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Cite as: [2005] EWCA Civ 114

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		Neutral Citation Number: [2005] EWCA Civ 114
		Case No: A3/2004/0973 CHANF

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF
JUSTICE, CHANCERY DIVISION
His Honour Judge Behrens
HC02CO1955

Royal Courts of Justice
Strand, London, WC2A 2LL

15/02/2005

B e f o r e :

LORD JUSTICE KENNEDY
LORD JUSTICE LAWS
and
LADY JUSTICE ARDEN
____________________

Between:

	Precis (521) plc	Appellant
	- and -
	William M Mercer Ltd	Respondent

____________________

Mr Andrew Sutcliffe QC and Mr William Edwards (instructed by the DLA) for the Appellant
Mr John Wardell QC and Miss Joanna Smith (instructed by Nicholson Graham & Jones) for the Respondent
Hearing dates : 15 – 17 December 2004
____________________

HTML VERSION OF JUDGMENT
____________________

Lady Justice Arden:

This is an appeal against the order dated 5 April 2004 of His Honour Judge Behrens sitting as a Deputy Judge of the Chancery Division. By his order, the judge dismissed the claim brought by the appellant, Precis (521) plc ("Precis"), against William M Mercer Ltd ("Mercer"), a firm of actuaries. The action is one for damages for professional negligence. Mercer prepared an actuarial valuation report dated 4 April 2000 ("the AVR") for one of the pension funds of Stoves Group plc ("Stoves"). The AVR described the position in the Stoves pension scheme as at 5 April 1999 and showed a deficit of £1.35m. In fact, the calculations in the AVR were negligently prepared and the deficit should have been £4.5m. Mercer accepts that the AVR had thus been prepared without the standard of care to be expected of professional actuaries.

In about August 2000, Glen Dimplex, a substantial private company incorporated in Ireland, approached Stoves with a view to making an offer for its issued shares. It in due course decided to make an offer through Precis, one of its subsidiaries. (Nothing turns on this appeal upon the distinction between Precis and Glen Dimplex, and accordingly references in this judgment to either one should not be taken as excluding a reference to the other). In order to obtain further information about Stoves, (through a process referred to below as "due diligence"), Glen Dimplex and Stoves entered into a confidentiality agreement dated 7 September 2000 ("the CFA"). This, among other matters, purported to exclude liability for the negligence of Stoves' agents, in relation to any of the information supplied to Glen Dimplex. Glen Dimplex's solicitors, DLA, served a questionnaire seeking information about Stoves' pension schemes. Stoves sent this to Mercer and one of their employed actuaries, Miss Eyres, who was the acting scheme actuary for Stoves' pension schemes, provided written answers and sent certain documents, including a copy of the AVR, to Stoves and to DLA. DLA prepared a report for Glen Dimplex in which they advised Glen Dimplex to take its own actuarial advice. Glen Dimplex did not take that advice. It made an offer of 45p per share. This figure was arrived at by Mr Sean O'Driscoll, an accountant and the chief executive of Glen Dimplex. He caused the board of Glen Dimplex to approve the offer price of 45p per share in partial reliance (on the appellant's case) on the statement in the AVR as to the deficit on Stoves' pension scheme.

Precis contends that Mercer owed it a duty of care with respect to the information in the AVR, that it relied on the AVR in making its offer for Stoves and that accordingly Mercer is liable in damages for professional negligence to it. In response Mercer denies that it owed a duty of care to Precis with respect to the AVR. It also contends that by virtue of the Contracts (Rights of Third Parties) Act 1999 ("the 1999 Act") it is entitled to rely on the exclusion clause in the CFA. It also contends that Precis did not in fact rely on the pension deficit in assessing the offer price for the share capital of Stoves. It also contends that Precis had been contributorily negligent because it had failed to take its own separate actuarial advice.

The judge gave a long and careful judgment. I need only summarise his judgment on the three issues which arise on this appeal (duty of care, the CFA and the 1999 Act, and contributory negligence) and the further issue which arises on Mercer's cross appeal (reliance). In the course of his judgment the judge concluded that Mercer owed no duty of care to Precis with respect to the preparation of the AVR. Miss Eyres did not know the precise purpose for which she was asked to provide information pursuant to the questionnaire though she did appreciate that such information might be used for the purposes of valuing Stoves. Miss Eyres was not asked to verify that the report was accurate and she had not purported to confirm any valuation. In the circumstances, Mercer assumed no responsibility to guard against the loss allegedly suffered by Precis.

Nonetheless, the judge concluded that Precis relied on the pension deficit stated in the AVR when it made its offer of 45p. per share for the issued shares of Stoves.

As to the CFA, the judge held that Mercer was entitled to rely on the exclusion clause. He rejected the argument that, because the CFA did not apply to information which was "generally available to third parties", it did not apply to the AVR. Precis contended that Mercer had not assented to the exclusion clause in the CFA before Mrs Eyres answered the questionnaire and that it was too late for it to do so later. Furthermore, Precis contended that it was open to it and Stoves to vary the CFA by excluding the exclusion clause, which they had done by a deed of variation dated 25 April 2003. The judge rejected these arguments.

The judge found that Precis was contributorily negligent in failing to instruct its own independent actuary. It was common ground that the error in the AVR was a computational error which would have been spotted by an independent actuary instructed by Precis.

I will take the four issues identified above in turn.

Duty of care

I have explained above how the enquiry about the AVR came to Mercer. It was sent to the scheme actuary, Miss Eyres. She received an extract of the list of information Precis required as part of its due diligence enquiries into Stoves under cover of a fax from one of the directors of Stoves. She checked where the information was to be sent. She then consulted a colleague, Mr Costas Yiasoumi. She recognised that the request was being made in the context of a corporate transaction of some kind. Mr Yiasoumi confirmed that it was in order to comply with the request and so Miss Eyres put the documents together with the help of her secretary and an assistant. She said in her evidence that the exercise was a purely administrative exercise and that there was no question of her reviewing any of the information requested in the time available. In any event, she had not been asked to carry out any review. She did not know the nature of the transaction, the identity of the interested party or the nature and extent of the interest being acquired. She made a charge on a time basis with an uplift because this was urgent mergers and acquisitions work: the time records showed that she and her assistant spent about six hours each on preparing Mercer's response to the due diligence enquiries. The information she had prepared was sent to Stoves, Stoves' solicitors, Ashurst Morris Crisp, and DLA, Precis' solicitors by courier. DLA prepared a report for Precis in reliance on this information and quoting the figure of £1.3m. for the deficit on Stoves' main pension scheme.

The first question is whether the purpose for which Precis subsequently claimed it had used the figure of £1.3m, namely for calculating the offer price for Stoves' shares, was a purpose expressly permitted by the AVR.

Section 2 of the AVR described the purposes for which the valuation contained in the AVR might be used as follows:-

"2.2 The valuation has been undertaken in accordance with Clause 4 of the Scheme's Trust Deed dated 30 March 1992. The purpose of the valuation is to review the Company contribution rate taking account of the Trustees' funding objectives and statutory requirements ...

2.4 The calculations in the report use methods and bases appropriate for the purpose described above. Figures required for other purposes, such as employer accounting, should be calculated in accordance with the specific requirements for such purposes and it should not be assumed that the figures provided here are appropriate. The report may be disclosed to other parties with the consent of the Trustees or under the disclosure legislation and regulations. Such parties may rely upon the results for the purpose described above or any other purpose agreed with the Scheme Actuary at the time of disclosure."

