When is it permissible to take into account the merits of a proposed amendment in an application to amend? Does it make a difference if it is a very late amendment as opposed to a late amendment?
Background
In October 2015, the Claimant company ('CNM') acquired a property with the intention of developing it. The purchase price was approximately £60.5 million, of which £54 million was funded by loans. In April 2017, CNM fell into default on the loans; and by August 2017, had instructed real estate agents to market the property for sale.
The Defendants were the receivers appointed pursuant to the lender's rights under the mortgage and debenture which formed security for the loans ('the Receivers'). They were appointed before CNM's marketing campaign commenced, and subsequently engaged their own agents to market the development site for sale. In December 2017, the Receivers entered into a contract of sale of the property to a third party for the total outstanding balance on the loans, a sum in excess of £80 million.
CNM contended that this was well below the market value of the development site and issued the present proceedings. Its original claim against the Receivers, CNM's pleaded case was that the Receivers had breached their equitable duties to exercise proper skill and care to obtain the best price reasonably obtainable on the sale of the development site.
Following the trial of a preliminary issue in June 2020, Foxton J held that: (i) the Receivers would only be liable for breach of an equitable duty of care owed to CNM where the liability in question was directly caused by the Receivers' gross negligence or wilful misconduct; and (ii) CNM had not advanced any such case of gross negligence nor of wilful misconduct in its original pleadings. Permission to appeal Foxton J's decision was subsequently refused by Flaux LJ. Accordingly, unless amended, CNM's claim against the Receivers was bound to fail.
CNM, however, took no steps to amend until prompted by the Receivers in January 2021 with an invitation either to discontinue the claim, or to provide draft amendments for consideration. On 8 April 2021, CNM indicated its intention to continue the claim and to seek permission to amend. This, however, was followed by another sustained period of delay on CNM's part, which resulted in an application by the Receivers to the court for directions. Eventually, on 3 November 2021, CNM agreed the terms of an 'unless' order which was duly made by Bryan J by consent in the following terms ('the Unless Order'):
"The Claimant shall, by 4pm on Friday, 14 January 2022 serve on the parties and CE File draft Re-Re-Amended Particulars of Claim ('the Proposed RRAPOC'), failing which its claim shall be struck out."
CNM then served a draft pleading on 14th January 2022. This pleaded a case of wilful misconduct. However, it made no allegations of gross negligence. There was no formal application to amend.
On 6 May 2022 sought to amend again. It made a formal application to amend again, with a further Re-Re-Amended Particulars of Claim annexed. Again, this was only upon prompting by the Receivers. This time, CNM included pleas of both gross negligence as well as wilful misconduct.
The Court Below
The application came before Julia Dias QC sitting as a Deputy Judge of the High Court ('the Deputy Judge'), who dealt with the pleas separately.
i) Gross Negligence
The Deputy Judge considered that CNM was in breach of the Unless Order and would therefore require relief from sanctions to advance the case in gross negligence. Having then heard an oral application for such relief, the Deputy Judge refused both relief from sanctions and permission to advance the case in gross negligence. In further refusing permission to appeal, the Deputy Judge gave her reasons for her decisions as follows (cited at [35]):
The unless order gave CNM a final chance to advance a case which would not be precluded by the judgment on the preliminary issue and that it did not permit CNM to avoid its claim being struck out by serving an amendment in one form but then seeking permission to raise a completely different claim.
ii) Wilful Misconduct
The Deputy Judge recorded that the principles applicable to permission to amend were not in dispute. She then identified the principal relevant factors to be taken into account when exercising the discretion to be: "the lateness of the application, any reasons for delay, the adequacy of the pleading and whether it had a real prospect of success, of which the latter two were the most important" (cited at [36]).
Although the Deputy Judge held that the proposed amendment "just about set out with sufficient clarity the nature of the case which CNM sought to make," the claim was internally incoherent and inconsistent in some respects, such that the claim was "decidedly weak" and "lack[d] conviction". Weighed against other factors, including the procedural history and the "series of failures" by CNM to comply with orders of the court, the prejudice to the Receivers thus, and the seriousness of an allegation of wilful misconduct against professional people raised at the last minute, the Deputy Judge's conclusion (cited at [36]) was that:
Taking a step back and balancing the factors all in the scales, I cannot regard this as anything other than a claim which is speculative and weak, even if I charitably assume that it is just about pleadable. In my judgment, therefore, it would not be right or in accordance with the overriding objective to allow it to continue for another two or three years occupying court time, which has many other calls on it.
