bought a company worth less than Eastgate reasonably expected it to be worth.  The vendor, if liable, has sold a company worth substantially less than the value they contracted it to have;  S&W, if liable, have caused Eastgate to buy a company worth substantially less than the price they paid; the damage suffered by Eastgate is the same damage, even if the damages recoverable may be different.  The damage is “identical” to use Nourse LJ’s words in Birse Construction v. Haiste at 682H although the measure of recovery may not be.
18	To some extent this issue is a matter of impression but I would not, for my part, agree with the judge that the difference between the damage for which LMG are potentially liable and that for which S&W are potentially liable is reflected by the different starting points for the relevant assessment of damages.  It is, of course, true that the starting point for a claim against S&W must be the price paid for HLP whereas the starting point for a claim against LMG must be the value of HLP as warranted.  But these starting points are, in fact, likely to be the same in monetary terms.  Certainly Eastgate claims that they are and for the purposes of assessing the viability of any claim to contribution at the present (interlocutory) stage of the proceedings, the assertions in Eastgate’s Points of Claim are to be taken as true.  It would, of course, be open to LMG at trial to argue that, even as warranted, HLP was worth less than £51 million and that Eastgate had, in any event, made a bad bargain.  It is not possible at this stage to assess the strength of any such argument but it would be a somewhat unattractive argument for LMG to mount.  To the extent that it had any prospect of success, however, it might well not reflect happily on S&W as the accountants charged with the duty of investigating the worth of HLP, as warranted, in the first place.  It can be said that it is open to LMG to admit that the starting point of the claim against them is, in fact, the price paid by Eastgate and that LMG have declined to make any such admission.  But, as a matter of law, the answer to the issue ought not to depend on whether LMG make what would obviously be a tactical admission.
19	I would add that, having once reached a conclusion in LMG’s favour on the Mutual Discharge issue., I am happy to reach a similar conclusion on the Same Liability issue.  Although Sir Richard Scott V-C in Howkins & Harrison posed the mutual discharge question as a necessary threshold question for the purpose of identifying whether a claim to contribution was capable of being a claim to which the 1978 Act could apply, I cannot believe that he intended that the answer to what can itself be quite a difficult question would not ordinarily resolve also the question whether the relevant parties were liable for the same damage.  If this were not so, questions of contribution would become unnecessarily complex and there would be a danger that the Act would not be given the wide interpretation it was intended to have.
20	For these reasons, it seems to me that the judge was wrong in his determination of those first two issues and that LMG’s claim for contribution against S&W is capable of being a claim to which the Act applies and that LMG and S&W are, in principle, liable for the same damage.  It is, of course, sufficient for Mr Boswood to show that these points are arguable but, since, in my view, his arguments are in fact correct, it is preferable so to decide so that the judge at trial (if there is one) can be relieved of the burden of considering them all over again.  It does not, of course, follow that the trial judge must make some apportionment.  He is entirely free to make any apportionment or none at all because the amount of contribution is to be “such as may be found by the Court to be just and equitable”.  S&W, indeed, maintain that it is so obvious that any contribution from them would not be “just and equitable” that the case against them should be stopped now for this reason also;  that is the subject of their cross-appeal, to which I turn.
Just and Equitable issue
21	Here I am happy to say I agree with the judge.  The argument is that LMG, if liable, will have to pay the amount by which the warranted value of (or purchase price for) HLP exceeds the true value of HLP;  if LMG can recover any contribution from S&W, then LMG will receive from HLP more than its true value and will, thus, be unjustly enriched.  This is an argument of considerable force but I do not think it can be appropriately decided on an interim application.  It is just the sort of argument that can only be justly addressed at trial.  I agree with the judge that the true value of HLP is a somewhat nebulous concept since it may not have been the same to LMG as to Eastgate.  Concepts of unjust enrichment may also depend to some extent on whether the value of the company might be greater at the time of trial than at the time of contract and on the extent to which, if at all, S&W either failed to appreciate that which ought to have been obvious to them at the time of their investigation or, having appreciated that which should have been obvious, failed to give proper information to Eastgate.  I emphasise that these are only possible matters for consideration;  there may be others.  But it is a matter for the judge at trial whether there would be any unjust enrichment if contribution were to be awarded and whether, in that event, it would not be just or equitable for contribution to be awarded at all.
Conclusion
22	I would, therefore, allow this appeal and permit LMG to pursue the Part 20 proceedings.

Lord Justice Potter:
23	For the reasons so clearly set out by Lord Justice Longmore, I agree that this appeal should be allowed.
Order: Appeal allowed; appellants to have costs in the appeal assessed in the sum of £21,265 payable within 14 days; Part 20 defendant to pay the Part 20 claimants’ costs of the application below subject to detailed assessment if not agreed; Part 20 claimant to repay to the Part 20 defendant the interim payment made on account of costs under the order dated 22nd March 2001 and pay to Part 20 defendant the further sum of £20,000 on account of the costs of the application below, such payment also to be made within 14 days; leave to appeal refused.
(Order not part of approved judgment)