The appellant contends that the exercise carried out by DLA was a review of the contribution rate, and that accordingly Precis was a person whom Mercers expressly recognised might rely on the AVR. However, in my judgment, the type of review referred to in paragraph 2.2 of the AVR is a review for purposes connected with the management of the pension fund, not a review which third parties might wish to undertake for private purposes of their own.

The appellant also contends that Miss Eyres had implicitly agreed to their relying on the AVR for the purpose of the acquisition of Stoves by providing the AVR to them pursuant to their due diligence enquiry. I do not accept this submission. The agreement of Miss Eyres extended only to their having the information. She cannot thereby be taken to have agreed to their relying on the information for a particular purpose because, although she believed that a corporate transaction of some kind might be in contemplation, she did not know what type of transaction was envisaged. Without a clearer idea of Precis' purpose she cannot, in my judgment, fairly be said to have agreed to it.

That leaves Precis' argument that Mercer owed a duty of care to it when it provided the AVR. For this purpose, Mr Andrew Sutcliffe QC, for Precis, submits that a duty of care arises whenever there is in law an assumption of responsibility and that, on the authorities, an assumption arises because Mercer provided information for a purpose made known to Mercer when it gave the information, and that Mercer knew that the information was to be provided to Glen Dimplex (or an unnamed potential offeror). Mercer did not, on Mr Sutcliffe's submission, have to know precisely how the information was to be used. It only needed to know the general nature of the purpose. Mr Sutcliffe particularly relies in support of his submission on the dissenting judgment of Denning LJ in Candler v Crane Christmas & Co Ltd [1951] 2 KB 164, which judgment was later approved in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465, and on the speeches of Lord Oliver in Caparo Industries plc v Dickman [1990] 2 AC 605 and Lord Goff in Henderson v Merrett Syndicates Ltd [1995] 2 AC 145.

Mr John Wardell QC, for Mercer, submits that Mercer did not assume any duty of care to Precis when providing the AVR. The provision of the replies to the due diligence enquiry was a limited administrative exercise and there was no review of the accuracy of the AVR. The information supplied was of a historic nature, and in such a case there is no assumption of a duty of care unless the provider of the information makes it clear that he is standing by it so that the recipient can rely on it for a new purpose. Nothing turned on Miss Eyres' short conversation with Mr Yiasoumi. Nothing turned on the way her firm's fee was calculated. The assurance Precis was seeking about Stoves' pension schemes was to be provided by DLA, who were advising Precis. Mr Wardell also submits that Mercer could not anticipate that Mr O'Driscoll would value Stoves in the way he says that he did. Further, if there had been a substantial number of redundancies, the deficit might well have been irrelevant.

Mr Wardell also relies on the CFA. The existence of the exclusion clause was inconsistent with the assumption by Mercer of responsibility to Precis. Moreover, when the request for the information was made, Precis did not know that the scheme actuary was Mercer.

In Hedley Byrne v Heller, the House of Lords held that liability in tort would arise if (without an appropriate disclaimer) a person, having special skill, negligently provided information to another when he knew or should have known that that other would rely on it, and that such liability would arise even if the information was given gratuitously. There was said to be an "assumption of responsibility". The meaning of that phrase was left to be developed by later case law. However, the House of Lords have sought to impose limits on the situations which can give rise to a duty of care, particularly in the field of pure economic loss (such as results if a claim for negligent misstatement lies). This occurred in Caparo Industries v Dickman. In that case, the House held that no duty of care was owed by auditors of a company to investors in that company in respect of their investment decisions made in reliance on the company's audited accounts. In short, before a duty of care could be said to arise, the loss had to be foreseeable, there had to be a sufficient relationship of proximity between the parties and it had to be fair, just and reasonable to impose a duty of care. The decision in Caparo heralded a return by the courts to the traditional incremental development of the law of negligence. The later case of Henderson v Merrett Syndicates Ltd established that if there was an assumption of responsibility, it was not necessary to determine whether the imposition of liability was fair, just and reasonable.

Notwithstanding Caparo, the courts have continued to apply the concept of assumption of responsibility; (doubts, however, have been expressed as to its usefulness). Thus in Henderson v Merrett Syndicate Ltd, the House of Lords held that managing agents owed a duty of care to the Lloyd's names both on syndicates which they managed and on syndicates managed by other managing agents pursuant to a sub-agency agreement between the managing agents. In White v Jones [1995] 2 AC 207, the House of Lords held that a solicitor who negligently failed to carry out his client's instructions when making his will was liable in damages to the disappointed beneficiaries. In this case, Lord Goff also based his decision on "assumption of responsibility" and Lord Browne-Wilkinson said that liability was the result of an extension of the principle of assumption of responsibility.

In Henderson v Merrett Syndicates Ltd, Lord Goff with whom the remainder of the House agreed, described the principle established by the Hedley Bryne case in these terms:

"From these statements [in the Hedley Byrne case] and from their application in Hedley Byrne, we can derive some understanding of the breadth of the principle underlying the case. We can see that it rests upon a relationship between the parties, which may be general or specific to the particular transaction, and which may or may not be contractual in nature. All of their Lordships spoke in terms of one party having assumed or undertaken a responsibility towards the other. On this point, Lord Devlin spoke in particularly clear terms in both passages from his speech which I have quoted above. Further, Lord Morris spoke of that party being possessed of a 'special skill' which he undertakes to 'apply for the assistance of another who relies upon such skill'. But the facts of Hedley Byrne itself, which was concerned with the liability of a banker to the recipient for negligence in the provision of a reference gratuitously supplied, show that the concept of a 'special skill' must be understood broadly, certainly broadly enough to include special knowledge. Again, though Hedley Byrne was concerned with the provision of information and advice, the example given by Lord Devlin of the relationship between solicitor and client, and his and Lord Morris's statements of principle, show that the principle extends beyond the provision of information and advice to include the performance of other services. It follows, of course, that although in the case of the provision of information and advice, reliance upon it by the other party will be necessary to establish a cause of action (because otherwise the negligence will have no causative effect), nevertheless there may be other circumstances in which there will be the necessary reliance to give rise to the application of the principle. In particular, as cases concerned with solicitor and client demonstrate, where the plaintiff entrusts the defendant with the conduct of his affairs, in general or in particular, he may be held to have relied on the defendant to exercise due skill and care in such conduct.

In subsequent cases concerned with liability under the Hedley Byrne principle in respect of negligent misstatements, the question has frequently arisen whether the plaintiff falls within the category of persons to whom the maker of the statement owes a duty of care. In seeking to contain that category of persons within reasonable bounds, there has been some tendency on the part of the courts to criticise the concept of 'assumption of responsibility' as being 'unlikely to be a helpful or realistic test in most cases' (see Smith v Eric S Bush [1990] 1 AC 831, 864-865 per Lord Griffiths; and see also Caparo Industries plc v Dickman [l990] 2 AC 605, 628, per Lord Roskill). However, at least in cases such as the present, in which the same problem does not arise, there seems to be no reason why recourse should not be had to the concept, which appears after all to have been adopted, in one form or another, by all of their Lordships in Hedley Byrne [1964] AC 465 (see, e.g. Lord Reid, at pp. 483, 486 and 487; Lord Morris (with whom Lord Hodson agreed), at p. 494; Lord Devlin, at pp. 529 and 531; and Lord Pearce at p. 538). Furthermore, especially in a context concerned with a liability which may arise under a contract or in a situation 'equivalent to contract,' it must be expected that an objective test will be applied when asking the question whether, in a particular case, responsibility should be held to have been assumed by the defendant to the plaintiff: see Caparo Industries plc v Dickman [1990] 2 AC 605, 637, per Lord Oliver of Aylmerton. In addition, the concept provides its own explanation why there is no problem in cases of this kind about liability for pure economic loss; for if a person assumes responsibility to another in respect of certain services, there is no reason why he should not be liable in damages for that other in respect of economic loss which flows from the negligent performance of those services. It follows that, once the case is identified as falling within the Hedley Byrne principle, there should be no need to embark upon any further enquiry whether it is 'fair, just and reasonable' to impose liability for economic loss – a point which is, I consider, of some importance in the present case. The concept indicates too that in some circumstances, for example where the undertaking to furnish the relevant service is given on an informal occasion, there may be no assumption of responsibility; and likewise that an assumption of responsibility may be negatived by an appropriate disclaimer. I wish to add in parenthesis that, as Oliver J. recognised in Midland Bank Trust Co Ltd v Hett, Stubbs & Kemp [1979] Ch.384, 416F-G (a case concerned with concurrent liability of solicitors in tort and contract, to which I will have to refer in a moment), an assumption of responsibility by, for example, a professional man may give rise to liability in respect of negligent omissions as much as negligent acts of commission, as for example when a solicitor assumes responsibility for business on behalf of his client and omits to take a certain step, such as the service of a document, which falls within the responsibility so assumed by him."

