(back to preceding text)

    198.  Mainstream sued all three of them. The claims against Mr Young and Mr Broad succeeded. The company's claim against Mr De Winter was that he induced the other two to break their contracts of employment; in other words, a straightforward Lumley v Gye claim. The judge, Judge Norris QC, dismissed this claim. Mainstream appealed, and the Court of Appeal, comprising Sedley and Arden LJJ and Aikens J, dismissed Mainstream's appeal: [2005] EWCA Civ 861. Before the House is a further appeal by Mainstream.

    199.  The relevant findings of the trial judge were these. Mr De Winter knew Mr Young and Mr Broad had contracts of employment, although not their precise terms. He knew sufficient to spot the conflict problem. He raised this issue with the others. In the light of what they told him Mr De Winter genuinely believed their participation in the Findern venture would not occasion a conflict between their duty and their interest. Accordingly Mainstream failed to establish that Mr De Winter intended to procure a breach of the others' employment contracts.

    200.  These are factual findings, which were not disturbed by the Court of Appeal. On these findings the appeal must fail. The burden of proving Mr De Winter intended to persuade Mr Young and Mr Broad to break their contracts lay on Mainstream. Mainstream failed to discharge this onus.

    201.  Mr Randall QC sought to avoid the difficulty posed by the judge's findings by drawing attention to Mr De Winter's written statements. These showed that Mr Broad told Mr De Winter that Mainstream was not interested in buying the land at Findern. Mr De Winter believed what he was told. On this basis he believed the joint venture would not entail a breach by the others of their contracts with Mainstream. This, submitted counsel, was not good enough. The matters on which Mr De Winter relied did not, as a matter of law, leave Mr Broad and Mr Young free to compete with Mainstream over the development of the Findern land while still working as full-time executives of the company in that area. Mr De Winter was relying on his own, erroneous, legal conclusion. He was not entitled to escape liability by relying on his own mistaken assessment of the legal position.

    202.  I cannot accept this. An honest belief by the defendant that the outcome sought by him will not involve a breach of contract is inconsistent with him intending to induce a breach of contract. He is not to be held responsible for the third party's breach of contract in such a case. It matters not that his belief is mistaken in law. Nor does it matter that his belief is muddle-headed and illogical, as was the position in British Industrial Plastics Ltd v Ferguson [1940] 1 All ER 479. As Lord Devlin said in Rookes v Barnard [1964] 1129, 1212, the defendant must know of the contract 'and of the fact that the act induced will be a breach of it'. Counsel referred the House to several authorities where a contrary view seems to have been expressed; for instance, Metropolitan Borough of Solihull v National Union of Teachers [1985] IRLR 211, 213, paras 7-10, and Welsh Development Agency v Export Finance Co Ltd [1992] BCLC 148, 179. If and in so far as observations in those cases depart from the principle outlined above they were wrong.

    203.  I would dismiss Mainstream's appeal.

    204.  OBG Ltd carried on a substantial business as a civil engineering contractor, specialising in laying and maintaining underground pipes. An associated company provided plant and transport. For present purposes they can be treated as a single entity.

    205.  In 1992 OBG had the misfortune to fall out with its main customer North West Water Ltd. OBG's cash flow dried up and it became unable to pay its debts. In June 1992 one of its subcontractors Raymond Centriline Ltd appointed joint administrative receivers under a floating charge assigned to Centriline by OBG's bankers. It later turned out that this appointment was invalid because at the date of the assignment OBG did not owe any money to the bank under the charge. But at the time Centriline and the receivers, acting in good faith, believed the appointment was valid.

    206.  The receivers went into possession of OBG's property and took control of its business on 9 June 1992. They did what receivers do in these circumstances. They dismissed employees, terminated contracts, disposed of assets and settled claims. Work ceased on the sites on 12 June. One week later OBG went into creditors' voluntary liquidation.

    207.  North West Water treated the appointment of the receivers as an event of default, entitling it to determine its contracts with OBG. Disputes arose. In November 1992 the receivers agreed to accept £400,000 in settlement. OBG's contracts with other customers were completed on the instructions of the receivers.

