Mr Justice Nugee:
Introduction
- This is the hearing of an action claiming damages for professional negligence against a firm of solicitors for misdrafting a limited liability partnership ("LLP") agreement.
- The Claimant, Wellesley Partners LLP ("WP") was incorporated in May 2004. Its business is, or was when it was active, that of an executive search consultancy, or headhunter, particularly in the investment banking sector. It was formed by Mr Rupert Channing and Mr Christian Brun, but by the time of the events with which this action is concerned was almost wholly owned by Mr Channing.
- The Defendant, Withers LLP ("Withers"), is a well-known firm of solicitors.
- In 2008 Withers acted for WP in connection with the admission of a number of new partners into the partnership, including in particular Addax Bank BSC (c) ("Addax"), a Bahraini bank, which was to make a significant capital contribution (about £2.5m or US$5m) and acquire a 25% interest in the partnership. This required the drafting of a new LLP agreement. The new agreement was completed on 14 May 2008. It was agreed between Mr Channing and Addax that Addax should have an option to withdraw half its capital contribution. As executed the LLP agreement gave Addax such an option, exercisable at any time within the first 41 months of the agreement. Addax exercised that option in May 2009.
- This was very unwelcome to Mr Channing, and caused a number of problems for him and WP. In this action WP's case is that Mr Channing's instructions to Withers were that Addax's option should only be exercisable after 42 months (as an earlier draft had indeed provided) and that in the course of drafting the agreement Withers altered this to an option exercisable during the first 41 months without any instructions to do so. Withers' defence is that it made the change on Mr Channing's instructions.
- WP makes two other complaints about the drafting of the LLP agreement: (i) that on exercise of the option, Addax were entitled to repayment in US dollars whereas WP operated in sterling, so this exposed WP to a currency risk; and (ii) that the LLP agreement made no express provision for how Addax's interest in the partnership should be redistributed if the option were exercised. WP also complains about the advice, or lack of it, given by Withers in February 2009 when Addax first intimated that it was thinking of exercising the option. This is only a brief summary of the complaints which are set out in more detail below.
- With that introduction, I will set out the facts, but without at this stage seeking to resolve the more contentious issues of fact which are in dispute.
Facts
- Mr Channing has worked in the executive search industry for many years. In 1992 or 1993 he set up a business called Charterhouse Search and in 1996 sold it to The Consulting Group. From June 2000 he worked at Heidrick & Struggles International Inc, one of the world's leading executive search firms. By early 2004 he had decided to set up a new specialist executive search firm which would be a "boutique" firm specialising in financial services. He persuaded Mr Brun, who also worked at Heidrick & Struggles, to join him, and in 2004 they left and set up WP together, each initially holding a 50% interest. The business was successful and in 2005 they decided to expand into Hong Kong. They therefore established a second business there using a limited company, Wellesley Partners Ltd ("WPHK"). Mr Brun moved to Hong Kong with his family and headed up the business there. In due course he and Mr Channing decided to restructure their interests to reflect the fact that they had separate focuses, and by the time of the events in 2008 Mr Channing's interest in WPHK, and Mr Brun's interest in WP, had each been reduced to 5%. Mr Channing held the other 95% in WP.
- In 2007 Mr Channing thought the time was right for a further expansion. He had in mind the Middle East (Bahrain or Dubai) and India. He was introduced to Addax, initially as a potential client as Addax was seeking to expand its investment banking operations. But Mr Yousef Al Essa, the Chief Executive Officer (or CEO) of Addax, raised the possibility of Addax itself investing in WP. This was attractive to Mr Channing as a means of financing his plans for expansion which at that stage involved the setting up of two new offices (one in the Middle East and one in India, each with two consultants), and the hiring of three new consultants in London. He calculated the amount he needed for this at about £2.5m, and thought the business was worth around £10m, so he was prepared to let Addax have a 25% interest in return for £2.5m. There is an issue which I will return to as to how this was to be structured. In January 2008 he flew to Bahrain and put this proposition to Mr Al Essa, who was very interested in it and asked for a written proposal.
- At this stage Mr Channing decided to instruct solicitors, and specifically Withers. Withers had acted for him for a number of years, giving him employment law advice in connection with his entry and exit from various firms including Heidrick & Struggles; and he had used them to draft an LLP agreement between himself and Mr Brun when they set up WP in 2004.
- On 10 January 2008 he therefore got Mr Scott Hudson (WP's internal accountant) to contact Mr Hugh Devlin of Withers, who had been involved in the drafting of the LLP agreement, saying that Mr Channing needed some changes to the agreement to accommodate external partners. Mr Devlin suggested getting one of his partners, Mr Ben Simpson, whom he described as "really expert in this area", to deal with it. Mr Simpson, who had been a partner of Withers since 2003, was in Withers' Corporate Department and did indeed have experience in LLPs: among other things he had taken part in drafting Withers' standard form LLP precedent.
- Mr Devlin gave Mr Simpson a copy of WP's existing LLP agreement. On 14 January 2008 Mr Simpson spoke to Mr Channing on the telephone, who told him that he had identified external investors to take 30% of the LLP. Mr Simpson's attendance note of the call says "They would contribute 30% of the capital and have a 30% profit share". As well as Addax, Mr Channing had approached a number of individuals who were interested in acquiring small interests in WP. There were four of these, all of whom had had successful careers in the financial services industry, as follows:
(1) Mr Christian Meissner, then Head of European Investment Banking at Lehman Brothers ("Lehman");
(2) Mr Ludovico del Balzo, then Global Head of Consumer Banking for Lehman;
(3) Mr Simon Roberts, who had a senior role in Bluecrest Capital (a hedge fund);
(4) Mr Harvinder Hungin who had previously been at Lazards, S G Hambros, Société Générale and Chelsfield.
Mr Channing regarded these individuals as being able to play the role of "ambassadors" for WP, and to provide valuable introductions, support and advice for the business.
- Mr Simpson's note of the telephone call records Mr Channing as confirming that the advice to be given would be:
"Dealing with appropriate amendments to the LLP agreement;
LLP approval and subscription documentation for the new members…"
He also confirmed that Withers would not need to give tax advice.
- On 15 January 2008 Mr Simpson e-mailed Mr Channing with some initial thoughts. He sent a copy to Mr Jamie Cuffe, who was a junior solicitor in his department and shared his office. Mr Cuffe had been admitted in November 2006, so he had then been admitted for about 14 months. Mr Simpson had worked with him on a number of other matters and considered that he would be competent to take instructions from Mr Channing and manage the amendment of the LLP agreement, subject to his (Mr Simpson's) supervision. Mr Cuffe told me, and I accept, that where he was the supervising partner Mr Simpson would not allow anything material to go out from Withers without his having signed off on it.
- Later that day Mr Cuffe sent Mr Channing an e-mail with a list of minority protections which the investors would want to see enshrined in the LLP agreement, and a retainer letter from Mr Simpson. The retainer letter set out the scope of Withers' engagement as follows:
"I set out below the services which I believe we will be required to provide (based on the information you have given me):
1. reviewing the current LLP agreement;
2. advising on and drafting new provisions for the LLP agreement required by the investors such as pre-emption rights, veto rights and management provisions generally;
3. drafting a summary of the LLP agreement for the benefit of the investors; and
4. drafting deeds of adherence for the admission of new members to the LLP."
He continued:
"I propose that this matter will be handled by me and Jamie Cuffe…I will act as the partner primarily responsible for the overall supervision of this matter and will be your main point of contact."
- On 16 January Mr Simpson e-mailed Mr Cuffe saying he had given him some initial comments and setting out areas where they needed to do further thinking, including:
"- what capital they are putting in and how that affects capital and profit sharing as if they are coming in at a higher value, then we will have to have capital and profit sharing by reference to an agreed percentage rather than the actual capital that was put in as Rupert and Christian may have put in a very small amount of capital.
We need to give everyone a vote by reference to their percentage interest eg 100 votes per percentage or if we are putting in a table, we can just have a column for votes."
- By 18 January Mr Cuffe had completed a first draft of the amended LLP agreement, and sent it to Mr Channing, with a blackline version showing changes from the existing 2004 LLP agreement, and a covering letter drawing attention to certain points and inviting him to review the draft with a view to arranging a convenient time to discuss the matters raised. This draft ("the 18 January draft") contained numerous amendments to the 2004 agreement, many taken from Withers' standard precedent for a basic LLP. It included in particular new provisions for an Executive Committee; for the members' capital accounts and capital contributions; for the members to have votes as set out in schedule 1; for certain matters to be decided by simple majority (more than half the votes cast), and a very limited number (admission or expulsion of a member or change in the nature of the LLP's business) to be decided by special majority (3/4 or more of the votes cast); and for profits and losses to be shared as set out in schedules 3 and 4 respectively. Schedule 1 listed Mr Channing and Mr Brun as initial members with 65 and 5 votes respectively, with space for Investors (left blank), and schedules 3 and 4 listed Mr Channing and Mr Brun with 65% and 5% respectively of the profits and losses.
- Mr Simpson and Mr Cuffe had a telephone conversation with Mr Channing that afternoon. Mr Cuffe's note of the call includes the following:
"- Value – they put in capital on current arm's length value of the business. Now they come in at market value need a schedule of percentages
- Business value is £10m"
Mr Simpson accepted in evidence that the first statement was probably made by him, and that it was Mr Channing who indicated the value was £10m. Mr Cuffe's note also includes a reference to:
"express mention of commission levels"
and another note of the same call, made by Peter Finding (a trainee solicitor in the Corporate Department) refers to:
"45% commission payment".
Various other matters were discussed. Mr Channing agreed to send a schedule of the names and intended holdings of the investors, which he did on 23 January. At that stage the proposed interests of the outside members totalled 38%, being 25% for Addax, 10.5% for the four "ambassadors", and 2.5% for Mr Jeremy Harris who was employed in WPHK. With 5% for Mr Brun that left 57% for Mr Channing.
- Later on 23 January Mr Cuffe sent to Mr Channing a second draft of the LLP Agreement ("the 23 January draft"). This included a blackline comparing it to the 2004 Agreement. This was similar to the 18 January draft but added "a change in the level of commission payable to the Members" to the matters requiring a special majority; and schedule 1 now listed the names of the Investors as given to Mr Cuffe by Mr Channing with the number of votes each was entitled to, with schedules 3 and 4 specifying the corresponding percentages for sharing profits and losses respectively. On 24 January Mr Cuffe, at Mr Channing's request, sent a clean version of the 23 January draft to each of Mr Meissner and Mr del Balzo.
- There was then a period when there was little for Withers to do although Mr Cuffe did produce a couple of further drafts with minor amendments. The first of these among other things replaced Mr del Balzo as investor with a Jersey trust company ("RBC") who were investing on his behalf, and reduced his interest to 1.5%: this draft was sent by Mr Cuffe on 30 January to RBC, copied to Mr Channing and Mr del Balzo. Then on 20 February Mr Channing asked Mr Cuffe for a clean copy of the LLP agreement with the amendments relating to Mr del Balzo and also reducing Mr Meissner's interest to 1%: Mr Cuffe sent him this the same day.
- In the meantime Mr Channing was busy dealing with Addax both in relation to WP helping it with its own hiring requirements, and in relation to Addax's proposed participation in WP. So far as the former is concerned, on 29 January Mr Channing had sent Addax a detailed proposal, which included provision for a monthly retainer of £50,000 to be paid by Addax to WP for a 6 month period with a review after that; on 6 February Mr Al Essa thanked him for this proposal and said "We are ok with the terms".
- So far as the proposal for Addax's own participation is concerned, on 30 January Ms Rowena Valdez of Addax sent Mr Channing an e-mail with various queries including a request for:
"a short break down of the use of proceeds (GBP 2.5MM)"
Mr Channing replied the same day, saying:
"proceeds….The proceeds generated through this process will assist WP init [sic] growth plans on a number of levels. By definition the cash flow in the business is very lumpy, making it difficult to make investment decisions in people and premises on a seamless basis. The funds will give the business a significant working capital cushion to be able to absorb the hiring on new colleagues and the financial commitments required to accomplish that, as well as establish the new offices in the Middle East and India. You will see from the plan that we will be hiring new consultants and associated support into London, as well as establish the Middle East business with a team of 4-5 people this year, and growing thereafter. Next year we plan to accomplish the same in India. In raising this capital we will be able to accomplish this without putting unnecessary cash flow stress in the business"
The reference to "the plan" is to a draft business plan which Mr Channing had supplied.
- On 11 February Mr Al Essa told Mr Channing that they had in principle approval from the Board, and hoped to get the final approval by "this Saturday". It in fact took rather longer than that, being considered at a meeting of Addax's investment committee on 27 March. On 26 March Mr Channing sent to Mr Al Essa, for the purposes of the meeting, what he described as a Summary Document. The document attached was headed "Wellesley Partners LLP Investment Term Sheet" ("the Term Sheet"). It is dated 27 March 2007, but this is a mistake for either 26 or 27 March 2008. It included the following:
"Wellesley Partners is seeking to raise external capital in order to accelerate significantly its growth both in the Gulf Region, as well as India, and other emerging markets…
The investment from Addax will not only provide the financial capital required to generate this accelerated growth, but it may also become a significant partner in helping to generate symbiotic introductions throughout the Gulf Region…
The Investment
Investment: £ 2.5 million (approx US$ 5 million).
Addax Bank will become a 25% shareholder in the LLP (Group) with an enhanced 40% share of the Middle East business.
Addax bank will receive a guaranteed minimum dividend return of 15% per annum for the first 3.5 years of the Investment in Wellesley Partners.
In November of 2011 (3.5 years anniversary of investment) Addax will have the opportunity to require the management of Wellesley Partners LLP to buy back 50% of their Investment in Wellesley Partners LLP at par value at Addax's discretion…
Investment Returns* to Addax. (Guaranteed minimum)
Initial Investment Date 1 April 2008
4/2008 – 4/2009 – 15% - £375,000
4/2009 – 4/2010 – 15% - £375,000
4/2010 – 4/2011 – 15% - £375,000
4/2011 – 10/2011 – 7.5% - £187,500
Total minimum return £1,312,500
Management Put - £1,250,000
On-going carried interest in WP – 12.5% (Group), 20% Middle East.
This structure is intended to provide significant comfort to Addax about the return profile of the business, and its ability to exit part of the Investment for any reason in a reasonable time frame. The structure guarantees to Addax a minimum return, as well as an opportunity to exit 50% after 3.5 years
Returns and Exit strategy
The Wellesley Partners LLP management team is highly experienced in the growth of executive search businesses, with a significant track record of success. This is intended to be a commercial opportunity for all stakeholders in the business. On the basis of conservative modelling WP believes it will be in a position to generate significant interest in a trade sale of the business within a 3-4 year time frame, or seek an AIM or equivalent listing of the business. Historically the leading large executive search organizations have been highly acquisitive in their own growth strategies, particularly in connection with highly focused high quality boutiques. Clearly the views of all stakeholders will be sought as to the appropriate decision at this time.
In applying conservative industry standard multiples to conservative growth estimates, WP believes that it can generate a 3-4 x exit multiple for Addax over this time period, excluding dividend yields…"
There is in evidence another version of this document in different terms. In particular this version included a statement that:
"The firm has already raised a small amount of capital from a number of highly influential external investors."
This version proposed that Addax's minimum 15% dividend would be for the first 3 years only (rather than 3½). It is also dated 27 March 2007, and it is not possible to date it securely, but I find that it was an earlier version than the Term Sheet and I accept that it was the latter that was sent.
- Mr Channing's evidence was that he believed he had supplied the Term Sheet to Withers, but there is no trace of this in the documentary record and Withers have not disclosed a copy. I find that he did not do so.
- Addax's Investment Committee approved the transaction, and Mr Channing was given the name of Ms Foutoun Hajjar-Alami, Addax's Chief Legal Counsel. Shortly afterwards Mr Channing was back in touch with Withers. On 4 April Mr Cuffe e-mailed Mr Channing saying he was delighted to hear that all the investors other than Addax had agreed the latest draft of the LLP agreement and were ready to sign up, and that he understood that Mr Channing would revert to him with any comments Addax had after a planned meeting with them. He continued:
"With regard to Addax's contribution taking the form of a loan, so long as you comply with certain formalities contained in the LLP agreement, legally there is no prohibition to this. In particular, specific written arrangements must be put in place between Addax and the LLP (i.e. the loan must be evidenced in writing) and the approval of a simple majority of the Members must be obtained. Given that you hold more than 50% of the voting rights in the LLP obtaining the simple majority will not be an issue. However, the other Members must be given notice of the proposal and this may cause them to seek to restructure their own contributions."
Mr Channing's reply said:
"…the other members were made aware of the likelihood that addax would seek this structure and were willing to proceed on that basis. I will ask addax to structure a separate document to describe the terms for circulation to all members."
It was suggested to me by Miss Parkin that this exchange was referring to the ability of Addax to call back 50% of its investment. That may have been what Mr Channing was referring to, but I do not think this would have been apparent to Mr Cuffe. There is nothing to show that he was aware of the terms set out in the Term Sheet and he appears to have simply been asked about the possibility of a loan, and there is a difference in principle between a loan and an investment which one has a right to unwind in certain circumstances.
- Addax instructed Taylor Wessing ("TW") to act for it in relation to the drafting of the LLP agreement. I am not told when TW were first instructed but they had been instructed by 14 April when Mr Channing wrote to Mr Tom Cartwright of TW replying to a due diligence questionnaire Mr Cartwright had sent him.
- On 15 April Mr Cartwright phoned and e-mailed Mr Cuffe to introduce himself as acting for Addax in relation to its proposed investment in WP, and Mr Channing sent Mr Cartwright hard copies of certain documents he had requested, including
"5. A copy of the business plan and proposed term sheet…
11. Details of Bonus (commission) arrangements for Partners."
Mr Cuffe asked Mr Cartwright to send over a mark up of the LLP agreement, which Mr Cartwright did by e-mail timed at 00.15 on Wednesday 16 April (copied, among others, to Mr Simpson and Mr Channing). His e-mail said that the draft had not been reviewed by Addax and was subject to any comments they might have. It also said:
"As regards the attached draft, we have assumed that the investors other than Addax will be investing alongside Addax on a £ for £ basis and will be expecting a return on a similar basis, although we have not built them into the put option mechanism. You will note that many of our amendments reflect the commercial terms finally agreed between the parties as well as those contained in our letter of last week with our headline comments circulated."
Withers have not disclosed a copy of TW's "letter of last week"; but since Mr Cartwright only introduced himself to Mr Cuffe the previous day, I consider it unlikely that it was addressed to them and I do not find it surprising that they do not have a copy. WP has not produced a copy either and there is no evidence of what it said.
- The draft circulated by Mr Cartwright ("the TW draft of 16 April") was a blackline markup of the last draft prepared by Withers (that of 20 February). It contained numerous amendments, among which were the following:
(1) Provisions conferring substantial negative control on the Investors. These took the form of providing for the Investors to have representative(s) on the Executive Committee; introducing the concept of Investor Consent (given either by such Investor Representative(s) or by a majority (by votes) of the Investors); requiring Investor Consent to the draft business plan each year; and requiring virtually any significant decision of the LLP to be approved by the members by Simple Majority with Investor Consent.
(2) A requirement for the Investors to pay the Capital Contributions set out against their name in schedule 1 to the LLP.
(3) Provision for an Investor Priority Share ("IPS") to be paid to each Investor, calculated at 15% of the Capital Contribution made by that Investor with profits to be divided between the members only after payment of the IPS.
(4) Provision (in clause 25) for Addax's option to unwind half its investment. Clause 25.1 provided:
"Subject to clause 25.2 on Addax issuing a notice (an 'Exercise Notice') requiring the LLP to terminate its membership in relation such percentage (up to a maximum of 50 per cent) of the Partnership Interest held by Addax as may be specified in such Exercise Notice (the 'Relevant Interest'), the LLP shall (and the Designated Members shall procure that the LLP shall) terminate Addax's membership in respect of the Relevant Interest and shall pay to Addax the Cancellation Sum."
The Designated Members were (unless changed) Mr Channing and Mr Brun.
(5) Clause 25.2 provided:
"Addax shall only be permitted to issue an Exercise Notice to the LLP on or after the date falling within 42 months following the Commencement Date."
The Commencement Date was defined as the date of the agreement, so the effect of clause 25.2 as drafted was to enable Addax to exercise this option only after 3½ years, which accorded with the Term Sheet.
(6) Clause 25 went on to provide for other matters such as the calculation of the amount to be paid, the date of repayment, and a provision that if the LLP was not able to pay, the Cancellation Sum would remain outstanding as a debt carrying interest.
(7) Schedule 1 now contained a new column against the names of the Investors headed "Capital Contribution" but no amounts were yet shown in this column. There was no similar column for the Initial Members (Mr Channing and Mr Brun).
(8) Schedule 6 contained a number of warranties to be given by Mr Channing and Mr Brun.
- Mr Simpson and Mr Cuffe discussed the TW draft of 16 April with Mr Channing in a telephone call at 15.40 on Wednesday 16 April. Mr Cuffe made a note of the call. A number of separate matters arising out of the TW draft of 16 April were discussed. Among them were the following (as recorded in Mr Cuffe's note):
(1) "Draft response to TW – COP tomorrow"
This records Mr Simpson saying that they would get a draft response to TW by close of play on 17 April.
(2) "No negative control of the company. Power of veto.
They are only buying 25% and they are not gett [s…?]"
This reflects Mr Channing's instructions that he did not want Addax to have negative control over WP. The last word is unclear.
(3) "15% coupon ok – other investors fine"
This refers to Mr Channing's instructions that the provision for the 15% IPS for Addax was acceptable, but that the other investors were not expecting a similar return.
(4) "Management put structure fine"
This refers to Mr Channing's instructions that he was happy with the provisions for Addax's option to unwind half its investment. It is of some significance in the light of what later happened.
Although not noted in the attendance note, Mr Channing and Mr Simpson both said in their written evidence that Mr Simpson also raised with Mr Channing the possibility of adding a long-stop beyond which Addax could not exercise its option, and that Mr Channing agreed to think about this.
(5) "I have not thought of getting a call. I will think about it."
This refers to the question whether Addax's put option should be matched by a similar call option under which Mr Channing could require them to unwind half their investment. As appears from the note, he had not previously considered this, and it seems likely it was Mr Simpson's suggestion; Mr Channing again agreed to think about it.
(6) "15% coupon only for 3.5 years.
Ensure no double-dip – greater of 15% or 25%."
This refers to two other aspects of the IPS provisions as drafted by TW. First, TW had drafted the IPS as an indefinite entitlement, whereas it was only to last for the first 3½ years. Second, under TW's drafting Addax would be entitled first to a 15% return by way of IPS and then to 25% of profits by way of profit share. Mr Channing's instructions were that it should have a minimum return of 15% by way of IPS or 25% of profits if greater, but not both.
(7) "BXS – worth you going through clause 16"
Clause 16 was the governance clause. As drafted by TW it listed the matters which required Investor Consent. This records Mr Simpson's advice that it would be worth Mr Channing going through the particular matters listed in clause 16.
(8) "call tomorrow evening 5.30.pm"
This is self-explanatory. The intention was that Withers would do a re-draft incorporating Mr Channing's instructions which would be discussed at 5.30pm the next day (Thursday 17 April) with a view to getting it to TW that evening.
- Mr Cuffe duly worked up a re-draft and sent it as a blackline version by e-mail to Mr Channing at 16.46 on Thursday 17 April. The blackline showed the mark up as compared with the TW draft of 16 April and is timed at 16.15 ("the 16.15 draft of 17 April"). The e-mail said that the blackline was fairly self-explanatory but drew attention to three points, the first two being that Withers had removed the concept of Investor Consent and reduced the number of Investor Representatives to one; and that they had amended clause 7 regarding the IPS to ensure that there was no element of double counting. The third point was in relation to clause 25 as follows:
"With regard to clause 25, the Addax option, could you confirm whether there should be a long stop on Addax's ability to force the LLP to buy half its interest? We have inserted a 3 and a half year window for exercise. Further, I believe that you were going to consider whether you wished to be able to force Addax to sell 50% of it Partnership Interest to the LLP. Have you come to a conclusion in this regard ?"
As the e-mail indicated, Mr Cuffe's draft had amended clause 25.2 to provide for a long stop for Addax's exercise of its option as follows:
"Addax shall only be permitted to issue an Exercise Notice to the LLP on or after the date falling 42 months following the Commencement Date and before the date falling 84 months following the Commencement Date."
- Mr Cuffe's e-mail also said Mr Simpson had unexpectedly been required to deal with another matter and would not be able to participate in the scheduled call. Mr Cuffe said he was very happy to discuss the draft at 5.30 pm but asked Mr Channing to let him know if he would rather wait for Mr Simpson to become available. Mr Channing replied:
"No probs…lets talk at 530….I will call you"
- In fact Withers' telephone records show that there were a series of calls as follows: Mr Channing called Mr Cuffe from his mobile at 17.16: this call lasted 35 seconds. At 17.33 Mr Cuffe e-mailed Mr Channing to say he was having difficulty reaching him on his mobile. At 17.36 Mr Cuffe called Mr Channing's office: this call lasted 50 seconds. At 17.38 Mr Cuffe then telephoned Mr Channing's mobile: this call listed 6 minutes and 6 seconds. At 17.45 Mr Channing called Mr Cuffe from his mobile: this call lasted 22 seconds. I infer from this that the substantive call was that at 17.38. Neither Mr Cuffe nor Mr Channing made a note of the call.
- Mr Cuffe then amended the draft which he had sent Mr Channing. The version in evidence is a further blackline version again showing changes from the TW draft of 16 April, and contains a final page summarising the "Document comparison done by DeltaView" timed at 19.56 ("the 19.56 draft of 17 April"). I heard no technical evidence but I take this to mean only that the particular version put in evidence was generated at 19.56 that evening; it does not indicate when Mr Cuffe actually made the amendments to the text, which might have been at any time between 17.38 and 19.56.
- The version as so amended contained the crucial change to clause 25.2, as follows:
"Addax shall only be permitted to issue an Exercise Notice to the LLP on or after the date falling within 42 from the Commencement Date until 41 months following the Commencement Date. (the 'Lapse Date'). If the Exercise Notice is not issued before or on the Lapse Date the rights set out in this clause 25 shall lapse in their entirety."
The changes to clause 25.2 appear to have been the only changes made from the previous draft timed at 16.15 on the same day: neither party has identified any others, nor have I. This is supported by the document comparison statistics on the two drafts, which show the 19.56 version as containing one more insertion and two more deletions than the 16.15 version, all of which are accounted for by the changes to clause 25.2.
- Withers did not, as had been intended, send the draft to TW that evening. As appears below this is because Mr Simpson wanted to further review it overnight. At 23.26 he sent an e-mail to Mr Cuffe saying
"I will need to send you a couple of emails on Wellesley. Firstly please respond to TW in your name. Secondly, make sure you respond to all the points he makes in his email dated 16 April.
Other points:
-in paragraph 1 of your email refer to the vetoes first before giving them the news about removal of investor consent and make clear that our client feels rather than we feel
-in relation to clause 7, you are using a lot of words to say not very much other than we didn't like their drafting
-are you also saying as regards clause 25 that they didn't reflect the deal in their drafting
Can you try rewriting your email in the light of the above ?"
It is apparent from this that Mr Cuffe had drafted, and Mr Simpson had seen, an e-mail to go to TW with the redrafted agreement. No copy of such a draft e-mail has been produced, but on this I accept Mr Cuffe's explanation which is that it is probable that he would have drafted an e-mail, printed it off in draft and given a hard copy to Mr Simpson (or left it for him), and then amended the draft in the light of his comments before sending the e-mail to TW. Again I heard no technical evidence but I infer that in these circumstances no copy of the original draft would have been preserved on Withers' system.