One of the points made by Lord Goff in this passage is that the test to be applied in determining whether there has been an assumption of responsibility is objective. This point was taken up by Lord Steyn, giving the judgment of the House of Lords, in Williams v Natural Life [1998] 1 WLR 830, 836:-

"The practical application of the extended Hedley Byrne test was not agreed. Before I turn to the facts of the present case it is therefore necessary to explore this aspect. Two matters require consideration. First there is the approach to be adopted as to what may in law amount to an assumption of risk. This point was elucidated in Henderson's case by Lord Goff of Chieveley. He observed, at p.181:

"especially in a context concerned with a liability which may arise under a contract or in a situation 'equivalent to contract', it must be expected that an objective test will be applied when asking the question whether, in a particular case, responsibility should be held to have been assumed by the defendant to the plaintiff: ..."

The touchstone of liability is not the state of mind of the defendant. An objective test means that the primary focus must be on things said or done by the defendant or on his behalf in dealings with the plaintiff. Obviously, the impact of what a defendant says or does must be judged in the light of the relevant contextual scene. Subject to this qualification the primary focus must be on exchanges (in which term I include statements and conduct) which cross the line between the defendant and the plaintiff. "

Accordingly, the fact that, viewed subjectively, the provider of the information did not think he was assuming a duty of care is not determinative. On the other hand, it is now well established that in finding the true meaning of the exchanges between the parties the court will apply not the dictionary meaning of the words used but the meaning which the parties may reasonably be supposed to have given to those words in that context: see, for example, Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896; see also the passage from the speech of Lord Steyn, above, particularly the sentence which begins "Obviously, the impact of what a defendant says ...".

The above citation from Lord Steyn's speech makes it clear that, where (as here) it is common ground that the person providing the information has special knowledge, the critical question is whether, when the circumstances are viewed objectively, the defendant must be taken to have assumed responsibility for the provision of that information to the claimant. Thus, for example there can be no assumption of responsibility in law where a party effectively disclaims liability as in the Hedley Byrne case. This general approach is supported by the speech of Lord Browne-Wilkinson in White v Jones at 274 where he stated that he doubted whether the concept of assumption of responsibility would have been criticised (in the Caparo case and elsewhere):-

"if the words had been understood, as I think they should be, as referring to a conscious assumption of responsibility for the task rather than a conscious assumption of legal liability to the plaintiff for its careful performance."

Thus the court's scrutiny of all the facts is not in this respect without purpose. The purpose in this case is to see whether, when Mercer provided the AVR, it did so in circumstances which, viewed objectively, meant that it was accepting that it was responsible to the ultimate recipient if the information was negligently prepared.

It is, however, apparent from the foregoing that the precise limits of the concept of assumption of responsibility are still in a state of development. A difficulty which the court faces is that there is no comprehensive list of guiding principles to help the courts determine when an assumption of responsibility can be said to arise. I would not accept Mr Sutcliffe's submission that the concept can be said to arise whenever the proposition he formulated is satisfied, or indeed only when such proposition is satisfied. I note that the summary of the Hedley Byrne principle by Lord Oliver in the Caparo case, on which Mr Sutcliffe relies (and to which Lord Goff refers), seeks to identify circumstances which "typically" – not exclusively or always – give rise to the finding of an assumption of responsibility. The courts have, therefore, to look at all the relevant circumstances, and (following their approach to the duty of care generally : see above) determine whether the circumstances fall within the situations in which an assumption of liability has previously been held to exist or whether the circumstances are closely analogous to and consistent with the situations in which liability has been imposed in previous cases. In this connection, I have found considerable assistance in the judgment of Neill LJ in Bank of Credit and Commerce International (Overseas) Ltd v Price Waterhouse [1998] PNLR 564. After a detailed analysis of the case law, he held that, in determining whether there was an assumption of responsibility, the authorities provided guidance, and he suggested that the relevant factors would include:-

"(a) the precise relationship between (to use convenient terms) the adviser and the advisee. This may be a general relationship or a special relationship which has come into existence for the purpose of a particular transaction. But in my opinion counsel for Overseas was correct when he submitted that there may be an important difference between the cases where the adviser and the advisee are dealing at arm's length and cases where they are acting "on the same side of the fence".

(b) the precise circumstances in which the advice or information or other material came into existence. Any contract or other relationship with a third party will be relevant.

(c) the precise circumstances in which the advice or information or other material was communicated to the advisee, and for what purpose or purposes, and whether the communication was made by the adviser or by a third party. It will be necessary to consider the purpose or purposes of the communication both as seen by the adviser and as seen by the advisee, and the degree of reliance which the adviser intended or should reasonably have anticipated would be placed on its accuracy by the advisee, and the reliance in fact placed on it.

(d) the presence or absence of other advisers on whom the advisee would or could rely. This factor is analogous to the likelihood of intermediate examination in product liability cases.

(e) the opportunity, if any, given to the adviser to issue a disclaimer."

Mr Wardell contends that a relevant factor in determining whether there is an assumption of responsibility is the exclusion clause in the CFA, and that showed that Precis did not expect to rely on the provision of any information by Mercer. The presence of an exclusion clause in a contract with a third party is not within the factors identified by Neill LJ although his helpful identification of factors is clearly not intended to be exhaustive. Neill LJ makes reference to reliance by the adviser, but as I see it that is primarily so that the court has a total picture of the dealings between the adviser and advisee. Reliance is accordingly viewed in this context from the perspective of the provider of the information. Mr Sutcliffe submits that the exclusion clause is not a relevant factor, and in support of this proposition he relies on The Aliakmon [1986] 1 AC 715 in which the House of Lords (obiter) rejected the argument that the duty of care owed by a party could be excluded by a contract between claimant and a third party. In Pacific Associates v Baxter [1990] 1 QB 993, 1022, Purchas LJ held that such an exclusion clause should be taken into account where the contract in question was the basis for the creation of the duty of care. The other members of this court proceeded on the basis that the exclusion clause was relevant, though they did not refer to The Aliakmon. The facts of Pacific Associates are complex but it is clear that both the claimant and the defendants knew of the exclusion clause before work commenced. The position is different in this case. The CFA is not the basis for the alleged assumption of responsibility, and Mercer was unaware of the CFA.

