England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION (COMMERCIAL COURT)
Hon Mr Justice Moore-Bick
[2005] EWHC 279 (Comm)

		Royal Courts of Justice Strand, London, WC2A 2LL
		13th June 2006

Lord Justice Longmore:

1. Introduction

The principles of Islam, from which Sharia law has derived, impose important restrictions on the circumstances in which money may be invested to produce a profit. These principles include the prohibition on usury which is contained in the Koran particularly in the books of Al-Baqara (ii.275-6), Al-Imran (iii.130) and Ar-Rum (xxx.39). Exodus (22.25) and Deuteronomy (23.19) contain similar injunctions. As a result, banks offering services to Islamic clients have developed types of investment vehicles structured in such a way that the income from such vehicles is consistent with Islamic principles. These vehicles are known as "Sharia-compliant" funds. This appeal concerns one such fund, assets of which were invested in operating leases of equipment which provided returns for investors in the form of rental payments together with the value of the leased equipment at the end of the rental period. It is said (and the judge has found) that many of the leases were acquired by the relevant fund at too great a value and the fund has, as a result, suffered serious losses. The first question that arises is whether the defendants in these proceedings owed any duty of care to the fund to exercise proper care in relation to the valuation of the leases. In his judgment [2005] EWHC 279 (Comm) Moore-Bick J (as he then was) has felicitously described the background facts in a way on which I could not improve and can only usefully repeat.

2. In 1994 the defendant Ahli United Bank (UK) Plc, then known as The United Bank of Kuwait Plc (and thus conveniently referred to as "UBK" hereafter), established through its Islamic Investment Banking Unit an income fund whose assets were invested in operating leases of equipment. Most of the leases in which the fund invested related to equipment used by large commercial organisations in the United States. The fund was known as the "IIBU II Fund" and was marketed to the bank's customers in Kuwait and elsewhere. It is convenient to call this fund the "UBK Fund". The person primarily responsible for the day to day operation of the UBK Fund at the time in question was Mr Derek Weist subject to his superior Mr Duncan Smith.
3. The first claimant, Riyad Bank, is a major commercial bank based in Saudi Arabia. The second claimant, RBE London Ltd ("RBE"), is a wholly-owned subsidiary of Riyad Bank which was incorporated in England for the purposes of carrying on the private banking business of Riyad Bank, both in this country and elsewhere. From 1993 it began to develop products which were marketed through Riyad Bank's network of branches in Saudi Arabia. Its customers included many wealthy individuals and RBE was therefore particularly interested in developing Sharia-compliant investment products in order to meet their requirements. At the time of the events giving rise to this action Mr Keith Scott was managing director of RBE and chairman of its Product Development Committee. Ms Najwa Al-Tunisi was manager of the Investment Department.
4. The head of UBK's Islamic Investment Banking Unit ("IIBU") was Mr Duncan Smith. He and one of his assistants, Mr Richard Thomas, became acquainted with Ms Al-Tunisi when they worked together at another bank some years prior to the events with which this appeal is concerned. In about December 1995 Mr Smith and Mr Thomas approached RBE through Ms Al-Tunisi to enquire whether Riyad Bank would be interested in marketing the UBK Fund through its branches in Saudi Arabia. Following discussions and a formal presentation by Mr Smith and Mr Thomas to various senior members of RBE, including Mr Scott and Mr Nabil Al-Ajroush, Mr Scott's deputy, a proposal along those lines was put to RBE's Investment Committee, but the committee was not willing to market a product bearing the name of UBK because it feared that promoting a fund established by a smaller competitor would damage its own standing with Saudi investors.
5. However, the idea of a leasing fund as a form of investment vehicle suitable for Islamic investors still held strong appeal for RBE and further discussions soon took place to see whether it could be developed in a different way. Mr Smith and Mr Thomas suggested that RBE should set up its own fund on the same lines as the UBK Fund using IIBU as its technical adviser. Several months of discussions eventually culminated in the signing of Heads of Agreement in November 1996 setting out the framework under which RBE and UBK, acting through IIBU, would co-operate in the establishment of a leasing fund in the form of an Irish-domiciled variable capital company. The services that it was intended UBK should provide in connection with the project included devising a suitable structure for the fund and workable documentation, recommending and engaging suitable lease managers, recommending suitable custodians, administrators, legal advisers and auditors for the fund, devising suitable operating procedures and, most importantly, providing technical services in connection with the operation of the fund, such as recommending suitable leases for purchase by the fund and the analysis of lease managers' estimates of residual values and lease renewals. For its part it was intended that RBE should draw up a business plan for the fund, review and approve the fund documentation and administrative procedures drafted by UBK and act as general investment adviser to the fund.
6. During the next few months the parties devoted themselves to setting up the structure of the fund. As a first step RBE and UBK entered into a Technical Services Agreement ("the TSA") dated 30th May 1997 which defined in some detail the services which UBK was to render in connection with the operation of the fund. A company was then acquired to embody the fund itself and on 14th October 1997 its name was changed to RBE Ijara Fund Plc, the third claimant in these proceedings. At the same time changes were made to its memorandum and articles of association to enable it to act as an open-ended investment fund, enabling investors to enter and leave the fund at times convenient to themselves. On the same date the company (to which I shall now refer as "the Fund") entered into an Administration Agreement with International Fund Managers (Ireland) Ltd ("IFMI"), a Custodian Agreement with Barings (Ireland) Ltd ("BIL") and an Investment Advisory Agreement ("the IAA") with RBE under which RBE agreed to act as its general investment adviser. Also on 14th October 1997 the Fund published its prospectus setting out essential information about its structure, the nature of its proposed investments and the manner of its operation. The Fund's structure was in all respects closely modelled on that of the UBK Fund. Its directors were Mr Scott, Mr Basel Algadhib (a senior employee of Riyad Bank in Riyadh), Ms Al-Tunisi, Mr Victor Holmes (the managing director of IFMI) and Ms Neena Aeri (an accountant employed by IFMI).
7. The administration of the Fund revolved around 'Dealing Days' on which investors could purchase and redeem shares, distributions were made to existing shareholders and new leases were acquired for investment purposes. The first Dealing Day was 25th November 1997 when the Fund purchased its first leases and the first investors bought shares. Dealing Days occurred thereafter throughout the life of the Fund, generally at quarterly intervals, but sometimes more frequently. The last Dealing Day on which new leases were acquired was 29th February 2000, although none were acquired on the advice of UBK after 24th August 1999.
8. The Fund continued in operation until the first signs of impending difficulties emerged in early 2000. In April 2000 UBK informed RBE that some of the leases in the UBK Fund had not performed as well as had been expected and that as a result the value of the fund might now be overestimated. UBK had commissioned a valuation of the whole of its fund's portfolio and suggested that it might be prudent for RBE to do the same. Although they were not unduly concerned at that stage, on 24th April 2000 the directors instructed Independent Equipment Company ("IEC"), a well-respected American equipment appraiser, to carry out a valuation of the Fund's assets. IEC's report delivered on 19th May suggested that the value of the Fund might be over-stated by as much as 20%, the range of values being between 100% and 80% of the estimated values. On 24th May the directors instructed another specialist appraiser, Murray Devine, to carry out a second valuation, intending to await its report before making a decision on the Fund's future, but the next Dealing Day was 30th May and applications had already been made for redemption of shares in an amount of about US$7 million. Given the difficulties in establishing the true value of the Fund, the board decided at a meeting held on 30th May to suspend the Fund with immediate effect.
9. Murray Devine's report was received on 2nd June. It was a little more optimistic than that of IEC since it valued the assets at somewhere between 85% and 105% of the figure which the Fund itself had previously placed on them. Nonetheless, given the range of values indicated by Murray Devine, it appeared quite likely that there would be a shortfall. In these circumstances Riyad Bank decided in the interests of preserving its relationship with the existing investors and its wider commercial reputation to offer to purchase all the shares in the Fund at their par value of US$100 a share. The bank, which already owned shares in the Fund with a par value of US$1 million, thereby acquired the whole of the remaining share capital at a total price of a little under US$75 million.
10. The general economic environment prevailing immediately before and during the period in which the Fund was established and remained open to investors forms a backdrop to the events with which this case is concerned and it is convenient to refer to it briefly at this point. It was agreed that the leasing market in the United States and the related market for used equipment were both very buoyant during 1997 and 1998. Activity levelled off in 1999 leading to the first signs of a significant downturn during the last quarter of that year. A clear decline was apparent by the early part of 2000 which accelerated during the remainder of that year and throughout 2001. During 2002 the market continued to decline, but less rapidly.
11. In paragraphs 10-14 of his judgment, the judge set out the way in which the Fund operated. All it is necessary to say for the purpose of this appeal is that the leases were acquired from three leasing companies in the United States, referred to as asset managers in the TSA. Before Dealing Days there were discussions between RBE and UBK about possible leases which could be purchased and a Technical Services Proposal was formulated setting out the nature of the equipment, the number of rental payments, any assumed renewal and the estimated renewal value ("ERV") of the equipment at the end of the rental period. The judge found that the main source of advice about the leases was Mr Weist who, it will be remembered, was the person primarily responsible for the day to day operation of the UBK Fund. He attended every board meeting of the Fund with which this appeal is concerned (save one on 5th August 1999) and took an active part in discussions. He also prepared three Due Diligence Reports in October 1998, April and October 1999, containing detailed reviews of the leases in the Fund's portfolios.
12. Issues

