Canary Riverside Estate Management Ltd v Circus Apartments Ltd

On an application to strike out a pleading alleging dishonesty, the claimant must plead the facts, matters and circumstances said to support an inference of dishonesty. Facts equally consistent with an innocent explanation or negligence are insufficient. At the interlocutory stage, the court asks whether the pleaded primary facts would justify the allegation, rather than whether the evidence will prove dishonesty at trial. A single equivocal statement, viewed against documents supporting an innocent explanation, will not ordinarily satisfy that test. A fresh allegation of breach should also be pleaded in the particulars of claim, rather than introduced for the first time in a reply.

The claimant landlord sued the defendant tenant for alleged breaches of a long lease, including an alleged breach of the alienation covenant. The claimant alleged that, despite a series of disclosed short underleases and a conditional agreement for a ten-year underlease, the defendant had secretly and dishonestly agreed to grant Bridgestreet an unconditional ten-year underlease.

The defendant applied under CPR 3.4(2)(a) and, alternatively, CPR 3.4(2)(c) to strike out paragraph 9 of the reply. The central issue was whether the pleaded material justified an inference of dishonesty.

1. The application was granted. Paragraph 9 of the reply was struck out under CPR 3.4(2)(a) because it disclosed no reasonable cause of action.

2. The governing pleading principles, restated in Three Rivers District Council v Bank of England [2001] UKHL 16, require dishonesty to be distinctly alleged and sufficiently particularised. The pleading must identify the facts, matters and circumstances relied upon to show dishonesty, rather than mere negligence. Facts consistent with innocence do not suffice.

3. At the interlocutory stage, the court considers whether the primary facts pleaded would justify an inference of dishonesty. It does not determine whether the evidence will ultimately establish dishonesty at trial. The relevant question is whether dishonesty is more likely than innocence or negligence on the pleaded facts.

4. The claimant’s case depended principally on an informal email from a junior Bridgestreet employee stating that Bridgestreet had the building for another ten years. Against the background of the disclosed conditional ten-year agreement and the disclosed short underleases with put options, that statement was equivocal and equally consistent with an honest belief that Bridgestreet would remain in occupation for ten years. It did not justify an inference that the defendant was concealing an unconditional agreement.

5. The court did not decide the alternative submission that an agreement to grant an underlease could itself breach the alienation covenant. Nor was it necessary to decide the alternative procedural ground. The court nevertheless observed that, had the allegation disclosed a reasonable cause of action, it should have been pleaded in amended particulars of claim because it was a fresh allegation of breach and should not have been introduced in the reply.