I consider that Mr Sutcliffe is correct on this point. The question of the assumption of responsibility cannot as I see it depend on the terms of a private transaction between the claimant and a third party which is unknown to the defendant and which forms no part of the matrix of fact said to give rise to an assumption of responsibility. The submission that it is relevant, in my judgment, is inconsistent with the approach of Lord Steyn in the Williams case. Lord Steyn made it clear that the primary focus had to be on exchanges between the parties (see the passage set out in paragraph 20 above). I consider it likely that Lord Steyn used the words "primary focus" because he recognised that it might be necessary to look at matters, other than the parties' exchanges, in order to put those exchanges in their proper context. I do not therefore consider that he had in mind a separate class of information unconnected with those exchanges.

We have been referred to a further passage in the speech of Lord Steyn in the Williams case, and it is said that this passage shows that the reasonableness of reliance by the defendant is a relevant factor in determining whether there has been an assumption of responsibility by the claimant. I do not accept this submission. The relevant passage (which is at pages 836 to 837 of the report) includes the following:-

"That brings me to reliance by the plaintiff upon the assumption of responsibility. If reliance is not proved, it is not established that the assumption of personal responsibility had causative effect ... [after citation of authority]. This reasoning is instructive. The test is not simply reliance in fact. The test is whether the plaintiff could reasonably rely on an assumption of responsibility by the individual who performed the services on behalf of the company ..." (emphasis added by Lord Steyn).

In my judgment, Lord Steyn is clearly referring to reliance in the context of causation, not in the context of determining whether there has been an assumption of responsibility. Reliance in that context is a separate issue on this appeal, with which I deal below.

It may not much matter whether or not the CFA is left out of account since on any basis, Mercer can rely on the limitations on the permitted use of the AVR set out in the AVR itself. As I have already held, these did not permit Precis to use the AVR for the purpose of confirming its indicative offer price. The relevance of the exclusion clause is largely eclipsed by this point.

The principal factors supporting an assumption of responsibility are that Mercer knew that there was a corporate transaction in contemplation and that the information was required by the potential counterparty and might well be relied on by him in deciding to enter into the transaction. But the more detailed facts, in my judgment, militate against Mercer having provided the AVR in circumstances where expressly or impliedly it accepted responsibility to the claimant.

Mercer and Precis had no pre-existing relationship. The relationship which Mercer had was with the opposite party to the transaction which Precis was contemplating. Mercer provided historic information, that is information which had already been assembled and which dealt with the financial position of Stoves' pension scheme as at a past date. The information could have just as easily been provided by the trustee of the pension scheme. If Stoves had provided the AVR rather than Mercer, there would have been no assumption of responsibility by Mercer. If Mercer had helped Stoves to assemble the information, the purpose for which Mercer provided information to Stoves would have been to enable Stoves to meet Precis' request and it would not necessarily have been to enable Precis to rely on it on the footing that Mercer had assumed responsibility to it. Furthermore, the purpose for which Precis wanted to use the information in the AVR was outside the purpose for which reliance was on the face of the document permitted. Precis did not communicate with Mercer directly or inform Mercer why the information was requested. Precis did not require that the response be given by Mercer. Moreover, Miss Eyres expected the recipient to have its own advisers. The expert actuaries instructed by the parties in this case did not take the view that Miss Eyres ought to have appreciated that Precis would rely on the AVR in determining the offer price. Indeed, Precis had other advisers: it had instructed DLA to advise it about the response to its enquiries about Stoves' pension schemes.

In all the circumstances, I do not consider that Mercer can be taken to have assumed responsibility to Precis. Nor do I consider (if the question is relevant) that it would be fair, just or reasonable to impose liability in these circumstances. Accordingly, I would dismiss the appeal on this issue.

The CFA and 1999 Act

The CFA is contained in a letter dated 7 September 2000 from Stoves to Glen Dimplex. The material parts of the CFA are as follows:-

"We understand that you are interested in receiving information relating to our group with a view to considering making an offer for all or part of the issued share capital of the Company (the "Proposed Transaction"). The purpose of this letter is to record the terms and conditions on and subject to which we are prepared to supply certain information to you in order for you to consider the Proposed Transaction.

1. SCOPE OF THIS LETTER

1.1 For the purposes of this letter, "Confidential Information" means information of whatever nature relating to the Company or any of its subsidiary undertakings or associate undertakings (the "Group") or any of their respective businesses and affairs supplied to you or your representatives by or on behalf of any member of the Group whether in writing, orally or otherwise including, for the avoidance of doubt, information supplied by officer, employees, agents and professional advisers of any member of the Group or obtained by you or your representatives through negotiations or discussion with any such persons and including any reports, analyses, compilations, studies or other material or documents prepared by you or on your behalf which contain, are based on, derived from or otherwise reflect any such information.

1.2 None of the undertakings or obligations contained in this letter shall apply to Confidential Information:-

(a) which is generally available to third parties (unless available as a result of a breach of the terms of this letter or any other confidentiality undertaking); ...

6.1 You acknowledge that you will be responsible for making your own decision on and investigations with respect to the Confidential Information supplied to you, and acknowledge that neither the Company nor any other member of the Group nor any of their respective representatives, advisers, directors or employees makes any representation or warranty (express or implied) as to the accuracy or completeness or reasonableness of, or will have any liability whatsoever for any inaccuracy in, omission from, or the use by you or your representatives of or any decision based on, such Confidential Information.

6.2 Neither the Company nor any other member of the Group nor any of their respective officers, employees, agents or professional advisers are to have any liability to you in connection with the supply of the Confidential Information or its contents."

Section 1(1) of the 1990 Act provides as follows:-

"(1) Subject to the provisions of this Act, a person who is not a party to a contract (a "third party") may in his own right enforce a term of the contract if:-

(a) the contract expressly provides that he may, or

(b) subject to subsection (2), the term purports to confer a benefit on him."

Section 2(1) of the 1999 Act provides as follows:-

"(1) Subject to the provisions of this section, where a third party has a right under section 1 to enforce a term of the contract, the parties to the contract may not, by agreement, rescind the contract, or vary it in such a way as to extinguish or alter his entitlement under that right, without his consent if:-

(a) the third party has communicated his assent to the term to the promisor,

(b) the promisor is aware that the third party has relied on the term, or

(c) the promisor can reasonably be expected to have foreseen that the third party would rely on the term and the third party has in fact relied on it."

By deed of variation dated 25 April 2003, Glen Dimplex and Stoves varied, or purported to vary, the terms of the CFA by excluding Mercer from any benefit under the deed, and by agreeing that the CFA did not bind Precis. As it stood, the CFA was intended to impose a liability on Glen Dimplex for any breach of the terms of the CFA by Precis.

A number of issues arise. First, Mr Sutcliffe submits that the information was not confidential information because pension scheme beneficiaries had statutory rights to obtain the AVR. They could also pass the information on to other parties. In my judgment, information which is available to a limited number of third parties is not "generally available to third parties" for the purposes of clause 1.2(a) of the CFA. The word "generally" makes it clear that the exclusion applies only to information which is in the public domain. The fact that a beneficiary could put it on to the internet does not mean that it is generally available until that happens.

Mr Sutcliffe's next point is that Mercer were advisers to the schemes and their trustees and were, therefore, not advisers to the Group within clause 1.1 of the CFA. But, Miss Eyres was not providing the information in the performance of her functions as scheme actuary. She signed off the information she provided with her name and her description as "Scheme Actuary" but she was actually simply acting as agent for Stoves, by whom Mercer were engaged to provide actuarial services. There was a written contract to that effect, and the invoice for Miss Eyres' work in answering the due diligence enquiry was rendered to Stoves (on 18 January 2001) and not to the trustee of Stoves' pension schemes.