The claimants assert that, in breach of the TSA, UBK failed to exercise the requisite degree of care in analysing and evaluating the information about the leases which it received from the asset managers, failed to observe that the renewal assumptions and ERVs put forward by the asset managers were questionable and negligently advised the Fund to pay more for the leases than they were really worth. They further asserted that UBK owed a duty of care in tort directly to the Fund.

13. One would not normally think that it much mattered whether UBK was in breach of their contractual duty of care to RBE or in breach of a tortious duty of care to the Fund. But it emerged during the course of argument that it might matter a great deal because the Fund (which had suffered the loss) had never made a claim under the Investment Advisory Agreement against RBE who had agreed to act as the Fund's general investment adviser. UBK said that it was now too late to do so with the result that RBE had not suffered any loss since they could never be liable to the Fund. It is apparently for this reason that, according to UBK, the claim had to succeed, if at all, as a claim in tort by the Fund. UBK submitted that no duty of care could arise because the contractual structure was inconsistent with any such duty. This led to an alternative claim by RBE and Riyad Bank that they could recover the Fund's loss pursuant to what have become known as the exceptions to the principle (set out in The Albazero [1977] AC 774) that a claimant can normally recover only for his own loss and not for the loss of others.
14. UKB did not, in this court, seek to say that if they did owe a duty of care, there was no breach of that duty but the judge was asked to answer several questions relevant to the calculation of damages for breach of duty and this court has granted permission to appeal the answer given to four of those questions.
15. Duty of care owed to the Fund by UBK?

In relation to this question the judge made important findings of fact viz.:

(1) After UBK originally gave RBE its prospectus referring to the informed advice rendered by UBK, Ms Al-Tunisi wrote a discussion paper in January 1996 setting out her understanding of how the UBK Fund operated in preparation for a meeting of 19th January at which Mr Smith and Mr Thomas of UBK met RBE personnel. The paper was based on information provided by Mr Smith and Mr Weist and emphasised the professional advice taken in determining the renewal value of the leases and regular due diligence work undertaken by UBK. Nobody suggested that Ms Al-Tunisi's understanding was in any way mistaken and Mr Smith emphasised that investment policies were conservative repeating that UBK's own due diligence reports were based on their own experience and expertise supported by independent experts where necessary. (Judgment paras. 34, 38 and 39);

(2) The method chosen to circumvent the objections of Riyad Bank's Investment Committee to the Bank's clients dealing directly with the UBK Fund was to engage UBK to set up a mirror image of that fund on behalf of RBE. UBK continually made much of its own practical experience in producing a satisfactory legal structure and of the fact that it had acquired significant expertise in managing leased assets. Mr Smith, Mr Thomas and Mr Weist of UBK were well aware that none of those with whom they were dealing at RBE had any experience of setting up or managing an investment fund based on leased assets. (Judgment para. 54);

(3) The fact that the RBE fund was to be established as a mirror image of the UBK Fund coupled with the insistence of the Investment Committee that UBK should not be directly involved in its management structure had two consequences. The first was that the Fund would require a General Investment Manager to give advice to the directors on the identification and acquisition of suitable leases, carry out reviews of ERVs and other relevant information about leases offered to the Fund and provide other advice as necessary for the purposes of valuing its assets. The second was that the only organisation that could plausibly fulfil that role was RBE itself, or one of its subsidiaries, despite the fact that, as everyone was aware, it did not have the knowledge or experience to do so. It must have been obvious to UBK, therefore, not only that RBE would rely on its advice in deciding how to structure the Fund, but that once the board of the Fund became the body ultimately responsible for investment decisions it would rely on the advice emanating from UBK in deciding whether to buy leases offered to it. That expectation was reflected in the Outline Proposal and the draft Administrative Procedures, each of which specifically contemplated that UBK would attend board meetings of the Fund in an advisory capacity as Mr Weist of UBK did, in fact, do. (Judgment para. 55);

(4) In the light of the above UBK professed to have relevant expertise which they offered to make available to the Fund in the form of advice on (1) the acceptability of ERVs and renewals as put forward by the asset managers and (2) the suitability of leases offered as investments to the Fund. UBK was well aware that RBE would be likely to pass this advice on to the Fund without qualification since RBE could not exercise any independent judgment. (Judgment para. 56).

16. It was on the basis of these findings of fact that the judge decided that UBK did indeed owe a duty of care to the Fund. This duty was not to be negligent in the giving of advice on the value of the leased assets and was of the kind sanctioned by the House of Lords in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 and Henderson v Merrett Syndicates Ltd [1995] 2 AC 145. In coming to this conclusion the judge approached the matter in two stages asking first whether there was in the circumstances a duty on UBK apart from any contractual considerations and then considering whether the contractual structure adopted by the parties militated against the imposition of a duty of care.
17. For the purpose of this appeal UBK instructed Mr Mark Howard QC to present the arguments on this part of the case. He submitted that the judge was wrong to adopt a two stage approach because there was only one question viz. whether, in all the circumstances of the case, including the positive decision made that there was to be no contractual connection between the Fund and UBK, UBK owed a duty of care in law to the Fund. He relied on the contractual structure adopted by the parties, the terms of the contracts between UBK and RBE on the one hand and RBE and the Fund on the other and on various authorities to submit that the right conclusion could only be that UBK owed no duty of care in tort to the Fund.
18. Before considering these arguments, it is appropriate to say something in relation to Henderson v Merrett which figured largely in the parties' arguments. In that case the question arose whether managing agents at Lloyd's owed a tortious duty of care to Names who contracted with members' agents to underwrite on their behalf who, in turn, subcontracted that responsibility to such managing agents. These Names were referred to as Indirect Names to distinguish them from Direct Names who had a contract directly with the managing agents. The House of Lords decided that the negligent performance of services could give rise to liability just as much as the making of a negligent statement if the requisites of a duty of care existed. Following Hedley Byrne v Heller they held that such duty did exist if there was an assumption of responsibility to another in a relationship which was akin to or equivalent to contract. Lord Goff of Chieveley (with whom the rest of their Lordships agreed) summarised the issues before the court in the following way on page 176:-

"the question falls to be considered whether a like obligation rested upon the managing agents in tort, so that the managing agents which were also members' agents owed such a duty of care in tort to direct Names, with the effect that the direct Names had alternative remedies, in contract and tort, against the managing agents; and whether managing agents which were not also members' agents owed such a duty of care in tort to indirect Names, so that the indirect Names had a remedy in tort against the managing agents, notwithstanding the existence of a contractual structure embracing indirect Names, members' agents and managing agents, under which such a duty was owed in contract by the managing agents to the members' agents, and by the members' agents to the indirect Names."

