K/S Lincoln & others v CB Richard Ellis Hotels

(Technology and Construction Court — 2 October 2009)

The claimants were special purpose vehicles created by a Danish company to buy eight hotels in England. They alleged that the defendant, CB Richard Ellis Hotels, was negligent and in breach of contract in carrying out valuations of these hotels. The purchases were structured such that the purchase prices included an 8% uplift paid, not to the sellers, but to property location agents.

The claimants proposed two alternative calculations for the quantum of damages: the primary method compared the defendant’s valuations with alleged “non-negligent” valuations and the alternative method instead compared the prices paid with these “non-negligent” valuations.

The defendant pleaded that the 8% uplift amounted to unlawful tax evasion under Danish law and that the claims failed for illegality. The claimants denied this, both on the facts and as a matter of law, and applied to strike out this part of the defendant’s defence.

The court reviewed the relevant authorities, culminating in the recent House of Lords’ decision in Stone & Rolls (in liquidation) v Moore Stephens (2009). The court set out the general principles on illegality and applied them to the facts.

The court held that the 8% uplift was only relevant to the claimants’ alternative calculation of quantum and it would be impossible for the claimants to convince the court that their damages claim should be uplifted by 8% in the event that the allegation of fraud were to be made out. The question of illegality was thus relevant, but on the court’s analysis it would not lead to the dismissal of the entire claim because the alleged fraud was for the most part too remote. Instead, the amount of the claim would be reduced by striking out that particular element of the damages calculation.

The court was reluctant to strike out such a claim prior to disclosure and evidence, and so considered what would be a proportionate response to the application as a matter of case management. The claimants were given a deadline to confirm whether they wanted to pursue the 8% element of their claims. If so, the allegation of illegality would not be struck out. If the claimants amended their claim to remove their reliance on the 8% element, then if the defendant elected to pursue its general allegation of illegality, it would risk having to pay the claimants’ costs incurred in dealing with that aspect of standard disclosure in advance of any trial.

Source – Post Magazine – 03.12.09