K/S Lincoln & Ors v CB Richard Ellis Hotels Ltd

A pleading must state a positive case. Parties cannot use pleadings merely to issue warning shots or reserve insufficiently developed arguments. An allegation of illegality will not ordinarily defeat a professional negligence claim where the alleged illegality concerns a separate transaction to which the defendant was not a party and which does not taint the duty or contract sued upon. The allegation may nevertheless affect a particular head or element of damages if recovery would assist the claimant to obtain a benefit from its own wrongdoing. Case management should address the proportionality of disclosure and costs, particularly where the allegation appears weak and may require extensive investigation.

The claimants, special purchase vehicles, sued the defendant hotel valuers in negligence and contract, alleging that the valuations caused them to overpay for eight hotels. Their alternative damages calculation included an 8% payment made to a property location agent. The defence alleged that the payment had been structured to facilitate unlawful Danish tax evasion and that the claims therefore failed for illegality.

The claimants applied under CPR 3.4 to strike out the allegation or alternatively sought further particulars. The central issues were whether paragraph 58.2 positively pleaded illegality, whether the alleged illegality could defeat the professional negligence claims, and how the issue should be managed pending disclosure.

1. Pleading. Paragraph 58.2 was a positive allegation of tax evasion and illegality. Pleadings must identify the issues for trial and set out a positive case where possible. They cannot be used to fire warning shots or put down markers for arguments not yet properly formulated (paras [9]-[13]).
2. Illegality and remoteness. Contracts entered into with the intention of committing an illegal act will generally not be enforced, subject to exceptional remoteness. Collateral rights may sometimes be enforced where illegality does not necessarily form part of the claimant’s case. The court will not generally assist a claimant to recover a benefit from its own wrongdoing. The policy is deterrence, rather than whether the public conscience would be affronted (para [22]).
3. The alleged fraud concerned the hotel sale contracts, not the valuation services or the alleged duty and contracts between the parties. It was therefore prima facie too remote to defeat the entire professional negligence claim. The reasoning in 21st Century Logistic Solution Ltd v Madysen Ltd supported that conclusion, and the claimants were in an even stronger position because the alleged fraud did not taint the contract sued upon (paras [24]-[26]).
4. However, if the alternative damages calculation was legally correct, the claimants could not recover the fraudulent 8% uplift. The court could assess the loss by reference to the price paid to the sellers without the uplift. The tainted element could fail while the untainted claim continued, consistently with Hewison v Meridian Shipping PTE and Gray v Thames Trains Ltd (paras [27]-[29]).
5. Case management. The allegation could not be struck out while the 8% uplift remained part of the claim. The claimants were given 14 days either to maintain that element, in which event relevant documents would fall within standard disclosure under CPR 31.8, or to amend by deleting it. If deleted, the defendant would bear the immediate costs of pursuing the weak illegality issue, subject to repayment if ultimately successful (paras [30]-[38]).
6. The issue whether the alleged conduct was illegal under English law or Danish law was not decided summarily (para [39]).

First-instance decision. No prior appellate decision is stated in the judgment.