- Mr Simpson sent more comments by e-mail to Mr Cuffe at 1.01 and 8.41 on the morning of Friday 18 April (neither containing anything directly relevant to this dispute); and he also gave Mr Cuffe some amendments to the draft LLP agreement. Mr Cuffe prepared another version of the draft agreement incorporating these, and at 10.31 he sent this by e-mail to Mr Cartwright at TW, copied to Mr Simpson and Mr Channing, both as a clean draft and as a blackline against TW's 16 April draft, the blackline being timed at 10.19 ("the 18 April draft"). He included a covering e-mail which said that the blackline was fairly self-explanatory but explained why they had removed the concept of Investor Consent and reduced the Investor Representative to one. It did not say anything about clause 25. It concluded:
"Our client has not had an opportunity to sign off on the current draft so this version is subject to any final comments our client may have."
- Shortly afterwards at 10.34 Mr Cuffe sent Mr Channing an e-mail which said:
"Apologies that the LLP agreement did not go out last night, but Ben wanted to review it once more overnight. His further amendments have been incorporated in the current draft. There is nothing particularly different from the draft I sent you yesterday, but if you would like a blackline showing his changes please let me know."
Mr Cuffe's evidence was that he was sure that what he intended to convey by the 10.34 e-mail was that Mr Simpson's overnight amendments were not of significance. This would seem to be true: the 18 April draft does contain a number of further changes, but none of them would appear to be very significant. So far as clause 25 is concerned, the only change that has been identified is that the grammar of clause 25.1 was corrected by adding the word "to" so that it read:
"Subject to clause 25.2 on Addax issuing a notice (an 'Exercise Notice') requiring the LLP to terminate its membership in relation to such percentage (up to a maximum of 50 per cent) of the Partnership Interest held by Addax as may be specified in such Exercise Notice (the 'Relevant Interest'), the LLP shall (and the Designated Members shall procure that the LLP shall) terminate Addax's membership in respect of the Relevant Interest and shall pay to Addax the Cancellation Sum."
Clause 25.2 in the 18 April draft is identical to that drafted by Mr Cuffe the night before in the 19.56 draft of 17 April. This is indeed a change of some significance from the 16.15 draft of 17 April, but it is not one of the "further amendments" made by Mr Simpson.
- Mr Channing's evidence before me was that he opened the 10.34 e-mail first, and read it as saying that there were no significant changes from the last draft he had seen (which was the 16.15 draft of 17 April). He then opened the 10.31 e-mail, and read the attached e-mail which Mr Cuffe had sent to Mr Cartwright with his draft. Since the covering e-mail did not refer to anything which he was not expecting, and since the 10.34 e-mail had indicated there were no significant changes from the last draft, he did not think it necessary to review the draft agreement again and did not do so.
- As set out below the LLP agreement went through a number of further revisions but there were no material amendments to clauses 25.1 and 25.2, which found their way unaltered into the final version of the LLP agreement dated 6 May 2008.
- Mr Cartwright e-mailed Mr Channing at 11.03 (copied to Mr Simpson and Mr Cuffe) about certain due diligence documents but he added that he had received Withers' response to their mark up of the LLP agreement, that he had spoken to Withers and that he suggested that following their review they agree a list of outstanding points which he hoped would be limited in scope.
- On 21 April he e-mailed Mr Channing saying they were arranging a time to run through the draft contract with Addax and asking for an idea of the proposed structure with the Middle East joint venture ("JV"); this was not copied to Withers but Mr Channing forwarded it to Mr Cuffe, saying, in respect of the Middle East business:
"We have agreed to hold back £250k of working capital to seed business"
- On 22 April Mr Cartwright and Mr Cuffe had a telephone conversation to run through the draft agreement. Mr Cuffe's note of the call refers to various clauses but there is no reference to clause 25. The note ends:
"?Almost there on terms.
?Rupert needs to get clear on these points."
and in an e-mail that afternoon to Mr Cuffe Mr Cartwright referred to their having made a lot of progress on the draft LLP agreement over the last few days.
- Attention then turned to drafting other documents, namely an agreement between WP and WPHK (initially drafted as a trade mark licence agreement but which later became a non-compete agreement) and a JV agreement in relation to the proposed Middle East business. On 28 April Mr Cuffe e-mailed Mr Cartwright asking if he was going to send over another draft of the LLP agreement "based on our very helpful conversation last week". Mr Cartwright replied by e-mail on 1 May (copied to Mr Channing) with a further draft of the LLP agreement "which I think reflects where we got to following our call."
- This draft ("the 1 May draft") was a blackline against Withers' 18 April draft. It did not contain many changes although it did reinstate provision for Investor Consent, and contained new conditions precedent in schedule 7, namely Mr Channing assigning his 5% interest in WPHK to WP, and the execution of the licence agreement between WP and WPHK. Under schedule 1 it specified a capital contribution for Addax of $4,750,000, and $250,000 to be invested on formation of Wellesley Partners Middle East. It did not specify the capital contributions for the other Investors. It did not contain any change to clause 25, which remained as sent by Withers on 18 April.
- Mr Cuffe spoke to Mr Channing on the telephone on 2 May at 11.25. The call lasted 21 minutes. There is no note of the call but as set out below I am satisfied that the purpose of the call was to run through the 1 May draft.
- Mr Cuffe then sent a further redraft to Mr Cartwright at 16.55 on 2 May ("the 2 May draft"). There were few changes, although Mr Cuffe had filled in the capital contributions for the other Investors in schedule 1. He explained in oral evidence that although he could not now remember the process, he thought it likely that he had calculated these by saying that Addax's $5m contribution equated to 25 votes, and then calculating the equivalent contribution for the number of votes each investor had. The result was that the capital contributions were all shown in US$, ranging from $600,000 for Mr Roberts (3 votes) to $200,000 for Mr Meissner (1 vote). No changes were made to clause 25 other than the specification of a rate of interest. He sent another version the same day at 19.33 with some very minor changes, none of relevance.
- On 6 May Mr Cuffe e-mailed Mr Cartwright saying he was looking to tidy up the last remaining square brackets in the LLP agreement. At 11.37 on the same day he e-mailed Mr Channing to say he had not been able to speak to Mr Cartwright but attached the latest draft of the LLP agreement saying
"The Investor Representative is not yet known, and neither are the bank details of Addax, however other than this I hope that there should be no changes to the meat of the Agreement. I will continue to chase Tom [ie Mr Cartwright] for confirmation."
- Mr Channing replied at 11.46:
"That's great ….when you do speak to him, pls can you confirm that he plans to wire the US$ 5 MILLION today as he indicated to me on the phone yesterday, to Wither's client account, so that we may complete as soon as possible."
- Mr Cuffe then e-mailed Mr Cartwright with the details of Withers' client account saying that he understood that TW would be sending the completion funds to that account to be held to their order pending completion.
- At 17.41 on 6 May Mr Cuffe e-mailed Mr Cartwright a further revision of the LLP agreement with a blackline showing the minor amendments from the draft sent on 2 May at 19.33. There were no material amendments to clause 25.
- On 7 May 2008 at 8.52 Mr Cuffe e-mailed Mr Cartwright a clean copy of the LLP agreement "amended as discussed". The only amendment of substance appears to have been to clause 25.3 which set out the calculation of the Cancellation Sum payable to Addax on its exercising its option. As originally drafted by TW in its draft of 16 April, this had provided for the Cancellation Sum to be:
"Capital Contributions made by Addax x Relevant Interest"
Partnership interest of Addax as
at the date of the Exercise Notice
Mr Simpson had however queried in the course of his review of the draft agreement on 2 May whether this worked satisfactorily. Mr Cuffe and Mr Cartwright must have agreed that it did not as the draft sent on 7 May replaced this with the simpler calculation of the Cancellation Sum as being:
"Capital Contributions made by Addax x Relevant Interest"
- At 9.24 Mr Cuffe e-mailed Mr Cartwright yet another revised draft, this time in blackline; this was to take account of the fact that Mr Harris, who was to acquire a 2.5% interest in the LLP, was an employee in Hong Kong who was to be given his interest as an incentive so was not to be obliged to contribute the sum shown as a Capital Contribution from him.
- At 10.16 on the morning of 8 May Mr Cuffe e-mailed Mr Channing a (clean) copy of the latest draft of the LLP Agreement as it then stood. Also on the morning of 8 May Mr Cartwright e-mailed Mr Cuffe the LLP agreement signed by Addax to be held to TW's order.
- Completion was in fact held up pending arrival of the funds from Addax. On 13 May Mr Cartwright e-mailed Mr Cuffe saying he expected the funds from Bahrain that day, and asking:
"Can you please confirm you have all of the other investors's funds and are ready to complete ?"
Mr Cuffe must have asked Mr Channing for this confirmation as Mr Channing e-mailed him later that morning saying:
"I can confirm to you that we now have all the funds from the other investors, and that we are only waiting on Addax."
Mr Cuffe then replied to Mr Cartwright:
"Yes, I can confirm that we have all the funds and are ready to complete."
- Mr Cartwright replied saying he expected to be in a position to transfer funds that day and asking for bank details. Mr Cuffe's e-mail in response (copied to Mr Channing) gave the bank details and continued:
"The dollar exchange rate on the FT website today (see attached scan) is 1.94740. By my calculations, £2,567,525.93 should be sent."
Mr Cartwright replied "Fine" and that he would transfer the funds to be held to TW's order pending one outstanding signature (that of RBC).
- In the event RBC wanted a couple of minor amendments to the LLP agreement (which were agreed by TW), and it was not completed until 14 May 2008, although the LLP agreement was, for some reason not explained to me, dated 6 May 2008.
- Clause 25 of the LLP agreement as executed provided as follows:
"25.1 Subject to clause 25.2 on Addax issuing a notice (an 'Exercise Notice') requiring the LLP to terminate its membership in relation to such percentage (up to a maximum of 50 per cent) of the Partnership Interest held by Addax as may be specified in such Exercise Notice (the 'Relevant Interest'), the LLP shall (and the Designated Members shall procure that the LLP shall) terminate Addax's membership in respect of the Relevant Interest and shall pay to Addax the Cancellation Sum.
25.2 Addax shall only be permitted to issue an Exercise Notice to the LLP from the Commencement Date until 41 months following the Commencement Date (the 'Lapse Date'). If the Exercise Notice is not issued before or on the Lapse Date the rights set out in this clause 25 shall lapse in their entirety.
25.3 For the purposes of this clause 25 the 'Cancellation Sum' shall be calculated as follows:
Capital Contributions made by Addax X Relevant Interest
25.4 Completion of the repayment of the Cancellation Sum shall take place on the twentieth Business Day after service of the Exercise Notice (the 'Cancellation Date') at the registered office of the LLP when:
(a) the Designated Members shall procure that the LLP shall terminate the membership of Addax, in relation to the relevant Interest and shall update the register of Members accordingly;
(b) the LLP shall pay the Cancellation Sum by transfer to such account as Addax shall have notified to the LLP at least one Business Day before completion; and
(c) on receipt of the Cancellation Sum, Addax shall acknowledge that it shall not be entitled to receive any share of the Profits of the LLP in respect of the Relevant Interest for the period after the Cancellation Date.
25.5 If, in any circumstances, the LLP shall not be able to pay the Cancellation Sum to Addax in accordance with sub-clause 25.4(b), the Cancellation Sum shall remain outstanding to Addax as a debt of the LLP (the 'Outstanding Addax Debt') and interest shall accrue on the Outstanding Addax Debt at a per annum rate of 1% over the base rate of Barclays Bank plc from time to time.
25.6 Notwithstanding any other provision of this Agreement, the Members shall consent to the cancellation of the Relevant Interest and the payment of the Cancellation Sum pursuant to this clause 25."
- Clause 6.1(b) provided that, save for Mr Harris, the Investors should pay the amounts set out opposite their name in column 4 of schedule 1 by way of Capital Contribution to the LLP. The Capital Contribution shown in column 4 to schedule 1 opposite Addax's name was:
"$4,750,000
$250,000 to be invested on formation of Wellesley Partners Middle East."
- The documentary evidence does not reveal much of relevance in the months which followed. On 30 June 2008 Mr Sanjay Kalsi of Addax suggested to Mr Channing that pending the deployment of the funds which had been paid to WP, he might like to deposit them with Addax. There is no record of a reply. In September 2008 Addax sent Mr Channing details of two positions that they wanted filled, which Mr Channing followed up in October.
- In the meantime however Lehman had filed for Chapter 11 bankruptcy, an event which shocked the financial world and triggered the financial crisis. I will have to look in more detail below at the effect this had on businesses such as that carried on by WP, but the immediate effect was to cause a complete halt in recruitment across the financial sector. Mr Channing and Mr Al Essa agreed in the light of this that it was not an opportune moment to set up the proposed Middle East JV, and in the event it was never set up.
- The financial crisis also affected Addax, which was undercapitalised and which had invested a large proportion of its available investment funds in a single project, a golf course in Florida, that had lost substantial value. It was clear to Mr Channing from his discussion with Addax's management in early January 2009 that the bank was desperate to raise money from any source. On 26 January 2009 Ms Hajjar-Alami sent Mr Channing an e-mail confirming recent discussions on three matters, namely (i) that Addax's contribution to WP was only $4,750,000 with the other $250,000 being Addax's contribution to the Middle East JV, and that since it had been decided to postpone setting up the Middle East office indefinitely until the market picked up, Addax requested the immediate return of the $250,000; (ii) that Addax would not be recruiting anyone, at least during 2009, and therefore could not justify payment of WP's retainer fee; and (iii) that Addax had requested WP to consider depositing at least 50% of Addax's total investment with a fixed deposit account with Addax in return for an attractive interest rate: this request was not a reflection of mistrust or concerns but "would assist Addax at this time and would reflect good faith on your part".
- So far as the latter point was concerned, Mr Channing was very wary of depositing WP's money with Addax, and asked Mr Cuffe to confirm that he was not obliged to do so, which Mr Cuffe did. Mr Channing therefore told Addax that WP would not be moving its banking arrangements.
- Shortly afterwards on 3 February Mr Channing received a call from Ms Hajjar-Alami in which she told him that Addax intended to exercise their put option with immediate effect. Mr Channing telephoned Withers and spoke to Mr Cuffe. This was the first of three telephone conversations between them that morning, and since WP complains of what Mr Cuffe said or failed to say, I will set out the available documentary evidence in relation to them in full. The first call was timed at 9.26 and lasted 2½ minutes. Mr Channing's note of the call reads as follows:
"Jamie Cuffe call – Check option
Foutoun says option can be exercised ?
R.C. – not until 11/20121
J.C. – Addax incorrect – checking LLP agreement
J.C. Check with Simpson re wording"
- Mr Cuffe then went to check the LLP agreement. At 9.47 he sent an e-mail to Mr Channing as follows:
"Further to our telephone conversation I have checked the documents and unfortunately the Addax put option is exercisable from the date of the LLP agreement for 41 months (ie until October 2011). It can be exercised at any time in this period. Addax may, however, only exercise the put option in respect of a maximum of 50 per. cent of its partnership interest. If the LLP cannot repay Addax its capital contribution, the sum remains outstanding as a debt to Addax with interest accruing at 1 per. cent per annum over the base rate of Barclays Bank plc."
- The second call was even briefer: Mr Cuffe called Mr Channing at home at 10.01; the call lasted only 58 seconds. At 10.54 he called Mr Channing on his mobile. This third call lasted 15 minutes. Mr Channing's note of the call is as follows:
"- Addax correct = option can be exercised any time until 2011.
- He is shocked. Addax drafted changes
- Simpson unavailable
- ? Error in agreement – not original terms – JC agrees."
- Mr Cuffe's note of the same call is as follows:
"- JNC explained that the put option clause had been in the LLP agreement since early on in its current form.
- Rupert wanted to discuss his options. JNC explained that the put option would be a debt payable by the LLP but that commercially as Addax would still have 50% of its investment it would make sense to agree a payment plan that did not involve liquidating the LLP.
- JNC stressed that dialogue in order that the put was not exercised was the best option."
- At 12.01 Mr Cuffe e-mailed Mr Simpson, as follows:
"Rupert called asking me to check the put option in favour of Addax. You were copied into my response. He thought that the put was only exercisable after 3 years for one month. It is in fact exercisable from signing for 42 months.
I checked the file and this was changed early on in the drafting. The Taylor Wessing draft had "exercise on or after 42 months following the Commencement Date [the date of signing]". We changed it to before or on 42 months and lapsing thereafter. This was sent to Rupert as a blackline and remained unchanged for the following five revisions.
Rupert seemed to accept that this was the position and asked what it meant for the LLP. I explained that Addax would be an unsecured credit [sic] with a loan at 1% above base rate if the LLP did not have enough money to pay Addax. In addition, I pointed out that only 50% of the investment could be exercised as a put option and so it was in Addax's best interest not to put the LLP in a position that it a difficult position [sic] with regard working capital as it would jeopardise their investment.
[…] stressed that Addax had not taken a decision to exercise the put option and so Rupert should try to communicate with Addax to find out why they were unhappy and try to get help [sic] them become comfortable with the investment so they would not exercise the put."
- Mr Channing decided he did not want to remain partners with Addax and by 22 February he had proposed to Addax that they might exit WP altogether; Ms Hajjar-Alami suggested he put his proposal in writing. At the beginning of March he flew to Bahrain and had a meeting with Ms Hajjar-Alami and a Mr Sohab Rashid. Mr Channing's note of the meeting included the following:
"Option exercise. RC confirmed was extremely disappointed to discover Addax had deliberately changed terms of original deal without ever discussing or advising WP of such change. Very difficult meeting. No comment from FHA on deal change. Said that Board had instructed to exercise because of market conditions affecting bank. No comment on change of deal. RC said couldn't believe that Withers so crap as to let change into docs. Typical. RC Livid. FHA embarrassed and evasive."
Mr Channing also indicated that he wished to buy Addax out completely as his trust in them was broken, and was putting together an offer to buy them out over a two year period. Ms Hajjar-Alami indicated Addax would look favourably on such a proposal, and Mr Channing agreed to put together a proposal for her to put to the Board.
- Mr Channing had dinner with Ms Hajjar-Alami, and his note included the following comment:
"RC explained that option exercise would massively damage LLP chances with Nomura growth plan."
As explained in more detail below, Nomura, a Japanese bank, had taken over Lehman's business in UK and Europe, but had not acquired its business in the US and was therefore looking to build a business there which involved a large-scale recruitment exercise. Mr Channing was hoping that WP would be appointed to assist in that process.
- Mr Channing spoke to Mr Cuffe on his return. He said among other things that WP had a great book of business, but the value was in the people who worked there and the personal relationships with the clients; if Addax pressed for repayment, he felt the employees would leave and WP would become worthless. In such a case WP would fight the claim, and incur litigation costs, while he suspected that the existing business would leave WP. He did not want this to happen but if it came to it he was willing to see this course of action through.
- Mr Channing was unable to agree terms with Addax, and on 7 May 2009 Addax served a formal Exercise Notice under clause 25.1 of the LLP Agreement requiring the LLP to terminate its membership in relation to 50% of its interest, and stating the Cancellation Sum due as 50% of Addax's Capital Contribution of $4,750,000. Mr Cartwright contacted Mr Cuffe to ask him to take instructions but Mr Channing told Mr Cuffe to tell Mr Cartwright he was not instructed as Mr Channing was awaiting a call with Addax to resolve matters.
- Clause 25 required payment of the Cancellation Sum within 20 business days, which meant that the due date for payment was 5 June. On 18 June 2009 TW sent WP a formal letter before action in relation to non-payment of the Cancellation Sum threatening proceedings unless it was paid within 7 days, and said that such proceedings would include the Designated Members (Mr Channing and Mr Brun) as defendants for failure to procure payment of the sum as required by clause 25.1. The letter raised various other matters of complaint, including the non-payment of the $250,000 contributed towards the Middle East venture.
- On 24 June Mr Simpson and Mr Cuffe met Mr Channing to discuss the response to the TW letter. Mr Cuffe's attendance note includes Mr Channing as saying:
"When it was originally done I thought that the option was for after 3 years"
The upshot of the meeting was that Withers would draft a holding response and Mr Channing would push to have a conversation with Addax.
- Mr Simpson and Mr Cuffe briefed a partner in Withers' litigation department, Mr Roberto Moruzzi. In evidence is a copy of the TW letter of 18 June with a manuscript note in the margin:
"he thought option was for 1 mth after 41 mths – BXS and JC sd that changed in one of the drafts. Slight nervousness."
It was accepted in correspondence that this was Mr Moruzzi's handwriting. But Mr Moruzzi did not give evidence, and no questions about the note were asked of Mr Cuffe or Mr Simpson, who did, so I have no direct evidence about this note. I am willing to infer however that it records what Mr Simpson and Mr Cuffe told Mr Moruzzi at around this time, and that "he" refers to Mr Channing.
- On 25 June 2009 Withers sent a holding response to TW, as agreed, and on 26 June an engagement letter to Mr Channing at WP. The latter made it clear that Withers would be acting for WP and that they would be unable to advise either the designated members or the investors in their personal capacities. Since proceedings had been threatened against Mr Channing and Mr Brun, they strongly recommended that they obtain independent legal advice; and in due course Mr Channing instructed Berwin Leighton Paisner to act for him personally. I know nothing about the advice he, or Mr Brun, received but for what it is worth, Addax's claim against them appears to me to have been entirely misconceived. Mr Simpson's evidence was that he did not agree that they had personal obligations to procure WP to pay the Cancellation Sum and I agree with him: clause 25.1 fairly plainly provides that the Designated Members will procure WP to terminate Addax's membership in respect of the Relevant Interest, not that they will procure WP to make payment (as does clause 25.4(a) and (b)).
- The response from TW on 26 June was to the effect that Addax had instructed it to issue proceedings, which it had done that day. The claim was for $2,375,000, the sterling equivalent as at 26 June (the date of issue) being said to be £1,439,393.90. The claim, as threatened, was brought against Mr Channing and Mr Brun personally as well as WP.
- On 2 July Mr Channing spoke to Addax on a without prejudice basis, and later that day he told Mr Cuffe that agreement had been reached in outline to settle the dispute. TW also confirmed on 6 July that their instructions were that a settlement had been reached and attempts were then made to draw up an agreed settlement. There followed lengthy attempts to reach a comprehensive agreement which would not only settle the proceedings but effect various amendments to the LLP Agreement. By 24 July Withers were in a position to send to TW a draft settlement agreement together with a draft amended LLP Agreement. TW's response however on 28 July was that it had not been agreed that the LLP Agreement would be amended, the proposed amendments were far reaching and were not necessary to effect the settlement, and that they were primarily for the benefit of Mr Channing, although WP was bearing the costs, giving rise to a concern that there was a conflict of interest.
- At the end of July WP paid Addax $1.525m as a sign of good faith, and in August a further $700,000 in return for Addax discontinuing proceedings against Mr Channing and Mr Brun. That left $150,000 of the original sum claimed of $2,375,000 outstanding.
- The litigation, settlement discussions and the associated redrafting of the LLP Agreement meant that WP was incurring a significant liability for costs to Withers. An internal e-mail of 11 September from Mr Simpson to Mr Moruzzi shows that Mr Channing was being difficult about paying all of these. Mr Simpson said:
"Rupert is refusing to pay for any of my and Jamie's time from what I can see. I think we need to resolve this before we finalise the settlement arrangements as he is otherwise simply going to turn round and refuse to pay…
I think he would be fair to criticise the drafting of the LLP agreement for not having a carve out for Addax approval for settling litigation which Addax can veto when Addax is suing the LLP. Otherwise however we were simply trying to document the deal."
The latter paragraph is a reference to the fact that under clause 16.1(i) one of the matters for which Investor Consent was required was the settlement of proceedings, so Addax's consent was in effect required to settle proceedings brought by Addax itself. As Mr Simpson accepted this seems a bit nonsensical; but it does not (and did not) cause any practical problems. If Addax wanted to reach a settlement with WP, it would obviously consent to WP settling the litigation.
- In October Mr Simpson raised this directly with Mr Channing saying in an e-mail dated 14 October:
"I know from some of our previous meetings and conversations that you have expressed some unhappiness about the way the LLP Agreement was drafted eg the lack of a carve out from the requirement for obtaining Addax's consent in the situation where the litigation was between Addax and the LLP."
It is noticeable that there is nothing to suggest that Mr Channing had by that stage also complained to Withers about the drafting of clause 25.
- Further drafts of a settlement agreement and of an amended and restated LLP agreement were prepared by Withers during the autumn of 2009 and eventually sent to TW on 4 January 2010. One of the questions raised by Withers in the course of preparing the drafts was what was to happen to Addax's 12.5% interest. A draft of the amended LLP Agreement provided by Withers to Mr Channing on 8 December had the profit entitlements adjusted so that the 12.5% was reallocated 1% to Mr Brun and the balance to Mr Channing, but in a covering e-mail Mr Simpson advised:
"We would expect that Addax will require the re-allocation to be pro rata. Please can we discuss."
This was discussed with Mr Channing, as a result of which the next draft (sent to him on 11 December) provided that Addax's 12.5% was allocated pro rata to the other investors (but not Addax itself), with nothing for Mr Brun and the balance for Mr Channing, 5% of Mr Channing's interest then being allocated to a new member. Mr Channing had no comment on this and it was in this form that the draft amended LLP agreement was sent to TW. Even before taking instructions TW's immediate comment on 5 January 2010 was:
"One initial drafting observation on the LLP agreement is that as 50% of Addax's interest had been cancelled as opposed to transferred, the increase in each member's ongoing partnership interest should be pro-rata including Addax's, as opposed to applying to all members other than Addax. Please confirm that this is agreed."
- On 7 January 2010 TW said that Addax would not discuss settlement until certain financial information had been provided, but that the terms of the settlement went far beyond those discussed in September.
- Despite Mr Channing's further attempts to settle matters, and despite further payments of $50,000 on 1 April 2010 and $21,000 on 23 April 2010, no settlement was reached. In May TW wrote indicating that negotiations were at an end, and in June issued a summary judgment application.
- In the meantime Mr Channing had had a telephone conversation on 7 May 2010 with Mr Adam Duthie of Withers, who was Head of the Corporate Department and who called him about outstanding fees. In the course of the conversation Mr Channing had said that the drafting of the option was not what had been commercially agreed, and the omission to provide the option to be exercisable after the third anniversary was a mistake; he also referred to the fact that the effect of the way the LLP agreement was drafted was to require WP to repay £1.6m instead of £1.25m. Mr Duthie took the view that although Mr Channing did not say so in as many words, the implication of the conversation was that Withers had been negligent in both respects.
- This led to an internal discussion in Withers as to whether they could continue to act, and a letter in June from Mr Andrew Goodall, Withers' Risk and Compliance Manager, to Mr Channing raising the question of whether WP were satisfied that Withers were representing their best interests. Mr Channing took advice from another firm (Simmons & Simmons) with the result that in early July WP changed to them.
- The summary judgment application was heard by Eady J on 12 July 2010. In his judgment dated 23 July he rejected an argument that Addax was entitled to be repaid half the sterling sum actually transferred and held that it was entitled to be repaid half the US$ sum shown as its capital contribution. However he held that WP had an arguable legal or equitable set-off for two sums of £50,000 due as monthly retainers under the arrangements made with Addax in January 2008, and since the payments made by WP had reduced the outstanding debt to Addax to $79,000 (together with some interest), he rejected the claim for summary judgment.
- A settlement agreement between WP, Mr Channing, Mr Brun and Addax was eventually reached in October 2011, providing for payment to Addax of various sums in satisfaction of its interest in WP and the stay of the proceedings save for the purpose of giving effect to its terms.
- I address below the more contentious issues of fact when discussing the various allegations of negligence made by WP. Before doing so there are three other matters to mention briefly. First, in the course of the trial Miss Parkin raised with the witnesses from Withers, that is Mr Cuffe and Mr Simpson, a number of other respects in which she suggested that their drafting or advice had been deficient. I do not think it necessary to detail these or discuss them. Where a claim is brought in negligence against a professional firm, it is inevitable that the focus of the evidence and the preparation for trial will be on the particular allegations that are pleaded: the very purpose of statements of case is to identify the issues which are to be addressed. I agree with Mr Pooles' submission that it would not be fair to Withers or the witnesses to make findings in relation to wide-ranging but unpleaded allegations of incidental negligence, which may have arisen out of the events with which the trial is concerned, but which have not been the focus of the trial. Nor have I found it necessary, or of any particular assistance, to consider them when reaching my conclusions on the allegations that are pleaded and which I do need to resolve. I propose to say no more about them.