    208.  Meanwhile the liquidators were questioning the validity of the receivers' appointment. In October 1995 OBG, acting by its liquidators, started these proceedings claiming a declaration that the appointment was invalid and consequential relief including damages. In August 1997 the settlement negotiated by the receivers with North West Water was finally signed, with the concurrence of the liquidators.

    209.  In January 2001 Judge Maddocks held that the receivers' appointment was invalid. He directed an assessment of damages. OBG advanced claims for damages for trespass over and conversion of its land and chattels and all its other assets; alternatively, unlawful interference with contractual relations in respect of its contracts. OBG based its damages claims on the value of these assets on the date they were wrongfully taken over by the receivers, that is, 9 June 1992.

    210.  The judge rejected OBG's claim for conversion of its contractual rights. The tort of conversion is confined to tangible property. The judge upheld the claim based on interference with contractual relations. In reaching the latter conclusion the judge relied upon the passage from the speech of Lord Macnaghten in Quinn v Leathem [1901] AC 495, 510, which I set out above when considering the 'prevention of performance' aberration.

    211.  As to quantum, there was no difficulty in assessing the value of the land or the value of the plant and equipment. Before the judge the factual dispute centred on the value of OBG's contracts with North West Water ('the NWW contracts') and its contracts with other customers ('the non-NWW contracts'). Valuation of these contracts called for an assessment, as at 9 June 1992, of the amount these contracts could reasonably have been expected to yield to OBG had the receivers not been appointed. The judge assessed this amount at £1,400,000 for the NWW contracts and £420,000 for the non-NWW contracts.

    212.  This amount contrasted with the sums realised by the receivers for these items: £400,000 paid to the receivers pursuant to the settlement they negotiated with North West Water, and £353,000 in respect of the non-NWW contracts. The judge gave reasons why the values he attributed to the contracts could not be equated with the amounts actually realised by the receivers. He also held that, although the liquidators joined in the North West Water settlement document, there was no question of estoppel, acquiescence or ratification. This was throughout a hostile receivership. The receivers were not affected in their conduct of the receivership by anything done or not done by the liquidators. The liquidators never accepted the validity of the receivers' appointment, nor were the liquidators in a position to re-negotiate the settlement reached by the receivers with North West Water. None of these matters was in issue before your Lordships.

    213.  The outcome was that Judge Maddocks ordered the receivers to pay £1,854,000 to OBG plus interest. This amount comprised £244,000 in respect of the land, plant and equipment, and £1,910,000 in respect of OBG's contracts and other debtors and cash at bank. The judge deducted £300,000 in respect of estimated liquidation costs OBG would have incurred in any event.

    214.  The Court of Appeal, comprising Peter Gibson, Mance and Carnwath LJJ, allowed an appeal by the receivers on the interference with contractual relations claim and dismissed a cross-appeal by OBG on the conversion claim: [2005] QB 762. The Court of Appeal deleted from the judge's order all the amounts awarded by him save those for land, plant and equipment. This reduced the amount of the damages from £1,854,000 to £244,000.

    215.  The effect of the Court of Appeal's order was that OBG received nothing for the loss of its debts and other contractual rights. Valued altogether at nearly £2 million, these disallowed items represented almost 90 per cent of OBG's assets. But in respect of the receivers' misappropriation of these substantial items OBG received no recompense at all.

    216.  That was the effect of the order of the Court of Appeal. But I should note that the receivers have not sought to leave OBG in this position. They accept they are liable to account for their net realisations. This means, in financial terms, that the continuing dispute concerns the difference of £1,067,000 between the judge's assessment of the value of the NWW and non-NWW contracts and the amounts actually realised by the receivers for these assets.

    217.  Peter Gibson LJ said he reached his conclusion on the legal issues with regret. The wrongful taking of control of intangible assets by an invalidly appointed receiver leading to loss which but for the receivership would have been avoided ought to have consequences in law. Carnwath LJ's 'initial instinct' was that the receivers should be strictly liable for all the consequences of their unlawful misappropriation of OBG's business, by analogy with the long-established principles applied to unlawful receiverships under the law of trespass and conversion. But he agreed that course was not open to the Court of Appeal. Mance LJ dissented on the interference with contractual relations claim. On this ground he would have upheld the judge's order.