He held that the prescribed forms of agency and sub-agency agreements created a chain of mutually exclusive contractual relationships so that the managing agents owed no contractual obligations to the indirect Names. Nevertheless he held that the managing agents did owe a duty of care to those Names, pointing out that there was no material difference between the contractual duty of care owed to the members' agents by the managing agents on the one hand and the duty that would be owed to the indirect Names in tort under Hedley Byrne principles on the other. Only then did he deal with the submission

"that the indirect Names and the managing agents, as parties to the chain of contracts contained in the relevant agency and sub-agency agreements, must be taken to have thereby structured their relationship so as to exclude any duty of care owed directly by the managing agents to the indirect Names in tort" (see 195A).

19. Having decided that this submission was wrong, he added at page 195G:-

"I wish however to add that I strongly suspect that the situation which arises in the present case is most unusual; and that in many cases in which a contractual chain comparable to that in the present case is constructed it may well prove to be inconsistent with an assumption of responsibility which has the effect of, so to speak, short circuiting the contractual structure so put in place by the parties. It cannot therefore be inferred from the present case that other sub-agents will be held directly liable to the agent's principal in tort. Let me take the analogy of the common case of an ordinary building contract, under which main contractors contract with the building owner for the construction of the relevant building, and the main contractor sub-contracts with sub-contractors or suppliers (often nominated by the building owner) for the performance of work or the supply of materials in accordance with standards and subject to terms established in the sub-contract. I put on one side cases in which the sub-contractor causes physical damage to property of the building owner, where the claim does not depend on an assumption of responsibility by the sub-contractor to the building owner; though the sub-contractor may be protected from liability by a contractual exemption clause authorised by the building owner. But if the sub-contracted work or materials do not in the result conform to the required standard, it will not ordinarily be open to the building owner to sue the sub-contractor or supplier direct under the Hedley Byrne principle, claiming damages from him on the basis that he has been negligent in relation to the performance of his functions. For there is generally no assumption of responsibility by the sub-contractor or supplier direct to the building owner, the parties having so structured their relationship that it is inconsistent with any such assumption of responsibility."

20. Mr Brindle QC for the Fund relied on the first and second of the above passages to justify the two stage approach adopted. He submitted that Lord Goff had himself adopted that approach and that Moore-Bick J could not therefore be criticised for having done so. Mr Howard relied on the third passage and emphasised that in a structured contractual relationship (or a contractual chain as he called it) there was, in the great majority of cases, just no room for a duty of care in tort which by-passed the contractual chain. He said that the reason why a duty had been held to exist in Henderson v Merrett was that the Names had no choice other than to come into a pre-existing contractual structure and that it was for this reason that the House considered it right that there should be a tortious duty in spite of the fact that the indirect Names had contractual rights against the members' agents.
21. One stage or two stage approach?

For my part I regard this as only a terminological debate. Whether one poses a single composite question or a twofold question asking first whether there is, apart from contractual considerations, a duty of care as a matter of general law and secondly whether contractual considerations militate against the imposition of such a duty cannot, in my judgment, matter. The conclusion will be the same in each eventuality. I agree with Mr Brindle that Lord Goff did, in the course of expressing his views, approach the matter in two stages. This may have been as much for clarity of exposition as for any other reason. I do not consider the judge can be criticised for adopting the same approach. I am satisfied that if the judge had asked one composite question, he would have answered it in the same way. The question is whether he was right.

22. The contractual structure

I turn then to the question of substance. Mr Howard relied not merely on the existence of the separate agreements (the TSA between UBK and RBE and the IAA between RBE and the Fund) but also on the fact that there had been every opportunity for UBK and the Fund to enter a contractual relationship but the Bank, RBE and the Fund itself (once it came into existence as a corporate entity) had deliberately decided that the Fund was not to have a contractual relationship with UBK. This was, he submitted, an entirely different position from Henderson v Merrett where the indirect Names had no choice but to have no contractual relationship with the managing agents. Both parties also relied on the terms of the contracts in support of their arguments and it is necessary to say a little bit more about them.

23. The judge set out the terms of an Outline Proposal dated 29th April 1996 and the terms of the Heads of Agreement sent by UBK to RBE on 23rd July 1996 signed by RBE in November of that year. In January 1997 draft administrative procedures were sent by Mr Weist to Ms Al-Tunisi for her consideration. The TSA was then executed on 30th May 1997. As the judge observed (para. 49), although the Fund would not come into being until October 1997, its essential structure had been agreed in the Outline Proposal and the Heads of Agreement so as to reflect the structure of the UBK Fund with RBE (or possibly a subsidiary) taking on the role of General Investment Adviser. It was also clear that pursuant to the TSA, UBK as Technical Services Consultant ("the TSC") would provide the information and advice needed to perform that role.
24. The TSA (which was governed by English law) had the following, among other, provisions:-

"The Fund Advisor [RBE] hereby engages the TSC [UBK] . . . . as a technical consultant to the Fund Advisor . . . . to perform the following services:

. . . . . . . . . . . . . . . . . . . .

2.2 To evaluate and propose suitable Asset Managers (after undertaking appropriate due diligence work) for the proposed Fund . . . .

. . . . . . . . . . . . . . . . . . . .

2.5 To provide on-going technical services to the Fund Advisor as contemplated by the Administrative Procedures, including, but not limited to, the following:

(a) evaluation and proposal of specific lessees;

(b) review of portfolio diversification criteria;

(c) analysis of the Asset Managers' estimate of residual value and renewal assumptions, with suitable amendments if appropriate;

(d) evaluation and proposal of specific leases for the Fund which are in line with [the] Fund's objectives (as may be notified to the TSC by the Fund Advisor from time to time);

(e) provision of regular information on the Fund, such as portfolio mix, performance, etc.

2.6 The TSC shall use its best endeavours to ensure that all leases recommended by the TSC hereunder shall comply with the selection criteria used by the TSC in connection with [the] IIBU Fund

. . . . . . . . . . . . . . . . . . . .

2.8 To perform other related tasks, as the Fund Advisor may reasonably specify from time to time in order to comply with [the] Administrative Procedures and the Fund Advisor's obligations under the Investment Advisory Agreement to help the Fund to be devised, launched and operated in a manner that complies with relevant legal, regulatory, taxation, asset management and credit matters.

. . . . . . . . . . . . . . . . . . . .

4 RESPONSIBILITY AND INDEMNITY

4.1 The Fund Advisor acknowledges . . . . that all investment decisions and decisions with respect to the management of the Fund shall be solely made by the directors of the Fund, again as advised by the Fund Advisor. However, the TSC shall be obliged to exercise all reasonable care in the performance of its duties under this Agreement, taking into account the level of experience and expertise which the TSC has, such experience and expertise being based on its operation of IIBU fund II Plc."

Mr Howard relied particularly on clause 4.1 to show that the intention of the parties was that the Directors of the Fund were to be the sole decision makers in relation to the management of the Fund as advised by RBE as the Fund Advisor.

25. The IAA, made between the Fund and RBE on 14th October 1997, recited the Fund's wish to appoint RBE to advise as to the investment and reinvestment of the assets of the Fund in leases and to provide investment advice and other services. Among other terms there were the following:-

"2. APPOINTMENT OF THE GENERAL INVESTMENT ADVISOR

2.1. The Company [viz the Fund] HEREBY APPOINTS the General Investment Advisor [viz RBE] and the General Investment Advisor hereby agrees to advise the Company with effect from the date hereof as to the investment and reinvestment of the assets of the Company in Leases in accordance with the investment restrictions laid down by the Company from time to time, the provisions of the Articles, the Prospectus, the Act and the Notices and in order to achieve the investment objectives and policies from time to time laid down by the Company until its appointment shall be terminated as hereinafter provided.

. . . . . . . . . . . . . . . . . . . .

3. DUTIES OF THE GENERAL INVESTMENT ADVISOR

3.1. Without prejudice to the generality of Clause 2.1, where the General Investment Advisor acts as an advisor it shall on behalf of the Company:-

3.1.1. research and evaluate opportunities for possible investment by the Company in Leases and negotiate suitable terms for the acquisition and disposal of Investments;

3.1.2. keep under review the Investments for the time being and, as circumstances may require, recommend changes in such Investments;

. . . . . . . . . . . . . . . . . . . .

3.1.6. advise the Technical Services Consultant on all actions which it appears to the General Investment Advisor would be advantageous to the Company in implementing the investment policies of the Company;

3.1.7. analyse the performance of current Investments of the Company;

3.1.8. advise on the appointment and retirement of leasing advisors, monitor their performance and recommend allocation of assets amongst them.