- Second, the evidence revealed a degree of confusion as to the nature of the transactions (i) with the other Investors and (ii) with Addax itself. In principle a person may become a member of an existing corporate body in two different ways. In the case of a company limited by shares, a person may become a shareholder by acquiring shares from an existing member; or by the company itself issuing new shares to him. The same is no doubt true of an LLP: if the existing members of an LLP are A (90%) and B (10%), and C is to become a 10% member, this can be done by A selling a 10% interest to C (in which case the interests will be A (80%), B (10%) and C (10%)); in such a case the consideration for the sale will naturally be paid by C to A personally. Or it can be done by the LLP admitting C to membership in return for a capital contribution. In the absence of other agreement the effect of this would be to dilute A's and B's interests proportionately so that the resulting interests would be A (81%), B (9%) and C (10%), although it is of course open to the existing members A and B to agree that their interests will be diluted in some other proportion so as to admit C. In this case the capital contribution paid by C does not belong to A personally, but belongs to the LLP.
- This distinction was clear to Mr Simpson. When it was put to him that he would have understood from Mr Channing's initial call on 14 January that the transaction involved a sale of Mr Channing's interest in the LLP, he said that he had a completely different understanding, he thought it was akin with a company situation to a subscription, where you bring in new money and the resulting percentages come about from the new money that's being brought in. Since his note of the call referred to external investors contributing 30% of the capital, this seems an entirely reasonable conclusion; as he said, if the transaction had been a sale, he would have expected a reference to a sale not to investors. This was also how TW understood the transaction, which explains why the LLP Agreement took the form it did, with the Investors being obliged to make Capital Contributions.
- Mr Channing however did not see the transaction that way. His evidence was that so far as the investors other than Addax were concerned, they purchased shares in his business and the capital was always intended to come to him. Mr Pooles submitted that this was plainly untrue, pointing not only to the form of the LLP Agreement (which Mr Channing signed up to), but also to the first version of the Term Sheet which referred to WP having already raised a small amount of capital from external investors; the confirmation given by Mr Channing on 13 May that "we now have all the funds from the other investors"; and the Particulars of Claim which referred twice to the other investors contributing capital to the LLP and which Mr Channing signed by way of a statement of truth. I consider however that Mr Channing was not lying about this: rather, he thought of WP as in effect his business. Indeed in his witness statement he said that in his mind he and WP were "more or less one and the same". He was letting the investors have part of his business in return for cash, which he thought of as a sale; and it was a matter for him whether the arrangement he came to with them was that the money would go into the business or not. In the case of Addax he agreed it would, but in the case of the other investors he did not. I think he drew no very sharp distinction between his selling part of his interest to the other investors, and his giving Addax an interest in the LLP in return for their contribution, especially as the interest that Addax acquired, like the interest the other investors acquired, came from his interest in the LLP not from Mr Brun's which remained at 5%. Nor did he draw any sharp distinction between an "investor" who invested money in the business, and an "investor" who invested money in buying part of his interest.
- This same confusion helps explain two other matters. First, Mr Channing's evidence was that he valued the business at £10m and so was willing to let Addax have a 25% share in return for a contribution of £2.5m. This would make good mathematical sense if the transaction had been one of sale. However it does not do so if the transaction is, as it was, one of investment, as the contribution of £2.5m to the assets of the LLP means that it is now worth £12.5m. Addax has only contributed £2.5m of this, which is 20% not 25%. I do not think Mr Channing gave any thought to this at all. Second, on 13 May, when the transaction was just about to complete, Mr Channing had a discussion with Mr Hudson as to how the funds about to be received from Addax should be dealt with. Mr Hudson advised him that the funds should all be transferred to him personally and then to WP so that the accounts could show the source of the capital as a sale of Mr Channing's shares; and that he should retain sufficient funds in case there was a tax liability. This was quite inconsistent with the terms of the LLP Agreement, but again suggests that Mr Channing thought of the transaction with Addax as really involving a sale, albeit one where he had agreed that the capital would go into WP.
- That leads me to the third point which is Mr Channing's reliability as a witness. Mr Pooles invited me to view his evidence with great caution. He instanced several respects in which he submitted that Mr Channing's evidence could be shown to be unsatisfactory, and although in the end he refrained from accusing Mr Channing of deliberately lying in the witness box, he did submit that his evidence was unreliable due to an element of obsession, and that he might well have convinced himself but was not a reliable deponent. In these circumstances Miss Parkin naturally made lengthy submissions in response seeking to answer the criticisms made of Mr Channing.
- I do not think it necessary for me to deal with these matters in detail. I had the advantage of seeing Mr Channing give evidence and be cross-examined over a sustained period. I am satisfied that he was not attempting to mislead the Court, nor, as I have said, is this suggested. However I do accept that he was shown on occasions to have made statements that were inaccurate or overstated. I have already referred to one example which was explored at some length at trial, namely the nature of the transaction with the non-Addax investors, where although I have accepted that Mr Channing did regard this as one of sale and the proceeds as his, this means that he signed a statement of truth in respect of the Particulars of Claim stating that the investors would contribute capital to the LLP, which on his own case was simply wrong. Other examples included the fact that in his fourth witness statement he said that in 2005/6 he had appointed Ms Annie Jordan to assist in the execution of searches but that she was not a revenue generator, whereas, as he accepted at the outset of his evidence, this was incorrect and Ms Jordan had joined WP in 2004 as a revenue generator; and a statement that he had projected that he would personally generate revenue for the London office of £2m per annum "consistent with my current levels" when examination showed that this was a considerable overstatement. It is not necessary to refer to other examples. I also bear in mind that Mr Channing feels very strongly about the events with which this action is concerned, that the high hopes which he had for his business have come to nothing, that he blames Withers for everything that has gone wrong, and that he is a forceful personality who made his views known with some passion. In the light of all these matters, while I accept the broad thrust of Mr Channing's evidence, I have not found him an entirely reliable witness and have carefully assessed his evidence on specific matters against the contemporary documents and inherent probabilities.
Allegations of negligence (i) drafting of clause 25.2
- The first, and main, allegation of negligence that WP makes against Withers is over the way in which Mr Cuffe drafted clause 25.2 on 17 April. As set out above, in his previous draft (the 16.15 draft of 17 April) clause 25.2 provided for Addax's option to be exercisable only after 42 months and then during a window of another 42 months. The draft Mr Cuffe produced following his telephone conversation with Mr Channing at 17.38 (the 19.56 draft of 17 April) provided for Addax's option to be exercised in a window of 41 months from the Commencement Date. WP's complaint is that this change was made without instructions to do so.
- Mr Channing's evidence was that he categorically denied giving any such instructions. The telephone call was a short one. Its purpose was to confirm the points raised in Mr Cuffe's e-mail of 16.46. That had drawn attention to three issues, the third being the option in clause 25, where Mr Cuffe had asked Mr Channing two questions: should there be a longstop (as Mr Cuffe had drafted); and did he wish to have a corresponding right to force Addax to sell 50% of its interest ? Mr Channing's evidence was that he said he was happy with a longstop but he was in favour of a very much shorter period (about 1 month), although he would not insist on it if Addax did not want it; and that he did not want to have a right to force Addax to sell.
- Mr Cuffe's evidence was that he had no recollection of the telephone call, but that he would not have made the amendment to clause 25.2 without instructions. He was entirely candid in his oral evidence that he did not remember the conversation at all so his only way of working out what had been said ("piecing it together") was by looking at the draft that was created following it; that that was the only record as it were that he had of the conversation; and that
"I'm certainly not in a position to say that I know he instructed the change; but, for me, it seems the only logical explanation of the change and the fact that he then didn't object at any subsequent point."
- Miss Parkin referred me to what had been said in two other cases involving claims for alleged negligence against solicitors in support of her submission that I should prefer Mr Channing's account. The first is Padden v Bevan Ashford [2013] EWCA Civ 824 at [45] where McCombe LJ said there was nothing wrong with the trial judge preferring the claimant's evidence to that of a solicitor who had no specific recollection but relied on his usual practice. I do not read this passage as laying down any principle at all: it is just an example of a case where a judge was entitled to prefer the evidence of one witness to another. I find it of no help in the present case.
- The second is Middleton v Steeds Hudson [1998] 1 FLR 738 at 741E where Johnson J said:
"The absence of any written record or letter supporting the defendant's account of the meeting is clearly cogent evidence in support of the plaintiff's case."
Miss Parkin submitted that this was authority that where a solicitor had failed to make an attendance note that by itself was something that I was entitled to place some weight on. I do not accept that as a general principle. It is of course good practice to make attendance notes, precisely because the absence of them makes it more difficult to establish what instructions and advice were given, but I do not accept that the absence of an attendance note in some way counts against the solicitor in forming a view as to where the truth lies. In Middleton v Steeds Hudson the solicitor had made an attendance note of his meeting with the plaintiff, but this only recorded the instructions he had been given and did not contain any record of the advice that he said that he had given, namely that the plaintiff was being over generous in reaching a financial settlement with his wife. In this context, it is readily understandable why Johnson J should regard the fact there was no record of this advice, either in the attendance note or in any follow up letter, as cogent evidence that such advice was not given, although it is noticeable that in the event he found that the solicitor did give such advice. But his statement is self-evidently not intended to be laying down any general principle; it is simply a comment on the facts of that particular case. In the present case I have no doubt, for reasons given below, that some instructions were given in relation to clause 25.2; the lack of an attendance note does not to my mind help resolve what those instructions were, and I do not see it as evidence supporting one side's case or the other. It simply makes it more difficult to resolve the question.
- My findings of fact on this in relation to this call are as follows.
- First, there must have been some discussion of clause 25.2 during the call. Nobody suggests that Mr Cuffe would have taken it into his head to amend clause 25.2 on his own initiative, and both parties' cases are to the effect that Mr Channing did give some instructions as to clause 25.2. Indeed the very purpose of the call, as shown by Mr Cuffe's e-mail of 16.46, was to sign off on the draft so that it could be sent to TW, and one of the outstanding questions raised in the e-mail was the form of clause 25: should there be a longstop, and did Mr Channing want a corresponding call option ? It would be very surprising in those circumstances if clause 25 had not been discussed and as I say both parties agree that it was.
- Second, I am satisfied that there had been no renegotiation between Mr Channing and Addax on this point. It is suggested in the Defence (although the suggestion was not I think put to Mr Channing in cross-examination) that it can be inferred that the change to clause 25.2 had been discussed and agreed with Addax. Mr Channing's evidence was that there was during this period no contact between him and Addax at all. I accept this evidence. There is no trace in the documentary record of any such contact, and although this does not rule out the possibility of clause 25 having been renegotiated between Addax and Mr Channing on the telephone, it seems to me wholly improbable that this happened. Mr Channing had proposed in the Term Sheet that Addax should have an opportunity to require 50% of their investment to be bought back after 3½ years; Addax's Investment Committee had approved the transaction on the basis of the Term Sheet; and TW had drafted clause 25 in these terms early in the morning of 16 April. Mr Channing had expressed himself happy with the way the option was drafted on the afternoon of 16 April. I see no reason at all why he should then have initiated a renegotiation of this point between 15.40 on 16 April and 17.38 on 17 April, and I consider it clear that he did not. Nor is there any reason to think that Addax might have changed its mind and sought to reopen this point in this period. Had they done so, even if (which for reasons given below I consider unlikely) Mr Channing had agreed, I find he would undoubtedly have explained to Mr Cuffe that clause 25.2 had to be changed because the deal had changed.
- I find that he did not tell Mr Cuffe that there had been a renegotiation of clause 25.2. As appears above, Mr Cuffe had prepared a draft e-mail to go to TW with the redraft of the LLP agreement, and had provided a copy to Mr Simpson. Mr Simpson commented on the draft e-mail in his e-mail of 23.26 on 17 April, and in relation to clause 25 said
"Are you also saying as regards clause 25 that they didn't reflect the deal in their drafting ?"
I read this as indicating that Mr Cuffe's draft had made some comment explaining the change to clause 25 in terms that Mr Simpson did not find clear. (Miss Parkin submitted that it could alternatively be read as indicating that Mr Cuffe's draft had said nothing about clause 25 but that Mr Simpson thought he should add an explanation along these lines; but this does not seem to me right. "Are you also saying" is a reference to what Mr Cuffe is saying in his current draft. This is what Mr Cuffe thought ("I clearly wrote something which suggested that what the drafting of clause 25 didn't reflect the deal or that it was ambiguous …I think it is all comments on something that I prepared to go out is how I read it.") and I agree with him). In the event the e-mail as sent by Mr Cuffe to TW said nothing about clause 25. I infer from this that Mr Cuffe did not understand his changes to clause 25 to reflect the commercial deal as negotiated between Mr Channing and Addax (either the original deal or as renegotiated), as otherwise he would have said so. The reason he said nothing about clause 25 is that he appreciated that the change to clause 25 was not something that Addax had agreed but was a change being proposed on WP's behalf in the hope that TW would accept it.
- I also have written evidence from Ms Hajjar-Alami to the effect that to the best of her knowledge there was no communication between Addax and Mr Channing between 16 and 18 April; and that she recalled being surprised, when she saw the 18 April draft, to see that clause 25.2 had been redrafted to provide for the option to be exercised within the first 41 months of the agreement. She was not called to give oral evidence, for reasons that were not explained, and Mr Pooles undoubtedly would have wished to cross-examine her if she had been, so the weight I can give to her untested evidence is to that extent necessarily limited. But for what it is worth it accords with what I have found to be the case in any event, and I accept it.
- Third, I find that this was not a case of misdrafting by Mr Cuffe. By "misdrafting" I mean a case where a solicitor or other drafter intends to achieve a particular effect X but fails to do so and achieves a different effect Y. As the reported cases show, this is something that happens from time to time, particularly perhaps with complicated formulae or other intricate provisions. But on any view I do not think this is what happened here. The effect of clause 25.2 as drafted by Mr Cuffe is clear and entirely unambiguous: instead of Addax's option being exercisable on or after 42 months for a window of a further 42 months, it is now to be exercisable in the first 41 months alone. It was put to Mr Cuffe that a logical explanation of this was that Mr Channing gave him instructions to shorten the longstop to one month and that what he was trying to do was give effect to those instructions, to which he replied:
"I mean, of course it's a [possibility], but it seems like a very different drafting outcome from the one that is in there. It bears no resemblance to shortening the window."
I agree. I find that if Mr Cuffe was trying to draft something which shortened the window to one month, he would not have redrafted clause 25.2 as he did. Although it was put to him (again) that it was possible that he made a mistake in drafting to which he said "Of course", I did not understand him to be accepting any more than that this was a possibility, not that he thought it at all likely. It can in my view be ruled out.
- Fourth, I find that Mr Channing did not intend Addax to be given an option exercisable in the first 41 months. This was his clear and unwavering evidence but in the light of what I have said about the reliability of his evidence, I have considered with care whether he may have wrongly convinced himself of this. But I find that at any rate in this respect his evidence is to be accepted. The most compelling reason for doing so is that it would have made no commercial sense at all. The whole purpose of the deal with Addax from Mr Channing's point of view was to raise capital to provide a significant working capital cushion to enable WP to expand, not only in London but overseas (at that stage the Middle East and India), without putting unnecessary cash flow stress on the business. This was the explanation given in his e-mail to Addax of 30 January, and I see no reason to doubt what he there said. The deal he offered to Addax in the Term Sheet therefore required Addax to leave the capital in the business for at least 3½ years, at which point they could withdraw half of it. In return for this he was willing to let them have a generous guaranteed return of 15% per annum for the same period.
- No doubt he hoped that if Addax did then exercise its option, the revenues generated by the firm would be sufficient to allow the capital to be repaid without undue strain on its cashflow. But I think he actually hoped he would never have to find the money at all. As appears from the Term Sheet, his plan, as is no doubt very common with small businesses, was to grow the business to a stage where it would be possible to find an "exit strategy", either by way of a trade sale or by way of a listing. This is what he had done with Charterhouse Search which he had sold to The Consulting Group. In either event, he would not actually need to repay Addax: if there were a trade sale, they would receive their share of the sale proceeds, and if there were a listing, they could sell their interest if they wanted to take capital out. If the business had grown at all, he would have expected their interest to be worth more than the amount they had invested. In either case therefore there would be no need or purpose in them exercising their option and WP would not itself have to find the capital. Mr Channing was in my view very positive about the prospects of his proposed expansion, and thought the likelihood was that Addax would never exercise its option at all. He was happy to offer it to them so they would be comfortable with the investment; but it was not in his view a matter of any great significance or something that he was overly concerned with.
- By contrast the effect of clause 25.2 as redrafted was to enable Addax to demand back half its capital at any time in the first 41 months on 20 working days' notice. WP would therefore have to keep ready reserves of £1.25m (or $2.5m as it turned out). This would significantly reduce the advantage of raising the capital in the first place as half of it could not be relied on as working capital to finance expansion at all, but would have to be treated as money effectively repayable on demand. If WP had wished to borrow money repayable on demand, it is unlikely that it would have agreed to pay 15% per annum on that money: Mr Channing's evidence was that commercial lending rates at the time were approximately 6%. The change therefore transformed the option from something that he need not worry about for 3½ years (and in all likelihood would not then be exercised anyway) into something that was an immediate potential liability.
- I accept that in these circumstances there was no conceivable reason why Mr Channing should initiate a change to clause 25.2 which had this effect. As already said, Addax had accepted the deal as set out in the Term Sheet, TW had drafted it accordingly, and Mr Channing himself had been happy with it as so drafted on 16 April. It is not suggested that Withers advised or suggested the change to Mr Channing, and it is clear that they did not. This means that if Mr Channing did intend the change he must have had some particular reason for doing so. But I have not been able to discern, nor was Mr Pooles able convincingly to suggest, any possible advantage to WP in changing clause 25.2 in this way.
- Moreover if Mr Channing had, for some unexplained reason of his own, decided to make this change, he would I think have reacted differently in February 2009 when Ms Hajjar-Alami first told him that Addax was thinking of exercising its option. His immediate reaction was that they could not do that, and that the option could not be exercised until November 2011. This is what is recorded in his attendance note of his call to Mr Cuffe; Mr Cuffe's e-mail to Mr Simpson of 12.01 records that Mr Channing thought the option was "only exercisable after 3 years for one month". Ms Hajjar-Alami's written evidence is to the same effect, namely that she recalled quite how surprised Mr Channing was to receive her call; he thought she was mistaken and that the option could only be exercised after 3½ years. Although untested, this is consistent with the records of his initial telephone call to Mr Cuffe and I accept it. (The fact that Mr Cuffe referred to 3 years rather than 3½ is not to my mind significant in this context). It is also consistent with Mr Channing's note of his meeting with her and Mr Rashid in March, where he records that he was "extremely disappointed", and "livid", to discover Addax had changed the terms of the deal without telling him, and was critical of Withers for allowing the change in. I find that this was a genuine reaction on his part, and that he would not have reacted in this way had he in fact intended the change in the first place. If that had been the case, then even if he had forgotten making the change between April 2008 and February 2009, it is very difficult to think that he would not have remembered doing so when Mr Cuffe advised him that that was what the LLP Agreement said.
- I therefore find that Mr Channing did not intend Withers to make this change, nor indeed did he understand that they had done so.
- That means that on the one hand I have found that Mr Channing did not intend this change to be made; on the other I have found that Mr Cuffe did not misdraft clause 25.2 in the sense that I have explained of trying to achieve X but in fact achieving Y. It seems to me that that leaves only two possibilities. One is that Mr Channing meant to instruct Mr Cuffe to do something else (for example shorten the window) but gave such garbled instructions that Mr Cuffe understood him to be instructing him to make the change which he did make. The other is that Mr Channing indeed gave instructions to do something else but that by the time he came to draft the clause Mr Cuffe had misremembered what he had been asked to do.
- At first blush neither is particularly plausible. It is difficult to see how Mr Channing could have intended to give instructions as to the window and yet conveyed the impression that what he wanted to achieve was that the option be immediately exercisable. Equally however it is not easy to see how Mr Cuffe could have been instructed to make one change and yet come to believe that he was being instructed to make a quite different change. When I suggested that the case was really therefore about the balance of improbabilities, Miss Parkin quite properly referred me to the decision of the House of Lords in Rhesa Shipping Co v Edmunds [1985] 1 WLR 948. In that case a large hole had appeared in the side of a ship and it had sunk. The trial judge, Bingham J, had to consider whether it had been lost by perils of the sea. Having rejected the explanation put forward by the defendant underwriters (wear and tear), he accepted the only other theory put forward, namely the plaintiff shipowners' contention that it had been struck by a submarine, a theory which he had himself described as extremely improbable. The House of Lords held that he had been wrong to do so: it is always open to a trial judge to say that he does not know what happened and that the burden of proof has not been discharged. I take the ratio of the case to be that if a judge finds a factual contention to be improbable he should not find it as a fact on the balance of probabilities, even if there is no other theory put forward.
- I have therefore considered whether I should simply say that I do not know what happened in the telephone call and that WP has failed to discharge the burden on it. But as I understand it, a trial judge should be slow to resort to the burden of proof and should wherever possible make findings of fact. I have already found (i) that there was some discussion about clause 25.2 and (ii) that Mr Channing did not intend Withers to make the change which Mr Cuffe proceeded to make. In the light of this I find that it is indeed probable that Mr Channing instructed Mr Cuffe to make some change to the window in clause 25.2 rather than to make the option exercisable immediately. The change was probably that the window should be reduced to one month. I say this (a) because Mr Cuffe recorded, in his e-mail of 12.01 on 3 February 2009 to Mr Simpson, that Mr Channing thought the option was exercisable for one month; (b) the manuscript note on the copy letter of 18 June 2009 (which I have accepted was made by Mr Moruzzi and reflected what he had been told by Mr Simpson or Mr Cuffe) referred to Mr Channing as thinking the option was for "1 mth after 41 mths"; (c) for reasons given below it is the only explanation that I consider there might be for the selection of the period of 41 months. It was also Mr Channing's evidence, which on this point therefore I accept.
- I find that Mr Cuffe must have either misunderstood the instruction, or noted it down wrong, or when he came to redraft clause 25.2 misremembered what he had been instructed. The telephone call took place at 17.38. The drafting was carried out at some time between then and 19.56 when the DeltaView comparison was generated. I accept that it is not possible on this evidence to know when Mr Cuffe actually did the drafting – and on this the billing records do not assist – but I find that he did not draft the clause while Mr Channing was still on the telephone. Had he done so he would doubtless have read the draft back to Mr Channing who would have realised that it was not what he wanted. I therefore find that Mr Cuffe drafted it after the call was finished.
- Mr Cuffe's evidence was that although he usually either took a handwritten note of any conference calls or sent an e-mail to Mr Simpson summarising the discussion, he would on occasion in high pressure transactions (of which this was one) sometimes "record instructions within the document itself". I accept this evidence; and I accept that Mr Cuffe was under some pressure as the intention was to get the draft across to TW that evening although in the event that did not happen. But Mr Cuffe, to his credit, does not suggest that he has any actual recollection of what happened in this case. It is impossible to reconstruct quite how the mistake happened, but there is one possible clue. That is that Mr Cuffe's amendment refers to a period of 41 months. This (3 years and 5 months) is a very odd period to take, especially as the existing draft referred to two periods of 42 months (3½ years) which would be a much more natural period. It is very difficult to think that if Mr Channing had wanted the option to be exercisable immediately for the first 3½ years or so, he would have chosen 41 months rather than 42. But if his instructions were that there should be a one month window then the reference to 41 months, otherwise inexplicable, might make sense; if what he suggested was a one month window ending at the 42 month point, ie exercisable from 41 months for one month, then this would explain where the figure of 41 months comes from.
- In these circumstances I think the most likely explanation for what happened is as follows. Mr Channing instructed Mr Cuffe to change the option window to 1 month after 41 months. Mr Cuffe made some note (either in the document itself or on something that has not survived) to the effect that the option period was to be changed to 41 months. When he came to draft the amendment, he misremembered what the note was intended to say and drafted it on the basis that the option period was to be the first 41 months, rather than, as intended, the period of 1 month after 41 months.
- In the end however it is not necessary to reach any concluded view on how the mistake came about. On my findings, Mr Channing gave instructions which Mr Cuffe either misunderstood at the time, or noted down wrong, or misremembered when he came to draft the clause. On any view I consider that WP's claim is established. If Mr Channing gave clear instructions, then whether they were mistranscribed or misremembered does not matter: it is not disputed that Withers would be in breach of its contractual and tortious duties. So too in my judgment if Mr Channing's instructions were not clear: in those circumstances Mr Cuffe's duty was to obtain clarification. I do not think it is open to a solicitor who has not drafted something in accordance with his instructions to escape liability by saying that the instructions were unclear. Nor indeed do Withers actually say this: their case is that the change must have been what Mr Channing instructed them to do.
- I therefore find on the balance of probabilities that Mr Cuffe made the change to clause 25.2 without instructions to do so, and that this head of the claim is established.
Alleged negligence (2): Capital contribution expressed in US$
- I take next the allegation that Withers was negligent in relation to Addax's capital contribution being expressed in US$. The precise allegation is pleaded (at Paragraph 34(7) of the Re-amended Particulars of Claim) as follows:
"the Defendant further failed to heed or draw to the attention of Mr Channing or the LLP, or to advise Mr Channing or the LLP that the recording of the Investors' Capital Contributions in USD in the 'Capital Contribution' column of Schedule 1 to the LLP Agreement and the introduction of clause 6.1(b) to the LLP Agreement (which were proposed by Taylor Wessing in the draft LLP Agreements circulated under cover of their emails to the Defendant dated 16 April and 1 May 2008) would have the result that Addax would be entitled to insist on being repaid its Capital Contribution or any part thereof in USD, or at least risked doing so."
I have set this out because I bear in mind that although various other matters were raised in the course of the hearing I am only concerned with the particular allegation that is pleaded.
- The relevant facts are largely set out above and are as follows:
(1) Mr Channing's initial discussions with Addax were based on Addax's contribution being £2.5m. This was the sum mentioned by Mr Channing to Mr Al Essa in January 2008; and was understood by Addax to be the sum required as confirmed by Ms Valdez's e-mail of 30 January 2008 seeking a "breakdown of the use of the proceeds (GBP 2.5MM)".
(2) It was also the sum specified in the Term Sheet where Mr Channing specified the investment as "£2.5 million (approx US$ 5 million)". Consistently with this the Term Sheet also showed (i) the 15% guaranteed investment returns as £375,000 a year and (ii) Addax's option (described as "Management Put") as worth £1,250,000.
(3) The drafts of the LLP Agreement prepared by Withers in January and February 2008 did not contain any provision specifying the contributions to be made by the members. They simply provided that each Member should have a Capital Account and that his Capital Contributions should be credited to his Capital Account.
(4) The TW draft of 16 April introduced a new clause 6.1(b) in these terms:
"the Investors shall pay the amounts set out opposite their name in column 4 of Schedule 1 by way of Capital Contribution to the LLP."
At that stage column 4 of schedule 1 was blank and there was nothing to indicate that the contribution would be in US$. Indeed Mr Cartwright's covering e-mail said that they had assumed that the other investors would be investing alongside Addax "on a £ for £ basis". I infer from this that TW had by then had no instructions from Addax that the contribution should be in US$. TW also introduced clause 25 providing for Addax's option to require up to 50% of its membership interest to be cancelled, the cancellation sum being calculated by reference to its Capital Contribution (although the formula was later redrafted, this remained the case throughout).
(5) This draft was discussed by Mr Simpson and Mr Cuffe with Mr Channing in a telephone call on the afternoon of 16 April. There is no record in Mr Cuffe's note of the call of any discussion of clause 6.1(b) but there was no particular reason why there should have been. In itself it was unexceptional. There was a discussion as to clause 25 which Mr Channing described as fine; it seems to me that he must have understood that on exercise of the option Addax would get back (up to) half of its contribution. There was nothing at that stage to indicate that the contribution would be in US$; and indeed the note records under the Middle East JV that:
"WP invest £250k of investment funds"
which indicates that Mr Channing was then still thinking of Addax's investment as being made in sterling.