    The economic torts

    218.  I agree with the majority in the Court of Appeal that OBG's claim based on the economic torts fails. I can state my reasons very shortly, because they will be apparent from the views I have already expressed on the ingredients of these torts. The receivers did not intend to 'induce' OBG to breach of any of its contracts. The receivers honestly believed they were entitled to act on behalf of OBG in exercise of their powers as administrative receivers. So the tort of inducing a breach of contract does not avail OBG. Nor does the tort of interference with a business by unlawful means assist OBG. The receivers did not have any intent to injure OBG.

    219.  OBG's claim based on the tort of conversion, a tort of strict liability, is an altogether different matter. To that I now turn.

    220.  In this case the receivers, acting in good faith but without any lawful right, took over OBG's business and assets. They sold the company's land, its plant and its equipment. They wound down its outstanding contracts and negotiated a deal with its biggest customer. The receivers are liable for their unauthorised dealings with the company's land and chattels. That is not in dispute. But, it is said, they are not liable for their unauthorised dealings with the company's debts and other contractual rights.

    221.  This prompts the question: why not? The receivers took over the entirety of the company's business and assets. Why should they be liable strictly in respect of their unauthorised dealings with some parts of the company's property but not others? This distinction makes no sense. It lacks any rhyme or reason.

    222.  The distinction, it is said, follows from the limited scope of the tort of conversion. The tort of conversion provides a remedy in damages for the misappropriation of chattels, but not for the misappropriation of intangibles. Conversion applies to choses in possession, not choses in action, to use the historic labels.

    223.  There can be no better place to start consideration of this subject than to remember Sir John Salmond's famous words:

'Forms of action are dead, but their ghosts still haunt the precincts of the law. In their life they were powers of evil, and even in death they have not wholly ceased from troubling. In earlier days they filled the law with formalism and fiction, confusion and complexity, and though most of the mischief which they did has been buried with them, some portion of it remains inherent in the law of the present day. Thus if we open a book on the law of torts, howsoever modern and rationalized, we can still hear the echoes of the old controversies … and we are still called upon to observe distinctions and subtleties that have no substance or justification in them, but are nothing more than an evil inheritance from the days when forms of action and of pleading held the legal system in their clutches.

In no branch of the law is this more obvious than in that which relates to the different classes of wrongs which may be committed with respect to chattels. In particular the law of trover and conversion is a region still darkened with the mists of legal formalism, through which no man will find his way by the light of nature …'

    Salmond was writing in the Law Quarterly Review at the beginning of the last century: 'Observations on Trover and Conversion', (1905) 81 LQR 43. But his observations still have a ring of truth in this area of the law.

    224.  The cause of action, formerly known as trover but now known as conversion, was founded on a fiction. The standardised plea was that the plaintiff possessed certain goods, that he casually lost them, that the defendant found them, and that the defendant did not return them but instead 'converted them to his own use'. The defendant was not permitted to deny the losing and finding, and so the only issues were the plaintiff's right to possession and the conversion itself. In due course this became the standard remedy for the unauthorised assumption of the powers of the true owner. Any chattel could be lost and found, and so it could be converted. But land could not be lost and found, nor could intangible property. And so originally the rule was that intangibles could not be converted.

    225.  With the expansion of commerce and the increase in dealings with intangible property this rule, described by Professor Prosser as a 'hoary limitation', had to be relaxed. The law provided, in respect of the misappropriation of intangibles, no remedy equivalent to that provided by conversion for the misappropriation of tangibles. So the courts resorted to another legal fiction. They held that in appropriate cases a document embodying or recording a debt or obligation should be treated as having the same value as the debt or obligation.

    226.  As would be expected, the reach of this useful tool gradually expanded. Now it is not confined to documents of title and negotiable instruments. It includes insurance policies, guarantees, share certificates and much else. In Clerk & Lindsell the principle is said to extend to 'any document which is specially prepared in the ordinary course of business as evidence of a debt or obligation': Clerk & Lindsell on Torts, 19th edition, (2006), para 17-35.