. . . . . . . . . . . . . . . . . . . .

10. LIABILITY OF THE GENERAL INVESTMENT ADVISOR

10.2. The General Investment Advisor shall not be liable to the Company or any Shareholder of the Company or otherwise for any error of judgement or loss or disadvantage suffered by the Company or any such Shareholder in connection with the subject matter of this Agreement or any matter or thing done or omitted to be done by the General Investment Advisor in pursuance thereof . . . . howsoever any such loss may have occurred unless such loss or disadvantage arises from negligence, bad faith, fraud, reckless disregard or wilful default in the performance or non-performance by the General Investment Advisor its delegate or persons designated by it of its obligations or duties."

26. There was argument whether the contractual duties of care imposed by the TSA on UBK and the IAA on RBE were co-terminous. Mr Howard submitted that they were (although it was too late now for the Fund to rely on any breach of the IAA by RBE); Mr Brindle submitted that there was in fact no liability on the part of RBE in contract to the Fund by reason of clause 10.2 which exempted RBE from liability in all cases other than their own personal negligence – which had not occurred. This consideration was then said to support the existence of a duty of care owed directly by UBK to the Fund. The judge decided that, although different wording was used, the substance of the agreements was the same so that if negligence had occurred both RBE and UBK would be contractually liable. I agree with the judge, but do not consider that this consideration can, in any way, be decisive of the real question between the parties viz whether UBK assumed a responsibility to the Fund.
27. So does the existence of the contractual structure as I have outlined it or do the terms of the respective contracts mean that there is no room for a duty of care in relation to advice tendered by UBK or services rendered by them?
28. However the matter is approached, it seems to me that the findings of the judge which I have set out in paragraph 15 above are decisive of this question and, in the light of those findings, I agree with the judge's conclusion. The present case is not exactly a typical "chain contract". UBK's strongest point is that there was a specific decision not to have any contractual relationship between the Fund and the UBK but that is, to my mind, a neutral consideration until one knows what the reason for that decision was. It might very well be that such a decision would, on different facts, indicate an intention not to have any legal relationship of any kind so that the right decision would be that there was never any intention to assume responsibility. But in this case the decision was made because the First Claimants as a Saudi Arabian bank did not think that it would be as attractive to their potential investors to be directly associated with a Kuwaiti investment fund as it would be for them to be associated with a Saudi investment fund. The fact that UBK were happy to accept that state of affairs says nothing about any assumption of responsibility. Rather the opposite: as the judge has held, the earlier discussions emphasised the quality of UBK's experience and dedication to the nature of the investment vehicle which they created. That experience and dedication was never intended to evaporate when the fund scheme was set up, particularly since all relevant personnel knew that UBK had the relevant experience and professional expertise while RBE did not.
29. Nor do I consider that the first sentence of clause 4 of the TSA can bear the weight which Mr Howard sought to place upon it. It is natural enough to provide that the Directors of the Fund are responsible for investment decisions as advised by the Fund Advisor. That indeed did become the position under the IAA. But that does not amount (and was not argued to amount) to a disclaimer of liability. It is not clear enough to constitute any such thing and, once that is accepted, the provision is neutral on the question of assumption of any duty of care to the Fund which had, at that stage, in May 1997 not even come into existence, although it was contemplated that it would exist at a future date.
30. The question remains why it is that Lord Goff "strongly suspected" that the imposition of a duty of care in cases where a contractual chain existed would be "most unusual". It is possible he used the phrase because, in most cases of a contractual chain, it would simply be unnecessary for a party to by-pass the chain. It is perhaps more likely that he was simply not considering cases such as the present where direct and substantial contact has occurred between parties who are subsequently separated by a contractual chain. It is indeed unusual that a judge can make the findings of fact which Moore-Bick J made in the present case in relation to conduct of parties who for reasons that seem good to them (but are irrelevant to questions of assumption of responsibility) decide in the event not to enter into contractual relations. Likewise Professor Jane Stapleton's illuminating article about alternative opportunities for deterrence (1995) 111 LQR 301, in which she makes the point that generally speaking the law of tort should not encourage a free ride by those who could make contracts but do not, does not consider a case such as the present.
31. Authority

Mr Howard placed considerable reliance on the speech of Lord Steyn (with whom the rest of the House of Lords concurred) in Williams v Natural Life Health Foods [1998] 1 WLR 830. Lord Steyn there emphasised that, before a duty to take care to avoid economic loss by negligent misstatement could arise on the part of a director of a company with whom the claimant had contracted, there had to be an assumption of responsibility by the proposed defendant to the claimant which meant that there had to be conduct communicated to the claimant by which the claimant could reasonably expect that responsibly was being assumed to him. In the case of a company employee it is natural to suppose that even a senior director is doing no more than his duty to his company when he makes statements to a potential customer. The present case is not the same, since not only is UBK an entity in its own right (not an employee of RBE) but there is no doubt that representations were made, across the line, to persons who in due course would, and did, become representatives of the Fund. It was entirely reasonable for the Fund and its representatives to conclude the UBK was indeed assuming a duty to it.

32. Mr Howard then relied on building cases such as Simaan General Contracting Co v Pilkington Glass Ltd (No 2) [1988 QB 758 and Pacific Associate Inc v Baxter [1990] 1 QB 993 for the proposition that where there is a contractual chain, that chain should not be by-passed by a claim in tort. As Lord Goff said in Henderson v Merrett that is, indeed, the usual position. But neither of those authorities considered a case where discussions and representations were made directly to the party who, in the event, suffered loss. There cannot be a general proposition that, just because a chain exists, no responsibility for advice is ever assumed to a non-contractual party. It all depends on the facts. As the judge said in paragraph 67 of his judgment:-

". . . the manner in which much of that advice was expected to be and was given, namely by the attendance of Mr Weist at meetings of the Fund's board, reinforces the conclusion that it did, in fact, assume such a responsibility."

33. I entirely agree and would hold that UBK did indeed owe a duty of care to the Fund in relation to the valuation of the leases it offered to RBE for the Fund to buy. It is now accepted that UBK did not carry out any such evaluation or analysis as was necessary, if it were to exercise reasonable care to ensure that its advice to the Fund was sound. Subject to the specific points made about the calculation of the sum to which the Fund is entitled by way of damages, I would uphold the judge in principle. On these points I have nothing to add to the judgment of Neuberger LJ.
34. That makes it no more necessary for this court than it was for the judge to consider the claim made by RBE in contract for the Fund's loss. The scope of the exceptions to the principle that normally a claimant can recover only for its own loss is not well-defined and it would be unwise to add unnecessarily to the authorities on that matter.

Lord Justice Neuberger:

35. The basic facts relating to this appeal are set out in paragraphs 1 to 11, 15, and 23 to 25 of the judgment of Longmore LJ. The appeal involves two rather different types of issue. The first is whether UBK owed a duty of care to the Fund, when analysing, valuing and advising on leases (or, more accurately, reversions on leases) which the Fund was contemplating purchasing. The second issue, which arises if UBK owed such a duty, involves considering three principles which the judge decided should be applied when determining whether, and to what extent, UBK was in breach of its duty in relation to each lease which the Fund purchased pursuant to its advice.
36. The Duty of Care Issue

I have read, in draft, the judgments of Buxton and Longmore LJJ dealing with the question of whether the Fund was owed a duty of care by UBK, and I agree with their conclusions and their reasoning. Nonetheless, I would like to say something about this issue, partly because the point is, as Buxton LJ observes, apparently of some wider interest, and partly because of Mr Howard's principal argument. That argument was that it is inappropriate to permit the Fund to invoke the law of tort in order to sue UBK direct for negligent valuation advice, when the parties (i.e. the Fund, RBE and UBK) had structured their contractual relationship so that UBK's duty in respect of that advice was not owed to the Fund, but to RBE, who in turn owed a similar duty to the Fund.

