Jones & Anor v McCarthy

Factual and Procedural Background

In February 2008, the Plaintiff and the Defendant orally agreed (the 2008 agreement) to exchange assets: the Defendant would obtain beneficial ownership of a yacht registered in the British Virgin Islands, while the Plaintiff would acquire a villa near Palma, Mallorca, and a mooring on mainland Spain. The yacht was registered in the name of a company owned by the Plaintiff, the villa was legally titled in the Defendant's name, and the mooring was in the name of the Defendant's father. Both the yacht and villa had substantial mortgages at the time. It was envisaged that after the swap, both assets would be sold to third parties. The Defendant sold the yacht in late 2008 and retained the proceeds as agreed. The villa was sold in 2016, but the Defendant also retained the proceeds, which was not envisaged in the original agreement.

The Plaintiff seeks damages for breach of the 2008 agreement by the Defendant for failing to sell the villa as directed, claiming loss based on the market value or sale price of the villa. Alternatively, the Plaintiff seeks equitable remedies including an account of profits and a constructive trust over the sale proceeds. The Defendant denies entitlement to relief, disputing key factual assertions about the mortgage status of the yacht and the handling of the villa's mortgage and ownership interests, including involvement of a third party, Mr Proctor, in subsequent dealings.

The parties’ evidence and credibility were extensively examined, including witness testimony from the Plaintiff, Defendant, and a third-party witness to the yacht sale negotiations. The court noted the absence of several potentially relevant witnesses and declined to draw adverse inferences from that absence. The court also considered the contemporaneous documentation and email evidence, finding limited assistance from these due to gaps and inconsistencies.

Legal Issues Presented

1. Whether the Defendant breached the 2008 agreement by failing to sell the villa at the Plaintiff's direction and retaining the proceeds.
2. The proper measure of damages or alternative equitable remedies available to the Plaintiff.
3. The applicable law governing contractual and equitable remedies, particularly whether Spanish or English law applies to the villa-related matters.
4. Whether any defence of illegality arising from alleged tax avoidance under Spanish law applies to bar the Plaintiff's claim.
5. The credibility and reliability of conflicting evidence concerning the terms of the 2008 agreement and subsequent dealings.

Arguments of the Parties

Plaintiff's Arguments

• The Defendant breached the 2008 agreement by not selling the villa as directed and retaining the sale proceeds.
• The Plaintiff is entitled to damages reflecting the market value of the villa at the time it should have been sold, or alternatively equitable remedies such as an account of profits and constructive trust.
• The applicable law for contractual and equitable remedies is English law, as the parties are Welsh and the agreement was negotiated and finalized in Wales.
• The Defendant concealed the mortgage on the yacht and failed to redeem the mortgage on the villa despite receiving sufficient funds.
• Any defence of illegality based on tax avoidance should not defeat the claim as the Defendant agreed to the arrangement and has profited from it.
• The valuation of the villa at the time of sale was approximately €1.1 million, which should be used for calculating damages.

Defendant's Arguments

• The Defendant denies breach of the 2008 agreement and disputes key factual assertions, including the Plaintiff’s knowledge of the yacht's mortgage and the handling of the villa's mortgage.
• The Defendant claims the Plaintiff misrepresented the mortgage status of the yacht and caused delays that led to the loss of a sale to a prospective buyer.
• The Defendant asserts that the Plaintiff transferred beneficial interest in the villa to a third party, Mr Proctor, as security for debt, and that the Defendant’s dealings with Mr Proctor extinguished the Plaintiff’s interest.
• The Defendant contends that the mortgage on the villa was redeemed by the Plaintiff himself or via third parties, and that the Defendant could no longer be required to transfer an unencumbered beneficial interest.
• The Defendant claims to have incurred costs and renovations on the villa, offsetting any profit from the sale.
• The Defendant suggests the applicable law for equitable remedies is Spanish law, which governs immovable property, and that this limits the Plaintiff’s remedies.

Table of Precedents Cited

Court's Reasoning and Analysis

The court carefully examined the oral and documentary evidence, noting inconsistencies and gaps in recollection on both sides. It placed significant weight on contemporaneous emails and the credible evidence of the third-party witness involved in the yacht sale negotiations, finding the Defendant’s recollection on key points unreliable. The court found that the Defendant breached the 2008 agreement by revoking the power of attorney, reinstating it in favour of a third party, and ultimately selling the villa without the Plaintiff’s consent.

Regarding the applicable law, the court determined that while the villa is situated in Spain and the parties engaged Spanish legal services, the contract as a whole is more closely connected to Spain for the villa-related matters, leading to the conclusion that equitable remedies would be governed by Spanish law. However, the Defendant conceded that contractual remedies would be governed by English law, limiting the Plaintiff to contractual claims for the villa.

In assessing damages, the court accepted the sale price of €1.1 million as the market value of the villa at the relevant time. It rejected the Defendant’s claim for deductions based on alleged costs and renovations due to lack of documentary evidence. The court allowed a deduction of €75,000 for taxes and legal fees, considering the principles in Ridley v De Geerts and the market conditions at the time.

On the issue of illegality arising from alleged tax avoidance under Spanish law, the court applied the flexible public policy approach from Patel v Mirza and subsequent case law. It found that the Defendant had agreed to the arrangement to avoid taxes and had profited from it, and thus the defence of illegality should not bar the Plaintiff’s claim for damages.

Overall, the court found the Plaintiff’s evidence more reliable on critical issues, including the intent and terms of the 2008 agreement, and rejected the Defendant’s arguments that the Plaintiff had transferred beneficial ownership to a third party or consented to the villa sale.

Holding and Implications

The court's final decision is in favour of the Plaintiff, awarding damages in the sum of €1,025,000 for breach of the 2008 agreement by the Defendant.

The direct effect is that the Defendant must compensate the Plaintiff for the loss suffered due to the Defendant’s failure to sell the villa as agreed. The court did not grant equitable remedies due to the applicable law and procedural concessions. No new legal precedent was established, as the decision primarily applied established principles of contract law, credibility assessment, and public policy regarding illegality.