    227.  In the past some unconvincing efforts were made to justify this extension as a particular application of the ordinary principles of damages. Now it is openly recognised that this extension involves a legal fiction: see, for instance, Pill LJ and Potter LJ in Smith v Lloyds TSB Group plc [2001] QB 541, 551, 557, and Mance LJ in the present case [2005] QB 762, 784, para 76.

    228.  Legal fictions, of their nature, conceal what is going on. They are a pretence. They represent an unacknowledged departure from existing principle. By resorting to the fiction of equating the value of a document as a chattel or piece of paper with the value of the rights embodied or recorded on it the courts concealed the reality. The reality is that English law does sometimes provide a remedy for the misappropriation, or conversion, of intangible rights. To that extent the tort of conversion has already jumped the gap between tangibles and intangibles. It did so a long time ago.

    229.  This prompts a further question: why should this extension of the tort of conversion be confined to cases where the intangible rights are specially recorded in a document? I would like to think that, as a mature legal system, English law has outgrown the need for legal fictions. There was a time when John Doe and Richard Roe were popular characters. They had to be parties to some forms of action. When they were in their prime their names appeared again and again in the law reports. English law has moved on. John Doe and Richard Roe are no more. So here, if there is to be a limit to the types of intangibles which attract a remedy in conversion, this limit should be capable of being articulated and justified openly, not by reference to fiction piled upon fiction.

    230.  Rationally the dividing line cannot be the existence or not of a piece of paper. The existence of a document is essentially irrelevant. Intangible rights can be misappropriated even if they are not recorded in a document. In principle an intangible right not recorded in writing may merit protection just as much as a right which is recorded in this way.

    231.  In practice misappropriation is more likely to occur with a right embodied in a document such as a cheque which passes through several hands in the ordinary course of business. But that is no reason for withholding protection in other cases. This is especially so today when information is increasingly stored and communicated, and transactions are effected, by electronic means.

    232.  The better approach today is to discard the fictional significance of a piece of paper. Instead one should seek to identify the common characteristic of the intangible rights in respect of whose misappropriation English law, as a matter of reality, already provides the remedy of conversion. The common characteristic, it seems to me, is that the rights protected in this way are contractual rights. No principled reason is apparent for attempting, for this purpose, to distinguish between different kinds of contractual rights.

    233.  The time has surely come to recognise this and, additionally, to recognise that the tort of conversion applies to contractual rights irrespective of whether they are embodied or recorded in writing. I would so hold. This would be a modest but principled extension of the scope of the tort of conversion. It would rid the law of an artificial limitation derived from the limited scope of an enabling legal fiction.

    234.  This step would not run counter to any legislation. Parliament has not enacted any general relieving provision from strict liability for conversion. Parliament has enacted specific relieving provision in respect of particular types of dealings with goods, for instance, the Factors Acts, and particular types of dealings with intangibles, for instance, the Cheques Act. Abolishing the need for a piece of paper would not cut across any legislative scheme.

    235.  The receivers placed reliance on the Torts (Interference with Goods) Act 1977. This Act excludes 'things in action' from the scope of 'conversion of goods' as defined in that Act. This definition accords with the existing law by seemingly embracing the fiction that pieces of paper are deemed to be worth the value of the rights embodied or recorded in them. But Parliament cannot be taken to have intended to preclude the courts from developing the common law tort of conversion if this becomes necessary to achieve justice.

    236.  The receivers also drew attention to section 234(3) of the Insolvency Act 1986. This provision protects administrative receivers and liquidators, in the absence of negligence, from liability if they seize or dispose of property which is not the property of the company. 'Property' includes things in action: section 436. In Welsh Development Agency v Export Finance Co Ltd [1992] BCLC 148 the Court of Appeal held that 'property' in section 234(3) does not include intangibles because they cannot be 'seized'. So, the argument runs, this is a legislative recognition that protection was not needed in respect of intangibles. I do not agree. The difficulty I have with this submission lies in the Court of Appeal's restrictive interpretation of 'property'. Contrary to the decision of the Court of Appeal, I see no reason to suppose Parliament intended to exclude the wrongful disposal of contractual rights from the scope of this relieving provision.