(6) Withers' draft of 18 April sent back to TW contained no material change. On 21 April Mr Cartwright e-mailed Mr Channing to say that he would be running through the draft contract with Addax. When Mr Channing forwarded this to Mr Cuffe he again referred to "£250k of working capital" being held back to seed the Middle East business.
(7) Mr Cartwright and Mr Cuffe ran through the draft on the telephone on 22 April. Mr Cuffe's note of the call includes under "Addax JV":
"$5m investment"
This is the first indication in the papers that Addax's contribution was to be in US$. I infer that Mr Cartwright had, as he had indicated he would, run through the draft contract with his clients before this call, and that this was one of the matters Addax had instructed him to change.
(8) The next draft of the LLP Agreement was the 1 May draft sent by TW (and copied to Mr Channing). It specified Addax's Capital Contribution in sch 1 as being $4,750,000 with $250,000 to be invested on formation of Wellesley Partners Middle East. It did not specify the capital contributions for the other investors. Since it was a blacklined version, it was easy to pick up the change from the previous draft (the 18 April draft). It is not ambiguous – there is no doubt that it provides that Addax's Capital Contribution will be a US$ sum.
(9) Withers' telephone records show that Mr Cuffe spoke to Mr Channing on the telephone at 11.25 on 2 May for 21 minutes. Although there is no attendance note of the call, it is clear that the purpose of the call was to run through TW's drafts and obtain Mr Channing's sign-off on the changes they had proposed: Mr Channing had himself suggested on 1 May that Mr Cuffe and he meet or speak "to run through everything"; and Mr Cuffe's billing records describe the call as:
"telephone call – to Rupert Channing, going through all the documents".
(10) Mr Cuffe sent his redraft of 2 May back at 16.55. This left Addax's capital contribution unchanged (and indeed added capital contributions for the other investors in US$).
(11) By 6 May Mr Channing was anxious to complete. He sent an e-mail to Mr Cuffe asking him to confirm with Mr Cartwright that the latter planned to wire US$5 million that day "as he indicated to me on the phone yesterday."
(12) On 13 May Mr Cartwright e-mailed Mr Cuffe saying he expected to be in a position to transfer funds that day and asking him to reconfirm bank details. Mr Cuffe's response referred to the exchange rate on the FT website (£1 = $1.9474) and calculated the sum due at £2,567,525.93. This response was copied to Mr Channing, who replied to Mr Cuffe with WP's account details. Mr Cartwright did not dispute the calculation and later that day transferred the funds to Withers' account to be held to TW's order.
(13) Mr Channing knew that Withers had received approximately £2.56m on 13 May as he had a discussion with Mr Hudson that day to discuss how to deal with the money in which he referred to "approx £2.56m".
(14) Mr Cartwright confirmed to Mr Cuffe at 13.50 on 14 May that the funds could be released, and at 14.10 Mr Cuffe confirmed to Mr Channing that the funds had left Withers' account for WP's. The amount transferred to WP's account was the same as that calculated by Mr Cuffe, namely £2,567,525.93.
- In oral evidence Mr Channing accepted that he knew before he signed the agreement on behalf of WP that it referred to Addax's contribution as $5m (in fact $4.75m and $250,000); and that he was content that the agreement recorded the contribution in US$. I find it probable that this was one of the matters discussed in the telephone call on 2 May when Mr Cuffe ran through the TW drafts of 1 May with him, but whether or not this is so, I find that Mr Channing fully appreciated and understood that Addax's contribution was to take the form of an investment of $5m rather than, as he had initially proposed to them, an investment of £2.5m. Not only is this the effect of his own oral evidence, but it is confirmed by his e-mail of 6 May showing that he expected $5m to be wired, and by the fact that he knew that the amount that Mr Cuffe asked for and that was actually transferred was not £2.5m, but a sum of about £2.56m, being the sterling equivalent of $5m according to the exchange rate on 13 May.
- It is easy to see with hindsight that specifying Addax's capital contribution in the LLP agreement as a sum in US$ was not ideal. In particular, as Miss Parkin pointed out, clause 7.4 of the LLP Agreement provided that the IPS due to Addax should be
"15 per cent of the Capital Contribution less the profit allocation to it pursuant to Schedule 3 in respect of that Financial Year."
As Addax's Capital Contribution is expressed in US$, 15% of that sum is also a US$ figure, whereas Addax's entitlement to profits is calculated by reference to the profits as shown in the audited accounts for the year, which unsurprisingly for a UK entity are drawn up in sterling. So if WP had made any profits, calculation of the IPS would have involved subtracting a sterling figure from a dollar figure, which does not seem a very sensible arrangement and could easily give rise to questions as to which exchange rate to use.
- Miss Parkin also pointed out that there was some lack of clarity whether Addax's Capital Contribution was, for the purposes of Addax's option, to be taken as $5m or $4,750,000. In the event there was no dispute about this, but one can see that there might have been. And Mr Channing said in oral evidence that Mr Cuffe calculated the Capital Contributions of the other Investors, and expressed them in US$ of his own initiative ("I wasn't shown that. He did that by himself"). In fact the other investors had all paid sterling sums so this was inaccurate, quite apart from the question whether the other investors should have been shown as making capital contributions to the LLP at all (as opposed to buying interests from Mr Channing personally).
- But none of these is the complaint that is made. The complaint that is made is that the effect of expressing Addax's Capital Contribution in US$ had the effect of entitling Addax, if it exercised its option, to be repaid in US$ (thereby exposing WP to an exchange rate risk), and that Withers failed to give any advice about this.
- I do not think there is any doubt that the effect of expressing Addax's Capital Contribution in US$ was that it was entitled on exercise of the option to repayment of the appropriate proportion (in the event 50%) of the US$ sum contributed. This was the view taken by Eady J on the hearing of the summary judgment application, despite an argument to the contrary (characterised by him as 'ingenious') addressed to him by Miss Parkin. His conclusion was to my mind plainly right. Clause 25.1 provided that on exercise of the option, WP should pay Addax the Cancellation Sum; clause 25.3 defined the Cancellation Sum as "Capital Contributions made by Addax x Relevant Interest" (in the event 50%); and the Capital Contribution which Addax was obliged to make was expressed as a US$ sum. As Eady J says (at [34] of his judgment) it is impossible to see any other reason why Addax's obligation to contribute should have been defined in terms of US$. This was the contractually agreed amount of its Capital Contribution. The fact that in the event it satisfied that obligation by transferring the sterling equivalent did not change the fact that its Capital Contribution was the US$ sum specified in the Agreement: the law draws a well-known distinction between the currency in which an obligation is measured (the money of account) and the currency in which an obligation is in fact discharged (the money of payment).
- It is not suggested that Withers gave any advice to Mr Channing that the effect of the LLP Agreement would be to entitle Addax to repayment in US$. On the other hand it is not said that Mr Channing specifically asked what the position would be, or that Withers gave any incorrect advice. The allegation therefore is that Withers should have taken it upon themselves to point out to Mr Channing, unasked, that recording Addax's Capital Contribution in US$ would mean that Addax would be entitled to repayment in US$. I do not accept that Withers' duty required them to do this. Withers were not responsible for negotiating the commercial terms but for documenting them. It is apparent that although Mr Channing had proposed to Addax that they contribute £2.5m, Addax preferred for reasons of its own to have their contribution expressed as $5m rather than £2.5m. I have found that Mr Channing fully appreciated that that was so. He was therefore content both that Addax should contribute a sum expressed in US$ and that it should have an option to have half their investment repaid. It does not need a lawyer to point out that in these circumstances the amount they will be entitled to be repaid will be half the US$ sum they have contributed. I agree with the defence pleaded by Withers that it was obvious that any repayment amount would also have to be made in US$.
- Nor does it need a lawyer to point out to a businessman that if a future obligation is expressed in US$, he will either have to keep US$ to meet that obligation, or (if he operates in another currency) he will be running an exchange rate risk. I again agree with the defence pleaded by Withers that this risk was obvious. Miss Parkin submitted that it was not obvious; and that WP might have reasonably concluded that the exchange rate to be used for calculating the repayment would be that prevailing at the date of the agreement. This seems to me to be quite wrong. If Addax had a right to repayment in US$ then WP would prima facie have to make repayment in US$. If it did not have them to hand, it would have to buy them. If it was operating in sterling, that would mean buying US$ at whatever the £:$ exchange rate was at the time that the repayment obligation fell due. Of course Addax might have been content to receive payment in another currency such as sterling, but there is no reason to suppose that it would accept, in discharge of an obligation to pay say $2.5m, any other sterling sum than that equivalent to $2.5m at the time of payment. I find that if this was not in fact obvious to Mr Channing, it would have been if he had thought about it. I suspect he never thought about it: I have already concluded that he was not really expecting Addax ever to exercise its option, which would explain why he did not give any great thought to what it would mean if they did.
- The extent of a solicitor's duty to proffer advice, when not expressly asked for it by a client, is a very fact-sensitive one, and must depend on all the circumstances: Pickersgill v Riley [2004] PNLR 31 at [7]. A solicitor may be under an obligation to point out to a client proposing to take a lease the effect of a clause "in an unusual form" which might constitute a "trap" for a layman (Sykes v Midland Bank Executor Co [1971] 1 QB 113 at 123G-124C per Harman LJ); or to advise on risks which a solicitor is or ought to be alerted to but which "might elude even an intelligent layman" (County Personnel Ltd v Alan Pulver & Co [1987] 1 WLR 916 at 922E per Bingham LJ); or to draw a client's attention to any "hidden pitfall" a contract might contain (Reeves v Thrings & Long [1996] PNLR 265 at 275 per Sir Thomas Bingham MR). But it is not the general duty of a solicitor to give advice on matters of business (Jackson & Powell, Professional Liability (7th edn) §§11-177 to 11-180); nor to ask an experienced client whether he is insured against a risk, or to tell a client what was commonsense as a matter of business (Carradine Properties v DJ Freeman [1999] Ll Rep 483); nor to point out to an experienced businessman "matters which are well within the client's competence to appreciate and evaluate for himself, business considerations rather than legal ones" (Reeves v Thrings & Long at 279 per Simon Brown LJ).
- Applying these principles, in my judgment Withers' obligations as solicitors did not require them to point out to Mr Channing either (i) that the effect of expressing Addax's contribution in US$ would be to entitle it to repayment in US$ or (ii) that this would expose WP to an exchange rate risk. The first was no doubt a legal question in the sense that it was a question of WP's legal obligations, but it was not a subtle or technical point that constituted a trap, or hidden pitfall, that might elude even an intelligent layman; it was an obvious and straightforward point. I do not regard the second as a legal question at all: it is a business consideration that was well within Mr Channing's competence to understand and assess for himself.
- I therefore find that Withers were not negligent or in breach of duty under this head.
- I add that it is WP's case that if Withers had given the advice that it is said that they should have done, Mr Channing would have ensured that Addax's Capital Contribution was expressed in sterling. I am not persuaded that this is so. Although Mr Channing's proposal was that Addax's investment should be £2.5m, it is apparent from the history I have set out that Addax preferred to invest $5m and instructed TW to amend the draft LLP to make express provision for this. I heard no evidence explaining why Addax took this view, but it was evidently a deliberate decision by them, and I do not find it surprising that a Middle Eastern bank would prefer to operate in dollars rather than sterling. Mr Channing was keen to have Addax's investment and I do not think he was much concerned whether it was £2.5m or $5m. Had he appreciated that this made a difference to what WP might have to repay and hence that WP would be running an exchange rate risk, it is not at all obvious that he either would have bothered to seek to change it back to a sterling sum, or would have been in a position to insist on this. This would simply transfer exchange rate risk from WP to Addax. Mr Channing, as already said, was in my view hoping that he would never to have to repay it; and even if he had thought he might have to, he was planning, as detailed below, to open an office in the US which he expected to generate significant profits (necessarily in dollars). I find therefore that it is probable that even if he had asked Addax to change the contribution back to a sterling one, they would have declined and he would have accepted this.
Alleged negligence (3): Redistribution of Addax's interest
- The next allegation is that Withers was negligent in relation to how Addax's interest would be redistributed in the event of the exercise of its option. Again it is important to have regard to the precise allegation pleaded (at Paragraph 34(6) of the Re-amended Particulars of Claim), which is as follows:
"in drafting and advising on the drafting of clause 25 of the LLP Agreement, the Defendant further failed to make, or advise Mr Channing or the LLP as to the wisdom of making, express provision for how the votes attributable to Addax's Relevant Interest should be varied and redistributed upon the exercise of the Addax Option, so as to avoid the possibility of Addax continuing to represent an Investor Majority (and so controlling the giving or withholding of Investor Consent) notwithstanding the repayment of 50% of the Capital Contribution."
- The facts relevant to this allegation are as follows:
(1) Withers' first draft of the LLP Agreement (the 18 January draft) did not contain any reference to Addax's option nor any provision for Investor Consent or Investor Majority; nor did any of the other early drafts they produced.
(2) It was the TW draft of 16 April which first introduced both clause 25 dealing with Addax's option and the concepts of Investor Consent, Investor Representative and Investor Majority. Clause 25.1 as drafted required WP to "terminate Addax's membership" in respect of the Relevant Interest. The provisions in relation to Investor Consent and Investor Majority in effect gave the majority of Investors (the Members other than Mr Channing and Mr Brun) substantial negative control, the majority being calculated by number of votes.
(3) So far as clause 25.1 was concerned, Mr Channing expressed himself happy with Addax's option ("management put structure fine") in the telephone call which he had with Mr Simpson and Mr Cuffe on the afternoon of 16 April, and save for Mr Simpson's insertion overnight on 17/18 April of the word "to", the draft of clause 25.1 which Withers sent back to TW on 18 April was in the same form. It remained unchanged thereafter and the final form of clause 25.1 therefore required WP to "terminate" Addax's membership in respect of the Relevant Interest.
(4) So far as Investor Consent was concerned, Mr Channing said in the telephone call of 16 April that he did not want Addax to have negative control. Withers' 18 April draft therefore took out the reference to Investor Consent. But TW's 1 May draft reinstated it.
(5) As set out above, Mr Cuffe ran through this draft with Mr Channing on the telephone on 2 May. Withers' 2 May draft accepted the reintroduction of Investor Consent. In the light of this, I think it probable that this was one of the matters discussed between Mr Cuffe and Mr Channing and I find that Mr Channing was willing to accept this.
(6) As executed therefore the LLP Agreement provided that a significant number of matters (most of them listed in clause 16.1) required Investor Consent. By clause 15.3 Investor Consent could only be given by the Investor Representative or by an Investor Majority; and by clause 15.1 the Investor Representative was to be appointed by the Investors acting by an Investor Majority. Investor Majority was determined by the number of votes. The total number of votes for Investors was 35.5, of which Addax held 25.
- The practical effect of the final form of the LLP Agreement was as follows:
(1) Clause 25.1 provided that on exercise of Addax's option Addax's membership should be "cancelled" in respect of the Relevant Interest. I do not think there is any real difficulty over what this means. It is easiest to see in relation to votes. Addax's membership entitled it to 25 out of 100 votes. If 12.5 votes are cancelled, it is left with 12.5 votes, but no-one else gets the 12.5 that are cancelled: they simply cease to exist. This means that there are only 87.5 votes in total so Addax's share of the total votes is now 12.5 / 87.5 or about 14.3%. It is not 12.5%.
(2) The same is true of Addax's entitlement to 25% of the profits. In exactly the same way this can be thought of as an interest entitling it to 25 out of 100 shares in the profits, with the other members being entitled to 75 such shares. If 12.5 of these shares in profit are cancelled, they do not go to anyone else, so Addax is now entitled to 12.5, with the other members still entitled to 75. That means that Addax's share in profits is now 12.5 / 87.5 or again 14.3%.
(3) This means that although there is no express provision for Addax's votes or interest in profits to be re-allocated, the practical effect of cancelling half their interest is to increase all the remaining interests (including their own) pro-rata.
(4) It also follows that Addax remains entitled after exercise of the option to more than 50% of the total votes attributable to Investors. The initial total of Investors' votes was 35.5, with Addax having 25 and the other Investors 10.5; after cancellation of half of Addax's votes, the total is 23, with Addax having 12.5 and the other Investors still having 10.5.
- Thus although the question of how Addax's share should be reallocated was one of the matters raised in the autumn of 2009 when attempts were being made to redraft the LLP Agreement as part of the settlement of the proceedings brought by Addax, I do not think there was any ambiguity over what the LLP Agreement in fact provided. Mr Simpson understood this, as shown by his advice on 8 December 2009; as did TW, as shown by their immediate comment on 5 January 2010 when they saw the draft.
- I am rather doubtful whether Mr Channing understood this or whether it is what he would have expected. I have already referred to the fact that he was willing to let Addax have a 25% interest of a business valued at £10m in return for a capital contribution of £2.5m, and that he seems to have thought of this, wrongly, as if it were a sale of part of his interest. Similarly I am rather doubtful whether he appreciated that the provision in clause 25.1 that on exercise of the option the relevant part of Addax's interest should be "cancelled" would not mean that it would go to him, but would go in effect to all the other members pro rata. This was not perhaps what he had envisaged when he drew up the Term Sheet which referred to Addax having the right to require the management of WP (which meant in effect Mr Channing) to buy back 50% of their investment.
- But it is not necessary to consider this further. Withers were not responsible for the commercial arrangements that had been made between Mr Channing and Addax. On my findings they did not see the Term Sheet, and indeed there is no evidence that either Mr Simpson or Mr Cuffe was given any instructions about Addax's option at all before TW's draft of 16 April. They then took instructions from Mr Channing and were told that the management put structure was fine. I consider that they were under no duty to query these instructions, and were entitled to assume that Mr Channing knew what he was doing.
- In any event the allegation pleaded is not that Withers should have queried the way in which clause 25.1 was drafted to ensure that it accorded with what Mr Channing wanted. The allegation pleaded is that they should have given advice about how the votes attributable to Addax's interest should be redistributed "so as to avoid the possibility of Addax continuing to represent an Investor Majority".
- I do not think this allegation is made out. It was quite plain on the face of the LLP Agreement that Addax had 25 votes and the other Investors 10.5 between them, or in other words that Addax's votes were more than twice those of the other Investors. It is obvious that if half their votes are cancelled, they will still have more votes than the other Investors. This is so whether their votes are simply cancelled, or (which comes to the same thing) reallocated pari passu to all the members, or whether they are reallocated to Mr Channing. In other words, it is not the reallocation, or the failure to advise on reallocation, which means that Addax remains able to represent an Investor Majority: it is the simple fact that taking away half Addax's votes still leaves them with more votes than the other Investors. I do not consider that it was incumbent on Withers to point this out: it was not a technical point of law or a trap or hidden pitfall or something that would elude an intelligent layman.
- In my judgment therefore Withers were not negligent or in breach of duty in this regard.
Alleged negligence (4): failure to advise on 3 February 2009
- The final head of negligence pleaded is based on the events of 3 February 2009. Four complaints are made, namely that Withers (i) failed to explain that there had been a drafting error and that Withers had been the source of it (instead leading Mr Channing to believe that the change had been made by Addax); (ii) failed to advise Mr Channing to take any steps to correct that error; (iii) failed to advise Mr Channing to take alternative advice; and (iv) failed to explain (if that is what Withers then understood to be the case) that the drafting of clause 25.2 was due to Mr Cuffe having been instructed to draft it that way by Mr Channing, and that if that was not his recollection he should seek alternative advice.
- I have set out the documentary evidence in relation to the telephone calls between Mr Channing and Mr Cuffe above. My findings of fact in relation to them are as follows:
(1) The first call at 9.26 was a brief one, lasting only 2½ minutes. As appears from both Mr Channing's note of the call and Mr Cuffe's e-mail to Mr Simpson of 12.01, Mr Channing called Mr Cuffe to ask him to check what the LLP Agreement said about when the Addax option could be exercised. This was because Ms Hajjar-Alami had indicated to Mr Channing that Addax were thinking of exercising their option and he thought it could not be exercised until November 2011. Although Mr Channing could not recall this, I find that he also said he thought it could it be exercised for one month. Mr Cuffe agreed to check the wording of the Agreement. He did not give any advice at that stage. Mr Channing's evidence, supported by his note, was that Mr Cuffe told him that his recollection was the same as his, namely that Addax were wrong. Mr Cuffe, who had no actual recollection of the conversation, said in evidence that he thought it unlikely that he would have expressed a view on this as he was going to check the agreement. I think it likely that Mr Cuffe did say something along the lines that he did not think Addax were right but he would check the agreement, but I do not see this as significant. Mr Cuffe had evidently forgotten the detail of the drafting of clause 25.2, something which I do not find at all surprising, and I do not think he would have expressed any more than an off the cuff view.
(2) Mr Cuffe then checked the LLP Agreement, and e-mailed at 9.47 to say that Addax were in fact right. Mr Cuffe thought that he would have done no more at that stage than call up the agreement, find the relevant section and draft a response to the client. There is nothing in his e-mail to suggest that he had done more than this, and I accept that it is unlikely that he had then undertaken any review of the file.
(3) The second call of 10.01 was too brief to have been anything other than an agreement to speak later.
(4) Between then and the third call of 10.54 Mr Cuffe evidently did look at the earlier versions of the agreement, as his note shows that he told Mr Channing that the clause had been in this form since early on. He accepted in evidence that he would have said words to the effect that since the clause was in the signed agreement, Mr Channing must have signed up to it. As his note and his e-mail of 12.01 to Mr Simpson show, Mr Channing then asked what it meant for the LLP and what his options were, and the discussion moved on to the practicalities of seeking to persuade Addax that it was not in their interests to exercise the option.
(5) Mr Channing's note records Mr Cuffe as saying two other things. The first is that he was shocked and that Addax drafted the changes. Mr Cuffe had no actual recollection of the call, but said (a) that he simply would not have said that he was shocked as it would have been out of keeping with everything that he had been told about how to talk to clients; and (b) he would not have said that Addax drafted the changes as he had checked the file and Addax didn't draft it. Certainly by the time he sent his e-mail to Mr Simpson at 12.01 he had identified that it was Withers who had changed the clause from the TW draft, and it is very difficult to see why he would have told Mr Channing that Addax was responsible for the change if he had already identified this. On the other hand, there is no explanation for Mr Channing's note (which I accept is contemporaneous) unless something was said; and there is no doubt that Mr Channing believed Addax to have been responsible for introducing the change as his note of the meeting with Addax in early March makes clear. This refers to Mr Channing's disappointment with Addax for deliberately changing the terms of the deal, and with Withers for letting the change into the documents.
(6) I find the most probable explanation is this. Mr Cuffe identified from his review of the file that the final form of clause 25.2 had been in the draft since early on in the process of negotiating the draft with TW. (Since TW's first draft only arrived on 16 April and clause 25 had been changed by 18 April, this was correct.) He did not at that stage focus on who was responsible for the change, or precisely how it had come about. What he was interested in was the fact that it had been in the draft for some time and in versions which had gone to Mr Channing. When he told Mr Channing that it had been in the drafts since early on, Mr Cuffe expressed some surprise; this was because, as the first call indicated, this was not what he had expected to find. He also said something to the effect that Addax presumably must have made the change. This was not formal advice that Addax had been responsible for the change (something which he had not been looking for and had not checked), but was just a natural response to Mr Channing saying that he had thought the option was exercisable until 2011. It was no more than a passing comment as otherwise he would have recorded it in his note.
(7) The other comment noted by Mr Channing was "? Error in agreement – not original terms – J.C. agrees". Again Mr Cuffe said he thought it unlikely that he had said this as it was not recorded in his note and would probably be the kind of thing he would have recorded. I find it probable that something was said, but again more in the nature of a passing comment than considered advice. Mr Channing may have said that this was not in the original agreement and might have got in by mistake, to which Mr Cuffe might have assented. Mr Channing did not request him to follow this up or track down precisely how the error, if it was an error, occurred; or advise whether he had any remedies if it were an error.
(8) Between this call and his e-mail of 12.01 to Mr Simpson Mr Cuffe must have gone back to the file, no doubt for the purpose of drafting the e-mail, and discovered that the change was in fact introduced by Withers (that is by he himself) in the draft of 18 April. He evidently had no recollection of having made the change, and assumed that it was made on Mr Channing's instructions.
- I now consider, in the light of my factual findings, the various ways in which Withers' advice or lack of it is said to have been negligent. First it is said that they failed to explain that there had been a drafting error and that Withers were the source of it. On my findings, Mr Cuffe had no actual recollection of the drafting of this clause. The file, although showing that he had made the change, did not contain anything which would indicate that this was a mistake, and I find that he assumed that it was made on Mr Channing's instructions, and that Mr Channing's recollection that it could not be exercised until 2011 was wrong. He therefore did not realise that there had been a drafting error at all. It was not negligent in the circumstances not to tell Mr Channing that Withers had made a drafting error.
- It is also said that Withers falsely led Mr Channing to believe that a change had been made by Addax. I have found that Mr Cuffe did make a comment to this effect but it was more in the nature of a passing comment than a considered statement of the position, and I find it was not intended to mislead. If Mr Channing had made it clear that this was a point of importance and asked Mr Cuffe to check precisely how it had come about, he would have done so and told him. The most that can be said is that when Mr Cuffe shortly afterwards discovered that Addax was not in fact responsible, he could have corrected the position; but I do not think he was under any obligation to do so. The thrust of his advice had been that Mr Channing was wrong in what he thought the agreement said, and was stuck with the form of the option which had been through a number of drafts and which he had signed, together with advice as to what in the circumstances he could do about it. He had no reason to think that whether Addax had introduced the change or Withers had done so (which he assumed to be on instructions) made any difference to that advice. I find this head of negligence is not made out.
- Second, it is said that Withers failed to take any steps to correct the error, for example by rectification. On my findings, Mr Cuffe did not know that the agreement contained an error. Mr Channing had suggested that the change might have got in by mistake, but Mr Cuffe could see when he checked the file that the change had been drafted by Withers, and he assumed this was on instructions and Mr Channing's recollection was wrong. Mr Channing had accepted that as he signed the agreement he had signed up to it, and did not ask him to track down how the change had got into the agreement or advise on whether it could be corrected. I do not consider in the circumstances that Withers were obliged to explore the question of rectification. In any event it is not at all clear that it would have been of any benefit if they had: it would no doubt have been necessary to establish a case of unilateral rectification, which is never easy, and particularly difficult where a change has been deliberately introduced by one party's lawyers, and gone through a number of drafts. And although what is actually pleaded is that Withers failed to take "any steps" (or advise as to the possibility of taking steps) to correct the error, "including" seeking rectification, it is not suggested that there are any other steps that could have been taken to correct it.
- Third, it is said that Withers failed to advise Mr Channing to seek alternative advice. On my findings Mr Cuffe assumed that the change had been made on Mr Channing's instructions, and therefore had no reason to think that Mr Channing had a claim against the firm. In these circumstances he did not in my judgment owe Mr Channing any duty to advise him to take alternative advice. It is noticeable that Mr Channing in fact did feel dissatisfied with Withers (in letting what he assumed to be a change drafted by Addax to go through) but did not complain to them about this at the time. As soon as Withers were aware that he was complaining about the service provided by them (as a result of the conversation with Mr Duthie on May 2010), Withers took the allegation very seriously, as one would expect. I find that Mr Cuffe did not appreciate, nor should he have appreciated, in February 2009 that Mr Channing was blaming Withers, and that if he had done, he would have done something about it.