37. There is, at any rate at first sight, attraction in the notion that, where, in a purely commercial context, parties have voluntarily and consciously arranged their affairs so that there is a contractual obligation on A to give advice to B, and on B to consider and pass on that advice, to the extent that it sees fit, to C, there should normally be no part for the law of tort to play. In other words, that

i) There should be no tortious duty in relation to the advice, either as between A and B or as between B and C, because those parties have identified the extent and ambit of the respective rights and duties between them in their respective contracts; and

ii) There should be no tortious duty in relation to the advice given by A, as between A and C, because the three parties have intentionally structured their relationships so that there is no direct duty between A and C, but separate duties between A and B, and between B and C.

38. The justifications for each of these two points might appear to be the converse of each other. Point (i) is based on the contention that the raising of a tortious duty is inappropriate because the parties have agreed a contractual duty. Point (ii) is based on the contention that the raising of a tortious duty is inappropriate because the parties have decided that there should be no contractual duty. However, as I see it, despite this apparent paradox, both points essentially rest on the same proposition, namely that a tortious duty should not be invoked between parties to commercial contracts at least where there is no "liability gap".
39. In relation to point (i), it would be surprising (save perhaps in unusual circumstances) if the law of tort imposed greater liability on A or B than they had agreed to accept, either expressly or impliedly, in their respective contracts, and it might appear pointless and confusing if there was a tortious liability which was simply co-extensive with the contractual liability. Of course, tortious liability is generally subject to less strict statutory limitation bars than contractual liability (as is demonstrated in the Henderson case at 174F to G), but that may seem a questionable reason, in terms of principle, for justifying a co-extensive tortious duty where there is a contractual duty.
40. So far as point (ii) is concerned, it may be thought to be questionable whether the law of tort should normally be capable of being invoked in order to found a duty of care in circumstances where the parties have intentionally set up a contractual structure which avoids such a contractual duty. Especially so when there is no "gap" which requires "filling"; in this case C, the Fund, could have sued B, RBE, who could in turn have sued A, UBK. The only reason that that course cannot now be taken is that, for commercial reasons, Riyad Bank was not prepared to sue (or let the Fund sue) RBE, and it is now too late for it to do so, because of a limitation bar.
41. Some apparent support for the view that a tortious duty of care normally has no part to play in the context of a commercial contractual relationship may be found in observations of the Privy Council in a judgment given by Lord Scarman in Tai Hing Cotton Mill Ltd v Liu Chong Hing Bank Ltd [1986] AC 80 at 107, quoted by Lord Goff of Chieveley in the Henderson case at 186C to F. Further, in the Williams case at 837F, Lord Steyn said that, at least in the current state of English contract law, "the law of tort, as the general law, has to fill an essential gap-filling role".
42. On the other hand, there are strong countervailing arguments the other way, which appear to me, again, to apply equally to points (i) and (ii). If a duty of care would otherwise exist in tort, as part of the general law, it is not immediately easy to see why the mere fact that the adviser and the claimant have entered into a contract, or a series of contracts, should of itself be enough to dispense with that duty. If a claimant is better off relying on a tortious duty, it is not readily apparent why a claimant who receives gratuitous advice should be better off than a claimant who pays for the advice (and therefore would normally have the benefit of a contractual duty), unless, of course, the contract so provides. One might expect the question to be determined by reference to the contractual relationship on the normal basis, namely whether the nature terms and circumstances of the contract(s) expressly or impliedly lead to the conclusion that the parties have agreed that there will be no tortious duty.
43. These arguments have to be assessed in the light of the decision of the House of Lords and, in particular the analysis of Lord Goff, in the Henderson case. It seems clear from the closely reasoned passage in his speech at 184B to 194E that the issue has been resolved, at least in principle, in favour of the latter of the two views that I have summarised. In other words, "the common law is not antipathetic to concurrent liability". At 186C to F, Lord Goff considered and explained Lord Scarman's observation in the Tai Hing case. He went on to say that a claimant who is owed a contractual duty of care may also (or alternatively) be entitled to invoke a tortious duty of care, unless it would be "so inconsistent with the applicable contract that, in accordance with ordinary principle, the parties must be taken to have agreed that the tortious remedy is to be limited or excluded" – see at 193H and 194A to B.
44. Those observations are clearly appropriate to what I have called point (i), but, while it is not immediately clear that they apply to point (ii), in my view they do. As mentioned above, the principle upon which both points (i) and (ii) rest is essentially this, that the law of tort should not be invoked in a commercial context, at least where there are no gaps, where the parties have contractually provided for a duty, or a chain of duties. More importantly, Lord Goff's reasoning in relation to point (ii) appears to embody the same approach as that he applied to point (i).
45. At 193B to C, Lord Goff said "the law of tort is the general law out of which the parties can, if they wish, contract", and that the correct approach is to determine whether there would otherwise be a tortious liability arising out of an assumption of responsibility and concomitant reliance, and "then to inquire whether or not that liability is excluded by the contract because the latter is inconsistent with it". That is essentially the approach he adopted when he turned to consider the contention that "the indirect Names and the managing agents, as parties to the chain of contracts…must be taken to have thereby structured their relationship so as to exclude any duty of care owed directly by the managing agents to the indirect Names in tort" – 195A to B. He then said that he saw "no reason in principle" why an adviser could not owe, at the same time, a contractual duty of care to the next person in the chain and a tortious duty of care to another person further along the chain. He went on, in a passage more fully quoted by Longmore LJ, to observe at 195G that "in many cases in which a contractual chain comparable to that in the present case is constructed it may well prove to be inconsistent with an assumption of responsibility which has the effect of…short-circuiting the contractual structure put in place by the parties".
46. So far as "gap-filling" is concerned, Lord Steyn's observation in the Williams case cannot mean that a tortious duty can only arise where there is a "liability gap": that would be inconsistent with the whole basis of the reasoning and decision in the Henderson case. Lord Steyn's point in this connection was, I think, that there are cases involving contractual duties, where, if the law of tort cannot be invoked, as a matter of policy, there would be a "liability gap" which would be unacceptable (as in Smith v Eric S Bush [1990] 1 AC 831 and White v Jones [1995] 2 AC 207). That aspect of the law of tort has no bearing on the present case: the fact that the law of tort can be invoked where there is a "liability gap" in certain exceptional cases does not mean that it can never be invoked in a case where there is no "liability gap".
47. Thus, the question in a point (ii) case, as in a point (i) case, is whether, in relation to the advice he gave, the adviser assumed responsibility to the claimant, in the light of the contractual context, as well as all the other circumstances, in which the advice was given. The way in which Lord Goff expressed himself in more than one place in his speech in the Henderson case, including some of the brief passages I have quoted, suggests that it is for the adviser to establish that the contractual context negatives an assumption of responsibility, not for the claimant to show that the assumption survives notwithstanding that context.
48. Like Longmore LJ, I do not think that the answer can depend on whether one asks first whether, absent the contractual context, there would be an assumption of responsibility, and secondly whether the positive answer to that question is vitiated by the contractual context; or whether one asks the single question whether, in all the circumstances, including the contractual context, there was an assumption of responsibility. Whether or not one adopts the two-stage approach may depend on the facts of the particular case, or even on the way the case has been argued.
49. In the present case, there were a number of factors which together satisfy me that Moore-Bick J was quite right to conclude that UBK assumed responsibility to the Fund in relation to the advice and other assessments it agreed to provide under the TSA, notwithstanding the contractual structure the parties adopted. Those factors are as follows:

i) UBK held itself out as experienced and expert in the field in which it was tendering advice, namely the setting up, the marketing, and the administration of, and the assessing and the acquiring of leases for, entities such as the Fund;

ii) The original proposal was that RBE should market the UBK Fund, and when that was changed, and what became the actual structure was proposed, it was not "intended to vary or further refine the relationship between UBK and RBE" (judgment paragraph 53);

iii) UBK advised Riyad Bank and its subsidiaries (which included RBE) on, and was closely involved, from the inception, with devising the structure, setting up and marketing, of the Fund, as reflected in the Outline Proposal;

iv) As UBK knew, the only reason for the structure which was set up and the establishment of the Fund, and for interposing RBE between UBK and the Fund, was because the Fund did not want to appear to be directly run by a Kuwaiti company;

v) Neither RBE nor any other company in the Riyad Bank group had, as UBK knew, any experience or expertise in the field in which the advice was being given by UBK, in particular as to the characteristics and values of leases for the purpose of acquisition by a fund;

vi) It was "obvious" (judgment, paragraph 53) to UBK that its advice on leases and their values was provided to RBE on the basis that it would be passed on (effectively uncritically) to the Fund, who would be likely to act on it as the sole expert advice that the Fund would be receiving;

vii) Mr Weist, the person responsible for the day-to-day operations of the UBK Fund, regularly attended the Board meetings of the Fund "in an advisory capacity" (judgment, paragraph 55), as well as preparing three detailed reviews of the Fund's portfolio of leases in 1998/9;

viii) There was nothing in the express or implied terms of the contract between UBK and RBE, the TSA, or of the contract between RBE and the Fund, the IAA, which is inconsistent with UBK assuming responsibility to the Fund in respect of its advice;

ix) There is no logical conceptual or commercial conflict between either or both of the contractual duties owed by UBK to RBE, and by RBE to the Fund, and the tortious duty said to be owed by UBK to the Fund.

