High Court draws adverse inferences from failure to call relevant witness, and finds default interest clause to be an unenforceable penalty

The High Court has rejected a claim for misrepresentation, finding that although a fraudulent misrepresentation had been made, it had not induced the claimant to enter into the transaction: Ahuja Investments Ltd v Victorygame Ltd [2021] EWHC 2382 (Ch).

The court's finding as to (lack of) inducement was based in large part on the claimant's failure to call its former solicitor to give evidence, in circumstances where the claimant had obtained information from the solicitor in the course of the proceedings, but had successfully claimed litigation privilege in respect of the relevant communication (see our blog post here). As there was no explanation from the claimant for the failure to call the solicitor to give evidence, the judge inferred that his evidence would be unhelpful from Ahuja's perspective.

The decision demonstrates that, while the courts will not lightly draw adverse inferences from a failure to call a witness, it may do so in an appropriate case. Here it was perhaps ironic that the claimant had successfully prevented information from the relevant witness coming before the court by asserting litigation privilege, but that information had nonetheless damaged its case because it helped justify an inference that the witness had material, but unhelpful, evidence to give.

The decision is also of interest for the court's conclusion that a default interest provision in a loan agreement was penal where it provided for 12% interest per month (compounded monthly) on amounts outstanding after the redemption date.

Background

The dispute arose out of the purchase by the claimant (Ahuja) of a shopping centre in Southall, Middlesex, from the defendant (Victorygame) for just under £18 million, funded in part by a loan of £800,000 advanced to Ahuja from Victorygame.

Ahuja alleged that it (through its sole director and beneficial owner, Mr Singh) was induced to enter into the sale contract, and the loan agreement, by fraudulent (alternatively negligent) misrepresentations about the duration of the leases of retail units in the centre and the rental income from the tenants. It was common ground that a schedule was provided to Ahuja’s solicitors, and became incorporated into the sale contract, which stated (in capitalised, red text) that “ALL TENANTS HAVE SIGNED A 15 YEARS LEASE FROM THE 20/2/15”, when in fact the substantial majority were for 6 years 9 months and not all ran from that date.

Victorygame accepted that there was a misrepresentation, which they said was due to an innocent mistake, but denied that it had induced Ahuja to enter into the transaction. It said Ahuja knew the true terms of the leases before exchanging contracts for a number of reasons, including because the original leases were in the possession of Ahuja or its solicitors.

It was common ground that the leases had been provided to Ahuja’s solicitor, Mr Randeep Jandu (of Stradbrooks). The defendants contended that the court should infer that Mr Jandu had either inspected the leases and discussed them with his client, or that Mr Jandu had told his client that he had not inspected the leases and had been instructed to proceed in any event because his client was not concerned about the terms of the various leases.

There was no evidence from a number of individuals who had played a central role in the transaction, including Mr Jandu. Ahuja had obtained a letter from Stradbrooks’ professional indemnity insurers, but had successfully asserted litigation privilege over that letter, as noted above.

As an alternative to its claim for misrepresentation, Ahuja claimed for breach of contract.

Victorygame counterclaimed for sums due from Ahuja. These included sums due under the loan agreement which provided for (among other things) default interest at 12% per month on "the amount that may remain outstanding from the Redemption Date". Ahuja claimed that this was an unenforceable penalty.

Decision

The High Court (HHJ Hodge QC sitting as a High Court Judge) found that Victorygame had made the lease term representation fraudulently, but that it had not induced Ahuja to enter into the contract. The court based the latter finding in part on adverse inferences resulting from Ahuja's failure to call Mr Jandu to give evidence. The misrepresentation claim therefore could not succeed.

As the lease term representation was a term of the contract, and was false, Victorygame was in breach of contract. However, Ahuja had not proved that the property would have been worth more if the representation were true, and therefore that it had suffered any actual damage as a result of that breach.

With regard to the counterclaim, the court found that the default interest provision was an unenforceable penalty.

The below looks in more detail at the adverse inferences and penalty issues.