The next issue arises under the 1999 Act. Mercer wrote to Precis to claim the benefit of the CFA when it was disclosed in these proceedings. It claimed to be communicating its assent for the purposes of section 2(1)(a) of the 1999 Act. Mr Sutcliffe submits that it was too late for Mercer to communicate its assent then. It had to do so before it acted in the manner for which the CFA excluded liability. The exclusion clause operated in the same way as an offer, and that offer must be accepted within a reasonable time. That expires at the latest when the act is performed. In my judgment, this argument involves reading words of restriction into section 2(1)(a), which cannot, on well-established principles of statutory construction, be done. Nor do I consider that the provisions of CPR 31.22(1), which restrict the use of a party to litigation may make of documents obtained on disclosure, prevent reliance on the CFA by way of defence. It follows that, by the time that the deed of variation was executed, it was too late for the parties to the CFA to vary it so as to prevent Mercer from relying on the exclusion clause in the CFA. Accordingly, I would dismiss this appeal on the CFA and 1999 Act issue.

Reliance

This point does not now need to be decided, but it was argued at length and raises in part an important issue as to Mr O'Driscoll's honesty. I must, therefore, also deal with it at length. It is common ground that it is enough for Precis to show that it made the offer in partial reliance on the AVR. However, there is no contemporaneous document showing that Precis relied on the pension fund deficit. The further difficulty for Precis is that the acquisition of Stoves was approved by its board on the basis of oral advice from Mr O'Driscoll without details of how he had reached the figure of 45p per Stoves share. The judge found Mr O'Driscoll to be an unreliable witness and he stated that he could not accept his evidence save in so far as it was corroborated by other evidence. The judge, however, did not find that Mr O'Driscoll was dishonest, or that he was an evasive witness. Moreover, corroboration evidence for this purpose need not be in the form of contemporaneous written documentation. The judge considered the evidence as to reliance with great care. In the end he concluded that Precis made its offer on the basis of a net asset valuation which took into account the pension deficit of about £1.3m. shown in the AVR. At paragraph 243 he summarised the factors that had influenced him as follows:-

"1. The contemporaneous documents do point to a net asset valuation even though they make no reference to the pension deficit.

2. Glen Dimplex clearly attached considerable weight to the pension position in previous transactions and in this one. That is shown in the DLA documentation and in the requirement for additional due diligence after AMC had cut down the extent of the original request.

3. The amount of the pension deficit was drawn to the attention of the Board on 31^stOctober 2000 and noted by Mr Maher shortly before that.

4. The fact that the accountants agree that a pension deficit is relevant to the valuation of a company and that Mr O'Driscoll as an experienced accountant and purchaser of companies was well aware of this.

5. It is inherently unlikely that Mr O'Driscoll would give dishonest evidence to the Court." (judgment, para.242).

As I have explained, the question of reliance turns purely on Mr O'Driscoll's evidence as to how he reached the sum of 45p as the offer price for each Stoves share. Mr O'Driscoll explained how he had valued the share capital of Stoves in his second witness statement. He said that he decided that the basis of the valuation was a net asset value as there had been a sharp decline in Stoves' pre tax profits over its two financial years ended 31 May 2000. At paragraph 26.3 to 26.5 of his second witness statement, Mr O'Driscoll explained the impact of the pension deficit on his valuation of the company as follows:-

"26.3 ... According to note 25 [of the accounts at 31 May 2000], the Scheme assets as at 05/04/1999 were valued, by the Scheme actuary, at £24,516,000 and represented 95% of the value of the members' accrued benefit. In other words, the Scheme was in deficit. I can see that I have circled or underlined these figures in blue on page 36 of my copy of the Accounts as well as the corresponding figure for "Other pension costs" on page 28 of the Accounts and the figures relating to the Stoves Executive Pension Scheme on page 37 of the Accounts. This may well have been at the time when I did my valuation and calculated the preliminary offer although I have no recollection of exactly when I made any of my annotations.

26.4 Based on this information, I calculated that the value of the Scheme's liabilities must be in the region of £25.8 million and that the Scheme deficit must be in the region of £1.3 million. On the basis that the Scheme deficit was ultimately a liability of the company (and something which the company might ultimately be called upon to make good) I therefore factored my estimate of the Scheme deficit into my valuation of Stoves.

26.5 My valuation of Stoves could therefore be summarised as follows:

		£ million
Net Book Value (as at 31/05/2000)		18.7
less	Scheme Deficit	(1.3)
	Acquisition costs	(0.5)
	Restructuring costs (£4.5 - £5.0 million)	(4.75)
Revised net book value (rounded upwards)		12.2

This evidence on its face suggests that Mr O'Driscoll did rely on the pension deficit as shown by the AVR. However, that evidence was subjected to attack at trial. The respondents renew that attack in this court. However, we must bear in mind that the judge came to his conclusion after a trial lasting twelve days in which he heard Mr O'Driscoll, his fellow director, Mr Michael Maher, Mr Stone, Precis' solicitor and several other witnesses. As the question of reliance turns on the credibility of Mr O'Driscoll's evidence, we should not set aside his conclusion unless we are satisfied that it is clearly wrong: see, for example, Assicurazioni Generali SpA v Arab Insurance Group [2003] 1 WLR 577.

The respondent relies on a large number of points which they say individually and cumulatively make the judge's conclusion perverse. I will now deal with the principal points on which they rely.

(i) Lack of corroboration by Mr Treneman and by the negotiations with Stoves' board

In his second witness statement, Mr O'Driscoll stated that he had explained to Mr Treneman, a managing director, investment banking, of Dresdner Kleinwort Benson, the advisers to Stoves, that he had made a deduction for the pension deficit in making his valuation of Stoves. He stated that this was important because:

"by explaining the logic of my calculation to Mr Treneman it would make it harder for him or the board of Stoves to try to negotiate the offer price upwards without providing some credible basis for arguing that I should alter my basic calculations."

However, Mr Treneman's note of his conversation with Mr O'Driscoll on 29 August does not show that Mr O'Driscoll referred to the pension deficit and Mr O'Driscoll accepted in a later witness statement and in cross-examination that he had no recollection of mentioning the pension deficit to Mr Treneman. The note further suggests that Mr O'Driscoll's preoccupation was with the overall analysis of gross margin.

Mr O'Driscoll had a meeting with the board of Stoves and Mr Treneman on 20 October 2000. The note of this meeting contains a detailed discussion of the business of Stoves and its financial position, but makes no reference to the pension scheme deficit. It was Mr O'Driscoll's view that if the margin could be increased Stoves could be transformed into a very profitable business.

On 3 October 2000, Mr O'Driscoll informed Mr Treneman of the decision to make an indicative offer. He explained to Mr Treneman that he had deducted from the net asset value of Stoves of £19 million as shown by its last audited accounts to 31 May 2000 restructuring costs of £8-9 million. Nothing was said about a pension deficit. Mr O'Driscoll's case was that he recalled "strategically putting in a higher figure" so that, if challenged on how he had arrived at 45p. per share, he could explain that Precis was prepared to pay more for the business than its true net worth. The figure of £8–9 million for restructuring costs was in excess of the costs which Mr O'Driscoll on Precis' case had then estimated to be involved. Mr O'Driscoll did not believe the figure to be accurate. In addition, in his discussion with Mr Treneman, Mr O'Driscoll emphasised the level of net debt, a factor which the respondents point out was irrelevant to the net asset value of Stoves.

The respondent says that this was inconsistent with what he had said in his second witness statement. If Mr O'Driscoll had valued the company by deducting estimated restructuring costs from net asset value, there would have been no reason at all to have regard to a specific pension deficit of £1.3 million. Likewise, if he had really been looking at the position on the pension schemes, he would have had regard to the executive pension scheme and made an adjustment the other way to allow for the surplus in that scheme of £200,000.