50. It is fair to say that, factor (i) merely serves to found the basis for a claim in tort as a matter of principle, and that factors (viii) and (ix) are, as it were, defensive. However, it appears to me that factors (ii) to (vii) inclusive, particularly when taken together, make out a formidable case for justifying the notion that UBK owed a tortious duty of care to the Fund. They also show that this case is very different in its factual background (as well as being very different in its nature and in terms of the contractual provisions it involves) from the type of case discussed by Lord Goff at 195G to 196F in the Henderson case.
51. Valuation Issues

Introductory

Having determined that UBK owed a duty of care to the Fund, the judge proceeded to give guidance as to the basis upon which it was to be decided whether, and the extent to which, UBK was in breach of that duty when giving advice as to the value and characteristics of each of the leases (or, more accurately, as mentioned above, the reversions on leases) acquired by the Fund at the time it was relying on UBK's expertise. The total number of leases acquired by the Fund during this period was around two hundred. The judge was seeking to fix benchmarks by reference to which it could be decided at trial whether, and if so to what extent, UBK's valuation advice in relation to each of those leases was negligently high.

52. It was common ground that the value of a lease is to be assessed by aggregating two components, namely (a) the present value of the rental income stream under the lease, and (b) the present value of the assets the subject of the lease, when the lease determines.
53. The first and main valuation issue which was argued on the appeal related to the decision the Judge reached in relation to component (b), which is known as the estimated residual value ("ERV") of the relevant assets. The second valuation issue concerned the choice of discount rates made by the judge in relation to the exercise involved in both components. The third valuation issue concerned the permissible (i.e. non-negligent) range of valuation. I propose to deal with these three issues in that order, and therefore now turn to what I shall call the ERV valuation issue.
54. The ERV valuation issue: introduction

The judge had to decide what would constitute a non-negligent valuation of the ERV of the assets the subject of the leases. In the light of the identification of the issues by the parties, the views of the expert witnesses, and the way the argument developed below, this exercise involved three steps.

55. The first step was to determine the appropriate basis of valuation for assessing the ERV of the assets the subject of the leases. A number of different bases were canvassed below. As the judge explained in paragraph 93 of his judgment:

"These can be described (in ascending order) as scrap value, forced liquidation value ("FLV"), orderly liquidation value in exchange ("OLVIE"), fair market value in exchange ("FMVIE") and fair market value in place ("FMVIP"). Scrap value speaks for itself. FLV is the price that could be obtained for the equipment at public auction on the assumption that the seller is under compulsion to dispose of it within 90 days. OLVIE is essentially the same as FLV apart from the fact that the seller is assumed to be under less pressure to sell, being under compulsion to dispose of the equipment within 180 days. FMVIE is the price that could be obtained on a sale between a willing buyer and a willing seller, neither being under any compulsion. FMVIP is essentially the same as FMVIE with a premium to reflect the additional value to the purchaser of being able to retain the equipment in place. In each case there may be costs associated with the disposal of the equipment, such as refurbishment, storage and sale costs, that will reduce the amount ultimately received by the lessor, although these are likely to be minimal in the case of a sale in place to the lessee. Clearly, the choice of valuation basis is likely to have a significant effect on the estimate of residual value."

56. Having identified the appropriate basis of valuation, the second step involved deciding on the appropriate "haircut". This expression was explained by the judge in paragraph 94 of his judgment as being "a means of providing some protection against potential residual value losses arising from factors such as changes in economic conditions which are normally disregarded by appraisers".
57. Having arrived at the figure produced by applying an appropriate haircut to the correct valuation basis, the judge then had to deal with the third aspect. That involved determining the permissible range of values. In other words, once he had arrived at the "right" value for the ERV on the basis of the first two stages, the third stage involved deciding how great a departure from that value had to be before it can be characterised as negligent.
58. In an important paragraph of his judgment, paragraph 103, the judge decided that, in order to arrive at the ERV, the "right approach [was] to take the basis of valuation that broadly reflects the mid-point in market practice, …OLVIE with no haircut", and, in paragraph 128, he went on to determine that an assessment of the ERV would not be negligent if it was within 15% of OLVIE. In other words, his ultimate conclusion was that an assessment of the ERV would not be negligent if it was OLVIE + or – 15%, or, to be strictly accurate, the mid-point figure for OLVIE (where there was a range of possible values for OLVIE) + or – 15%.
59. To assist him in deciding on these valuation issues, the judge explained in paragraph 85 of the judgment that he had heard

"evidence from four expert witnesses, all of whom had extensive experience of commercial leasing operations in the United States. Two of those witnesses, Mr. Gregg Dight [the claimants' witness] and Mr. Kevin Florenz [called by UBK], had considerable experience as equipment appraisers; the other two, Mr. John Deane [called by the claimants] and Mr. George Fry [UBK's witness] had many years' experience on the commercial side of leasing operations."

60. The judge described both Mr Deane and Mr Fry as "impressive witnesses, though they gave their evidence in very different ways". While he thought that Mr Dight and Mr Florenz both had considerable experience, the judge "generally preferred the evidence of Mr Dight" on the basis that Mr Florenz's evidence was "less soundly based" and his "experience of equipment appraisal does not quite match that of Mr Dight".
61. These four experts had prepared ten reports between them, and, when taken together with the supporting documentation, the totality of the valuation evidence extended to some 24 files. The cross-examination of the experts at the trial lasted a total of nine days. Apart from the evidence of these four experienced experts, the judge had evidence of some actual transactions, other valuations, notes of valuation meetings, and published guidance notes which bore, or were said to bear, on the valuation issues. The majority of all this evidence bore on the ERV valuation issue.
62. The judge accepted, in paragraph 102 of his judgment "that at the commercial level as one would expect, there is no one single clearly defined approach in the market". The contrast between the expert opinions is well demonstrated by what the judge said in the same paragraph, namely:

"Mr. Deane's preference for OLVIE as the basis of valuation, subject to a further 30% haircut, no doubt reflects the practice of many lessors, but I think it represents the conservative end of the scale. Similarly, I accept in the light of the evidence of Mr. Fry and Mr. Florenz that some leasing companies do adopt FMVIE as a basis of valuation, perhaps with a small haircut, or even no haircut at all, though I am unable to accept that that is the general practice."