Adverse inferences

The judge referred to the well-known principle that, in certain circumstances, the court may be justified in drawing adverse inferences from the absence of a witness who might have been called, and who might be expected to have material evidence to give. Having referred to relevant authorities he stated that, before the discretion to draw an adverse inference or inferences can arise at all, the party inviting the court to exercise that discretion must first:

1. establish that the counter-party might have called a particular person as a witness, and that that person had material evidence to give on that issue;
2. identify the particular inference which the court is invited to draw; and
3. explain why such inference is justified on the basis of other evidence before the court.

If those conditions are satisfied, the party who has failed to call the witness "may have no good reason to complain if the court decides to exercise its discretion to draw appropriate adverse inferences from such failure".

The judge also referred to the Supreme Court's observations in Efobi v Royal Mail Group Ltd [2021] UKSC 33, a decision handed down after the hearing in this case, but which the judge said merely served to reinforce the conclusions he had reached independently. In that case the court referred to "a risk of making overly legal and technical what really is or ought to be just a matter of ordinary rationality". Tribunals should be free to draw, or decline to draw, inferences "using their common sense without the need to consult law books when doing so". Whether a failure to give evidence was significant would depend entirely on the context and particular circumstances, including for example whether the witness was available to give evidence, what evidence it was reasonable to expect they would have been able to give, what other evidence there was on those points, and the significance of those points in the context of the case.

The judge in the present case noted that there was no evidence from Ahuja as to why the court had not heard evidence from Mr Jandu, despite the judge inviting Mr Singh to provide an explanation. It was clear from the evidence of Ahuja's current solicitor, in opposition to the application for disclosure of the letter from Stradbrooks' professional indemnity insurers, that the letter contained information relevant to the present proceedings which was not apparent from the conveyancing file. Ahuja had asserted privilege over the letter and elected not to call Mr Jandu as a witness.

The judge was satisfied that the defendants had established both that Ahuja could have called Mr Jandu as a witness, and that he had material evidence to give. He was also satisfied that the defendants had identified the particular inferences they would invite the court to draw from Mr Jandu's absence, and had explained why such inferences were justified on the basis of other evidence before the court.

The judge accepted the defendants' submission that Ahuja's "manifest desire" to keep Mr Jandu from giving evidence permitted the court to infer that his evidence would be unhelpful from Ahuja's perspective. He was satisfied that this was "one of those perhaps rare cases" where it was appropriate to draw adverse inferences from Ahuja's failure to call Mr Jandu as a witness, adding: "Indeed, I can conceive of few cases where it would be more appropriate to do so".

In particular, the judge drew the inference that Mr Singh had instructed Mr Jandu not to trouble to consider the terms of the leases (or to charge Ahuja for doing so) because Mr Singh was concerned only with the rental income from the leases and not with their length. That attitude on the part of Mr Singh was consistent with other documents and with the commercial realities of the case.

Largely on the basis of that finding, the judge said he was entirely satisfied that the lease term representation contributed in no way to Mr Singh's decision to proceed with the property. Mr Singh considered that the tenants would remain for as long as the units were making a profit, and that if any tenant ceased to make a profit it would probably no longer be good for the rent regardless of their lease term.

Penalty clauses

Applying the principles established by the Supreme Court in Cavendish Square Holding BV v Makdessi [2015] UKSC 67 (considered here), the judge rejected Victorygame's submission that the default interest provision was a primary obligation which did not operate on a breach of contract and was not therefore susceptible to the law on penalties. He said it was clear from the authorities that whether or not a clause imposes a secondary liability upon a breach of contract was a question of substance and not form. If the substance of the contractual arrangement was the imposition of a punishment for breach, the concept of a disguised penalty could enable a court to intervene.

While it may be possible to circumvent the rule by "careful drafting", the drafting in the present case did not do so. The obligation to pay default interest arose on a breach of the obligation to repay the £800,000 advance on the Redemption Date.

The question then became whether the provision imposed a detriment which was out of all proportion to Victorygame's legitimate interest in enforcing the primary obligation. The judge accepted that it was difficult to demonstrate that a default interest rate applying prospectively from the time of a default is a penalty, but said it was not impossible. The question, he said, was whether the default interest rate actually applied because of the increased credit risk presented by a defaulting borrower was nevertheless, extravagant, exorbitant, or unconscionable.

In the present case the court was satisfied that the default interest rate of 12% per month, which represented a 400% increase in the pre-default interest rate, was properly to be characterised as a penalty.