The figures given by Mr O'Driscoll were repeated by Mr Treneman to Mr O'Driscoll and others during a conference call on 20 October 2000 which had been arranged to discuss due diligence. Mr O'Driscoll did not demur from those figures or give any other explanation as to his thought process.

I have considered all these points. I remind myself that the only question I have to decide is whether the judge was entitled to come to the conclusion that he did. He was not bound to deal with every item of evidence. Mr O'Driscoll was clearly wrong in his recollection of his conversation with Mr Treneman but I would accept Mr O'Driscoll's argument that he was not bound to give Mr Treneman full details of how he had got to his figure of 45p per share. He exaggerated the position to Mr Treneman, but that does not mean that the court must conclude that he did not deduct the amount of the pension deficit if he says that he did. So far as the significance of Mr O'Driscoll's imperfect recollection was concerned, there were in the end many instances of this. Nonetheless, the judge recognised this point by finding that he was an unreliable witness and by directing himself that he should not accept his evidence unless corroborated in some way.

Mr O'Driscoll was concerned with Stoves' profit potential. This was entirely logical since Precis intended to continue to run Stoves as a going concern. However, because of its then current lack of profitability, Mr O'Driscoll took the route of arriving at an offer price for Stoves on the basis of net assets. This means that he started with the net asset value of Stoves as shown by its last published audited group accounts for the year ended 31 May 2000 ("Stoves 2000 Accounts"). Its net assets were stated to be £18.722m. Note 25 to those accounts referred to the AVR and stated that the net assets of Stoves' main pension scheme were £24,516,000 "which represented 95% of the benefits that had accrued to members allowing for future salary projections". From this, Mr O'Driscoll (as the judge accepted) calculated that the pension scheme deficit as shown by the AVR was £1.3m. This deficit was not reflected in Stoves 2000 Accounts because Stoves applied Statement of Standard Accounting Practice 24 ("SSAP 24"). The disclosure required by SSAP 24 resulted in the main scheme being treated as in surplus. However, Mr O'Driscoll, as an accountant, appreciated that this was simply the effect of applying SSAP 24, and his cross-examination demonstrated that. It did not alter the position as shown by the AVR. It can be said, of course, that any pension scheme valuation is subjective and uncertain, but Mr O'Driscoll, for reasons he gave, treated the deficit as shown by the AVR as a reasonable figure, and certainly a figure to be used in preference to the SSAP 24 figure. There is no doubt that Mr O'Driscoll referred to restructuring costs when he spoke to Mr Treneman. Moreover, the experts were agreed that in valuing Stoves it would be reasonable to take account of the pension scheme deficit. (They differed as to how the deficit should be taken into account, but one of them thought that it should be taken into account in exactly the way Mr O'Driscoll had said he in fact took it into account).

Given that the pension scheme deficit can be so easily calculated from the narrative in note 25 to the Stoves 2000 accounts, the judge was, in my judgment, fully entitled to reject the respondent's argument at trial that Mr O'Driscoll (an accountant) had mistakenly assumed that the net asset value of Stoves as stated by those accounts (£18.7m.) took that deficit into account. Likewise, I see no reason why Mr O'Driscoll would on his own case have to have given a credit for the surplus on the (smaller) executive pension scheme. Credits were a matter for the offeree's board to raise.

There was no need for Mr O'Driscoll to make any separate mention of the pension scheme deficit to his own board if the pension scheme deficit was reflected in the offer price for Stoves. It was not a material amount. What Mr O'Driscoll said in cross-examination was that he treated the pension scheme deficit as a restructuring cost and (in contrast to other aspects of his evidence) he was hardly challenged at all on this:

"Q. We go on through Mr Maher's notes. It seems to me that you are telling him that restructuring is 7 to 8 million?

A. Mr Maher may have asked me would the figure be higher than that and I dont recall mentioning a figure of 7 to 8 but it may be that I said the top side would be 7 to 8 million.

Q. Top side would be. That is miles away from your 4.5?

A. Restructuring to me included the pension deficit.

Q. That is not involved in restructuring. Pension deficit is entirely different?

A It is an assumption of liabilities." (Day 3, page 43)

The cross-examination then moved to another topic and did not return to this point. The pension deficit was not, of course, a legal liability of Stoves. If it had been, it would have been shown as such in Stoves' balance sheet. However, where a pension liability represents a moral obligation of a company - and that is how Mr O'Driscoll regarded Stoves' obligation to fund its pension schemes – many accountants would consider it necessary for an actuarial deficit to be recognised in full in the accounts in order for the accounts to show a true and fair view: see FRS17, below. In that sense the deficit can be regarded as a liability of the company and referred to as such, as in Mr O'Driscoll's response set out above. There is, I accept, force in the point that a pension deficit would not normally be regarded as a restructuring cost, but the question was what Mr O'Driscoll meant by it. Moreover, there was evidence before the judge that

(a) Mr Maher and Mr O'Driscoll attached importance to the pension position because the offer document would have to say that employment rights would not be affected by the takeover, which created at least a moral commitment to fund the deficit.

(b) Precis had originally wanted more information to be provided in its due diligence enquiries about the pension schemes than Stoves was prepared to give.

(c) Stoves' contribution rate to the main pension scheme was increased from 9.4% to 11.9% from 1 June 2000. This is noted on Mr Maher's copy of the slides for the Glen Dimplex presentation with the figure of £1.5m. (his recollection from memory) as the deficit. In addition, the expression "0.6% extra" appears, which was reference to the increase in the contribution rate which, on the assumptions used in the AVR, would be necessary to eliminate the pension fund deficit. This suggests that some "restructuring" in connection with Stoves' main pension scheme was being considered, and in addition that Mr Maher at least was looking at ways in which the deficit could be eliminated. That would make it more likely that Precis would treat the deficit as a deduction from net assets.

(d) the other factors referred to by the judge in para.243 of his judgment set out above.

(ii) Mr O'Driscoll's communications with Mr Maher and the Glen Dimplex board

By 20 October 2000, Mr O'Driscoll had informed Mr Maher, finance director of Glen Dimplex, about his calculation of 45p. per share. Mr Maher made a note of the conversation, which took place on 10 October 2000. He recorded a net asset figure of £18-18.5 million and a net asset value of £12 million. In his note, he wrote that the restructuring costs were estimated to be £7-8 million, which was believed to be conservative. There was no mention of the pension deficit, but as explained below, Mr Maher became aware of this shortly thereafter.

On 31 October 2000, Mr O'Driscoll made a presentation to the board of Glen Dimplex. He explained that he intended to improve the gross profit of Stoves by relocating the operations of Stoves to Prescot, reducing Stoves' work force, avoiding low margin business and substantial savings on material costs. The respondent says that the key motive for the acquisition was, therefore, the potential in Stoves for substantial profit through cutting costs. Mr O'Driscoll did not explain to the board how he had calculated the proposed offer price of 45p per share.

Slides were prepared for the presentation to the board of Glen Dimplex on 31 October 2000. The respondent points out that these make no reference to a reduction in net asset value for the pension deficit even though Mr Maher was aware of the deficit at the time of making the presentation, as appears from his hand written notes (referred to above). However, the judge found that the pension fund deficit was drawn to the attention of the Glen Dimplex board as this meeting (para. 243) and that finding is not challenged.