- Fourth it is said that if (as I have found is the case) Withers understood the change to clause 25.2 to have been drafted on Mr Channing's instructions, they were under a duty to explain that to him, and to advise him to seek alternative advice if that did not accord with his recollection. I do not accept that such a duty existed. If Mr Channing had asked them to investigate and explain how the change had come about, they would no doubt have done so. But this was not the advice that he asked for or that Mr Cuffe gave. The advice he asked for, and that Mr Cuffe gave, was what was in the agreement and what the consequences for WP were. I do not think there was a duty on Mr Cuffe to add that as far as he was concerned Mr Channing had given the instructions for the change. He assumed that the change had been made on Mr Channing's instructions and I accept that to have explained this to the client would have been unnecessary, and possibly, as Mr Pooles put it, rubbing the client's nose in his own instructions.
- In the event therefore I do not find that Withers were negligent or in breach of duty in any of the ways alleged under this head.
Summary on liability
- I have found that Withers was negligent in drafting the change to clause 25.2 without being instructed to do so by Mr Channing; but was not negligent or in breach of duty in any of the other respects alleged by WP.
Contributory negligence
- The next question is whether WP was contributorily negligent. Withers relies on Mr Channing's failure to review the draft LLP Agreement and note the change to clause 25.2 despite being sent a marked-up copy of the draft LLP Agreement on 18 April and a number of subsequent drafts.
- The facts relevant to this are set out above but can be summarised as follows:
(1) Clause 25 in its original form was drafted by TW and included in the TW draft of 16 April.
(2) Mr Channing went through this draft with Mr Simpson and Mr Cuffe on the afternoon of 16 April. He expressed himself happy with clause 25 as drafted ("management put structure fine").
(3) Withers suggested adding a longstop provision and Mr Cuffe included one in clause 25.2 of the 16.15 draft of 17 April. This was sent to Mr Channing as a blackline against the TW draft of 16 April.
(4) Mr Channing spoke to Mr Cuffe at 17.38 on 17 April. I have found above that in that call they discussed clause 25.2 and that Mr Channing instructed Mr Cuffe to make some change to the window in clause 25.2, probably that the window should be reduced to one month.
(5) Mr Cuffe in fact changed clause 25.2 to provide for an option exercisable immediately. This was included in the 18 April draft which was sent to TW, as a blackline against their draft of 16 April, at 10.31. It was copied to Mr Channing. At 10.34 Mr Cuffe sent the e-mail to Mr Channing which referred to Mr Simpson's amendments having been incorporated in the current draft and that:
"there is nothing particularly different from the draft I sent you yesterday."
(6) Mr Channing's evidence was that he opened the 10.34 e-mail first, understood it to mean that there were no significant changes from the 16.15 draft of 17 April and therefore did not check through the draft attached to the 10.31 e-mail. I accept this evidence. If he had read through the draft attached to the 10.31 I find he would have noticed the change to clause 25.2. There were not many changes from the TW draft of 16 April, and they were easy to identify as the draft was a blackline one. Most of them were concerned with the removal of the requirement for Investor Consent, but the change to clause 25.2 would have stood out as the one which most directly affected the commercial terms. If Mr Channing had read it, he would have noticed what it said and objected: it is as I have said clear and entirely unambiguous.
(7) The next draft copied to Mr Channing was the 1 May draft produced by TW. This was a blackline against the 18 April draft and contained no further change to clause 25. Mr Channing went through it on the telephone with Mr Cuffe on 2 May, and although there is no direct evidence of what was discussed, I find it probable that discussion was limited to the changes introduced by TW and shown on the blackline. This is what one would expect.
(8) The next draft copied to Mr Channing was sent at 11.37 on 6 May. This was not a blackline version but a clean version.
(9) The next draft copied to Mr Channing was sent at 10.16 on 8 May. So far as appears from the documentary evidence it was the last version sent to Mr Channing before completion, even though there were a couple of later last-minute amendments introduced at the request of RBC.
- Mr Channing was cross-examined as to which version, if any, of the LLP Agreement he had read through in its entirety. His evidence at various points in his cross-examination was to the effect that (a) he believed he did read through the TW draft of 16 April; (b) he was not sure in how much detail he read it; (c) he read it in the knowledge that he was shortly going to be discussing it with Mr Simpson and Mr Cuffe, and believed he read it in sufficient detail to capture the essence of what he was looking for; (d) he could not now tell which draft he read from beginning to end; (e) he did not read the final version all the way through as he was advised by Mr Cuffe that it was as it should be.
- I find on this evidence that Mr Channing did read the TW draft of 16 April in some detail, looking out for any points he wished to raise with Mr Simpson and Mr Cuffe; that he probably looked at the blackline changes on the 16.15 draft of 17 April; that he did not open and did not look at the draft of 18 April; that he looked at the blackline changes on the 1 May draft; and that he did not read either the 6 May or 8 May draft through, relying on the fact that if there had been any changes of significance since the discussion on 2 May Mr Cuffe would have told him.
- Mr Pooles submitted that a person asked to sign a document ought to read it before signing it, even if it had been drafted by a solicitor that he is relying on. I think that overstates the position, and when I asked him if there was any authority to that effect he said there was not that he was aware of. In my judgment it must depend on the precise facts in each case, and I certainly do not intend to express any general principle; but on the facts of this case, as I have found them, Mr Channing did read through the TW draft of 16 April, at least in sufficient detail to understand which points he wished to discuss with Mr Simpson and Mr Cuffe. Thereafter he did not read through the whole document again, but looked at the changes highlighted by the blackline (i) in the 16.15 draft of 17 April and (ii) in the 1 May draft. In each case he had a conversation with Mr Cuffe (i) later in the afternoon of 17 April; and (ii) on 2 May. I consider that it was reasonable for him to confine himself to the changes brought to his attention, and not incumbent on him to read through the whole document again. When he received the draft on 6 May, it was not a blackline version but Mr Cuffe did not suggest there was any change of substance since they had spoken on 2 May. The same was true of the draft of 8 May. It was not in my judgment unreasonable for Mr Channing to assume that it was not necessary to read through the agreement again. I therefore do not regard Mr Channing as being at fault in not reading through the 1 May, 6 May or 8 May drafts in their entirety.
- That leaves the question whether he should have opened and read the 18 April draft sent to him at 10.31 that morning. I have already said that I accept his evidence that he did not do so because he opened the 10.34 e-mail first and understood it to mean that there were no changes of substance since the 16.15 draft of 17 April. This seems to me an entirely reasonable way to read the e-mail of 10.34 (even though I accept that what Mr Cuffe actually meant was that none of Mr Simpson's overnight changes were of substance). In circumstances where Mr Channing received a draft, but also received an e-mail which, far from drawing his attention to any particular changes or asking him to confirm that he was happy with it, said "There is nothing particularly different from the draft I sent you yesterday", I do not regard it as unreasonable for Mr Channing to have concluded that it was unnecessary for him to read through it again. He had effectively signed off on the 16.15 draft of 17 April the day before, apart from suggesting a change to clause 25.2 (the introduction of a shorter longstop) which he regarded as of no great significance. With hindsight it would no doubt have saved a great deal of trouble had he opened and read the 18 April draft, but I do not consider he was at fault in not doing so.
- In my judgment therefore Withers has not established that WP was contributorily negligent.
Loss
- WP claims damages under a number of heads, as follows:
(1) First, it claims that Addax's withdrawal of capital meant that it was unable to finance the anticipated expansion of its business both in London and abroad. It therefore claims the revenue that it would have earned had it recruited more consultants in London, and had it opened abroad. In practice, for reasons explained below, the latter refers to the possible opening of an office in New York.
(2) It claims losses flowing from the diversion of Mr Channing's time away from that of generating revenue and expanding the business into dealing with the disputes with Addax.
(3) It claims various legal costs which it has incurred in dealing with Addax.
- There is also a pleaded claim for an exchange rate loss caused as a result of the sum repayable to Addax on exercise of its option being calculated in dollars rather than sterling. Since I have rejected WP's allegation that Withers were negligent in this respect, this head of loss does not arise, although I should record, in case I am wrong in that conclusion, that the expert accountants stated in their joint statement that they were agreed on the mathematical calculation of the sum as set out in the second report of Mr Cottle (the Defendant's expert accountant). Unfortunately Mr Cottle's second report does not appear to set out the calculation anywhere but taking the sum claimed as £374,385 and adjusting it by the sum of £136,491 as set out in Mr Cottle's report gives a net loss of £237,894 and if this had been a live issue, I would have found this to be the amount of the exchange rate loss.
- The most significant head of loss is the first (loss of revenue). In support of this claim WP relies on a revised business plan ("the Revised Business Plan"). The evidence in relation to this is as follows:
(1) Mr Channing had prepared a business plan ("the Business Plan") for the purpose of his initial discussions with Addax. He had supplied a copy to Addax by 30 January as is shown by his e-mail of that date to Ms Valdez (paragraph 22 above). On 15 April 2008 he sent a copy to Mr Cartwright (paragraph 27 above).
(2) In the latter half of April Withers and TW were engaged on drafting the JV agreement for the Middle East business. On 29 April Mr Cartwright asked for a business plan for that business (with a view to annexing it to the JV agreement). Mr Channing suggested that since the Middle East plan was incorporated in the "group plan", it would make sense to attach the latter.
(3) Also being drafted was the agreement between WP and WPHK, which began as a trade mark licence under which WP licensed WPHK to use WP's trade mark, but which was later redrafted, after WPHK had objected to this form of agreement, as a non-compete agreement. In its original form it only licensed WPHK to operate in Hong Kong, but when Mr Cuffe asked Mr Channing if it needed to grant WPHK the right to trade anywhere else in Asia, Mr Channing instructed him that it should include all of North and South East Asia; and when Mr Cuffe sent through a list of all countries in Asia, Mr Channing's response (on 28 April) was that he should exclude all the Arab states and Turkey. The result was that the agreement was drawn up with a long list of Asian countries which were reserved to WPHK, including India.
(4) WPHK's redraft of the agreement as a non-compete agreement was received on 6 May. Mr Cuffe spoke to Mr Channing that morning. As a result he amended it to add an explicit reference to WPHK not using the name Wellesley Partners in Europe or the United States.
(5) At a very late stage (at 10.48 on the morning of 13 May) Mr Cuffe e-mailed Mr Channing to say that Mr Cartwright had been looking at the non-compete agreement and noticed that:
"although the business plan talks about growth opportunities in India, this is one of the reserved territories for WP HK"
He asked Mr Channing to confirm that the list of territories for WPHK was correct. There is no record of any e-mail response but Mr Cuffe and Mr Channing spoke on the telephone that morning and I infer that Mr Channing confirmed that the list was acceptable as it was left unchanged.
(6) Also on 13 May Mr Cartwright e-mailed Mr Cuffe the Business Plan asking him to initial it, as he would on behalf of Addax. Mr Cuffe did so and sent it back on 14 May. The plan gave details of WP's projected growth in London, the Middle East and India. There is no indication in the documentary record that Mr Cartwright ever received more than one plan and I find that this document was the plan sent to him on 15 April.
(7) Mr Channing's evidence was that some time before 13 May WPHK had suggested that it made sense for them to be able to market in India as it was closely linked to Hong Kong, and that as a result he agreed with Mr Al Essa that WP would turn its attention to the United States instead of India. He therefore drew up the Revised Business Plan, which dropped India and replaced it with the US. He says that he provided a copy of the Revised Business Plan to both Mr Cartwright and Mr Cuffe on 5 May, and indeed says he cannot understand how in these circumstances Mr Cuffe came to incorporate the earlier plan in the documentation.
(8) There is however no record of Mr Channing e-mailing or sending a hard copy of the Revised Business Plan either to Withers or to TW. I think it unlikely that he did. If Mr Cartwright had had it, he would not have thought there was any conflict between the business plan he had and the list of territories reserved for WPHK in the non-compete agreement, nor would one expect him to have annexed the superseded plan. If Mr Cuffe had had the Revised Business Plan before 13 May, he would not have had to pass Mr Cartwright's query on to Mr Channing; and again one would expect him to have told Mr Cartwright that he was proposing to annex the wrong plan. I find therefore that Mr Channing did not provide either Mr Cartwright or Mr Cuffe with a copy of the Revised Business Plan on 5 May, or indeed at all.
(9) At some stage however the Revised Business Plan was indeed drawn up and a copy is in evidence. This copy is undated, but I accept Mr Channing's evidence that by the end of April 2008 he had decided not to expand into India and was contemplating expanding into the US instead. I infer this from the fact that he excluded the Middle East from the list of territories reserved to WPHK and not India; and from the fact that on 6 May he asked Mr Cuffe to put in the non-compete agreement an express reference to WPHK not competing in the US. I find that the Revised Business Plan was probably drawn up in May 2008 at about the time of the LLP Agreement being completed.
- WP's accounting year ended on 31 March. The Revised Business Plan contains projections for revenue and profitability for each of WP London, WP Middle East and WP North America for the 3 accounting years ending March 2009, 2010 and 2011, together with a more extended London Profitability Summary giving actual figures for the years ended March 2005 to 2007, and budgeted figures for 2008 to 2011. The following points can be noted:
(1) The projections are not detailed: indeed although the profitability summary for WP London contains brief estimates of operating costs, those for WP Middle East and WP North America consist of no more than a summary of revenue (£1,350,000, £1,900,000 and £2,250,000 for each) and net profit (£500,000, £750,000 and £1,000,000, again for each). It is therefore little more than an outline sketch of expected profits for these two offices, and suggests that it was put together quite quickly.
(2) It contains a list of "Assumptions Supporting Revenue and Profitability Summary" but these are in fact taken unchanged from the original Business Plan and so still refer to the proposed expansion into India, and contain no reference to the US. This again tends to suggest that it was put together as a fairly quick exercise.
(3) The profitability summary allows for commission on all revenue at a rate of 45%. The London profitability summary uses the same rate for past years with a note reading:
"Commission has been applied at a standard 45% rate to Historical figures, although actual reported commissions have been much less, due to the partnership entity structure."
This is potentially relevant to one of the issues between the parties on the assessment of quantum.
(4) With this adjustment, the figures for WP London showed a net profit as follows:
| 2004/5 |
£210,598 |
| 2005/6 |
£392,264 |
| 2006/7 |
£254,468 |
| 2007/8 |
£252,300 |
| 2008/9 |
£672,806 |
| 2009/10 |
£1,196,756 |
| 2010/11 |
£1,650,506 |
It can be seen from this table that although there had been relatively little growth in net profit between 2004/5 and 2007/8, the projections showed a very substantial increase from then to 2010/11.
- WP's claim for loss of profits is primarily based on the figures in the Revised Business Plan (subject to certain modifications suggested by Mr Pearson, WP's expert accountant). WP makes no claim in respect of the Middle East as this project had been abandoned before February 2009 when Addax first intimated its intention to exercise its option. Nor does it make any claim for 2008/9. But it does claim loss of profits for each of the projected London and US operations, from 1 April 2009 to 6 November 2011 (being the date 42 months after the date of the LLP Agreement and hence the earliest date when Addax could have exercised its option had it remained as originally drafted). Its case is that the Revised Business Plan is a good indication of the level of profits that it could and would have made had it had the capital to expand as intended. Given that the Revised Business Plan was (a) little more than a back of the envelope exercise and (b) drawn up in May 2008 before the collapse of Lehman and the ensuing financial crash, this is a case which must be scrutinised with some care.
Nature of executive search business
- Before looking at the particular case advanced by WP, I should explain some of the features of the executive search or headhunting business and Mr Channing's and WP's place in it. On this I had evidence not only from Mr Channing himself, but from a number of other witnesses. Those giving evidence for WP were as follows:
(1) Mr Brun. Mr Brun gave evidence about working with Mr Channing both at Heidrick & Struggles and then at WP, and in particular about the establishment, and subsequent rapid growth, of WPHK.
(2) Mr Brian Sullivan. Mr Sullivan was between 1999 and 2002 Global Head Financial Services, and subsequently a Vice Chairman and Global Head of Practices at Heidrick & Struggles. He was responsible for rebuilding the firm's financial services practice and recruited Mr Channing to lead the practice and grow the business. His evidence was directed at Mr Channing's success in doing this. His witness statement was accepted without cross-examination and he was not called to give oral evidence. Mr Sullivan is now CEO at an executive search firm called CTPartners ("CT"), and in this capacity he in fact worked closely with Mr Channing in 2009 in trying to secure an appointment from Nomura in the US but his evidence did not deal with this particular matter at all.
(3) Mr Piers Marmion. Mr Marmion was President International and then CEO and Group Chairman of Heidrick & Struggles during 2000 to 2003. Mr Channing was already working there when he arrived. Mr Marmion also gave evidence as to Mr Channing's success in aggressively growing Heidrick & Struggles' financial services practice during his time there.
(4) Mr Anthony Fry. Mr Fry is a corporate finance advisor. In 2004 Mr Channing successfully recruited him to join Lehman as head of UK investment banking. He subsequently used WP to assist him to recruit a number of senior bankers to join Lehman's UK banking business.
(5) Ms Bridget Anderson. Ms Anderson worked for Lehman, becoming Chief Administrative Officer for Lehman's Investment Banking Division Europe; and subsequently, after the collapse of Lehman, continued in a similar role for Nomura which acquired Lehman's business in Europe. One of her tasks was to manage recruitment for the business and she had specific oversight of all executive search activity the business chose to conduct. She gave evidence of her experience of Mr Channing with whom she worked closely.
(6) Mr David Rothnie. Mr Rothnie is a financial journalist. His evidence, albeit heavily redacted by agreement between the parties, gave some general evidence about the executive search business and his knowledge of Mr Channing. His witness statement in its redacted form was accepted and he was not called to give oral evidence.
- For Withers evidence was given by the following witnesses:
(1) Ms Louise Kerr. Ms Kerr worked at WP from May 2006, initially in an execution role, although she later originated business herself. She was on maternity leave from July 2008 until January 2009, and left WP in May 2010. Her evidence was accepted without cross-examination.
(2) Ms Annie Jordan. Ms Jordan also worked at WP. She joined as a consultant in 2004, and left in May 2008. She now works in Moscow and her evidence was admitted as a hearsay statement under the Civil Evidence Act.
- Each party also called an expert from the industry, namely Miss Joannafey Mills for WP and Mr Jonathan Baines for Withers. Both Miss Mills and Mr Baines were impressive witnesses. Miss Mills has had a career in the executive search industry with a particular focus on investment banking since 1995, and is currently a partner in The Rose Partnership, a specialist boutique firm focused on investment banking. Mr Baines has an even longer career dating back to 1986 when he started his own firm, and is currently Chairman of the European business of Korn/Ferry, a large US based global search firm.
- From this evidence, both from those who had direct experience of working with and for Mr Channing and WP, and from the experts, the following points emerge.
(1) Executive search businesses invariably work on an exclusively retained basis, that is on being given a "mandate" by the client (in the case of investment banking, a financial institution) to fill a particular post, with a clear instruction to proceed and a contractual commitment to pay on the post being filled. (This is what distinguishes executive search or headhunting from recruitment in general).
(2) In the case of investment banking, recruitment tended to operate in an annual cycle. Bankers did not want to move before the end of the calendar year, when they would receive substantial year-end bonuses. A typical search from mandate to completion (when an offer is made to a candidate) would take around 3 to 4 months, but many candidates would be required to undertake a period of gardening leave so there was then a timelag until the new appointee took up a post. This meant that those looking to recruit would tend to place mandates in the latter half of the year (July to October) with a view to the successful candidate joining in January to March after the bonus period.
(3) Executive search firms in this field were on the whole either the large internationally recognised firms (such as Heidrick & Struggles and Mr Baines' firm, Korn/Ferry) or small specialist boutique firms (such as WP and Miss Mills' firm, The Rose Partnership). While the large integrated firms dominate most other areas of search, in investment banking some clients preferred to use boutiques and they could be very successful.
(4) The most successful boutique firms need to attract and retain some of the best search consultants. The professionals working for such firms divide broadly into consultants, who talk to clients, win mandates and generate revenue; and support professionals who help to execute the mandates and carry out the research necessary for a firm to be able to serve its clients. Top consultants develop deep relationships with their clients; they become close and trusted advisors to the most senior members of the financial institutions and build relationships with them that last many years.
(5) It is not however possible for a firm to have this sort of relationship with more than a handful of clients in the same sector. The experts are agreed that in the world of investment banking, no more than two or three core clients is the norm. Partly, as Mr Baines explained, this is because clients prefer to work with a few firms and appoint them exclusively ("preferred suppliers") but in return will require firms to agree to an "off-limits" provision (ie a provision that they will not seek to recruit the client's own employees to work for anyone else); this means that firms must have a large pool of non-client institutions from which to find potential candidates, and if they have too many clients will lose business. Partly, as Miss Mills explained, this is because investment banking is a very competitive industry and a client would not feel comfortable if its preferred firm also worked for its biggest competitors.
(6) So far as Mr Channing personally is concerned, all the evidence I heard agreed that he was among the most successful consultants in his field. Mr Sullivan, who recruited him to Heidrick & Struggles in 2000, said he then had an excellent reputation for originating and successfully executing assignments; and both he and Mr Marmion testified to his success in building the financial services team at Heidrick & Struggles, and to the fact that he personally was in the top echelon of fee-producers globally in the firm.
(7) One particular client of Mr Channing's was Lehman. Ms Anderson who was then Head of HR for Lehman's Investment Banking Division first met him in about 1999. She said that he had an excellent reputation, and it was not long before Heidrick & Struggles became one of Lehman's preferred suppliers. Mr Channing initially assisted with the London office, but subsequently with placements for Lehman across Europe. After Mr Channing established WP, she continued to work with him and Lehman retained WP as a preferred supplier. After WPHK was established, Lehman also used WPHK to assist with recruitment in Asia. Her overall assessment was that WP was one of the top two executive search firms with whom Lehman's Investment Banking Division worked (in terms of the strength and depth of relationships between Mr Channing and the key decision makers, and the volume of work done); and she regards it as the most successful search firm with which she has worked (in terms of its ability to find the best candidates and persuade the selected candidates to accept the offers made to them).
(8) Mr Fry, who had himself been recruited to join Lehman by Mr Channing in 2004, used WP to assist him in recruiting a number of senior bankers; he confirmed that Mr Channing had built a significant relationship with senior management at Lehman, and that Lehman used WP's services extensively both in Europe and Asia (the latter no doubt through WPHK).
(9) The fees paid to executive search firms are typically based on a proportion of the compensation of the successful candidate, with part of the fee (the retainers) paid during the mandate and the balance paid as a success fee only on successful appointment of a candidate. Since bankers are (notoriously) well paid, this means that the fees can be substantial; even though it became the practice to introduce fee caps, Mr Baines' evidence was that in 2004 to 2008 a fee of £300,000 for a senior appointment was quite possible, and that a top class consultant might generate fees in the order of £2 to £2.5m a year in that period, although his evidence was that this fell significantly after 2008. Miss Mills' evidence was that the most successful headhunters operating in this industry from boutique platforms could generate in the period 2008 to 2011 £1.5m to £2m a year, and that she included Mr Channing in this bracket. Mr Baines said that he fully agreed that Mr Channing was in a top group of some 20 or so consultants.
- With this introduction I propose to consider first the position with the US and then the London office. I will in each case first set out the evidence, and my findings, as to what in fact happened; and then consider what would have happened if Addax had not exercised its option.
The US – WP's actual experience
- Although the Revised Business Plan budgeted for equal development of both the proposed Middle East and US businesses (with each shown as generating identical revenue of £1,350,000 in 2008/9), in fact Mr Channing's primary focus after completing the Addax investment in May 2008 was on developing the Middle East business. He made a number of trips to the Gulf both in connection with the proposed JV and Addax's own recruitment process. But the financial crisis triggered by the collapse of Lehman on 15 September 2008 put a stop to these activities and Mr Channing and Mr Al Essa agreed to put plans for the JV on hold. In the event they were never reactivated (paragraph 60 above).
- So far as the US was concerned, very little had been done towards opening an office there before the crisis hit. Mr Channing's evidence is that he had begun discussions with Lehman in the US using his existing contacts, and had identified some former colleagues who might be suitable revenue generators for a WP business in the US, but he does not suggest – nor is there any documentary evidence – that any concrete steps had been taken either to open an office in New York or to approach potential recruits or do anything in the way of starting up a new business.
- The collapse of Lehman had an immediate impact on recruitment in banking, bringing it to a complete halt. None of WP's clients were able to undertake their normal annual recruitment cycle, and all of WP's existing projects were suspended or cancelled. Mr Channing's evidence was that the market remained paralysed from September 2008 until January 2009, although in an e-mail of 11 March 2009 to Mr Channing Ms Hajjar-Alami had referred to:
"the fact as mentioned by you in the last update, there is no clarity whatsoever in current market conditions on future revenues"
which indicates that the uncertainty continued for some time later than January. I revert to this point below.
- After the collapse of Lehman, Nomura, as I have already referred to, acquired Lehman's non-US investment banking business. It did not however acquire Lehman's US business, which was acquired instead by Barclays. As Ms Anderson explained, however, the whole point of Nomura's acquisition of the Lehman business was to get into the global investment banking business, but for this it needed a US presence. It therefore needed to grow a US business quickly. Ms Anderson described it as Nomura's No 1 priority: without it, she said, it was like sitting on a three legged stool with one leg missing. This exercise by Nomura was referred to in evidence as the Nomura US build out.
- Mr Channing was naturally aware of this opportunity. He mentioned it to Addax when he visited them in Bahrain from 11 to 13 January 2009; his meeting note refers to an:
"In depth discussion about Lehman / Nomura growth plans and proposed Europe / US buildout. Significant WP revenue opportunity."
In re-examination he told me that he had had conversations about the opportunity with Mr Meissner, probably, although he could not point to a formal starting point to them, around December 2008 to January 2009.
- Mr Channing had himself been responsible for recruiting Mr Meissner, who had formerly been at Goldman Sachs, to join Lehman in October 2003, where he became Head of European Investment Banking. As already mentioned Mr Channing persuaded him to become one of the non-Addax investors and take a 1% interest in WP. Mr Channing also helped him, after Lehman collapsed, to approach Addax as a potential partner in a private equity venture which he was considering when the future for the business he had been working in was very uncertain, although nothing in fact came of this approach. After Nomura acquired the business, Mr Meissner remained in a senior position and in due course became Global Head of Investment Banking; this is how Ms Anderson described him in her witness statement although it is not clear that he had been appointed to this post immediately as the presentation prepared in February 2009 (see below) gave his title as Head of Investment Banking EMEA.
- It is clear that Mr Channing had a very close relationship with Mr Meissner and I accept Mr Channing's evidence that he would have spoken to Mr Meissner around December 2008 or January 2009 when it became apparent that Nomura would be embarking on the US buildout.
- Mr Channing's evidence was that he understood that Nomura wanted him to do the US buildout through WP, and that WP intended to do it themselves, opening a small office in New York. I return to this below. In the event however, WP did not make any attempt to win the mandate by itself. Instead, relatively soon after Addax had indicated on 3 February 2009 its intention to exercise the option, Mr Channing turned to Mr Sullivan at CT with the aim of making a joint bid for the work. By 18 February CT had prepared a draft of a presentation to be made jointly to Nomura by CT and WP; its title page showed that it was addressed to Mr Meissner and Mr William Vereker (both described as Head of Investment Banking EMEA); and although CT were given prominence in the body of the presentation, the names listed on the front cover had Mr Channing first, followed by three CT personnel, namely Mr Sullivan (Chairman and CEO), Mr Burke St John (Vice Chair) and Miss Constance Kassouf (Partner).
- A slightly revised version of the presentation was subsequently sent by CT to Mr Channing and sent on by him on 3 March 2009 to Ms Anderson and Mr Meissner by way of introducing CT. In his covering e-mail he said that although as they knew, WP did not have a US practice, when clients asked him to assist in the US he always encouraged them to use CT, and he looked forward to a meeting being set up to present CT to them and talk through the US market. The reference to always encouraging clients to use CT may have been an overstatement, but this e-mail confirms that it was Mr Channing who had the existing contacts with Nomura and who was introducing CT to them.
- A meeting duly took place in New York on 16 April 2009. Those present included at least Mr Sullivan and Mr St John as both sent e-mails the next week to Mr Meissner saying what a pleasure it was to meet him. Both referred to Mr Channing, Mr Sullivan saying that:
"Rupert had spoken very highly of you whenever he and I had gotten together in London and it's very clear to me why you had been so successful"
and Mr St John saying:
"Christian, we are very excited about the prospect of representing you here in the US, and building upon Rupert's great work around the globe for Nomura."