63. Having explained, in very simple outline, the ERV valuation issue, and before turning to the arguments, it is right to observe that any appeal against the judge's decision on this issue faces, at least on the face of it, an uphill climb. The valuation basis of OLVIE without a haircut, with a permissible margin of 15% either way, was arrived at by the judge after hearing from four expert witnesses, who produced a mass of material and opinion, and who were each cross examined at some length, and in respect of whose evidence the judge heard detailed submissions from counsel. In his full and careful discussion on ERV valuation (which ran to over forty paragraphs, covering more than twelve closely typed pages), the judge appears to have summarised the evidence accurately and fairly, and to have arrived at conclusions which were reasoned, rational, and well within the ambit of the views of the experts who gave evidence.
64. While his ultimate conclusions on this issue cannot be characterised as being ones of primary fact, they are inferences from fact, which represent matters of judgement, based to a significant extent on oral evidence, with which an appellate court should be very slow to interfere. Unless satisfied that the judge misunderstood the evidence, took into account something of real significance which he ought not to have taken into account, failed to take into account something of real significance which he ought to have taken into account, or reached a conclusion which no reasonable judge could have reached, it seems to me that it would be wrong in principle for this court to interfere.
65. The ERV valuation issue: significant general points

An initial point of principle raised by Mr Lyndon-Stanford QC on behalf of UBK is that the judge went wrong in paragraph 103 of his judgment in alighting on OLVIE as the appropriate basis, when he had already accepted, in paragraph 102, that more than one approach was adopted in practice. In other words, it is said that, even if OLIVIE was an appropriate basis, it was not open to the judge to conclude that it was the only basis, to the exclusion of FMVIE (which the judge described in paragraph 105 as a "well recognised bas[i]s of valuation"), the basis supported by the evidence proffered on behalf of UBK. This argument relies on the well established principle that, where there is more than one accepted market practice, a practitioner will not be negligent if he follows one of them (at least in the absence of special factors) – see Maynard v West Midlands Regional Health Authority [1984] I WLR 634.

66. As was pointed out during the argument, this point would have obvious force if UBK had actually valued all the 200 leases on the FMVIE basis, but, according to the judge's findings it did not. In paragraph 154, the judge said that UBK "failed to carry out independent analyses of the asset managers' ERVs or renewal assumptions…". The reliance on the asset managers was particularly unfortunate because their interests were, in this connection, in conflict with those of the Fund. Although Mr Lyndon-Stanford suggested that UBK did carry out valuations based on their own experience, it appears clear to me that this is not what the judge found. Indeed, the judge concluded that UBK did not have the personnel with the necessary expertise to carry out the appropriate valuation exercise.
67. Accordingly, the principle relied on by Mr Lyndon-Stanford appears to me to be inapplicable in this case. Mr Brindle put it this way, that the principle in the Maynard case would apply to the valuation practice adopted by UBK (if it had adopted such a practice), and not to the results of such practice. The way I would express it, which may well amount to the same thing, is that the principle has no application here, because UBK was found to be negligent not because of the practice it adopted, but because it adopted no practice. It is not without interest to note that the argument based on the Maynard case does not appear to have been advanced below.
68. The next point made on behalf of UBK which it is convenient to consider is that it was inappropriate to select a single valuation benchmark for around 200 leases, which were for varying periods, on differing terms, and, most importantly in this connection, in respect of very different types of assets. That argument would have obvious force in terms of logic, as a matter of common sense, and in the light of the evidence, were it not for one fatal point. As is clear from a number of documents, not least the opening and closing written submissions of UBK, the parties agreed, and the evidence and argument proceeded on the basis, that the judge would take just that course. Although it may have been unusual, one can well see why the parties agreed this. It would make the eventual valuation exercise much easier, and it may also have been anticipated that, with about 200 lease valuations, any unfairnesses would be largely ironed out. Accordingly, it appears to me that this initial point must be rejected.
69. However, this initial point is of importance, because it serves to highlight the difficult nature of the exercise required of the judge, and indeed of the expert witnesses, in connection with the valuation exercise. In the real world, the appropriate basis of valuation of the ERV of assets contained in a portfolio of leases would vary from lease to lease, indeed possibly from asset to asset, (depending on the sort of factors mentioned in the previous paragraph), and the variations could be substantial. However, the judge had to identify a single valuation basis for leases of computers, bottling plants, and car wash units, to take a few of the many disparate assets which were the subject of some of the 200 leases in this case.
70. Another point of considerable general significance is the fact that, on the question of the basis of the correct basis of valuation, the judge was effectively faced with a stark choice between OLVIE, which the claimants and their experts supported, and FMVIE, the basis favoured by UBK and its experts. Subject to any adjustment through the means of the haircut at the second stage, Moore-Bick J had to choose one or other basis, unless, perhaps, he rejected both bases or chose a basis midway between the two. It was not suggested to the judge by any of the experts or by counsel that he should have taken either of those two courses. Nor was it suggested to us that the judge should have taken either of those courses (save to the extent that, as mentioned above, UBK is now attempting to resile from the common position of a single basis of valuation for all the leases). Further, as pointed out by Buxton LJ in argument, UBK's Notice of Appeal simply contends that we should substitute FMVIE for OLVIE in the order made by the Judge.
71. There is another point of general significance which I should mention. As the judge observed in paragraph 95 of his judgment, there is an obvious link between the selection of valuation basis at the first stage and the extent of any haircut at the second stage. Accordingly the adoption by the judge of OLVIE cannot be considered in isolation. It would be both illogical and unfair to consider whether UBK is right in its contention that OLVIE was too low a basis to select at the first stage, without taking into account that, at the second stage, the judge allowed (in its favour) for no haircut at all. As the figures in the present case show, the adoption of FMVIE with a 30% haircut (which, on the evidence before the Judge, was a level which was not infrequently applied in practice) could often produce a figure which was close to, or sometimes even less than, the OLVIE without a haircut.
72. Accordingly, when considering the judge's conclusion on valuation in relation to ERV, and UBK's attack on it, I consider that it is important to bear in mind that (a) the judge had a stark choice between FMVIE or OLVIE as the appropriate basis, (b) he had to choose a single basis for 200 leases where, in the real world, different bases would have been appropriate for different leases, and (c) the choice of basis cannot be divorced from the decision to apply no haircut.
73. I believe that these factors serve to make UBK's task in attacking Moore-Bick J's conclusions on the ERV valuation issue even more difficult than it would otherwise be. Given the first two points, it is inevitable that whatever conclusion the judge reached would be open to serious attack. Choosing between OLVIE and FMVIE in the case of a single lease may often be difficult, either because some other basis is more appropriate in that particular case (e.g. scrap value or FMVIP), or because a figure between the two would be appropriate. Self-evidently, it is much more difficult if one has to identify a single basis for 200 leases. As the judge effectively accepted, there are undoubtedly arguments which support FMVIE over OLVIE: it was simply that the arguments in favour of OLVIE appeared to him to be stronger. So, while an attack on the basis adopted by the judge, whatever it was, is bound to be easy, it is particularly difficult to establish that a reasonable judge could only have rejected OLVIE and adopted FMVIE (which is what UBK have to show). Further, UBK's problems in this connection are reinforced by the fact that the judge went for the lower of the two bases, but went on to give no reduction whatever for a haircut.
74. There is a fourth difficulty in UBK's way. The evidence before the Judge was that a lessor often incurs expense on selling assets which were or are subject to leases. The cost can be as much as 15% of the value, although it is almost always significantly less where the asset is sold to the lessee. At least on the basis of the evidence we were shown, the judge appears rather to have understated the likely cost to the lessor in the end of the passage in paragraph 93 of his judgment quoted above. To the extent that that was an error, it would have been one in favour of UBK. More importantly, the judge made no deduction from OLVIE to allow for this possibility, which is another general factor which can fairly be said to justify selecting OLVIE rather than the higher FMVIE.
75. The ERV valuation issue: UBK's specific criticisms of the judgment

Mr Lyndon-Stanford raised a large number of more specific criticisms on the main valuation issue in this court, namely the judge's decision to opt for OLVIE rather than FMVIE. The criticisms varied widely in importance, difficulty, detail, and appropriateness for an appellate court. At the end of his submissions, Mr Lyndon-Stanford summarised and enumerated the criticisms, and I propose to consider them (and one or two other criticisms he raised in the course of his argument) in roughly the same order as he enumerated them. I should, however, make two qualifications to this. First, I have not dealt with every one of Mr Lyndon-Stanford's points: I have tried to discuss every one included in his summary, on the assumption that he advanced them as his primary ones. However, one or two points raised in the course of his submissions, and not included in the summary, seemed significant, and I have dealt with them as well. Secondly, the number, and numbering, of the points in this judgment is a little different from that at the end of Mr Lyndon-Stanford's submissions. This is partly because I have added some points, as just mentioned, and partly because some of his points can be taken together (indeed, a few of them were the same point put differently).