The respondent submits that Mr O'Driscoll and Mr Maher did not consider the content of the AVR to be of any interest at all. They had advised their solicitors, DLA, that they were interested in the pension deficit from the perspective of potential redundancies. However, they never told them about its relevance to the offer they were about to make. Mr Maher discussed the AVR with Mr Atkinson of DLA on 2 November 2000. Mr Atkinson recorded that conversation in a note adding "NADA" which he explained meant that nothing of interest had been received on the pension front. Further he recorded in his note that Mr Maher "only had [an/the] actuarial valuation". This was not seen as being of interest. If Precis had been interested in its content, Mr Maher would have asked for a copy at this stage especially as, according to both Mr O'Driscoll and Mr Maher, Mr Maher was well aware that the pension deficit had been taken into account in valuing Stoves.

I do not find these points particularly useful. Mr O'Driscoll and Mr Maher regarded the valuation in the AVR as producing a reasonable figure. The offer price could only be renegotiated with the Stoves Board if Glen Dimplex discovered a significant adverse difference in its financial position as a result of its due diligence enquiries. Because the due diligence enquiries had to be completed quickly, so that the offer could be announced, Glen Dimplex had to take a commercial view about which figures it would investigate further. Given Mercer's professional standing in Glen Dimplex's eyes, the judge was entitled to take the view that nothing particularly turned on the points mentioned in this paragraph.

(iii) Accountants' report

Arthur Andersen made a report to Glen Dimplex as part of the due diligence process. Their report showed that there was a £1m. surplus in the pension fund. This was on the basis of the figures used in the accounts which were prepared on the basis of SSAP 24. The respondent submits that if Precis had been interested in the funding of the pension scheme and in the apparent existence of a deficit of £1.3m., the Arthur Andersen figure would have immediately been of interest to it because it suggested that a deduction to account for the pension deficit might, in fact, be inappropriate. It is improbable that such an inconsistency would have been disregarded if reliance was being placed on the pension deficit.

I do not accept this point. Mr O'Driscoll had his own views as to the usefulness of the SSAP 24 figures, and there was nothing in those circumstances to pursue with Arthur Anderson. Mr O'Driscoll was well aware of the debate in the accounting profession of the shortcomings of SSAP 24. In particular, SSAP 24 gives companies a large number of options for pension cost accounting, and the disclosure requirements do not adequately reveal the relevant pension costs. The shortcomings of SSAP 24 led to the issue in 2000 of Financial Reporting Standard ("FRS") 17. FRS 17 will in due course replace SSAP 24. A principal change brought about by FRS 17 is that actuarial losses in pension schemes must be recognised immediately in the accounts of the employer, and not simply spread over a number of years, as under SSAP 24. FRS 17 will apply even if (as in the case of Stoves) the employer's obligation to fund the deficit is only a moral one. SSAP 24 and FRS 17 apply in the Republic of Ireland.

(iv) DLA's due diligence report

DLA sent their report to Glen Dimplex on 13 November 2000. They did not send a copy of the underlying documents, including the AVR. DLA simply summarised the content of the AVR in its report. The respondent submits that it is unclear why Glen Dimplex would want or need to rely on this summary from DLA to check what they believed to be accurate.

Again, I do not follow this. It would be prudent for an offeror to seek a report by their solicitors on the information obtained in the due diligence enquiry and examined by them.

The respondent submits that if the pension deficit had played a significant part in the calculation of the bid, as Mr O'Driscoll claimed, it is inconceivable that he would not have wanted to obtain an independent actuarial report both as to the reasonableness of the underlying assumptions, to which any AVR is sensitive, and to the likely change in the position in the intervening months (especially as the liabilities of the scheme would have increased since the date of the actuarial report). DLA advised Glen Dimplex to take independent actuarial advice on the information disclosed about the pension schemes, including the pension deficit (and this is relevant to the issue of contributory negligence). However, Glen Dimplex took a commercial view on this. The judge was entitled to conclude that the fact that Glen Dimplex did not take separate advice did not mean that they did not use the figure of £1.3m. in deciding what to pay for Stoves' shares.

The respondent submits that, if Mr O'Driscoll was really interested in the profit he could generate from a turnover of £100,000,000 and his net asset valuation was a mere back of the envelope exercise to present to the board of Stoves, he would have had no interest in the pension deficit of £1.3m. There is some dispute about the number of redundancies which Glen Dimplex were planning, but, if there were a substantial number, this could have reduced the deficit. However, the judge did not make a finding that there was a plan to make a substantial number of redundancies and for the reasons given above an interest in profitability need not exclude a net asset valuation approach.

(v) Mr O'Driscoll's written calculations produced after the event

The respondent relies most heavily on the events following the discovery of the error in May 2001 and the realisation that there might be a claim against Mercer. Mr O'Driscoll contacted DLA to explain how he had valued Stoves. He contends that he told Mr Stone, a solicitor with fifteen years' experience and a partner of DLA since 1993, that, although his memory was clear, he had not made a note of his calculations at the time when he carried out the exercise in October 2000. Mr Stone told him that he should make a careful note of how he had gone about valuing Stoves and calculating the offer price because although his memory of how he had done it was crystal clear at the time (July 2001) it was possible that the matter could take two to three years to come to trial, by which time his memory might have faded. Mr Stone asked Mr O'Driscoll to let him have a copy of a note showing how he had valued the company for his information. Mr O'Driscoll then prepared a two page typewritten note which he sent to Mr Stone.

This note (referred to below as the note of 4 July 2001) explained the background to the valuation of Stoves. It explained that the board of Glen Dimplex had decided to make an offer subject to two conditions. The first condition was that Glen Dimplex would be allowed to undertake specific due diligence work, which would include reviewing the actuarial reports and rules of the pension schemes. The second condition was that the Stoves board would recommend the offer to its shareholders. Glen Dimplex considered that the only basis for valuing the business was net asset value less their estimate of restructuring costs "associated with reorganising the business". The note prepared by Mr O'Driscoll recorded (a) that the price given to Mr Treneman was 46p per share, not 45p, and (b) that the basis of valuation as explained to Mr Treneman was as follows:-

	£ million
Net asset value as at 31 May 2000
less	18.7
(1) Estimate of Restructuring costs	(6.0)
(2) Acquisition costs	(0.5)
=	12.2

It will be noted that the above calculation makes no specific reference to pension deficit. It also refers to a smaller figure for restructuring costs than that given to Mr Treneman, and a slightly different offer price per share. But the essential information conveyed was that a net asset valuation was used, and the deductions from the net asset value as shown by the latest audited accounts were in round terms £6.5m.

Mr Stone was not clear as a result of the conversation how the pension deficit came into the calculation. The respondent submits that he appears to have believed that the pension deficit had been taken into account when calculating the net asset value of £18.7m., but Mr Stone vehemently denied this in cross-examination (day 6/36 – 40).

Despite speaking to Mr O'Driscoll again on 12 July 2000, Mr Stone still did not have a clear understanding as to how the pension deficit had been taken into account. He then had to seek the assistance of Miss Massarono, a partner in DLA specialising in pensions, as to how to calculate the pension deficit from the notes in the accounts. Mr Stone stated in his witness statement that Mr O'Driscoll had on 18 September 2001 confirmed the typewritten note of 4 July 2001 as accurately reflecting his recollection of his calculation as to the value of Stoves.

The judge found (paragraph 197 of his judgment) that Mr Stone did not understand the basis on which Mr O'Driscoll had relied on the pension deficit. The respondent criticises this conclusion and submits that the judge failed to recognise that the reason why Mr Stone was unclear was that Mr O'Driscoll had been unable to give clear instructions as to how he had taken the pension deficit into account. But Mr Stone's evidence was that Mr O'Driscoll had consistently instructed him that he had made a deduction for the pension fund deficit.