    237.  Whether the law on conversion should extend beyond contractual rights and embrace other forms of intangibles is not a matter to be pursued on this occasion. This further step has been taken elsewhere in some parts of the common law world. But other forms of intangible rights, such as intellectual property, raise problems of their own. These problems are best considered when they arise.

    238.  Accordingly I would hold that in the present case the receivers committed the tort of conversion by their wrongful misappropriation of OBG's debts and OBG's contractual rights against North West Water and other contractors.

    239.  Mr Mitchell QC submitted that the tort of conversion should not be extended. OBG has a good remedy, which it has chosen not to pursue, against the other parties to OBG's contracts. By accepting that the receivers gave a good discharge to OBG's debtors and contractors despite the invalidity of the receivers' appointment, OBG accepted that the receivers acted as OBG's agents. OBG's remedy against the receivers lay, not in conversion, but in suing the receivers for breach of their fiduciary duties.

    240.  I cannot accept this. OBG acting by its liquidators could hardly be expected to pursue the company's debtors and contractors for non-payment, on the ground that the receivers were not able to give them a good receipt. That would be utterly unreasonable. OBG's failure to take this course cannot be treated as a waiver of the receivers' torts. OBG cannot thereby be taken to have accepted that the receivers were acting as agents of the company. In the case of North West Water OBG joined in the settlement document. But, here again, as already noted, the judge rejected the suggested defences of estoppel, acquiescence and waiver.

    241.  I would allow this appeal and restore the order of Judge Maddocks.

    242.  In the third appeal the dispute is between two magazines, OK and Hello (for ease of reading I will omit the exclamation marks). OK and Hello are keen rivals in the celebrity magazine market. On 18 November 2000 Mr Michael Douglas and Miss Catherine Zeta-Jones, well known film stars, were married at the Plaza Hotel, New York. The Douglases exercised tight control over their wedding photographs. They took steps to ensure no one was present except for 350 invited guests, authorised photographers, authorised hotel staff, security personnel and the like. They also made arrangements to see that, apart from the authorised photographers, nobody took any photographs. Despite the enormous media interest, this was, as the judge put it, a private wedding.

    243.  In order to satisfy the media demand for photographs and reduce the risk of unauthorised and intrusive photographs the Douglases entered into an agreement with OK on 10 November 2000. In outline the agreement provided that the Douglases transferred to OK the world wide exclusive right to publish, and authorise others to publish, wedding photographs approved by the Douglases. In return OK paid the Douglases £1million. The Douglases were to hire photographers, and do their best to ensure no other photographers or media had access to the wedding and that no guests or anyone else took photographs. Any rights not specifically granted to OK were reserved to the Douglases.

    244.  So this was a private wedding, subject to this: many photographs, approved by the Douglases, were to be made publicly available at once.

    245.  The best laid plans can go astray. A photographer called Robert Thorpe somehow, by deceit or subterfuge, infiltrated the wedding and the reception. Surreptitiously he took some indifferent photographs. Early the next day these photographs were offered on the market and sent electronically to Hello's picture editor Ms Neal in London. They were then sent on from London to Madrid for Senor Sanchez Junco, Hello's editor- in-chief, to decide whether to buy them. The upshot was that Hello agreed to pay £125,000 for the exclusive right to publish six photographs in the United Kingdom, France and Spain.

    246.  Hello then prepared the photographs and accompanying text for publication in issue 639. On Monday 20 November the Douglases obtained an ex parte injunction restraining publication. This was discharged by the Court of Appeal on Thursday 23 November. Edition 639 of Hello containing the six unauthorised photographs went on sale on the following day, Friday 24 November, on the same day as issue 241 of OK which included OK's coverage of the wedding. OK had hurriedly brought forward this publication. Hello's sales figures for issue 639, about 523,000, were some 150,000 above average.