What’s the law regarding deciding a case on its merit? What are the merits of deciding a case on the law? It’s a debate that may interest judges more than your average builder
Ah, the merits, oh, the law! This is a story about building eight houses: the bread-n-butter in the real world of building. The builder happily contracts with the developer. Or at least he thinks he does. See, it’s getting complicated already isn’t it? And eventually the builder is held out of his money and the story ends up in the courts. I reckon the first judge decided the case on the merits but the next three judges in the Court of Appeal decided the case on the law.
All went well until, wait for it, the banking shenanigans of October 2008, when the world was discovered to be mad. The house sales stumbled smack into a market in panic
I will tell you the full story in a moment. First though, let me quote from a recent Chartered Institute of Arbitrators lecture given by lawyer Derek Roebuck. I love it:
“All my legal life I have been reminded of the gulf between legal rights and merits. As a lad starting my articles, I prepared the brief for Hartley Shawcross in a claim against our client John Summers Steeleworks. We were pouring cyanide into the River Dee, which upset the salmon since they preferred to die in the traditional way. In 1958 Shawcross was the Garfield Sobers of the Bar, so quick and brilliant that I found it hard to follow what he was doing. On the other side was Charles Russell, appearing to move more at my speed. I could not imagine a more overwhelming case than that which Shawcross presented. Russell hardly raised a point. He just left it to the scientific experts to establish a cyanide spill and to the judge to find the law he wanted. We lost, of course. We never had a chance of persuading the Judge that the law should override the merits. Perhaps he likes to do a bit of fishing himself. Fifty years of experience have taught me that judges are suckers for merits. I have still to come across one who enjoys deciding a case on unmeritorious law”.
Mr and Mrs Costello are modest housing developers. They told the builder, Mr Macdonald, that they would pay him through their company Oakwood Residential Ltd because that conduit was useful for tax and financial purposes. That’s the sort of commercial arrangement that is so frequently made at this level. By “level” I mean small developer, small builder, all decent people not bothering to talk the arrangement through with any high-fallutin’ lawyer. Builders at this level simply get on with it.
All went well until, wait for it, the banking shenanigans of October 2008, when the world was discovered to be mad. House sales stumbled smack into a market in panic. Mr and Mrs Costello’s line of cash into Oakwood and then onto the builder dried up. The builder begged for his cash, but got nowhere, and went to his lawyers. He sued Mr and Mrs Costello. Dear me no, said their lawyers; your contract is with Oakwood. Perhaps, said the builder, but that outfit is only a conduit, an agent for tax purposes. The court liked all this. After all it was the development of Mr and Mrs Costello’s land now with eight finished, albeit empty, unsold houses. The judge decided that Mr and Mrs Costello and their shell company Oakwood were jointly bound to the builder. Since Oakwood hadn’t paid, Mr and Mrs Costello should or both should. Good on merits, I think.
The builder sued Mr and Mrs Costello. Dear me no, said their lawyers; your contract is with Oakwood
The Costellos appealed. I don’t recognise any of these C0urt of Appeal judges as erstwhile bricklayers, nor small builders, nor small-time house developers. Anyway they weren’t so interested in the merits, nor in the actual real life relationships down here in small commerce. Anyone of them would have shuddered at the notion of the builder entering into a contract with a shell company, a mere tax advantage vehicle. As a different appeal judge once said: “Precedent provides off-the-shelf-solutions where merits don’t”. And here we have a situation where the builder entered into a contract with Oakwood Residential. True, that enterprise is owned lock-stock and barrel by the Costellos. But we run smack into sound legal principle.
The builder and Oakwood made the contract between them. Oakwood, in law, is a person. The builder shared risks with that person. The risk of insolvency by Oakwood and failing to pay the builder doesn’t see the Costellos come to the rescue. The contract doesn’t even hint at that. As to the conduit for tax benefits and all that, the court says the builder “must be deemed to have gone into the agreement with their eyes wide open”. Snag here is that the Court of Appeal is absolutely right on the button with the legal analysis, but builders with eyes wide open rarely sport a law degree between their ears.
Tony Bingham is a barrister and arbitrator at 3 Paper Buildings Temple