Mr Channing's evidence was that he flew to New York with Mr Meissner on 19 April, but the probability is that he flew out with him for this meeting and in order to introduce the team from CT to him.
- Mr Meissner sent an encouraging reply to Mr Sullivan on 27 April saying that he looked forward to seeing him again next week and proceeding with the project. He then set out his priorities, the first priority being to find a head of the US Investment Banking Division, and, concurrently with this to build sector teams, specifying in particular FIG (financial institutions), Natural Resources & Energy, TMT (telecoms, media, technology) and Consumer Retail. Other sectors would need to wait. He then referred to M&A execution capability which he thought should follow; and "other products (principally capital markets)" which he thought should go on the back-burner for the time being. He continued:
"In order to make the discussion as productive as possible, I wonder if you could focus on the first two questions and think about how we might approach these issues. Also, to give you an update on my thinking, I had a very good impression of our first discussion and I'm minded to work with you on this if you are interested. However, I am still debating whether it makes sense to hire one or two firms given the scope of the project so I'd be interested in your thoughts on that as well. Finally I will invite my senior colleagues from Nomura NY to the meeting (Mr. Kashiwagi and Ms. Iino) although I don't know yet if they are free."
Mr Sullivan's response was to say that they remained very interested and excited about working with him, and that they were confident that he should use one firm.
- A second meeting took place on 5 May at CT's offices in New York. Mr Channing again flew out for the meeting. However in the event Nomura did not award them the mandate. Instead they ultimately hired two of the largest integrated firms, namely Heidrick & Struggles and Korn/Ferry. Ms Anderson's evidence was that they did not have existing relationships in the US with either and it took some time to get them to sign up to Nomura's terms and conditions and get them up to speed in terms of what Nomura wanted ("what the Nomura hiring story was") but that they were in place by the end of 2009 or early 2010. She recalled that the idea was to get two search firms up and running and then maybe one more for capital markets in due course, but she did not herself know if this had been done: she left Nomura in June 2010 and while she was there it was just the two firms.
- Mr Channing gave evidence that he had asked Mr Meissner why they didn't get the work and Mr Meissner had told him he didn't like Mr St John. I accept this evidence, which was to a large extent confirmed by Ms Anderson. She said that she remembered very clearly Mr Meissner saying that he did not want to work with CT, and believed that Mr Vereker was of the same view ("So if the two heads of banking weren't going to enjoy working with that particular individual it wasn't going to happen.").
- That concludes the evidence as to WP's actual experience in the US. There was no other evidence before me of any subsequent attempt by WP to win any work there.
- The next question therefore is what would have happened had Addax not been able to exercise its option in 2009. This raises two questions: (1) would WP have opened its own office in New York ? and (2) would it have been successful if it had ?
The law on loss of profits – loss of a chance
- Before answering these questions, I should deal with a point of law raised by Miss Parkin. The assessment of whether WP would have opened an office in New York and whether, if it had, it would have obtained the Nomura mandate would appear at first sight to be a classic case for the application of the principles in Allied Maples Group Ltd v Simmons & Simmons [1995] 1 WLR 1602 ("Allied Maples"). As set out in the leading judgment given by Stuart-Smith LJ there are two stages in such an exercise. If the defendant's negligence consists of an omission, for example to give proper advice, the first stage is to ask the hypothetical question: what would the claimant have done if the advice had been given (at 1610D). The claimant must prove that he would have taken action to obtain the benefit which he says he would have obtained, and he must establish this on the balance of probabilities (at 1610G). The second stage arises where the claimant's loss depends on the hypothetical action of a third party. At this stage the claimant does not have to establish on the balance of probabilities that the third party would have acted in such a way as to confer the benefit, but only that he (the claimant) had a substantial, rather than speculative chance of obtaining it (at 1611A-C). The corollary of this is that the quantification of his loss depends on the assessment of the chance that he has lost.
- A conventional application of the well-established Allied Maples approach would therefore require me to decide whether WP had (i) established on the balance of probabilities that it would have opened a New York office so as to be able to pitch for the Nomura mandate by itself and (ii) satisfied me that it had lost a real or substantial chance of winning that mandate.
- But Miss Parkin submits that this is not the correct approach. She does not ask me to assess the chance of WP succeeding in winning the Nomura mandate. Rather she says that the Nomura opportunity is an example of the sort of opportunity that was available to WP in the US, and that I can use this to justify the inference that if WP had opened in the US it would have made profits in line with those set out in the Revised Business Plan.
- She referred me to two decisions of the Court of Appeal. The first is Parabola Investments Ltd v Browallia Cal Ltd [2010] EWCA Civ 486 ("Parabola"). In this case the successful claimant (Tangent) was a vehicle for trading in stocks, shares and derivatives carried out by a Mr Gill, who was very successful in his field. Tangent was systematically defrauded over a sustained period by the defendants. Flaux J found that but for the fraud Tangent would have had about £4.25m at the end of June 2001 instead of some £520,000 which it had in March 2002 when his relationship with the defendants came to an end. He awarded the profits that he found Tangent would have made with that fund during that period (Stage 1) and further loss of profits until trial (Stage 2). On appeal it was argued that this was flawed as the case that a specific level of profits would have been earned was unproven (at [20]-[21]). Toulson LJ (with whom Rimer and Mummery LJJ agreed) rejected this ground of appeal. He said:
"22 There is a central flaw in the appellants' submissions. Some claims for consequential loss are capable of being established with precision (for example, expenses incurred prior to the date of trial). Other forms of consequential loss are not capable of similarly precise calculation because they involve the attempted measurement of things which would or might have happened (or might not have happened) but for the defendant's wrongful conduct, as distinct from things which have happened. In such a situation the law does not require a claimant to perform the impossible, nor does it apply the balance of probability test to the measurement of the loss.
23 The claimant has first to establish an actionable head of loss. This may in some circumstances consist of the loss of a chance, for example, Chaplin v Hicks [1911] 2 KB 786 and Allied Maples Group Ltd v Simmons & Simmons [1995] 1 WLR 1602, but we are not concerned with that situation in the present case, because the judge found that, but for Mr Bomford's fraud, on a balance of probability Tangent would have traded profitably at stage 1, and would have traded more profitably with a larger fund at stage 2. The next task is to quantify the loss. Where that involves a hypothetical exercise, the court does not apply the same balance of probability approach as it would to the proof of past facts. Rather, it estimates the loss by making the best attempt it can to evaluate the chances, great or small (unless those chances amount to no more than remote speculation), taking all significant factors into account: see Davies v Taylor [1974] AC 207, 212, per Lord Reid, and Gregg v Scott [2005] 2 AC 176, para 17, per Lord Nicholls of Birkenhead, and paras 67–69, per Lord Hoffmann.
24 The appellants' submission, for example, that "the case that a specific amount of profits would have been earned in stage 1 was unproven" is therefore misdirected. It is true that by the nature of things the judge could not find as a fact that the amount of lost profits at stage 1 was more likely than not to have been the specific figure which he awarded, but that is not to the point. The judge had to make a reasonable assessment and different judges might come to different assessments without being unreasonable."
- The second case to which I was referred was Vasiliou v Hajigeorgiou [2010] EWCA Civ 1475 ("Vasiliou"). In this case the claimant had a lease of a restaurant but was unable to trade because of the defendant's breach of covenant. The procedural history was complicated, with two separate assessments of damages for two different periods, the first by HHJ Levy and the second by HHJ Dight. The appeal was in fact only against the latter assessment but Patten LJ (with whom Black and Ward LJJ agreed) dealt with both assessments in his judgment. In each case the trial judge had found that the restaurant would have been a success, and then assessed the profits that the restaurant would have made. On appeal, the defendant argued that HHJ Dight's award should have been discounted to reflect the risk or chance that the claimant would not in fact have achieved that level of profit. Patten LJ rejected this. Dealing first with HHJ Levy's assessment in respect of the first period, he said:
"21. In the classic loss of a chance case the most that the claimant can ever say is that what he (or she) has lost is the opportunity to achieve success (e.g.) in a competition (Chaplin v Hicks [1911] 2 KB 786) or in litigation (Kitchen v Royal Air Forces Association [1958] 1 WLR 563). The loss is by definition no more than the loss of a chance and, once it is established that the breach has deprived the claimant of that chance, the damage has to be assessed in percentage terms by reference to the chances of success. But there will be other loss of chance cases where the recoverability of the alleged loss depends upon the actions of a third party whose conduct is a critical link in the chain of causation. The decision of this court in Allied Maples Group Ltd v Simmons & Simmons [1995] 1 WLR 1602 has established that causal issues of that kind can be determined on the basis that there was a real and substantial chance that the relevant event would have come about."
He then said that the loss of a chance doctrine established by Allied Maples was primarily directed to issues of causation and needed to be distinguished from the evaluation of factors which go to only to quantum (at [22]); that the claimant's case on causation was straightforward as there was no doubt that the breach had caused the loss subject only to quantification (at [23]); and that HHJ Levy had found as a fact that the restaurant would have been a success and assessed its lost profits on that basis (at [24]). He continued:
"24….His analysis of the variable factors I have outlined which formed the agreed components of that calculation involved taking into account the time needed to establish a reputation and other everyday contingencies but did not involve a more general discount of the kind described in Allied Maples to take account of the statistical possibility of failure. That was excluded by his finding that the restaurant would have been a success.
25 Where the quantification of loss depends upon an assessment of events which did not happen the judge is left to assess the chances of the alternative scenario he is presented with. This has nothing to do with loss of chance as such. It is simply the judge making a realistic and reasoned assessment of a variety of circumstances in order to determine what the level of loss has been."
He then referred to what Toulson LJ had said in Parabola at [22]-[24] (which I have set out above) and continued:
"26 In the assessment proceedings in the first claim Judge Levy reached a view about the prospects of success for the restaurant and then proceeded to carry out this sort of exercise in relation to the issues about cover turns and increases in profitability. As Toulson LJ, I think, makes clear, that process is not the kind of exercise contemplated as the second stage in Allied Maples and does not require a discount to be made for the possibility of failure which, on the judge's own findings, was non-existent.
…
28. The task of the judge is to decide what profit could have been made. Once he does this any further discount is inappropriate. Judge Levy decided that he was assessing the profits of a successful restaurant. The only issue was how successful."
- As these citations show, despite Allied Maples having been the leading authority for nearly 20 years, this area is one that continues to cause real difficulties of classification and application. What I understand from these authorities can be summarised, with I hope suitable diffidence, as follows:
(1) There is a difference between the question whether a loss has been caused by the wrong complained of, and if it has, the quantification of that loss. The fact that there is a distinction is in principle clear; what is not always clear is where the line is to be drawn.
(2) Sometimes what the claimant has lost was only ever an opportunity to obtain something else, for example the chance to take part in a competition or the opportunity to bring litigation. Such an opportunity is a valuable right in itself, and what the claimant proves (on the balance of probabilities) is that he has lost that right; the assessment of the value of the right then depends on the chances of success. As Patten LJ says in Vasiliou at [21] this is because what has been lost is by definition the loss of a chance. It would obviously be wrong to value the right to take part in a competition at the value of the prize that might be won as the claimant never had a right to the prize, only the right to enter the competition. It would also be wrong to value the right to bring litigation as if it were bound to succeed, if, as is almost inevitably the case, the outcome of the litigation is uncertain. A claim with a prospect of success has a value, but until judgment has been obtained (and indeed it is clear that it can be successfully enforced) that value is not the same as the amount which would be awarded were it to succeed.
(3) What Patten LJ makes clear, which had not I think been so clear before, is that this is not quite the same type of case as Allied Maples. In an Allied Maples case the claimant has not lost a valuable right, but he has lost the opportunity of gaining a benefit, albeit one which depends on a third party acting in a particular way. In such a case the claimant is not required to prove that the third party would have acted in that way, only that there was a real and substantial chance that he would. This is still a question of causation, not of quantification (see Vasiliou at [22], and also First Interstate Bank of California v Cohen Arnold & Co [1996] CLC 174 at 182 per Ward LJ, cited in Vasiliou at [43]); but if the claimant does establish that there was such a real and substantial chance, then when it come to quantification, his damages will be assessed not at 100% of the value of the benefit he would have obtained, but at the appropriate percentage having regard to the chances of his obtaining it. I only add the obvious point that in some cases, where the chance is found to be say 30%, the requirement that the claimant only need show that he has lost a real and substantial chance is beneficial to him (as if he had to prove how the third party would have acted on the balance of probabilities, he would recover nothing); but in other cases, where the chance is assessed at say 70%, it has the effect of only enabling him to recover 70% of the damages he otherwise would. But as I read the authorities, the claimant does not have a choice whether to adopt the Allied Maples approach; if the case is an Allied Maples type of case, this is the appropriate way to approach the issues of causation and quantification.
(4) However, as Parabola and Vasiliou illustrate, there are other cases where the claimant does not seek to establish as a matter of causation that he has lost the opportunity of acquiring a specific benefit which is dependent on the actions of a third party; rather, he claims he has lost the opportunity to trade generally, and claims the loss of profits that he would have made.
(5) It seems that in such a case the Court must first decide whether the claimant would have traded successfully. It is not entirely clear if this is part of the question of causation and a separate exercise from quantification; or whether it is to be regarded as part of the quantification exercise. Toulson LJ in Parabola at [23] fairly clearly treats the finding of Flaux J that "on a balance of probability Tangent would have traded profitably…" as part of the question of causation as he deals with it in the context of the claimant having first to establish an actionable head of loss, and coming before the "next task" which is "to quantify the loss". On the other hand Patten LJ in Vasiliou at [23] seems to have regarded the question as part of the exercise of quantification: see his reference to there being "no doubt at all that the breach had caused the loss subject only to the quantification of that loss", and to Mr Vasiliou's competence and the restaurant's prospects of success not being matters that went to causation at all but being relevant at most to the assessment of how profitable the restaurant would have been.
(6) On either view this is clearly a different type of exercise from that undertaken in an Allied Maples case. It does not require the Court to find that there was a real and substantial chance of a third party acting in a particular way; but to reach a conclusion whether trading would have been profitable or not. However the exercise is characterised, I think it must follow that this is a simple yes/no question (would the trading have been profitable ?), and hence falls to be decided on the balance of probabilities. I accept that this is so, even though as a matter of strict logic it is not entirely obvious why there should be such a sharp difference of approach from the Allied Maples type of case. The profitability of the restaurant in Vasiliou presumably depended on whether it would have attracted sufficient custom, or in other words whether a number of third parties would have chosen to come to Mr Vasiliou's restaurant; and this does not seem very different in kind, only in degree, from the question in Allied Maples which was whether the third party in question would have chosen to accede to Allied Maples' request for a particular contractual term. It may be that the difference is between one particular third party and a pool of potential customers; in the case of an individual third party, the Court must assess the chance of his acting in a particular way, but in the case of a pool of potential customers, the Court is not concerned with how any individual would have behaved but with whether there would have been sufficient custom generally to make the business a success.
(7) Be that as it may, it is clear from Parabola and Vasiliou that if the Court finds that trading would have been profitable, it then makes the best attempt it can to quantify the loss of profits taking into account all the various contingencies which affect this: see Parabola at [23]. This neither requires any particular matter to be proved on the balance of probabilities (see Parabola at [24]) nor has anything to do with the loss of a chance as such (see Vasiliou at [25]). The assessment of the loss will itself include an evaluation of all the chances, great or small, involved in the trading (see Parabola at [23]). Once the judge has assessed the profits in this way, any further discount is therefore inappropriate (see Vasiliou at [28]).
Those being, as I understand it, the principles which I am bound to apply, it is now necessary to see how they apply to the facts of this case.
Would WP have opened an office in New York ?
- The first question is whether WP would have opened an office in New York. Mr Channing's evidence is that it would have done. He said that they intended to go and do it themselves, it was actually relatively straightforward to open a small office, to hire a couple of people, and to get execution resource to be able to deliver to the client. Against this are the following considerations:
(1) There is no evidence that WP took any steps towards opening an office or hiring anyone before February 2009.
(2) Ms Jordan's evidence in her witness statement, when asked whether she was aware that Mr Channing intended to expand into the US, was that she was not, and that she was surprised by the suggestion as it would have been very difficult for WP to compete there: Mr Channing's focus in terms of growth when she was at WP was on emerging markets, including the Middle East, India and Europe. However not only was this untested, but she left WP in May 2008, so I do not regard this as inconsistent with Mr Channing's evidence.
(3) Ms Kerr's evidence was that she was aware that Mr Channing went to New York a number of times to meet Mr Meissner following her return from maternity leave and that he was pitching for business at Nomura with Mr Sullivan, her understanding being that it was to be a joint exercise with CT rather than WP pitching for business on its own. This evidence clearly relates to what actually happened between mid-February and May 2009. It does not support Mr Channing's evidence that he would have opened an office himself; but on the other hand Ms Kerr only returned from maternity leave at the end of January 2009, and she herself says that Mr Channing did not involve her in decisions about business strategy. Her evidence is therefore not inconsistent with Mr Channing having planned until 3 February 2009 to open an office himself.
(4) When WP did start preparing for a pitch it did so jointly with CT, and it had started doing this by 18 February 2009 at the latest. If this was a change of strategy, it was one that took place very rapidly after Addax first intimated its intentions on 3 February.
(5) It was suggested to Mr Channing that even after Addax had threatened to withdraw half its capital, WP would have had ample money left to open an office in New York had it wanted to, so the fact that it did not do so cast doubt on his evidence that it was the lack of money caused by Addax's threat of withdrawal that caused it to make a joint pitch with CT. Mr Pooles invited me to infer that even if the money had not been withdrawn WP would not have gone ahead with a New York office.
- So far as this last point is concerned, I was presented with rival calculations of how much cash was available to WP in February 2009 with a view to seeking to establish that the opening of an office in New York was, or was not, easily affordable for WP. The cost of setting up WPHK's office was relied on as a useful analogy. Here once the decision had been made to open an office, Mr Channing went frequently to Hong Kong between July and September 2005 to lay the ground; he found and recruited two other consultants (one, Mr Nick Henderson, already in Hong Kong and the other, Mr Harris, in Singapore whom he persuaded to relocate); a researcher was also recruited and the office was opened in November 2005. Mr Brun went out to run the office and with the three of them it took WPHK about 12 to 18 months to build up the head of business that they had in London, Mr Harris being a bit slower than the others to generate revenue. During this time the running costs were financed by cash from WP, which had made available a facility of £650,000 for this purpose. In fact WPHK only drew down £407,000 and had repaid the facility within two years.
- It was therefore suggested to Mr Channing that WP could have advanced in the US with about £400,000 or £500,000 and that WP had such funds available to it. Mr Channing did not accept this. It is therefore necessary to look at the funds available on 3 February 2009. This exercise was carried out by the expert accountants. They agreed that WP then had cash in its bank account of £441,931; and that Mr Channing was holding a further £1,057,000 on behalf of WP making together about £1.5m. They also agreed that in calculating the amount potentially due to Addax on exercise of its option one should assume that it was repayable in US dollars, although they put this variously at around £1.4m or £1.65m depending on exchange rates. They each also allowed for the repayment of the Middle East monies (about £175,000) and for the first year's IPS (about £460,000).
- The major items of disagreement were (i) the availability to WP of the monies paid by the non-Addax investors (some £800-900,000) and (ii) whether Addax's liability for its monthly retainer of WP (which appeared in WP's accounts as an accrued liability of £450,000) could be set off against the amount payable to Addax. So far as these points are concerned: as to (i) Mr Channing had received the money himself and spent it on works to his house in Gloucestershire. He accepted in evidence that because of the way the LLP agreement was drafted he ultimately agreed that he was holding this money for WP, but I accept his evidence that his belief at the time was that he was personally entitled to this money as the proceeds of the sale of his own shares.
- As to (ii) I have not understood, despite Mr Channing's attempts to explain this in evidence, why the sums due from Addax were not simply set off against the repayment of capital. But there is no doubt that they were not: even when Addax sued WP (and Mr Channing and Mr Brun personally), Mr Channing only appears to have told Withers about the first month's retainer of £50,000 and as set out above, he caused WP to repay all but the last $79,000. After WP changed its solicitors, it did raise with Simmons & Simmons the question of other sums being due, and Miss Parkin successfully applied before Eady J for permission to amend the defence to rely on them, although even then only the first two months' worth of £100,000 was pleaded as a debt giving rise to a legal set-off, the balance being claimed as damages giving rise to an equitable set-off, apparently on the basis that only two months' invoices had been rendered. I would myself have thought it plain that if the claim was a good one at all, it was a claim for the total sum due as a debt whether or not it had been invoiced for.
- But whatever the actual legal position, the relevant inquiry is what Mr Channing thought at the time, that is in February 2009, was the money available to WP. I accept his evidence that he did not then regard the money he had received from the other investors as WP's money; and that he thought he ought to retain enough money to repay Addax without setting off the sums accrued due from it. I doubt he calculated these sums very precisely, and on 3 February 2009 he did not appreciate that Addax would be claiming that it was entitled to be repaid in US dollars (this was first set out in writing in an e-mail from Ms Hajjar-Alami on 11 March 2009). But even on the basis that the sum Mr Channing was expecting WP might have to repay was 50% of £2.5m, that would still be £1.25m. There would also be a liability for the first year's IPS at 15% of £2.5m or £375,000 (on the basis that Mr Channing did not then appreciate either that this would be payable in US dollars). This would only be payable when there were sufficient profits, but would be rolled forward and so would have to be provided for.
- The effect of the paralysis of the market caused by the financial crisis was that, unlike in a normal year, WP did not have a suite of mandates that it was about to complete successfully in February and March. Mr Channing's evidence was that the business was consuming cash at a run rate of about £76,000 per month. I accept that Mr Channing was concerned about having the cash to meet unavoidable overheads and did not then know (in February 2009) when business would pick up again. In his perception therefore WP had about £1.5m in cash and a liability for £1.25m as well as ongoing cashflow requirements, and a potential liability for the first year's IPS. In these circumstances I accept his evidence that once Addax had indicated its intention to exercise its option, his view was that it was impossible and inconceivable that WP would open an overseas office.
- It was suggested to him that if he thought a New York office would have been so profitable he could have provided money from his own resources – not least the £800-900,000 he had received from the non-Addax investors. I accept that he could in principle have raised money against his house, but I am not surprised that he did not do this, nor do I regard it as indicating that he was not really interested in a New York office. There is a significant difference between being a part-owner of a business which has the cash resources to be able to expand, and raising money from one's own property to invest further in a business, and especially so when Mr Channing had only a year before withdrawn substantial amounts of capital from the business for his own purposes. He was not I think contemplating investing capital back into it: indeed he had got Addax to agree that the capital they introduced could be used among other things to repay him all the capital he had funded the business with from the outset, which was calculated as some £313,000. I therefore reject the suggestion that because he did not use his own money to finance an expansion in New York, it can be concluded that he did not consider an expansion by WP viable at all.
- That still however leaves the question whether WP would in fact have opened in New York if Addax had not been able to withdraw its money. In that case WP would have had about £1.5m available to it. Assuming that it might be necessary to reserve some £650,000 for a New York office as had been done for WPHK when it started, this would leave WP with about £850,000 cash reserves. At a run rate for expenses of £75,000 per month, this would give WP about 11 months' cashflow even assuming no income, and even allowing £375,000 for the first year's IPS, it would equate to some 6 months' cashflow.
- This would not have been an entirely easy decision for WP. It would I think have been wary of running the risk of both opening in New York and embarking on a major expansion in London at the same time. This had been the plan at the time of the Revised Business Plan, but the failure of the Middle East venture, the paralysis in the market and the uncertainty of when it would pick up, and the failure of Addax to pay what was due from it would in my judgment have left WP, even without a threat from Addax to withdraw its capital, in a position where it might not have been sensible to finance both a US office and a significant expansion in London.
- The safe option would have been to concentrate on London where WP was well known, rather than to try and set up in New York which was a new market for WP, and for Mr Channing personally. It was also not an easy one to break into. The evidence from Mr Baines was that although many had tried, he could think of only one UK based search firm that had managed to establish a credible presence in New York in the last 10 years. It is therefore distinctly possible that even without Addax's threat to withdraw its money, Mr Channing would have done what he in fact did, namely team up with Mr Sullivan at CT to pitch for the Nomura business, and use the money available to WP to expand in London.
- On the other hand, Mr Channing was excited at the Nomura opportunity and I think he would have seen it as the ideal way to establish WP in New York. He had the contacts with Nomura, he had an extremely good relationship with Mr Meissner and was already talking to him, and he was by nature optimistic. He regarded himself as ideally placed to deliver on the Nomura mandates. He explained in evidence that Nomura was not a well-known name in US investment banking so in order to persuade potential candidates to move to Nomura, one needed to be able to convey the message that the quality was actually in the people that had come from Lehman; and he was able to do that and tell the story of who the key management people were, and how they operated, going right back through the Lehman organisation, and, as he put it, "represent that story in some granular detail to the potential candidate pool" without any learning curve. His evidence that it was relatively straightforward to open a small office and hire a couple of people was supported by Miss Mills, who said that someone in Mr Channing's shoes might well hire a couple of executors and get the job done.
- On balance, and despite the potential difficulties, I accept that if Addax had not been able to withdraw half its capital, Mr Channing would have caused WP to open an office in New York and pitch for the Nomura business on its own without CT. I find that it was Addax's threat to withdraw half its capital that made this impossible to contemplate, and that led him to make a very quick decision to make a joint bid with CT so as to still be able to pitch for Nomura. In accordance with the principles I have set out as to the assessment of damages, once WP has established, as I find it has, that it would have acted this way on the balance of probabilities then even though I regard this as far from certain, its failure to do so is to be treated as caused by Withers' negligence without any discount for the possibility that it might not have done this anyway.
Would WP have had a profitable business ?
- The next question is whether WP would have secured the Nomura mandates or any of them, or would otherwise have had a profitable business. I put it like that because Miss Parkin's case, as I have explained, is that the Nomura opportunity is an illustration of how WP could have been successful in the US, and she asks me to find that WP would have had a profitable business generally in the US.
- In my judgment however on the unusual facts of this case, this is not so. The evidence was that Mr Channing and hence WP had a deep and close relationship with Lehman (and hence Nomura), and in particular with Mr Meissner. Mr Baines said that it was very clear to him, not least from the evidence of Ms Anderson whom he had met and regarded highly, that Mr Channing had a "particularly good" relationship with Lehman from 2004 to 2008 (and from before); Miss Mills described his relationship with Lehman as "extraordinarily close", said that she regarded it as significant that he enjoyed close relationships not just with senior bankers like Mr Meissner but also with Ms Anderson, and added that it was comparatively rare to find consultants who had this breadth and depth of relationship with one organisation. There was no evidence that WP had any similar relationship, or anything approaching it, with any other organisation or individual in New York. It was clear from Miss Mills' reports and her evidence that it was only the exceptional relationship between Nomura and WP that led her to express the opinion that the revenues in the Revised Business Plan could have been achieved. In cross-examination she accepted that if the Nomura business had not come to WP it would have been a difficult process to open a New York office, and that although she had no personal experience in trying to open an office there she had heard from other headhunters who had tried to build there and she thought it was difficult but not impossible. I do not feel able on this state of the evidence to conclude that WP would have been profitable in the US if it had not succeeded in winning at least some of the Nomura mandates.
- In my judgment therefore WP can only recover damages for loss of profits in the US on the basis that it has lost the opportunity of winning business from Nomura. For reasons that I have sought to express above, this turns on the actions of a single third party and in my judgment is to be assessed on the Allied Maples basis, that is by considering what the chances were of WP succeeding in winning that business, and by awarding a percentage of the profits accordingly.
Would WP have secured the Nomura mandate ?
