Johnson v. Gore Wood & Co.

The House of Lords held that the bringing of a personal negligence action by a controlling shareholder after settlement of a company's action was not necessarily an abuse of process under the rule in Henderson v. Henderson; facts and conduct of the parties may give rise to an estoppel or to acquiescence barring an abuse plea. The court emphasised a merits-based, flexible approach to abuse of process, requiring the defendant to show oppression or misuse of court procedure. On recoverability of damages, the House confirmed the general principle that a shareholder cannot recover loss which merely reflects loss suffered by the company (the Prudential principle) but allowed that where the shareholder has a duty owed to him personally and proves personal loss separate and distinct from the company’s loss, those heads of damage may be recoverable.

This appeal arose from contested preliminary issues in professional negligence proceedings. Mr Johnson, a businessman who controlled Westway Homes Limited (WWH), sued his solicitors, Gore Wood & Co. (GW), in respect of alleged negligent advice and conduct in connection with WWH's exercise of an option to purchase land. WWH had pursued its own negligence claim against GW and settled for a substantial sum in 1992. Mr Johnson thereafter issued a separate personal action alleging that GW had owed duties to him personally and had caused him personal financial loss.

The House of Lords considered two principal questions on preliminary issues: (i) whether Mr Johnson's separate personal action was an abuse of process because it could and should have been advanced in or with the company's action and (ii) whether the heads of damage pleaded by Mr Johnson were, as a matter of law, recoverable by a shareholder where they mainly reflected loss sustained by the company.

The court reviewed authorities on abuse of process (notably Henderson v. Henderson) and estoppel doctrines. It held that whether successive litigation is abusive must be judged on all the circumstances; a defendant alleging abuse bears the onus of showing oppression or misuse. The settlement discussions and the terms of settlement in this case supported the judge's finding that it would be unconscionable for GW to raise abuse after participating in negotiations and agreeing a settlement which treated the personal claim as a separate matter, and that acquiescence or estoppel by conduct prevented GW from striking out the action.

On damages the court applied established principles: a shareholder cannot recover for loss that merely mirrors the company's loss; however, if a duty was owed to the shareholder personally and the loss is separate and distinct (non-reflective consequential loss), the shareholder may recover subject to remoteness and avoidance of double recovery. The House struck out specified elements of the pleaded heads (certain pension-related claims that were reflective, and claims for mental distress and aggravated damages) but allowed other heads to proceed to trial.

Nature of relief sought: declaratory and damages relief for alleged professional negligence in contract and tort, and a strike-out application by GW on abuse and on preliminary objections to recoverability of pleaded heads of damage.

Issues framed by the court: (i) whether the personal proceedings were an abuse of process; (ii) whether GW was estopped or had acquiesced so as to be precluded from asserting abuse; (iii) whether, on the facts pleaded, the several heads of damage were in principle recoverable by Mr Johnson or were merely reflective of the company's loss; and (iv) whether damages for mental distress and aggravated damages were recoverable.

Concise account of reasoning: the House applied a flexible, policy-sensitive test to abuse of process and concluded that the conduct of the parties and the settlement terms made it unconscionable for GW to assert abuse; on damages the court distinguished recoverable personal losses from reflective losses, struck out pension contributions and claims for mental distress/aggravated damages, and permitted other non-reflective heads to proceed to trial subject to proof and remoteness rules.

Appeal allowed in relation to abuse of process and estoppel/acquiescence: the House held that the personal proceedings were not an abuse of process on the facts and that GW was precluded by its conduct from striking out the action. Cross-appeal dismissed in large part: the House held that certain pleaded heads of damage were not recoverable as they merely reflected loss to the company (notably pension contributions/enhancement in part) and that damages for mental distress and aggravated damages were not recoverable; other non-reflective heads of loss were left to proceed to trial.

First instance: Pumfrey J. (preliminary issues decision) — judgment in favour of Mr Johnson on estoppel and recoverability (21 May 1998). Court of Appeal (Nourse, Ward & Mantell L.JJ.) reversed as to abuse of process and allowed GW's appeal on that point; judgment given 12 November 1998. House of Lords (Appellate Committee) allowed Mr Johnson's appeal and dismissed GW's cross-appeal in part — judgment delivered 14 December 2000 ([2000] UKHL 65).