Precis has in the course of this litigation disclosed certain privileged documents including a note of a video conference with counsel on 19 October 2001 prepared by one of DLA's trainees. This records that, in response to leading counsel's question whether the deficit was for both pension schemes of Stoves, Mr O'Driscoll said that "he could not confirm this or really explain". The respondent contends that this is inconsistent with a clear understanding on Mr O'Driscoll's part that a deduction was made for the deficit on one scheme. Mr Stone's note of the same response was that he thought it meant the whole deficit of £1.3m. The judge accepted that Mr Stone's uncertainty about this was not consistent with his evidence that he was clear about it at the time (judgment, paragraph 217). As I explain below, both Mr O'Driscoll and Mr Stone thought that the conference note was inaccurate.

When Mr O'Driscoll gave instructions in September 2002 for the purpose of his witness statement, he informed DLA that he had relied on the Stoves 2000 accounts and that, had anything different come to light, action would have been taken. The respondent makes the point that the Stoves 2000 accounts were prepared on the basis that there was a surplus of £1m. in Stoves' pension scheme, but, as I have explained above, note 25 also disclosed the pension fund deficit of £1.3m.

The respondent submits that the judge ought to have concluded that Mr O'Driscoll could not possibly have relied on the pension deficit in the AVR. If he had done so, he would have been able to give clear instructions to DLA at the outset and would have shown in his typed note how the pension deficit had been included in his calculation of the value of the shares. The judge (on the respondent's submission) failed to consider the effect of this evidence or to understand its significance and this resulted in his arriving at a conclusion as to reliance which he should not have reached. But this is only a valid criticism of the judge if the deficit was not included in restructuring costs, and as I have explained above, the judge was in my judgment entitled to take the view that the pension fund deficit was included in that item.

The respondent also relies on a manuscript "calculation note" dated 3 October 2000 prepared by Mr O'Driscoll. This has to be contrasted with the note of 4 July 2001 referred to above. In response to Mr Stone's request to flesh out his valuation of Stoves Mr O'Driscoll prepared a typewritten version in similar form as follows:-

"3/10/2000

Stoves – Value

Real results for 31.5.2000 is a loss

£000

Profit Pre-tax 55

Adjust for negative goodwill

Write-back
(236)

(181)

Situation is likely to get worse.

Is it in breach of bank covenants.

Interest cover.

Doesn't appear to provide for warranty properly.

Pension fund fund 5 April 1999 in deficit.

£'M1	%
24.5	95
24.5 x 100 =	25.8
95	(24.5)
Deficit	1.3

Need to close Warrington factory (cost?) – Assume neutral from a cash flow perspective.

Site may have residential value.

Would appear to be buying certain listings

Production flow – very poor

Net book value 31/5/2000	18.7
less
Pension deficit	(1.3)
Acquisition costs (say)	(0.5)
Restructuring costs (Range £4.5 – 5.0M)	(4.75)
Revised NBV	12.2
NBV per share	12.2 = 46p.
	26.5

If we are to make an offer – 45 pence(!)"

I note that this document treats the pension deficit as separate from, but ahead of, restructuring costs. But I doubt if Mr O'Driscoll's evidence on restructuring costs (quoted above) could be rejected simply because he omitted to use the word "other" in front of "restructuring costs" in this note. Moreover, according to this note, the aggregate of the deductions from the net book value of Stoves (as shown by the Stoves 2000 accounts) was £6.8m., giving a revised net book value of £12.2m., and this figure for the adjusted net book value of Stoves was used as the basis of calculating the offer price of 45p. per share. In round terms, all these figures are comparable with the equivalent figures used in the note of 4 July 2001 and to that extent the note of 4 July 2001 is corroborative of the calculation note.

The respondent contends that the calculation note was manufactured by Mr O'Driscoll after the event to look like a contemporaneous document. It submits that the judge made no real findings about the calculation note other than to state that Mr O'Driscoll was not dishonest. He simply found that the significant disparities between his witness statements could be explained on the grounds that he did not take trouble in preparing court documents. The respondent contends that the judge did not confront the problems raised by the calculation note, such as the fact that it was dated 3 October 2000, was drafted in the present tense and was understood by all the lawyers who attended the video conference on 19 October 2001 to be a contemporaneous note of his calculations. The calculation note was also filed in rough chronological order in Mr O'Driscoll's files. In addition, it was sent to DLA in a 38 page fax containing important contemporaneous documents extracted by Mr O'Driscoll from his own file. Moreover, prior to October 2002, Mr O'Driscoll was dealing personally with the litigation and in that capacity was sent copies of correspondence from Mercer's solicitors as well as letters drafted by DLA. It is also clear that Mr O'Driscoll would in practice read these letters and comment on them. Yet he failed to spot that the calculation note was being advanced by DLA as a contemporaneous document. The respondent submits that no reasonable intelligent man could have misread the correspondence as Mr O'Driscoll did.

The respondent contends that the judge failed to consider the possible significance of the fact that Mr O'Driscoll informed DLA that the calculation note was not contemporaneous in November 2002 at a time when Mercer's solicitors had threatened to submit it for forensic analysis. It also submits that if the judge had addressed these points he would have come to the conclusion that the calculation note was manufactured by Mr O'Driscoll after the event to bolster his case. Had he so found, he would (on the respondent's submission) also have found that Mr O'Driscoll was dishonest, and he would have found that Mr O'Driscoll had not in fact relied on the AVR.

All these points were put to Mr O'Driscoll in cross-examination. He accepted that he had mistakenly said in his second witness statement that the calculation note was prepared in July 2001 when it was in fact prepared in about September of that year. He said the calculation note was in the present tense because he was asked to do the calculation as he had done it on that date. That is why he put that date at the top of the note. He would not personally have filed it and he hazarded the guess that his secretary must have put it in the relevant transaction file in date order. He did not look "at the minutiae" of his solicitors' drafts. He had never said the note was contemporaneous. He had told his solicitor on two occasions that he did not have any contemporaneous documents. He did not understand the significance his solicitors were giving to the calculation note. At the relevant time, the challenge from Mercers was as to whether he had valued Stoves on a net asset basis at all. In his cross-examination, he was referred to the statement in the note of the video-conference: "SD[Mr O'Driscoll] ... still has his original contemporaneous handwritten note". The exchange was as follows:-

"Q. ... you deny you ever told Mr Stone or leading counsel that you had an original contemporaneous handwritten note?

A. I deny that I ever used the word contemporaneous. It is not in my vocabulary. That is a legal term I have never used. I am certain that I would have not used the word contemporaneous.

Q. What about the word original?

A. I am not sure about the word original but I would be satisfied that I used the word handwritten.

Q. You may well have said original handwritten note?

A. I may well have said, yes, I have – and I am speculating here but I would certainly have used the word handwritten note because I had a handwritten note at that point in time.

Q. The word original conveys the idea that it is a document that was created at the time, doesn't it?

A. I don't know the legal term for the word original.

Q. I am not asking for a legal term. I am asking you to confirm what it means as a matter of plain English. Does original not mean to you something created at the time rather than after the event?

A. It doesn't in English to me, my Lord.

Q. What does it mean to you?

A. That I have a handwritten note and it is an original, it is not a photocopy.

Q. Is what you sent to Mr Stone on 4^th July an original typed note?

A. It would be an original typed note.

Q. It is quite clear that listening to you, Mr O'Driscoll, leading counsel, Mr Stone and trainee all thought you had told your legal team that you had an original contemporaneous note?

A. That is quite clear. However, Mr Stone had been told by me on two prior occasions that there were no original notes – sorry, that there were no notes written documenting this procedure at the time when the company was valued. I didn't hear Eureka coming back to me to say we have found the Holy Grail, so I wasn't on notice that this was being taken as what has now been described as a contemporaneous note." (Day 3/100)