Laufer & F.S.I. Financial Services U.S. Inc. v International Marabella Club S.A.
| Jurisdiction | Jamaica |
| Judge | Wright, J.A.,Rowe, P.,Campbell, J.A. |
| Judgment Date | 14 November 1988 |
| Neutral Citation | JM 1988 CA 190 |
| Docket Number | Civil Appeal No. 2 of 1988 |
| Court | Court of Appeal (Jamaica) |
| Date | 14 November 1988 |
Court of Appeal
Rowe, P.; Campbell, J.A.; Wright, J.A.
Civil Appeal No. 2 of 1988
Emil George, Q. C. and Charles Piper for the appellants.
David Muirhead, Q.C., Hugh Small, Q.C., and Angela Hudson-Phillips, Q.C for the respondent.
Tort - Economic loss — Loan agreement for financing hotel — Failure of venture — Loan called in — Receiver appointed — Claim for damages by plaintiff/respondent — Amendment to defence sought — Amendment refused — Appeal against refusal — Whether discretion judicially exercised — Contractual relationship — Negligent performance of contractual obligation — Whether claim in tort can be introduce in circumstances where defences open to plaintiff against contractual party may not be available to it in an action founded in tort by persons not parties to the contract from which pecuniary obligations arise — Finding that parties delimited their obligations in contract and not able to extend obligations of other party by suing in tort — Finding that where there is no allegation of physical damage to property or person, an allegation which sounds only in economic loss cannot support a cause of action in tort — Amendment refused.
On May 19, 1988 we dismissed this appeal with costs to the respondent and promised to put our reasons for so doing in writing. This we now do.
This appeal arose out of the refusal by Harrison, J., on the fiftieth day of the trial of this case, to allow an amendment to their defence sought by the appellants to enable them to pursue against the plaintiff a defence which up to then had been pleaded only by the first defendant S.S.I. (Cayman) Limited which has since ceased to be a party to the case. The application was made at that point in time because of action initiated to terminate the 1st defendant's involvement in the case, a course which the appellants perceived as prejudicial to their cause because as regards that specific defence they had, in a manner of speaking, been riding piggy back on the 1st defendant's case. However, if the 1st defendant were no longer a party to the action, the appellants would need to stand on their own feet. This is what was sought to be achieved by the amendment. In order to set the application in its true perspective, it will be necessary to relate the background to the proceedings which may be briefly set out as follows:
Dr. Steve Laufer, the owner of the Third defendant/appellant (F.S.I.) of which the first defendant/appellant (S.S.I.) is a wholly owned subsidiary, wished to acquire ownership of the Dragon Bay Hotel in Port Antonio with the assistance of a loan from the plaintiff/respondent (I.M.C.) to be secured by a mortgage of the Dragon Bay property and guarantees by Dr. Laufer and S.S.I. To effectuate this purpose, a loan agreement was signed on 30/3/83 for US$3,200,000 plus interest and other additional amounts. The loan was in fact made to F.S.I. at the request of Dr. Laufer and S.S.I. with agreement that it be loaned to S.S.I. so as to enable S.S.I. ‘to acquire and develop the property and operate the hotel and to sell units in the Condominium Project planned as part of the said development’. On the same date, there was also executed a Management Agreement between S.S.I and I.M.C. whereby the latter undertook to manage the hotel for a period of 10 years exclusively on behalf of S.S.I with a proviso that I.M.C. may assign or sub contract the rights and obligations under the agreement on condition that I.M.C. would guarantee the due performance by such subsidiary of the terms of the agreement. It was provided that the principal means of repayment of the loan would be from the sale of villas in the Condominium Project planned as part of the said development. The loan was secured by a Mortgage Debenture bearing date 30/3/83.
The venture failed. The hotel did not attract sufficient clients and the expected sale of villas did not materialise. Consequently, I.M.C. called in the loan on 16.2.85, appointed a receiver for S.S.I. on 6.3.85 and issued a Writ claiming approximately US$5.9 million in damages against S.S.I., Dr. Laufer and F.S.I.
Very lengthy pleadings are involved in the case and up to the point where this appeal arose there had been several amendments. At the core of this appeal is paragraph 21(i) of the Amended Defence and Counter Claim of the three defendants dated 22/4/86, who were then jointly represented by Messrs. Clinton Hart and Company. This particular paragraph in its present form represents an amendment of an earlier pleading to meet the plaintiff's claim. It reads:–
“The defendants say that the plaintiff as Operator and Manager of the said Hotel and as agent of the first defendant stood in a special relationship to the first defendant as owner of the Dragon Bay Hotel, as a result of which relationship the plaintiff owed a duty of care to the said defendant. The plaintiff was in breach of the said duty.”