Submissions on Appeal
CNM appealed the decision in respect of both proposed amendments on the following bases:
- The Deputy Judge was wrong to hold that relief from sanctions was required before permission to advance a plea of gross negligence could be granted. CNM was not in breach of the Unless Order, which had required CNM to serve a draft pleading on the sanction of strike out. CNM had duly done this, and there was nothing in the Unless Order which prevented CNM from seeking permission to make a further amendment, which should have been dealt with in the ordinary way.
- The Deputy Judge was wrong to have concluded that the proposed amendment pleading wilful conduct was speculative and weak. It was a claim with a real prospect of success which the judge ought to have permitted to go to trial. What she had done, in effect, was to conduct a mini-trial, contrary to the well-established approach that this is not appropriate.
The Court of Appeal
In the Court of Appeal (Males LJ, Vos MR, and Newey LJ) these two grounds of appeal gave rise to three distinct issues: (i) whether this was a case in which relief from sanctions was required; (ii) the principles applicable to applications to amend; and (iii) consideration afresh of both CNM's proposed amendments on the merits.
i) Was Relief from Sanctions Required?
The Court of Appeal unanimously allowed the first ground of appeal for the reasons given by Males LJ at [40]-[46] (Vos MR and Newey LJ agreeing at [64]).
At [42], Males LJ set out the two questions that must be answered before the well-known Denton principles were to be engaged: first, whether a rule, practice direction or court order imposes a sanction; and if so, second, whether a party has failed to comply with the rule, practice direction or court order in question.
Males LJ noted at [43] that, in the present case, the Unless Order undoubtedly imposed a sanction, namely that in the event of non-compliance, the whole of CNM's claim would be struck out. This, however, was not the sanction imposed by the Deputy Judge. She had, instead, impermissibly adopted a "halfway house" by "prevent[ing] CNM from pursuing a claim which was not included in the draft amendment served within the time specified, while permitting the claim which it had pleaded in time to go forward." (cited at [43]).
This was not, however, what the Unless Order had said: it was either that CNM had complied with the order, in which case no relief from sanction was required; or CNM had failed to comply, in which case the whole of the claim would be struck out, subject to any relief from sanction.
Given that CNM had complied with the Unless Order by serving a draft pleading on 14th January 2022, Males LJ found that the Deputy Judge should have considered the proposed amendment pleading gross negligence on its merits on the same basis as she considered the application to advance the case of wilful misconduct.
Accordingly, it fell to the Court of Appeal to consider the proposed amendment to plead gross negligence, alongside CNM's second ground of appeal relating to the proposed case in wilful misconduct.
ii) The Principles Applicable to Applications to Amend
The Court of Appeal was further unanimous in the principles that apply to applications to amend for the reasons given by Vos MR and Newey LJ (in a combined judgment) at [69]-[77] (Males LJ agreeing at [49]).
There was no doubt that permission to amend should be refused if it is apparent that a proposed claim would have "no real prospect of succeeding" within the meaning of CPR Part 24.
In addition, the authorities showed that:
- the principal focus must be on the pleading in question, and no attempts should be made to resolve disputed matters of evidence in a 'mini trial' (Okpabi v Royal Dutch Shell Plc [2021] UKSC 3 at [103] to [107], cited at [48]);
- it is, however, appropriate to consider whether a proposed pleading is coherent and contains properly particularised elements of the cause of action relied upon (Elite Property Holdings Ltd v Barclays Bank Plc [2019] EWCA Civ 204 at [42], cited at [48]):
- beyond this, the Court must strike a balance between the interests of the applicant and those of other parties and litigants more generally in accordance with the overriding objective, and against the need for finality in litigation (Nesbit Law Group LLP v Acasta European Insurance Company Ltd [2018] EWCA Civ 268, at [41], cited at [75]).
All members of the Court further distinguished between "late" and "very late" amendments, with "very late" amendments defined in Quah Su-Ling v Goldman Sachs International [2015] EWHC 759 (Comm) as those which would cause the trial date to be lost.
The authorities were clear that, in respect of "very late" amendments, the modern approach of the courts is that "a heavy onus lies on a party seeking to make a very late amendment to justify it, as regards his own position, that of the other parties to the litigation, and that of other litigants in other cases before the court" (Swain-Mason v Mills & Reeve LLP [2011] EWCA Civ 14, [72], cited at [67]). Thus, In Quah Su-Ling itself, an application concerning "very late" amendments, Carr J thought it appropriate to assess the strength of the new case.