- The next question therefore is whether WP has shown that there would have been at least a real and substantial chance of being awarded Nomura business, and if so what that chance was. On this I found Miss Mills' evidence particularly helpful. She explained that a search firm only got one chance to pitch for a mandate ("there's only one pitch in our business"), that winning the mandate was the difficult part, and that the e-mail from Mr Meissner to Mr Sullivan dated 27 April 2009 (paragraph 178 above) was a clear indication to her that after the initial meeting Nomura had made a decision to go with Mr Channing and CT ("That was an e-mail once you're in execution phase. That was not a pitch e-mail…it was a very clear kick-off e-mail."). Her interpretation of what happened was that although the e-mail was addressed to Mr Sullivan (in reply to his), Mr Meissner would not have been sending that e-mail if it had not been for his relationship with Mr Channing. In effect he was laying out his plans ("I'm baring my soul to you about my build kind of e-mail"), which he would not have done to someone he didn't know. She suggested that Mr Sullivan, whom she described as a fantastic salesperson, might well have had a good initial meeting, but once you get into the detail of advising the client, you need a good personal relationship and this may have been unearthed at meeting 2 or 3. In other words, she concluded that Mr Meissner was perfectly happy to give the mandate to Mr Channing, but it was only after the subsequent meeting that Nomura in the event went down a different route, and she had heard that this was due to a personality clash with CT ("a personality click that didn't work").
- I accept this evidence, which I found convincing. As a result I think it probable that if Mr Channing had made a pitch on behalf of WP alone, Mr Meissner would in principle have been equally happy to work with him and see him have the Nomura mandate.
- But as the experience with WP's joint pitch with CT shows, Nomura would not ultimately give the mandate to a firm unless they were satisfied both that it could be completed satisfactorily and that the individuals carrying out the mandate would be ones they would be happy to work with. Mr Baines was very clear that although he accepted that Mr Channing had a first class relationship with Mr Meissner, it would have been most unusual to launch a buildout as important as this without ensuring that the Nomura colleagues were happy to work with the individuals concerned and that the operation knew the market well and had the resources to do the job. So even though Mr Meissner might very well have been happy to go with Mr Channing there are a number of considerations which suggest that it was by no means assured that WP would ultimately secure the mandate, as follows:
(1) Mr Baines' view was that WP would need to have a credible presence in New York before securing the mandate and this would require demonstrating a fully functioning office with deep local market knowledge. He doubted that WP could have got to this by May 2009 even if they had started in September 2008. He also considered that WP would have needed to recruit 3 senior partner hires (as part of a team totalling 8 to 10 professionals), and felt that it was particularly hard to hire search consultants in the US. Miss Mills considered that it would have been possible for WP to do it with 2 senior consultants and 2 support professionals. This would mean working extremely hard but it was possible.
(2) The decision was not simply one for Mr Meissner. Mr Vereker was also part of the process, and as appears from Mr Meissner's e-mail, Mr Meissner also felt it appropriate to invite senior Japanese colleagues from Nomura NY to meet the proposed headhunters.
(3) In the event Nomura decided against hiring a boutique firm at all and took the decision to hire two global firms. The reason for this is not known but it may have reflected a concern as to whether a boutique firm was large enough to handle the business, or a desire to play it safe.
(4) Mr Pooles also pointed to the fact that Mr Meissner did not give evidence. Mr Meissner, as set out above, has a long and close relationship with Mr Channing and is himself a member of WP with an interest (albeit small) in this litigation and it might be thought that he would have given evidence in support of WP's case had he been able to confirm that Nomura would in all probability have appointed WP had WP pitched for the business on its own. Mr Pooles referred me to the decision in Wisniewski v Central Manchester Health Authority [1998] PIQR 324 and the principles stated by Brooke LJ at 340, in accordance with which a court may draw adverse inferences if a witness is not called who might be expected to have material evidence to give.
(5) Even if Nomura had given the mandate to WP it does not follow that they would have given it to them exclusively. Mr Baines did not think that a client would give a build of this magnitude to one search firm alone; and thought that if WP had managed to put together a team to work in the way that Miss Mills suggested, that would make it likely that Nomura would have chosen to divide the work among two or three suitable firms. Miss Mills in her second report herself said that banks who embark on large build outs of the sort contemplated in Mr Meissner's e-mail of 27 April "typically retain one or two" firms and that it was "not inconceivable" that Mr Channing might have been the "main provider for the build". Mr Meissner's e-mail itself raised the question of whether it would be better to hire one or two firms given the scope of the project (and that was in the context of a joint bid where CT were rather larger and more established than a new WP office would have been); and in the event two firms were hired, even though each were large global firms.
- I have taken all these matters into account. I do not feel able to reject either Mr Baines' views or Miss Mills' views as wrong: the various matters on which they disagree are a reflection of how many imponderables there are. It is impossible in these circumstances to form any definite view as to the likelihood of WP being awarded all or any part of the mandate, and I consider there are substantial doubts whether they would have pulled it off; but I find that if WP had opened an office in New York it would have had a real and substantial chance of being awarded at least some of the mandate. I find however that this was by no means assured, and even if it had been, the likelihood is that it would only have been awarded part of the mandate. It is necessary, although inevitably artificial, to put a percentage figure on these chances; I assess the prospects of WP being awarded some part of the mandate at 60%; and if it had been, I assess the likelihood as being 25% that it would have been awarded a sole mandate, and 75% that it would have been appointed together with one or more other firms, and would in effect have had half the mandate. In other words I assess the overall chance of being awarded the sole mandate at 15%, and the chance of being awarded half the mandate at 45%.
Remoteness of damage
- Before translating that assessment into financial terms, I should deal with the question of remoteness of damage. Mr Pooles said that losses flowing from the failure to win the Nomura mandate were too remote. His submissions were as follows:
(1) The test for remoteness in contract is whether the type or kind of loss was "not unlikely" to result from the breach in question: Victoria Laundry (Windsor) ltd v Newman Industries Ltd [1949] 2 KB 528, 539-40 (Asquith LJ) ("Victoria Laundry"), The Heron II [1969] 1 AC 350, 382-6 (Lord Reid), Transfield Shipping Inc v Mercator Shipping Inc [2009] 1 AC 61 ("The Achilleas").
(2) Loss of profits from a new market such as the US, is different in kind and type from profits in existing markets, or in markets where it was known that WP was opening: see for example the distinction drawn in Victoria Laundry at 543 between the loss from certain lucrative dyeing contracts and general loss of profits; and Mayhaven Healthcare Ltd v Bothma [2009] EWHC 2634 (TCC) at [49] per Ramsey J where he accepted that loss of profits is not to be equated with loss of a particular kind or type so as to make all profits recoverable.
(3) Where there is concurrent liability in contract and tort, the contractual test for remoteness applies: see Obsession Hair and Day Spa Ltd v Hi-Lite Electrical Ltd [2010] EWHC 2193 ("Hi-Lite") at [66]-[68] per HHJ McKenna.
- I will take this last point first. Miss Parkin disputed the proposition, citing Jackson & Powell at §11-258 where, after discussion of the contractual rules for remoteness (namely what was or should have been in the reasonable contemplation of the parties) and the problem caused by the fact that this must be assessed at the time the contract was made (whereas much may happen between the date of retainer and the date of breach), the editors add:
"In any event, it is now established that there will be a parallel liability in tort and the problem can normally be avoided by applying the tortious rules as to remoteness of damage."
No authority is cited, and I was not referred to anything else on this aspect of the case other than Hi-Lite. Given that there can be quite significant practical differences between the application of the test for remoteness in contract and that in tort, it is a little surprising that the question does not appear to have come up otherwise, or been decided.
- Hi-Lite was a claim for damages in which HHJ McKenna found, at a trial on liability alone, that a fire in the claimant's hair salon and spa had been caused by a pump supplied by the defendant electrical contractor. At a subsequent trial on quantum, in which among other things the claimant claimed loss of profits, the question arose as to whether the claimant had established liability in negligence or only in contract. HHJ McKenna held (at [51]) that he had only found the defendant liable in contract so that the relevant test for remoteness was the contractual one. But he did briefly consider what the position would have been if the claimant had established liability in tort as well. It was in this context that he said that:
"It seems to me where there are concurrent duties owed in contract and tort there are strong arguments for concluding that it should be the test for remoteness in contract that applies."
He then referred to a passage in McGregor on Damages (18th edn) at §19-008 which supports that view as follows:
"Now that the tort of negligence has been expanded to allow recovery for pure economic loss so that in cases of professional negligence there is concurrent liability in contract and in tort, the question arises whether, where it would make a difference, the victim of the negligence may rely on the wider tortious test of reasonable foreseeability and ignore the stricter and more limiting contractual test of contemplation of the parties. It is thought that there is much to be said for not allowing him to do so. Where the claim in tort is in the context of a contractual relationship, the parties are not strangers, as most tortfeasors and tort victims are, and they should be bound by what they have brought to their contractual relationship in terms of what risks have been communicated the one to the other. This question has not yet been faced by the courts but one day it will have to be."
This is quite tentative language, and HHJ McKenna's observations in Hi-Lite are clearly neither part of the ratio (as he had decided that there was in fact no claim in tort) nor expressed as a definitive conclusion. I therefore consider that I am not bound to follow his views even as a matter of comity, and should reach my own view on the point.
- I in fact received almost no argument on this aspect of the case, simply being briefly referred to the materials I have set out above. I see the attraction of the view expressed by McGregor, and endorsed by HHJ McKenna. It seems odd, and to my mind distinctly unsatisfactory, that the law should give two different answers to the question "for what losses is a solicitor liable if he fails to take due care in carrying out a client's instructions ?" depending on how the claim is framed. A rational system of law would only give one answer to that question. And for the reasons given by McGregor if there were only one answer, it seems far more satisfactory that parties in a contractual relationship should be governed by the contract rules rather than the tort ones.
- Moreover, the principle that damages cannot be claimed if they are too remote is in essence a control mechanism, adopted by the law for policy reasons, which has the effect of preventing a defendant from being liable for all damage caused by his wrong (be it a breach of contract or tort). A second control mechanism, most clearly articulated by Lord Hoffmann in South Australia Asset Management Corp v York Montague [1997] AC 191 ("SAAMCO"), is that a defendant will not be liable for breach of a duty of care unless the damages claimed fall within the scope of the duty; and in The Achilleas Lord Hoffmann at [14ff] relied on what he had said in SAAMCO in his analysis of the contractual rules of remoteness, to a large extent assimilating the principles between the two. Yet in SAAMCO, which was itself a case of a breach of a duty of care owed concurrently in contract and tort by professionals (in that case valuers), the scope of the duty was expressly held to be the same in contract and tort (at 211G), and hence the measure of damages was the same. It seems unsatisfactory that where what is in issue is the scope of the duty the measure of damages in contract and tort is identical, but where what is in issue is remoteness of damage (which is another facet of the same question, namely what damage is the defendant liable for ?), the answer should be different.
- For all these reasons I am strongly attracted to the idea that there should be one test for remoteness and that it should be the contractual one. But it has been established at the highest level that a professional retained by a client has (usually) a concurrent liability in tort as well as contract. It seems equally unsatisfactory that the law gives two different answers to the question "how long does the client have in which to sue his solicitor for failure to take due care in carrying out his instructions ?" but the well-known consequence of the client being able to sue in either contract or tort is to enable him to take advantage of the longer limitation period available in tort. Given that the test for remoteness of damage is different in tort from that which it is in contract, I do not think it is open to me to say, particularly in the absence of extended argument on the point, that a client who chooses to sue in tort cannot equally take advantage of the more generous rules for remoteness of damage available in tort. If that step is to be taken, I think it must be by a higher court.
- In my judgment therefore WP can rely on the tortious rules for remoteness of damage. These allow damages to be recoverable if they are of a type of damage that is reasonably foreseeable. Mr Simpson accepted in evidence that his understanding from the outset of first being contacted by Mr Channing was that WP had a plan to develop, and that it needed capital for that purpose. Mr Cuffe had WP's Business Plan which showed an intention not only to expand in London but to open offices overseas, albeit because he had the original plan rather than the revised version, it referred to expansion in the Middle East and India (paragraph 160(6) above). He also amended the non-compete agreement on 6 May after speaking to Mr Channing to provide expressly that WPHK should not use the name Wellesley Partners in Europe or the US (paragraph 160(4) above), and I infer from this that Mr Channing had told him that WP was thinking of expanding into the US among other places. Withers of course did not know anything about the specific Nomura opportunity (which did not exist in May 2008) and I do not find that they knew anything about WP having a particular plan to expand in the US by using Mr Channing's contacts with Lehman. But I do find that they knew sufficient for it to be reasonably foreseeable that Addax's capital might be used to expand the business, and that this might, among other places, be in the US. I also find that it was reasonably foreseeable that if Addax were able to withdraw its capital at short notice, it might prevent WP from earning profits in the US. On this basis I find, applying the tortious test, that the loss of the chance of the Nomura opportunity was a type of damage that was reasonably foreseeable and is not too remote to be recovered.
- That makes it strictly unnecessary to decide whether the damages would have been recoverable had the contractual test for remoteness applied. The law on contractual remoteness has been considered in very many cases from the classic judgment of Alderson B in Hadley v Baxendale (1854) 9 Exch 341 onwards. The most recent authoritative statement of the law that I was referred to was that in The Achilleas but although all 5 members of the House agreed that the loss of profits claimed in that case was too remote, each gave their own reasons for that conclusion and it is not entirely easy to be confident of what the ratio is. (There is some discussion of this by HHJ McKenna in Hi-Lite, but I have little doubt that the question has also been considered on other occasions). Given that it does not on my judgment in fact arise, I will therefore simply say that I am not satisfied that damages in respect of the Nomura opportunity would be recoverable in contract. The Nomura opportunity was a very particular, and potentially very remunerative, opportunity that did not exist in May 2008 and could not reasonably then have been contemplated. This seems to me analogous to the loss of profits on the lucrative contracts refused in Victoria Laundry or the loss of profits on the forward charterparty in The Achilleas. Miss Parkin sought to avoid this by saying that WP was not claiming damages for the loss of the Nomura opportunity as such, but for loss of profits generally in the US; but I have already rejected this way of putting the claim.
Quantification of US loss
- The remaining issue on this part of the claim is the quantification of the loss. This in itself is a point of some intricacy. In principle it depends on (i) assessing the revenue that WP would have received and (ii) assessing the costs it would have incurred. The latter also requires a particular issue to be resolved, namely whether WP's assumed costs should include, as well as overheads, commission payable to Mr Channing or not. I will address each of these in turn.
- So far as revenue is concerned, WP's claim is that if it had won the Nomura mandate it would have achieved the revenue shown in the Revised Business Plan. That gave revenue for the three years ended March 2009, 2010 and 2011 as follows:
2008/9 £1,350,000
2009/10 £1,900,000
2010/11 £2,250,000.
WP makes no claim for 2008/9 when on any view the US office would not have been contributing to revenue, but based on these figures its claim for the years ended 2009/10 and 2010/11, and the part-year to 6 November 2011, is that the revenue would have been as set out in Mr Pearson's supplemental report as follows:
2009/10 £1,900,000
2010/11 £2,250,000
1.4.11 to 6.11.11 £1,084,800
Total £5,234,800
(The figure for 1.4.11 to 6.11.11 is based on the revenue for 2010/11, reduced by 20% to allow for a market decline, and then apportioned for the relevant period, namely 220 out of 365 days, an apportionment that is not disputed and that I will adopt even though 2012 was a leap year).
- Miss Mills' evidence was that if WP had been awarded the Nomura mandate the revenues for the New York office would have been "more than comfortably met" at least for the years 2009/10 and 2010/11. Mr Channing provided a detailed calculation of what the first phase of the hires contemplated by Mr Meissner in his e-mail might have generated and came up with a figure of about £4.3m; Miss Mills' opinion was that that was broadly accurate, but added that it was uncommon for search firms to secure 100% of anticipated revenues. She and Mr Baines agreed that it was reasonable to assume that between 60% and 80% of the searches would have completed. Mr Channing also said that the second phase would have been even more extensive. His estimate of the total fees that would have been payable over the 2 to 3 years period was some £6-£10m.
- I accept the general thrust of this evidence. Had WP been awarded the Nomura mandate in its entirety I find that the total potential fees would have been roughly double what they were for phase 1, and that roughly 70% of these searches would have completed successfully. WP would therefore have received say 70% x £8.6m = c. £6m over 2 to 3 years from this mandate alone, which is more than enough to cover the figures claimed, even without allowing for any revenue from any other source.
- Rather more difficult to estimate is what the revenues would have been if WP had had to share the mandate with one or two other firms. There is little hard evidence of this, although Miss Mills readily accepted in cross-examination that the projected revenues would not have been achieved if the mandate had been split. I think it would be wrong however to assume that the revenues would have been only half what was projected as (i) the revenues from the Nomura mandate (assessed above at some £6m) are themselves higher than the revenues projected in the Revised Business Plan; (ii) I think it likely that Mr Channing would have persuaded Nomura to let him have the first pick of the hires and taken the most lucrative part of the mandate; (iii) some allowance should be made for the possibility of other business once a New York office was up and running successfully. I will therefore assume that if WP was only executing half the mandate it would have received 60% of the revenues projected in the Revised Business Plan.
- So far as overheads are concerned, Mr Channing provided a breakdown of the overheads for the New York office of £545,000 for the first year. This was not challenged and Mr Pearson in fact allowed £600,000 for the first year, and then rolled this forward in line with the growth in income to produce the following figures:
2009/10 £600,000
2010/11 £710,526
1.4.11 to 6.11.11 £428,262
There is one complication. Mr Channing accepted that if WP had been awarded the Nomura mandate its overheads would have been higher as he would have had to recruit an additional consultant and researcher at a combined cost of £225,000 per year. His evidence was that this would have been more than offset by the revenue from the Nomura mandate being higher than the revenues in the Revised Business Plan. I accept this and will therefore use the figures put forward by Mr Pearson. I will also assume that had WP been awarded only half the mandate these extra costs would not have been incurred, and the overheads would therefore have simply been those used by Mr Pearson.
Commission payable to Mr Channing
- That leaves one significant issue which is that of commission. It is not disputed that where commission is payable to anyone other than Mr Channing, this is a cost which must be taken off the gross revenues to find WP's net profits. The issue is whether a similar allowance should be made for commission payable to Mr Channing personally.
- The facts are as follows:
(1) It is normal in the executive search business for the consultant or revenue generator who secures a mandate to be paid by commission, often of the order of 40% to 50% of the search fees received by the firm. This reflects the fact that it is winning the mandate that is the difficult part, and this is very dependent on the personal relationship between the consultant and the client.
(2) Historically however when WP was owned by Mr Channing and Mr Brun equally, they simply split the profits after payment of operating expenses. Financial statements were prepared by WP's (external) accountants, Frank Hirth & Co ("FH"), for the period ended March 2005, and the years ended March 2006 onwards, although they were not formally audited accounts. The profit and loss accounts for the first two periods (ending March 2005 and 2006) each show a figure for WP's profit, calculated after cost of sales and administrative expenses and including interest receivable but "before members' remuneration and profit shares". It is not possible to tell from them how the profits were divided between Mr Channing and Mr Brun, although a note to the 2006 accounts does reveal that the "share of profit" of the member with the largest entitlement (which was no doubt Mr Channing) was £289,074 for the period ending March 2005 (the total profit available for division being £508,148), and £777,119 for the year ended March 2006 (the total available being £1,034,978) which shows that the profit was not simply divided equally.
(3) For 2006/7 and 2007/8 however a statement of the partners' profit share (included in the 2008 financial statements) gives a detailed explanation. In each case the starting point is the net profit after costs of sales (commissions payable to non-partners) and administrative expenses (2007: £883,000; 2008: £944,000 – I have rounded all figures to the nearest £1,000 as the exact amounts do not matter). There is then calculated a commission for Mr Channing at 40% of the total search fees for the year less the commission paid to non-partners, to give a net commission figure due to Mr Channing (2007: £515,000; 2008: £519,000). The balance of net profit after deduction of this figure, called "Net Profit After Partners Commission Adjustment" (2007: £367,000; 2008: £425,000) is then split between Mr Channing and Mr Brun in the proportion 95% to 5%. Mr Channing's 95% (2007: £349,000; 2008: £403,000) is then added to his net commission to give a total figure (2007: £864,000; 2008: £922,000), described as his "Share of Net Profit". Mr Brun's "Share of Net Profit" is simply his 5% of the net profit after deduction of the commission for Mr Channing (2007: £18,000; 2008: £21,000).
(4) Mr Channing's evidence was that after Mr Brun left to run WPHK, "as is reflected in the accounts" he drew a salary and received 40% commission on the revenue he generated, both salary and commission being "treated as expenses of the business". I am not sure that is accurate: no separate salary for Mr Channing is identified in the accounts, and the 40% commission payable to Mr Channing, as I have set out above, is treated as a priority division of profits payable to him as a working partner, rather than as an expense of the business.
(5) When Mr Channing drew up his business plan he projected the profits for the London office by allowing a 45% commission. This was deducted from revenues to find gross profit, from which was deducted operating expenses to find a net profit. He also restated the profits for the London office for previous years by allowing for a 45% commission in the same way although as explained above (paragraph 161(3)) it was noted that this was not how commission had actually been dealt with.
(6) Mr Channing mentioned a figure of 45% commission to Mr Simpson and Mr Cuffe on the telephone on 18 January 2008 (paragraph 18 above).
(7) When Mr Channing sent the business plan to Mr Cartwright on 15 April he also enclosed what he described as "Details of bonus (commission) arrangements for Partners" (paragraph 27 above). This document was not produced in evidence, nor is there any evidence of what it contained.
(8) Mr Channing's evidence was that because he had shown a 45% commission in the business plan sent to Addax he proceeded on the basis that he remained entitled to a salary and commission (now at a rate of 45%); and that when draft accounts for 2008/9 were drawn up in April 2010 they were drawn on this basis.
(9) What the draft accounts in fact include is a page headed "Draft Partners Share of Losses", WP having made a loss for the year of some £321,000 (again all figures are rounded to the nearest £1,000). There is then a "Working Partners Adjustment", which calculates a commission to Mr Channing at 45% of the total search fees for the year, less the commission paid to non-partners. This is only some £13,000. The next line is "Notional Managers "Salary" equivalent" of £180,000. (This is £15,000 per month and Mr Channing's bank statements show that he was receiving repeated payments of £15,000 from WP during the year.) The total "Working Partners Adjustment" was therefore £193,000; this was added to the net loss for the year to make a total of £514,000 and this loss was then divided between the partners in accordance with their respective percentages. The result for Mr Channing was that his share of the loss was £381,000, which after crediting him with the Working Partners Adjustment, left a net share of loss of £188,000.
(10) These draft accounts were sent to TW in April 2010. The response was a letter from TW in May raising a number of queries, one of them being that it appeared Mr Channing had been paying himself substantial sums on account of drawings and that since there were no profits to draw against he should be shown as a debtor to the partnership. TW also sent a letter making the same points direct to FH.
(11) Matters were then overtaken by the summary judgment application but in October 2010 Mr Channing agreed to allow FH to discuss the draft accounts for 2009 with Addax's accountant. This was Mr Andrew Cottle of BDO, the same Mr Cottle who gave expert evidence before me on behalf of Withers.
(12) Revised draft accounts were sent by FH to TW on 1 October and discussed at a meeting between FH and Mr Cottle on 13 October. By this stage the draft accounts showed members' remuneration on the profit and loss account as being "charged as an expense". Mr Channing's total remuneration was some £680,000, made up of some £500,000 commission and £180,000 "salary/guaranteed draw". Following the meeting Mr Cottle sent a list of queries to FH, one of them being to ask for an explanation of the basis for accruing salary and commission to Mr Channing, the LLP Agreement being silent on such matters. FH's response was that they were advised that Addax were aware of the terms of Mr Channing's remuneration agreed at the time of the LLP Agreement.
(13) Mr Cottle's position was that this was not accepted by Addax. On 26 October FH sent Mr Channing a list of matters that were outstanding including:
"Christian Brun to confirm RC entitlement to profits being 45% on total sales (regardless if commission to third parties also payable) and £180k guaranteed profit share."
(This was a repeat of a request FH had previously made in September). There is no record of Mr Brun having given any such confirmation, and when the accounts were signed off on 16 November, FH qualified their auditors' report in a number of respects one of which was:
"We have been unable to obtain sufficient evidence regarding amounts disclosed as remuneration charged as an expense of one of the members."
(14) Mr Brun was asked in evidence what the commission arrangements were in London. He said he could not remember the way in which they paid themselves when they set up WP, but he said there was no explicit commission structure as there was in WPHK. He also said he could not remember having any discussions about commission rates because they were focused on the percentage they owned in the business and that was how funds were distributed.
- Mr Pearson and Mr Cottle disagreed about how in the circumstances commission should be treated, and in particular whether WP's loss of profits claim should be calculated after deducting 45% commission for Mr Channing or not. Mr Pearson's view was that he could not find any reference in the LLP Agreement to members being entitled to commission (or indeed salary): their entitlement to remuneration was governed by clause 8 which dealt with drawings and distribution of profits. This was similar to the view taken by Mr Channing himself who complained that whereas the 2004 version of the LLP Agreement had expressly referred to commission (clause 18.1 had said that a Member should be entitled to retain any commission which he might receive in respect of any transaction for which he was in the normal course of business allowed commission), the 2008 LLP Agreement contained no such entitlement. This is one of the matters that he criticised Withers for, although he recognised that the only claims in this action are brought by WP and it is not something of which WP (as opposed to Mr Channing) can complain.
- However I do not regard this criticism as well-founded. Clause 19 of the LLP Agreement is headed "Members' remuneration and expenses" and clause 19.1 provides:
"A Member may act and be remunerated as a member or employee or as agent or adviser of the LLP and shall not be liable to account for any remuneration, fees or profit received."
Remuneration is a wide word and is plainly wide enough to include commission. I agree with Mr Cottle therefore that the fact that the LLP Agreement does not itself specify whether, and if so what, commission was payable to Mr Channing does not mean he was not entitled to it; and that it is a question of fact whether an agreement existed between Mr Channing and WP under which he was entitled to be paid commission. Mr Cottle was cross-examined at some length about the apparent change in his views, but the mere fact that, when acting for Addax, he quite properly asked for evidence to support the accounting treatment in the 2009 accounts, does not prevent him from now saying that it is a question of fact to be decided on the evidence before the Court, nor preclude Withers from now submitting that on such facts I should find there was such an agreement.
- I have set out the facts above, so far as they appear on the evidence before me. On these facts I do not consider that any such agreement has been established. There is no evidence that Mr Channing ever expressly agreed with Addax that he would be entitled to a commission payment from WP: Mr Channing simply says that as it had been shown in the business plan, he assumed it was accepted. FH asked more than once for confirmation from Mr Brun as to an agreement, but no such confirmation appears to have been forthcoming and it appears from his oral evidence that he did not remember making any such agreement.
- I accept that there is some material from which it can nevertheless be inferred that there was an agreement between Mr Channing and Mr Brun before 2008, namely the treatment of commission in the (unaudited) 2008 accounts which treat Mr Channing as entitled to commission (at that date of 40% less the commission payments payable to others). But the way in which this was dealt with in the 2008 accounts was by way of a priority claim on the profits, not as an expense of the business. Consistently with this, the first draft of the 2009 accounts treated Mr Channing's commission as an adjustment to the division of losses rather than as a contractual entitlement against WP. It was only after TW had pointed out that Mr Channing had been making substantial drawings against profits but that since there were no profits he owed money to WP, that the accounts were redrawn to show Mr Channing's remuneration as an operating expense. This was something that Mr Marco Baccanello, who had replaced Mr Hudson as WP's internal accountant, had asked FH to do, saying that Mr Channing felt very strongly that his full salary and commission should be put through as a profit and loss charge; and Mr Channing indeed made it clear in his oral evidence that he did not think he should be working for nothing. But there is before me no material to suggest that this was ever agreed.
- I am conscious that I am not hearing a dispute between Mr Channing and WP, or between Mr Channing and the other members of WP; but on the evidence before me I find that there was no agreement between WP and Mr Channing that he would be entitled to a commission payment as an expense of the business. At most there was an agreement as to how the profits of the business should be divided, and even then I find there was no actual agreement between Mr Channing and Addax that he should be entitled to an allowance by way of commission out of the profits.