Mr. Emil George, Q.C., Counsel for the appellants entertained no doubt as to the adequacy of this pleading to carry the claim of negligence then being pursued on behalf of the 1st defendant (S.S.I.). However, that tranquility of mind was to be rudely disturbed by an event not contemplated. The receiver for S.S.I and the directors of S.S.I. were divided on the wisdom of S.S.I. remaining in the action. The receiver contended that defending the action would create a drain on the already insufficient assets of S.S.I whereas the directors maintained that there was the possibility of an appreciation of those assets, should the defendants' counter claim succeed. The issue was resolved by the receiver seeking and obtaining the leave of the Court to withdraw S.S.I. from the action unless the directors gave an indemnity for the costs of S.S.I. Harrison, J. ordered that the receiver could withdraw S.S.I. from the case unless the directors gave indemnity set at US$2.8 million by way of a bond to be given by 14/1/88. However, on appeal the amount was reduced to JA$1,000,000. The directors failed to post the requisite bond. Consequently, the receiver had his wish and S.S.I. ceased to be a party to the action. The immediate and inevitable consequence of this eventuality was that the claim of negligence made in paragraph 21(i) (supra) did not enure for the benefit of the remaining defendants.
But from the time when the continued participation of S.S.I. seemed threatened, Mr. George sought by means of an amendment to preserve the benefit of the plea in paragraph 21(i) for the 2nd and 3rd defendants. He would have the paragraph amended to read:–
“The defendants say that the plaintiff as Operator and Manager of the said Hotel and as agent of the first defendant stood in a special relationship to the first defendant as owner of the Dragon Bay Hotel TO THE THIRD DEFENDANT AS OWNER OF THE FIRST DEFENDANT AND TO THE SECOND DEFENDANT AS THE BENEFICIAL OWNER OF THE THIRD DEFENDANT AND AS GUARANTOR OF THE OBLIGATION OF THE THIRD DEFENDANT UNDER THE LOAN AGREEMENT, AND AS PRINCIPAL IN ALL NEGOTIATIONS ON BEHALF OF ALL THREE (3) DEFENDANTS WITH THE PLAINTIFF as a result of which relationship the plaintiff owned a duty of care to the said defendants. The plaintiff was in breach of the said duty.”
Now, it is patent that the relationship which gave rise to the original paragraph 21(i) arose out of contract because the plaintiff and the 1st defendant were the parties to the Management Agreement which did not by its terms include the 2nd and 3rd defendants. And so, quite predictably, the application ran into very stiff opposition at the end of which Harrison, J., refused the application ruling as follows:
“In this application for amendment the second and third defendants are alleging that the plaintiff as operator and manager of the said hotel stood in a special relationship with the first defendant as owner of Dragon Bay Hotel, and the third defendant as owner of the first defendant and the second defendant as beneficial owner of the third defendant and as guarantor of the obligations of the third defendant under the loan agreement and as principal in all negotiations on behalf of all three defendants, as a result of which relationship, the plaintiff owed a duty of care to the said defendants.
Now IMC was sued for breach of contract and that suit seems to have arisen under the Management Agreement. There was a contract between the first defendant and IMC. There is therefore a direct relationship between both parties, that is, the first defendant and IMC.
The second defendant and third defendant therefore are alleging in the application for amendment that by an operation of law — because they are not alleging of contract — the third defendant is also owner of the first defendant, and they are also alleging by an operation of law, the second defendant as beneficial owner of the third defendant and as guarantor and principal, both were owned a duty of care by the plaintiff, that is, a duty to take care in the management of the hotel. It seems to me that a duty of care may arise either by contract or in the circumstances of this case, by law. There is no contract alleged between the plaintiff and the third defendant in respect of the duty to take care in respect of the management of the hotel. Now if this duty of care is alleged to have arisen out of that duty imposed by law there seems to be an oblique way in which the second defendant is in fact linking with the first defendant, the second defendant being beneficial owner of the third defendant. The third defendant is also linked by ownership being the beneficial owner of the first defendant. It seems to me that the second and third defendants are in fact distinct and different entities to the first defendant and therefore contractual rights and liabilities do not arise as a consequence of such...
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