Court of Appeal emphasises importance of truthful pleadings

The Court of Appeal has recently upheld the High Court’s decision in Makdessi –v- Cavendish Square[1] allowing committal proceedings for contempt of court to be brought against Mr Makdessi for making false statements in his pleadings.

The substantive proceedings

Cavendish brought a claim against Mr Makdessi for breach of restrictive covenants in a Sale and Purchase Agreement (SPA) dated 28 February 2008 for the acquisition by Cavendish of Team Y&R Holdings, a company in which Mr Makdessi was a major shareholder.  Under the terms of the SPA, a breach of certain restrictive covenants contained in the SPA would cause the relevant seller to become a Defaulting Shareholder. The monetary effects of becoming a Defaulting Shareholder were significant, and included the right for Cavendish not to pay outstanding instalments of the price (deferred consideration), to exercise a call option at a price favourable to them and to seek damages for any losses incurred as a result of the default.

Pursuant to the terms of the restrictive covenants, Mr Makdessi was obliged to sell any shares that he held in Carat, a competitor of Cavendish, within four months of completion and to terminate a joint venture agreement with Carat to which Mr Makdessi was a party, and under which he owed extensive obligations to Carat.

On 13 December 2010, Cavendish purported to exercise a call option on the basis that Mr Makdessi was a Defaulting Shareholder on the grounds that he had failed to dispose of his shares in Carat within four months, had failed to procure the termination of the joint venture agreement with Carat and had continued to provide services to Carat.  On 15 December 2010, Cavendish issued proceedings against Mr Makdessi for (i) a declaration that it was entitled not to pay the final instalments of the price (ii) seeking specific performance of the call option and (iii) damages in respect of the loss of value to its shareholding.

On 15 February 2011 Mr Makdessi filed his Defence and Counterclaim, in which he denied being in breach of the SPA as alleged by Cavendish, and in particular, denying any on-going involvement with Carat after April 2008. In October 2012 Mr Makdessi submitted a Re-Amended Defence and Counterclaim admitting that he had had an on-going unpaid involvement with Carat, and that such involvement placed him in breach of his fiduciary duties to the second claimant.

As a result of the admissions in Mr Makdessi's amended pleadings, the majority of the factual issues in dispute fell away. Consequently, what had been fixed for a four to five week trial was listed for five days and confined to legal argument as to whether the Defaulting Shareholder provisions were penal in nature and therefore unenforceable. In November 2012 Cavendish applied for permission to bring committal proceedings against Mr Makdessi for contempt of court.

The committal proceedings

High Court judgment

The first instance judge reviewed the relevant case law on committal proceedings and relied on the summary laid down in Poole Motors –v- Seabrook [2010] EWHC 1849[2] which provides that "a person who makes a statement verified with a statement of truth... is only guilty of contempt if the statement is false and the person knew it to be so when he made it".  The overriding consideration in committal proceedings is whether it is in the public interest for such proceedings to be brought.  In considering whether it is in the public interest, the following factors are relevant:

1. There must be a strong case against the alleged contemnor;
2. The false statements must be significant in the proceedings;
3. The court should consider whether the alleged contemnor understood the likely effect of the statement and the use to which it would be put in the proceedings;
4. The need of the courts to treat instances of false evidence seriously, to avoid the statement of truth being seen as a mere formality; and
5. Whether there has been a failure to warn the alleged contemnor, at the earliest opportunity, that he may have committed contempt.

The judge also noted the case of Kirk –v- Walton[3], which established that the court's discretion to grant permission to bring contempt proceedings should be exercised with great caution and that there must be a strong prima facie case against the alleged contemnors.

Having considered the above authorities and the significance of allowing committal proceedings to be brought, the judge concluded that there was a strong case that Mr Makdessi had continued to be very substantially involved with Carat beyond April 2008.  Therefore, the statements in Mr Makdessi's original Defence and Counterclaim that he had no involvement with Carat after April 2008 were on the face of it, false. The judge considered that this was not a case in which Mr Makdessi could have forgotten what he was doing after April 2008 in relation to Carat's business, or in which he had no reason to know that the statement was false.  Furthermore, the judge held that Mr Makdessi "would have known that a knowingly false statement was of considerable significance to the case". Had the false statements not been made in the original pleadings, the factual defence on liability could not have been made and this would have saved a vast amount of the time which had been expended on these issues before the factual case was abandoned.

The defence argument that permission to apply for committal had been made in bad faith or for some improper motive was also rejected by the judge.

The judge held that it was therefore in the public interest to allow committal proceedings to be brought against Mr Makdessi.  Mr Makdessi appealed against the first instance decision on a number of grounds.

Court of Appeal

The Court of Appeal dismissed Mr Makdessi’s appeal and allowed permission for the committal proceedings to be brought.  The court noted that the grounds of appeal which were relied upon by Mr Makdessi were largely an attempt to carry out a further review of the judge's findings of a threshold question as to the strength of the case against Mr Makdessi.  The Court of Appeal felt that this was an issue in respect of which the courts should be slow to interfere with the trial judge's conclusions, and did not feel that the grounds of appeal in this case suggested a reason to do so.

The court reiterated that the critical question in these cases was "whether or not it is in the public interest that an application to commit should be made", and that the discretion to permit such an application should be approached with considerable caution.  In considering the public interest question, the court noted that the statements made in Mr Makdessi's original pleadings were not matters which he was likely to have forgotten or be mistaken about.  The time and costs incurred by Cavendish in establishing the factual element of liability were significant and could have been avoided had the false statements not been made.  The court further noted that there were strong grounds to think that Mr Makdessi appreciated the significance of what he said.

It was submitted by the defence that claimants, or their solicitors, ought to have warned Mr Makdessi at the earliest opportunity of the fact that they considered that he may have committed contempt.  The Court of Appeal did not accept this and noted that a litigant such as Mr Makdessi was "a highly successful and intelligent businessman with top flight lawyers", who "did not need to be reminded …that false statements were punishable by committal".

In its judgment, the court drew attention to the proposition from South Wales Fire and Rescue Service –v- Smith[4], which was cited with approval by the Supreme Court in Fairclough Homes Ltd –v- Summers[5], that it is in the public interest to discourage the making of false statements by litigants because of the effect on those involved in the litigation and their effect on the justice system, which "depends above all upon honesty".

Sanction

The Court of Appeal's judgment means that a hearing of the application to commit will take place in order to determine whether Mr Makdessi was in fact in contempt of court. If he is found to be in contempt, he will potential face a maximum two year prison sentence or a fine or sequestration (seizure) of assets order.

Comment

This judgment is an important reminder to individuals that they must read statements of case in full before signing the statement of truth.  It highlights the seriousness of the potential implications of signing such statements, in particular in light of the Court of Appeal's comments in relation to Mr Makdessi not requiring any further warning that false statements were punishable by committal.

It should be noted that there is scope in this type of situation for legal advisors to be liable for negligent advice to clients, for example, if it becomes obvious following disclosure that statements made in original pleadings are untrue and the solicitors either (i) fail to realise that this is the case, or (ii) fail to advise the client that they need to amend their pleadings and of the potential consequences of not doing so for the client.

This blog was written by Katie Wright.

[1] EWCA Civ 1540

[2] Barnes t/a Poole Motors –v- Seabrook [2010] EWHC 1849 (Admin)

[3] Kirk –v- Walton [2008] EWHC 1780 (QB)

[4] South Wales Fire and Rescue Service –v- Smith [2011] EWHC 1749 (Admin)

[5] Fairclough Homes Ltd –v- Summers [2012] UKSC 26