Declarations do not bar claims for subsequent relief: Zavarco plc v Nasir

Background

On incorporation of the Claimant, Zavarco plc ("Zavarco"), in 2011, 360 million ordinary shares of EUR 0.10 each were allotted to the Appellant, Mr Nasir.  In 2015, Zavarco served on Mr Nasir a call notice requiring him to pay EUR 36 million, the par value of the 360 million shares which had been issued to him on incorporation (the "Shares"). Mr Nasir denied liability to pay for the Shares, arguing that they had been issued in consideration for the transfer of shares in a group company. Zavarco then served on Mr Nasir a notice of intended forfeiture of the Shares.

Both Mr Nasir and Zavarco then issued proceedings. Zavarco issued a claim for a declaration that: (i) the Shares were unpaid; (ii) the call notice was valid; (iii) the notice of intended forfeiture was valid; (iv) Zavarco was entitled to forfeit the Shares; and, alternatively, if the call notice, or notice of intended forfeiture, was invalid, (v) Zavarco was entitled to serve new notices of similar effect. Zavarco did not make any claim for payment of the par value or the Shares or any other relief.

In October 2017, the High Court gave judgment in Zavarco's favour and Mr Martin Griffiths QC, sitting as a Deputy Judge of the High Court, made declarations that: (i) the Shares were unpaid; and (ii) Zavarco was entitled to forfeit the Shares (the "Declaration Order").

Zavarco subsequently forfeited the Shares, but by then, there was no market for the Shares and they were not sold.

In October 2018, Zavarco issued a second set of proceedings claiming EUR 36 million (i.e. the par value of the Shares) and interest.  Mr Nasir disputed the jurisdiction of the Court and sought an order to set aside service of the claim form.  Chief Master Marsh found in Mr Nasir's favour and dismissed the claim, finding that the Court had no jurisdiction to hear it.

One of the grounds of Mr Nasir's application was that the claim for payment of the sum due in respect of the par value of the Shares was barred due to the doctrine of merger.

Procedural history

At first instance

Chief Master Marsh found that merger was the automatic consequence of a final judgment on a cause of action following a hearing at which all aspects of the cause of action have been dealt with. 

Although he acknowledged the difference between a judgment that may lead to enforcement and one that simply declares the legal position, he considered that it depended on the nature of the claim and declaration sought and found that, on the facts, the doctrine of merger did apply.

On appeal

On appeal, Birss J reversed Chief Master Marsh's decision. He did not see: "how a declaration which declares to exist the right which the claimant already had before judgment was given could be said to extinguish that pre-existing right. It does the opposite".

He went on to find that: "characterising a declaration as relief or as a remedy is not enough to answer the question in a given case. The question will be whether the earlier right in particular has merged into and been extinguished by the actual declaration given in the judgment, having regard to the terms in which that declaration is couched.  One only has to ask that question in this case to see that the answer is that these declarations do not purport to do that. They are, if anything, a formal statement explaining why Zavarco did have and still does have a right to €36 million cash from Mr Nasir."

Court of Appeal

Mr Nasir appealed to the Court of Appeal. Mr Nasir's counsel argued that Birss J ran counter to a long line of authority and that the distinction he had drawn between a cause of action and a right arising under a cause of action was incorrect. 

Mr Nasir's appeal was unanimously dismissed by Sir David Richards, and Warby and Henderson LJ.

In the leading judgment, Sir David Richards considered the key authorities regarding the doctrine of merger, including Virgin Atlantic Airways Ltd v Zodiac Seats UK Ltd [2013] UKSC 46, [2014] AC 160 and Clarke v In Focus Asset Management and Tax Solutions Ltd [2014] EWCA Civ 118, [2014] 1 WLR 2502 and the leading textbook in this area, Spencer Bower & Handley.

Sir David Richards accepted that the underlying cause of action in both sets of proceedings was the same (i.e. that Mr Nasir was liable to pay to Zavarco EUR 36 million, the par value of the Shares) but he did not accept that the Declaration Order prevented Zavarco from being able to bring proceedings for seeking an order that Mr Nasir pay that EUR 36 million.

Sir David Richards found that the doctrine of merger is applied strictly and that there is no good reason to widen its scope.  Whilst he acknowledged that it was not easy to discern from the authorities the precise scope or limits of the doctrine of merger, "a doctrine that prevents a party bringing a second claim to recover a remedy that has already been the subject of a judgment between the same parties makes obvious sense. A doctrine that would prevent a party from bringing a claim for an enforceable remedy, such as a judgment for debt or damages, because it had earlier obtained a declaration as to its rights and the defendant's obligations serves no obvious purpose, if the circumstances are such that the second action is not an abuse of the court's process…

A declaration is a quite different remedy from judgment for a debt or damages. It makes sense to speak of a merger of a claim for a debt or damages into a judgment for the payment of a specified sum as debt or damages, so creating "an obligation of a higher nature". The lesser right is merged into the higher. The same simply cannot be said of a purely declaratory judgment, which itself imposes no obligation but only confirms the obligation which already exists."

Comment

Given the lack of previous authority on this particular point, it is helpful (although perhaps unsurprising) to have clarity and certainty that the doctrine of merger does not apply to a judgment for declaratory relief only (ensuring that a key function of seeking such relief – a quicker more cost-effective resolution of questions of pure interpretation – was not undermined). Parties can therefore be confident that seeking a declaration as to the existence of legal rights will not preclude them from subsequently bringing a claim to enforce those rights.  However, bringing separate claims in relation to the same cause of action, even when one claim relates solely to declaratory relief, remains problematic.  While not applicable on the facts, Sir David Richards highlighted that other principles, including: i) issue estoppel; ii) the rule in Henderson v Henderson that precludes a party from raising in subsequent proceedings matters which were not, but could, and should, have been raised in earlier proceedings; and iii) the doctrine of abuse of process; might nonetheless prevent a subsequent claim being properly pursued.

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¹ [2021] EWCA Civ 1217