- Thus although I agree with Mr Cottle that the terms of the LLP Agreement are not conclusive as to Mr Channing's entitlement to a commission, and that it is a question of fact whether it was agreed that Mr Channing should be paid commission by WP as remuneration for introducing business to it, I find that there was no such agreement.
- Mr Cottle had a second argument, which he referred to under the heading "substance over form". This was that it may be necessary, when for example considering the valuation of a private company, to look beyond the position reflected in the accounts. In a private company where directors are also shareholders, it is largely a matter of choice whether they take income from the business by way of payments in the form of salary or directors' fees, or by way of dividends on their shares. If one wishes to assess the actual profitability of the business one should adjust operating income to reflect an appropriate compensation for owner managers. Similarly here, the underlying economic reality is that someone in Mr Channing's position generating revenue for WP would need to be paid for doing so, and that, to quote from a text cited by Mr Cottle:
"to get a more precise estimate of operating income, we have to estimate the appropriate compensation for the owner-managers, based on the role they play in the firm and the cost of hiring replacements for them".
Mr Cottle's view therefore was that whatever the actual arrangements with Mr Channing, it would be appropriate to reflect commission payable to him as a cost of the business.
- This is all readily understandable and if the question had been one of valuing WP's business or assessing its level of profitability, I would have agreed that it would be necessary to make a notional allowance for the remuneration that would typically be payable to a replacement for Mr Channing, which I agree can be taken as a commission of 45%. But this is not the question I am asked. I am asked to assess the profits that WP would have made had it opened a New York office and won the Nomura mandate. If it had done that, the success would almost entirely have been due to Mr Channing and on my findings WP would not have had to pay him commission by way of remuneration. It may seem paradoxical that WP's claim in these proceedings is affected by the question whether Mr Channing's income from the business would have been in the form of commission taken as remuneration, or in the form of a division of profits; but it seems to me to follow inexorably from the fact that WP is a separate legal entity from its members, and the claim I am considering is WP's claim for loss of profits. If those profits would have been earned without having to pay Mr Channing commission, that should in my judgment be reflected in the assessment of its loss of profits and hence in the level of damages awarded. I will therefore leave out of the calculation of WP's loss of profits any sum for commission payable to Mr Channing.
US loss of profits: conclusion on quantum
- That means I can now assess the quantum of this head of claim as follows:
(1) Sole mandate.
In the light of the above I accept Mr Pearson's calculations of the loss of profits in this scenario as set out in Appendix 6(i) of his Supplemental Report. This can be summarised as follows:
| |
2009/10 |
2010/11 |
to 6.11.11 |
Total |
| Revenue |
£1,900,000 |
£2,250,000 |
£1,084,800 |
£5,234,800 |
| Commission |
|
£157,500 |
£75,960 |
£233,460 |
| Overheads |
£600,000 |
£710,526 |
£428,262 |
£1,738,789 |
| Net profit |
£1,300,000 |
£1,381,974 |
£580,578 |
£3,262,551 |
I will therefore award 15% of this figure, which is £489,383.
(2) Shared mandate
I have assumed above that if WP had been awarded a shared mandate (i) it would have received 60% of the revenues projected in the Revised Business Plan and (ii) its overheads would have been those used by Mr Pearson. That leads to the following calculation, taking 60% of the above figures for revenue and commission and the same figures for overheads:
| |
2009/10 |
2010/11 |
to 6.11.11 |
Total |
| Revenue |
£1,140,000 |
£1,350,000 |
£650,880 |
£3,140,880 |
| Commission |
|
£94,500 |
£45,576 |
£140,076 |
| Overheads |
£600,000 |
£710,526 |
£428,262 |
£1,738,788 |
| Net profit |
£540,000 |
£544,974 |
£177,042 |
£1,262,016 |
I will therefore award 45% of this figure, which is £567,907.
London office – WP's actual experience
- The Revised Business Plan showed projected revenues for the London office as follows:
| 2008/9 |
£3,375,000 |
| 2009/10 |
£4,500,000 |
| 2010/11 |
£5,625,000 |
As with the US office, WP's claim for loss of profits is based on these figures for the years to 2009/2010 and 2010/2011, and an apportioned amount for the period to 6 November 2011.
- These revenues were based on (i) in 2008/9 Mr Channing personally generating revenue of £2m per year, and two further revenue generators, one being Ms Kerr and one newly recruited, together generating about £1.4m; (ii) in 2009/10 Mr Channing again generating £2m, Ms Kerr and the other generator bringing in £1m each, and a third recruit adding £0.5m; and (iii) in 2010/11 there being a total of 4/5 revenue generators.
- WP's actual experience was in fact very different. So far as 2008/9 is concerned, the total revenue shown in the audited accounts was only £1,110,082 and of this £450,000 was in respect of the Addax monthly retainer. This was largely due to the paralysis in the market following the collapse of Lehman, but there were a number of other factors:
(1) Ms Kerr in fact went on maternity leave from July 2008 to the end of January 2009 so did not contribute significantly to revenue during the year.
(2) She had noticed by the time she went on maternity leave that business had begun to slow down. This accords with Mr Baines' evidence that even before the collapse of Lehman in September 2008, the market, which had been very buoyant in 2004 to 2008, had begun to change when Bear Stearns folded in March 2008.
(3) Mr Channing says that he had begun a search for another revenue generator for the London office and had identified some potential candidates, but he was concentrating on the proposed Middle East business, and WP had not recruited anyone by September 2008 when Lehman collapsed.
- In 2009/10 WP's turnover was similar at £1,166,115. In 2010/11 it dropped to £700,000 and by 2011/12 it was doing very little business – Mr Channing's figure is a turnover of £150,000. In effect it is now dormant save as a vehicle for bringing this litigation.
London – what would have happened ?
- The next question is what revenue WP would have generated if Addax had not been able to trigger its option in 2009. In considering this I need to bear in mind that the only claim which I have held to be established is that, as a result of Withers' drafting of clause 25.2, Addax was able to withdraw half its capital early. I have not upheld the other complaints, that it was able to claim repayment in US dollars, and that no provision was made for redistribution of its shares; nor is there any claim in respect of various other matters which arose, such as the correct treatment of the capital from the non-Addax investors or the question of Mr Channing's commission. As appears below, dealing with all these matters seems to have taken up quite a bit of Mr Channing's time, but it is not easy to disentangle the consequences of the one respect in which I have found Withers to have been in breach of duty from the consequences of other matters.
- I will deal separately with the diversion of Mr Channing's time. The immediate consequence of Addax being able to exercise its option is that it left WP short of capital. WP claims that this left it unable to finance its anticipate expansion by recruiting further consultants. It should be noted that the lack of capital did not by itself have any impact on Mr Channing's position or his ability to pitch for and win business.
- I accept, as set out above (paragraph 195), that the threat by Addax in February 2009 to exercise its option left WP facing potential cashflow problems and that as a result it could not contemplate expanding. The question therefore is whether it would have done so had Addax not been able to exercise its option.
- This requires addressing the following points: (i) would WP have sought to recruit more consultants ? (ii) if so, would it have succeeded in doing so ? (iii) if so, would they have succeeded in earning revenue for WP ? (iv) if so, how much revenue would they have earned ? and (v) when would they have earned it ? As I understand the law as stated in Parabola and Vasiliou, the first of these falls to be decided on the balance of probabilities, as does the general question whether WP would have earned more profits as a result, that is whether the proposed expansion would have been successful. The remainder of them all go to make up the question how much profit would have been made, which is to be assessed by making the best attempt I can to evaluate the chances, great or small, taking all significant factors into account.
- So far as the first of these questions is concerned, Mr Channing's evidence was that he calculated he might need £200,000 to £250,000 to carry the cost of a newly recruited consultant until he or she was fully earning. On my assessment of what WP's financial position would have been, it could have afforded to do this as well as open an office in New York, but it would have been quite risky (paragraph 198 above).
- Mr Channing's evidence was that one of the effects of the financial crisis was that investment banks divided into those that had to be bailed out with public money who were restricted in what they could pay their staff and those who were not. The latter were able to embark on an aggressive hiring campaign. This evidence was supported both by Miss Mills, who said that there was a strong market for hiring in investment banking during 2009 and 2010 for those institutions who had the liquidity to continue without government subsidies, and that the collapse of Lehman led to significant activity in the search industry in which her firm operated with many of their clients embarking on quite aggressive search processes; and by Mr Baines, who said that it became fashionable to talk about winners (who had largely avoided the crisis or found private sources of capital) and losers (who had been reliant on government support) and that the winners found themselves able to win business fairly easily as the markets unfroze leading to a strong period for recruiters.
- There was some disagreement when this 'rewarding period for the search community' (as Mr Baines put it) started and how long it continued. Mr Channing's evidence was that the trend had become apparent by January 2009; but this contrasts with the statement attributed to him by Ms Hajjar-Alami in March 2009 in his "last update" that there was no clarity in current market conditions. Miss Mills said that the situation had become much clearer by the spring of 2009; and Mr Baines put the start of this period at September 2009. Ms Kerr said that after she returned from maternity leave (which was at the end of January 2009) business got off to a slow start. I will assume that the market began to look promising in early 2009 but took a little while to get going.
- Mr Baines' evidence was that this period lasted until June/July 2010 but that by the third quarter of 2010 the banking market had become unstable and hiring had remained depressed since. Miss Mills' evidence was that business became 'much trickier' after March 2011. I will proceed on the basis that there was some slowdown in 2010/11 and a more marked one after March 2011.
- In these circumstances and despite the fact that it would have involved some risks, I accept Mr Channing's evidence that had it not been for Addax withdrawing its capital, he would have proceeded to seek to recruit further consultants as reflected in the Revised Business Plan. With himself and Ms Kerr, that would have meant one extra consultant in 2009/10, and a second in 2010/11. I therefore find on the balance of probabilities that he would have sought to recruit these two extra consultants. On the other hand I find that with the downturn in the market towards the end of 2010/11, he would probably not have recruited anyone further in 2011/12.
- On the second question, whether such attempts to recruit consultants would have been successful, Mr Baines and Miss Mills were agreed that it is not always easy to recruit successful lateral hires. Mr Baines said recruiting talented individuals is not just about paying them enough but about the business opportunity, culture, colleagues and working environment. He said that his experience was that consultants who move firms find it more difficult than they expect to transfer their client relationships; and that the decision to move has considerable risks attached, particularly if moving to a small boutique dominated by a strong individual, and he himself had often advised those thinking of making such a move but few had done so. He described Mr Channing's plans as 'highly ambitious'. His best estimate is that while Mr Channing would have been able to make some hires, he would have not have achieved his full target and that a figure of 60-70% in hitting his targets would be the most likely outcome. In oral evidence he gave evidence of his own difficulty when running a boutique to bring in the calibre of people he wanted.
- Miss Mills agreed that there were challenges in recruiting new talent to the executive search business, and did not disagree that what Mr Channing was proposing was ambitious and beyond the scale of most firms. But she pointed to the record of WP and WPHK together; and to another firm called Stonehaven to support her view that it was feasible. Mr Baines accepted that Stonehaven was an example where it had been done, although he explained in oral evidence that it was not clear to him how stable the business model adopted at Stonehaven actually was.
- In these circumstances I find on balance that WP would have succeeded in recruiting further consultants as sought, but that it would be wrong to treat this as if it were certain. It might have taken some time to find the right people, and it might not have been possible at all. Those who were sufficiently talented might need to be attracted by the prospect of being offered in due course a share of the partnership, but this would require the consent of all existing partners which would make it rather more difficult to arrange. These are all the sort of contingencies which as I understand it I should take into account in evaluating the quantum of lost profits.
- The next question is whether the new consultants would have succeeded in earning revenue for WP. I find on the balance of probabilities that they would. Both Miss Mills and Mr Baines assumed that if such consultants could be recruited they would have generated revenue for WP: Miss Mills in particular pointed to the fact that Nomura was very active in the recruitment market in 2009 and 2010 in Europe and the UK (as well as the US), and referred to the evidence which I have already mentioned above of the very close relationship between WP and Nomura and the "pipeline" of work which she identified as available.
- More difficult is to assess how much revenue such consultants would have earned for WP. This involves two sub-questions: (i) how much they would earn once fully up to speed and (ii) how long it would take to get to that position.
- As to the first, Miss Mills' evidence was that a good consultant with a track record would expect to generate around £750,000 to £1m pa in the period 2008-2011; Mr Baines' view was that a consultant who had been able to generate £1m to March 2008 (pre-crisis) might have generated £450,000 to March 2009, £850,000 to March 2010 and £600,000 to March 2011. In her second report Miss Mills said that it is possible that consultants with a very active client and who had already dropped their fees to lower levels would not have experienced much revenue drop. This is quite hesitant language and allowing for the various contingencies that might affect this, on this point I will adopt Mr Baines' figure of £850,000 for the year to March 2010, a figure of £750,000 for the year to March 2011, and £600,000 for the period after March 2011 when Miss Mills accepted that the market became much trickier.
- As to the second point, Mr Baines explained that a consultant who decided to move would usually be subject to a notice period, usually 3 months but sometimes 6, and after that would typically be subject to a further period of 3 to 6 months where he would be subject to restrictive covenants. That means there would be a time lag of at least 6 months, and possibly 12, before any meaningful revenue generation started to kick in, which means that he expected a consultant to be earning at approximately 50% of full potential in the first year, and 75-80% in the second year. Miss Mills agreed that it takes time for lateral hires to become profitable, although she would have expected new consultants to have operated at around 75% of normal expected revenues in the first year. Mr Channing's own evidence was that he assumed, when calculating the amount of capital he needed, that WP might need to fund the costs of employing new consultants for around a year. I propose in these circumstances to assume that a newly recruited consultant would earn 65% of his or her full potential in the first year and 90% in the second year.
London office – quantification of lost profits
- It is now possible to calculate the loss of revenue from new consultants as follows:
(1) Year to March 2010
Consultant 1:
| Full potential |
£850,000 |
|
| 65% of full potential |
65% x £850,000 = |
£552,500 |
| Total |
|
£552,500 |
(2) Year to March 2011
Consultant 1:
| Full potential |
£750.000 |
|
| 90% of full potential |
90% x £750,000 = |
£675,000 |
Consultant 2: |
|
|
| Full potential |
£750.000 |
|
| 65% of full potential |
65% x £750,000 = |
£487,500 |
| Total |
|
£1,162,500 |
(3) Period to 6.11.11 (220 days)
Consultant 1:
| Full potential |
£600,000 |
|
| Apportioned |
220/365 x £600,000 = £361,644 |
|
Consultant 2: |
|
|
| Full potential |
£600,000 |
|
| 90% of full potential |
£540,000 |
|
| Apportioned |
220/365 x £540,000 = |
£325,479 |
| Total |
|
£687,123. |
- To find WP's loss of profits attributable to its inability to recruit further consultants also requires identifying what extra costs would have been incurred. The consultants would have been paid by commission, and it is common ground that commission at the rate of 45% should be deducted from these figures. Beyond that the question is not an easy one as although Mr Channing has identified the costs that would have been incurred under the Revised Business Plan, the present exercise requires identifying the extra costs that would have been associated with the recruitment of the consultants I have identified above, which was not a question specifically addressed as such in the evidence.
- The bulk of the overheads are rent (which would be unaffected by such expansion) and staff costs; and the Revised Business Plan expressly stated that the London profitability study included allowance to hire dedicated research / execution for each of the new consultants. It is clear therefore that there would have been extra staff costs associated with the recruitment of new revenue generators. Mr Channing's projected costs assume total staff costs of £835,000 for 2009/10 and £985,000 for 2010/11. This can be compared with the actual staff costs for 2006/7 and 2007/8 which were £521,000 and £506,000 respectively. In other words Mr Channing's expansion plans involved about £320,000 over the prevailing levels in early 2008 for 2009/10; and a further £150,000 for 2010/11.
- In addition, as Mr Pearson accepted, if the business expanded, travelling and entertainment costs would also have increased. The Revised Business Plan budgeted for £150,000 for this for each of the years 2008/9, 2009/10 and 2010/11 (as opposed to about £100,000 for each of the years 2006/7 and 2007/8), but Mr Pearson adopted increased figures of £200,000 for 2009/10 and £250,000 for 2010/11 in line with increases in turnover, or about £100,000 and £150,000 respectively over the prevailing levels in early 2008.
- Taking these two elements together the extra costs would be as follows:
| |
2009/10 |
2010/11 |
| Staff costs |
£320,000 |
£470,000 |
| Travel etc |
£100,000 |
£150,000 |
| Total |
£420,000 |
£620,000 |
Not all of this however would be attributable to the new revenue generators as much of it would be attributable to Mr Channing and Ms Kerr. In the absence of any more detailed evidence I will assume that half of the extra costs would have been attributable to the recruitment of the new consultants, giving increased costs attributable to their employment of £210,000 for 2009/10 and £310,000 for 2010/11. I will assume that from April 2011 the same would apply as for 2010/11.
- It is now possible to calculate the loss of profits attributable to WP not recruiting the extra consultants as follows:
| |
2009/10 |
2010/11 |
to 6.11.11 |
Total |
| Extra Revenue |
£552,500 |
£1,162,500 |
£687,123 |
£2,402,123 |
| Commission |
£248,625 |
£523,125 |
£309,205 |
£1,080,955 |
| Extra Overheads |
£210,000 |
£310,000 |
£186,849 |
£706,849 |
| Net extra profit |
£93,875 |
£329,375 |
£191,069 |
£614,319 |
- I propose to adjust this figure to take account of the fact that it is far from certain that WP would have succeeded in attracting consultants of the requisite calibre, and the various other contingencies (paragraph 249 above), by taking 70% of this figure. This is £430,023.
- This is therefore my assessment of the loss of profits suffered by WP as a result of being unable to invest in the recruitment of further search consultants for the London office, this being the claim pleaded at Paragraph 39(1) of the Re-Amended Particulars of Claim. I am conscious that in assessing this loss in this way, I have not adopted the way in which Mr Pearson presented his calculation of the loss, and to which, to a considerable extent, Mr Cottle naturally responded with his own rival calculation. In each case they calculated their total projected revenue for WP's London office (making various assumptions) for the years 2009/10 and 2010/11 and the period to 6 November 2011, and then subtracted from it WP's actual revenue for those periods, the loss being the difference. There are two reasons why I have not adopted this approach.
- First, it includes Mr Channing's own projected revenue generation. This is a major component of the total projected revenue for the London office. But so far as the London office is concerned (as opposed to the New York office) Mr Channing's ability to generate revenue was not dependent on further capital. The capital was needed in order for WP to recruit further consultants; I am not persuaded (nor indeed is it pleaded) that capital was also needed to enable Mr Channing to fulfil his own full potential in London. The same applies to Ms Kerr, who was already an established employee and came back from maternity leave to work in the business; I am equally not persuaded that any lack of capital prevented her from generating revenue on her own account.
- The second reason is that, as this example shows, the effect of proceeding in this way is to calculate WP's loss of profits claim by attributing the entirety of the discrepancy between WP's projected profits and its actual profits to Withers' breach of duty. Not only is this not in fact the pleaded case, but it does not adequately reflect the task of the Court which is to seek to identify the extent of the loss properly recoverable as being caused by the particular breach of duty which I have found, namely the drafting of clause 25.2 enabling Addax to withdraw capital earlier than intended. This in my judgment requires a more focused approach on the consequences of this particular breach rather than an approach which in effect treats any divergence from WP's projected revenue as being prima facie caused by it. The onus is throughout on WP to establish what loss has been caused by the breach of duty, and to start with a comparison between expected profits and actual profits is to my mind to start in the wrong place as it assumes that the breach of duty caused all such differences. Rather, the Court has to identify the particular losses which flow from the breach concerned, and that is what I have tried to do above.
The IPS
- One other point of some significance was identified by the expert accountants, although in the event I received very little argument on it, and that is whether credit should be given against WP's loss of profits claim for the fact that by repaying half of Addax's capital early, it ceased to be liable to pay the IPS on that part of Addax's capital. The accountants agreed the amount involved at £476,124.
- Mr Cottle himself pointed out that since the IPS represents a distribution of profits it has no impact on the profitability of WP. Mr Pooles submitted however that it did not matter that it was to be paid as a profit share rather than as an interest payment treated as an expense in the profit and loss account – the simple point was that WP was better off by that amount as a result of Addax exercising its option.
- In my judgment however it does matter that this payment is structured as a distribution of profits rather than an expense, for reasons similar to those that I have given in relation to Mr Channing's commission (paragraph 232 above). WP is a legal entity distinct from its members. The claim that has been brought is a claim by WP for its loss. This requires identifying the extent to which its profits have been adversely affected. But I do not think that it also requires identifying how its profits, once made, would have been distributed. The distribution of the profits is something that affects the owners of the LLP, but it does not affect the question what profits the LLP makes, which is a prior question. Nor do I think that the fact that the payment to Addax could have been structured differently (as interest payable on a loan) changes this: this reflects what I understand to be the difference between financing a business by debt (in which case the return to the lender in the form of interest is an expense of the business) and financing it through equity (in which case the return to the investor by way of a distribution of profits is not). I therefore do not consider that the amount of extra IPS that would have been paid if Addax had not been able to exercise its option falls to be deducted from WP's loss of profits claim.
Diversion of Mr Channing's time
- The next head of loss pleaded is that Mr Channing's time was diverted away from the business of generating revenue into dealing with the disputes with Addax.
- In broad terms Mr Channing's evidence was that from February 2009 when Addax first threatened to exercise its option a large amount of his time was spent on a succession of disputes with Addax. In summary these were: first, trying to negotiate with them a means by which they could be entirely repaid; then (in the summer of 2009) dealing with the claims brought against him and Mr Brun personally; then (in the autumn of 2009 and into 2010) trying to negotiate amendments to the LLP Agreement; then (in the summer of 2010) dealing with the summary judgment application; then (in the autumn of 2010) dealing with various matters on the accounts which became very contentious; and finally (in 2011) negotiating a complete settlement with Addax which was not signed off until October 2011.
- I accept that although he had solicitors and accountants working for him he did personally spend a considerable amount of time on all these matters, although it is impossible to identify how much of his time it took up. More pertinently, as he himself accepted in cross-examination, he could not separate out the time that he allocated to various different points. I do not find this surprising – as he said he is not a lawyer and does not keep a record of the time he spends on an hourly basis.
- However this gives rise to a significant practical problem. I have only found established one allegation of breach of duty against Withers, that of misdrafting clause 25.2. I therefore have to identify so far as it is possible to do so the loss caused by that breach as opposed to all the other matters that took up Mr Channing's time. Specifically, it does not seem to me that WP has any claim for losses flowing from Mr Channing's time being taken up with any of the following: (i) negotiations over buying out Addax completely; (ii) the dispute over how much was repayable to Addax (whether it was to be calculated in US dollars or sterling and if in dollars at what exchange rate; whether Addax was entitled to repayment of the Middle East contribution); (iii) the claim against Mr Channing and Mr Brun personally; (iv) negotiations, which took up a great deal of time in the autumn of 2009, over the redrafting of the LLP Agreement (how the Addax shares should be redistributed, whether the provisions for Investor Consent should be modified, and various other matters); (v) the set-off of the Addax monies; or (vi) most of the accounting issues arising on the audit. These last were summarised by Mr Channing himself in cross-examination as being:
"the treatment of capital in 2009; the inability of the LLP to be able to recognise compensation; the failure of Addax to pay any of its bills; and the currency issue."
This is a fair summary of the issues which arose, but of these only the first could be said to have any connection to the clause 25.2 issue, and even then one of the main points was something entirely unconnected with it, namely whether the sums paid by the non-Addax investors should have been paid to WP.
- In these circumstances I accept Mr Pooles' submission that the bulk of the matters being dealt with over this extended period had nothing to do with the clause 25.2 issue. No doubt the fact that Addax was able to exercise its option in 2009 was the occasion for all the other issues to be raised, but the law only provides compensation for losses which are caused by a breach of duty in some legally relevant way, and it is well established that there is a difference between a breach of duty causing a legally recoverable loss, and a breach of duty merely giving rise to the opportunity for losses to be incurred. All the other matters which took up Mr Channing's time in my judgment fall into the latter category and WP cannot recover for losses flowing from them.
- Indeed there was never any real dispute that Addax was entitled to exercise its rights under clause 25.2. This was Mr Cuffe's advice on 3 February 2009, which was accepted, albeit with some reluctance, by Mr Channing and it was not thereafter substantially in issue. Most of the monies due to Addax were repaid quite soon after the option was exercised, and even when the summary judgment application was pursued, the live issues were (i) the currency issue and (ii) the issue as to whether the monies due from Addax could be the subject of a legal or equitable set-off (paragraph 86 above). Neither were caused by the way in which Withers drafted clause 25.2.
- Mr Pooles submitted that I should reject this head of claim in its entirety, among other reasons because the onus is on WP to prove its loss and Mr Channing as I have said could not separate out the time he spent on various matters. I have some sympathy with this submission as I have very little material on which to form a view as to how much of Mr Channing's time was taken up with the clause 25.2 issue itself as opposed to all the various other matters I have referred to. Nevertheless I accept that Mr Channing will have spent some time on it, and it seems to me that I should make some attempt, however broadbrush, to quantify the effect. This is necessarily a rough estimate but I estimate the time spent on this issue at about a month of Mr Channing's time in all, and I will assess the loss on that basis. I will assume, although this is somewhat artificial, that this month was during 2009/10 and that WP has therefore lost the revenue that Mr Channing could have generated in one month of that year.
- The Revised Business Plan was based on Mr Channing's personal revenue generation in the London office being £2m per year. But the evidence (set out in detail in his sixth witness statement) showed that his actual revenue generation in the years 2005/6, 2006/7 and 2007/8 was remarkably consistent being £1,441,467, £1,448,641 and £1,445,284 respectively. In 2008/9 it was sharply reduced to £810,082, but this was attributable to the impact of the financial crisis and other factors as explained above. Miss Mills' evidence was that revenues of £1.5 to £2m for a top revenue generator such as Mr Channing were feasible; Mr Baines, having said that an consultant who generated £1m to March 2008 might have generated £850,000 to March 2010, said that he would have expected Mr Channing to have achieved approximately double these figures had he been fully focused on clients, but he was very doubtful if he could have done that while trying to build the US business, and would expect to see a figure nearer £1.25m. Miss Mills thought this was a bit pessimistic but accepted that if the US project had come off she would have expected a drop in his revenue generating abilities for the London office of 20-25%.
- I propose in the circumstances to adopt a figure of £1.5m for Mr Channing's full potential for 2009/10. I therefore assess the loss to WP of one month of his time being taken up with the clause 25.2 issue at 1/12 of this, which is £125,000.
Legal costs
- The final head of claim is for legal costs. WP has spent, and incurred liability for, legal costs both with Withers and with Simmons & Simmons. I have no details of how much has been spent on what issues. In principle WP is entitled to recover costs reasonably incurred as a result of the clause 25.2 issue; but for similar reasons as apply to the claim for the diversion of Mr Channing's time, it is not in my judgment entitled to recover legal costs incurred on all the many other issues.
- I am in no position to apportion the costs, and in these circumstances I accede to Mr Pooles' submission that these costs should be referred to a costs judge for assessment, if not agreed, in order to distinguish the reasonable costs attributable to the misdrafting of clause 25.2 from those which are not.
Summary on quantum
- I will award damages as follows:
| (1) |
US loss of profits: |
£489,383 + £567,907 = |
£1,057,290 |
| (2) |
London loss of profits |
|
£ 430,023 |
| (3) |
Diversion of Mr Channing's time |
|
£ 125,000 |
| |
|
|
£1,612,313 |
- WP also has a claim for interest under s. 35A of the Senior Courts Act 1981. In principle it seems to me that suitable interest should be awarded, but I have received no submissions on the rate of interest, or the periods for which interest should be awarded (or indeed the principle). If not agreed, I will therefore hear counsel on these, and any other consequential issues.