It was, however, common ground that the proposed amendments were not "very late" within the meaning of Quah Su-Ling. Accordingly, the key question was how far it is appropriate to consider the strength of a proposed claim in such circumstances, as the Deputy Judge had done. In this respect, Vos MR and Newey LJ did not think the perceived strength of the case is normally a factor to be taken into account when undertaking the balancing exercise, unless where the amendments are "very late".
Hence, Vos MR and Newey LJ expressed the general rule in the following terms at [77]:
except in the case of "very late" amendments, unless it can be seen that a claim has no real prospect of succeeding, its merits should be determined at a full trial. The warnings against mini-trials apply with just as much force to applications to amend as they do to summary judgment or jurisdiction disputes. The CPR do not bar litigants from pursuing claims that might at an interlocutory stage be considered weak.
Vos MR and Newey LJ then subsequently endorsed HHJ Eyre QC's summary of the principles applicable to the determination of an application to amend in Scott v. Singh [2020] EWHC 1714 (Comm) at [19]:
"The new case set out in the proposed pleading must have a real prospect of success .... The approach to be taken is to consider those prospects in the same way as for summary judgment namely whether there is a real as opposed to a fanciful prospect of the claim or defence being raised succeeding. It would clearly be pointless to allow an amendment if the claim or defence being raised would be defeated by a summary judgment application. However, at the stage of considering a proposed amendment that test imposes a comparatively low burden and the question is whether it is clear that the new claim or defence has no prospect of success. The court is not to engage in a mini-trial when considering a summary judgment application and even less is it to do so when considering whether or not to permit an amendment."
Accordingly, Vos MR and Newey LJ considered at [79] the Deputy Judge had been mistaken to "attach significance to whether the proposed claim could be considered weak." The merits of the claim would "only have been material if the application to amend had been made "very late" in the sense used in which Carr J used those words in Quah Su-Ling."
The Court of Appeal, therefore, considered CNM's proposed amendments afresh.
iii) Consideration of CNM's Proposed Amendments
Vos MR and Newey LJ, in the majority, considered that CNM was entitled to be granted permission to make both amendments. In their view, having reviewed the proposed amendments and the evidence that had been before the Deputy Judge, "whether or not the allegations which CNM wishes to make might be said to be weak, they cannot be characterised as fanciful. In short, they have a real prospect of success."
Males LJ, on the other hand, considered at [50] that, on the face of CNM's own pleadings, the allegations relating to the case for wilful misconduct were "indeed fanciful, with no real prospect of success," as well as "internally contradictory and largely incoherent." Given that these allegations were also the principal components of the claim in gross negligence, Males LJ further considered that the Deputy Judge should have held CNM had no prospect of making good the claim in gross negligence.
Disposal and Comment
Accordingly, the Court of Appeal would have allowed the appeal on both grounds and granted CNM permission to amend its Particulars of Claim in the form of the proposed Re-Re-Amended Particulars of Claim served and filed on 6 May 2022. Notwithstanding that, shortly prior to judgment being handed down in draft, the parties compromised the claim in full, the Court of Appeal nevertheless handed down the judgments for reasons the Court considered "will be obvious."
Those reasons were that the judgments give critical guidance on the correct approach to applications to amend; in particular, whether it is ever appropriate to consider the merits of a proposed amendment in an application for permission to amend. It also draws attention to a novel point to relief from sanctions for failure to comply with an 'Unless Order.'
In particular:
- Scott v Singh [2020] EWHC 1714 (Comm), and the statement of Eyre J quoted above, was endorsed as the correct test for applications to amend. This is essentially the same as for summary judgment.
- The dividing line between 'late' and 'very late' amendments not absolute. At [76], it was stated that it is necessary to conduct "a review of the nature of the proposed amendment, the quality of the explanation for its timing, and a fair appreciation of the consequences in terms of work wasted and consequential work to be done".
- Authorities on "not conducting a mini-trial" in relation to applications for summary judgment, applications to set aside default judgment, and jurisdiction challenges equally apply to applications to amend (at [74]).
- Applications for relief from sanctions will only be necessary for failing to comply with an unless order where the party's actions are properly interpreted as non-compliance. At [45], Males LJ stated: 'I would accept that it is possible to envisage a case where a party who is required to comply with an unless order, for example by serving a pleading, does something within the deadline which cannot properly be regarded as compliance, for example by serving a document which contains gibberish or blank sheets of paper or that a party may serve a Response to a Request for Further Information which provides some but not all of the information which a party has been ordered to provide. In such a case, it would be obvious that there has been non-compliance and the sanction takes effect. But this case is far removed from anything like that.'
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