76. The first, and perhaps the most major, criticism is that the selection of OLVIE as the appropriate basis of valuation is inconsistent with the fact that, in the market, it would appear that many lessees (about 25% on the evidence before the judge) renew their leases when they come to an end, and even more (around 50%) exercise the option contained in their leases to purchase the assets the subject of their leases. In other words, it is said that the judge's conclusion was inconsistent with the evidence as to the "stick rate" (i.e the frequency with which leased assets can be expected to "stick" with the lessees after the leases expire).
77. In connection with this contention, Mr Lyndon-Stanford relied on the fact that almost all leases contain (a) an option in favour of the lessee to purchase at FMVIP (which is, of course, higher than OLVIE or FMVIE), and (b) terms which, for practical reasons, encourage lessees to purchase or renew. It is clear that the judge took into account the evidence in relation to purchases and renewals, although it is fair to say that he made no express reference to factor (b). However, it does not seem to me that factor (b) adds anything to the effect of the evidence that, in general, around half the lessees purchased, and around a quarter renewed, as the judge accepted. If the factor did result in more lessees renewing or purchasing, that would have been reflected in the figures.
78. As to factor (a), which only applies to purchases, there were two important points which, in the judge's view, as expressed in paragraph 103 of his judgment, considerably undermined its value to UBK. First, the evidence, on closer analysis, showed that, in most cases, the option price was "fair market value", which could have been FMVIE, rather than FMVIP, and that, in other cases, it was expressly FMVIE. Secondly, and perhaps even more tellingly, there was no evidence as to the prices actually paid by the lessees who purchased or renewed. As the judge said, there is no reason to think that a lessee with a right to buy at, say, FMVIE would in fact pay that price. Commercial common sense suggests that, at least in many cases, such a lessee would negotiate, or at any rate try to negotiate, a lower price with the lessor. Indeed, the more attractive to the lessor a sale to the lessee at the option price would be, the stronger the lessee's bargaining position. I can see no grounds, either in principle or in the light of the evidence, for saying that the judge erred in relying on these factors as a reason for rejecting the great significance which UBK invited him to give to the potential for purchases when assessing ERVs.
79. As to renewals, the judge, in the same paragraph of his judgment, made a similar point, namely, that in many cases, "it is very difficult to predict with confidence whether any given lessee will [renew] and, if it does, for what period and at what rate". Further, there was clear evidence that renewals in the case of leases of so-called "middle ticket assets", which is what the Fund was interested in, are significantly less frequent than in the case of "small ticket assets". It is difficult for any of that to be challenged given that it represented the view of, so far as I can gather, all the expert witnesses.
80. Also in paragraph 103 of his judgment, the judge made the more general point that, in cases where the lessee does not purchase or renew, which, even on the basis of the figures relied on by UBK, would apply to some 20% of leases, the assets concerned might well have to be disposed of under some pressure, not least because of the costs of storage etc, and sometimes would only fetch scrap value. In the same paragraph, as I have mentioned, he described "OLVIE with no haircut" as a "basis of valuation which broadly reflects the mid-point in market practice". In other words, the judge had well in mind the four general points discussed in the preceding section of this judgment.
81. In deciding that OLVIE, rather than FMVIE, was the appropriate basis upon which to value the assets comprised in the 200 leases, the judge, in my view, cannot possibly be said to have reached a conclusion which was inconsistent with the evidence as to, and arguments as to the effect of, stick rates. In the light of the various factors I have referred to, and which were relied on by the judge, he was amply justified in concluding that FMVIE would represent too high a basis, and that OLVIE was a more appropriate basis, in the light of that evidence and those arguments, subject, at least to the other criticisms of his reasoning to which I now turn.
82. The second argument it is convenient to consider, because it also arises from what the judge said in paragraph 103 of the judgment, was that he was wrong to conclude that one should "ignore any income that may be derived from renewals". The argument demonstrates the risk of acontextual interpretation. The observation, which might indeed appear surprising read on its own, was made on the basis of the fact that the ERV should take into account such renewal income, so that, having arrived at the ERV, it would involve double-counting if one added something to it for renewal income. So read, the observation is not merely one which the judge was entitled to adopt: it was plainly right. Indeed, he stated that it represented the view of each party's experts, a statement which was not challenged by Mr Lyndon-Stanford.
83. Thirdly, Mr Lyndon-Stanford relies on evidence (obtained during the trial) as to what had happened at the end of the first 29 of the 200 leases to expire. That evidence showed that, in the great majority of the 29 leases, the assets realised more than OLVIE, and quite often more than FMVIE. Such evidence was, at least arguably, strictly irrelevant to the issue before the judge. A valuation can be negligently high even if the asset concerned is sold for more than the valuation some time later. Quite apart from this, there was evidence before the judge that the assets the subject of the 29 leases in question represented some 7% of the total assets of the Fund, and, not least because they almost all related to laptops, which constituted just over 21% of the Fund's assets in total, they were not typical or representative of the totality of the assets the subject of the 200 leases owned by the Fund.
84. Fourthly, it was said that the judge seems to have thought that one of these transactions was at FMVIE, whereas it was in fact at the higher FMVIP. Assuming that this was not simply a misprint in the judgment (which it may have been) it is utterly insufficient to undermine his conclusion that OLVIE was the appropriate basis, unless it can be linked to other and more significant errors, which it cannot.
85. Fifthly, it was said that the judge should have taken into account the fact that (as mentioned in the judgment of Longmore LJ) two valuations of the portfolio of leases had been obtained from IEC and Murray Devine, and that they both produced higher values than would be obtained by using OLVIE. It seems to me that the judge was entitled, and many might think he was rather sensible, to take the view that he had enough valuation evidence from four expert witnesses, whose evidence was tested by close cross-examination, without considering valuations from experts who did not give evidence. It is also to be noted that IEC and Murray Devine do not appear to have entirely agreed in their respective valuations
86. Sixthly, Mr Lyndon-Stanford made the connected point that IEC, unlike the expert witnesses in this case, were able to talk to the individual asset managers and to look at their papers. He contended that this rendered their valuations particularly reliable, because they would have a better insight as to the likelihood of the particular assets "sticking". That fact does not invalidate the reasons discussed in the preceding paragraph justifying the judge's decision not to rely on the IEC valuation. In any event, the force of the point is undermined by the fact that no records of IEC's discussions with the asset managers or of the inspections of their papers were available, and Mr Florenz and Mr Fry, UBK's two experts, said that, unless they could have access to such records, they could not express a view on the likely level of renewals.
87. As to Mr Florenz and Mr Fry, the judge was seventhly criticised for misunderstanding their evidence as indicating that they could not speak to a specifically appropriate rate of likely renewal for this portfolio. With respect, it appears to me that this is exactly what they were saying. The judge was not adversely commenting on their evidence in this connection; he was simply recording their position.
88. Mr Lyndon-Stanford eighthly argued that the judge misunderstood or failed to take into account the concept of "compelling rent", and that this led him into an erroneous view which vitiates his adoption of OLVIE. The "compelling rent" was a level of rent which, it was said, Mr Florenz assumed on a renewal essentially for the purpose of making a point: it was half the rent payable under the original lease, and was therefore, he said, compellingly low – i.e. very conservative, and favourable to the claimants' case. It is said that the judge seems to have wrongly deduced from this that, in some cases, the rent on renewal might well be at such a low level, even where it would thereby be lower than the rate of depreciation of the asset the subject of the lease, and that this is an economic nonsense.
89. I am unconvinced by this contention. First, in paragraph 101 of the judgment, the judge described Mr Florenz's compelling rent figures as being at "level[s] at which the renewal rent[s are] so low as to be compelling" and as also being "little more than an educated guess". Far from indicating any misunderstanding on the part of the judge, those observations seem to me substantially to accord with Mr Lyndon-Stanford's characterisation of that evidence. They are also consistent with some extracts of Mr Florenz's oral evidence which we were shown.
90. I am not satisfied that the judge proceeded on the assumption that renewal rents could, in some cases, be less than depreciation value, or that, if he did he would have been so wrong to do so that his ultimate decision could be impugned on appeal. It is true that he said in paragraph 101 that, in a case where a renewal rent got as low as Mr Florenz's compelling rent, "there is an increased risk that renewal will reduce rather than increase the [ERV]". However, that does not, in my opinion, support the instant ground of criticism of the judgment. It is a comment on the effect of the renewal being at the compelling rent, and does not mean that the judge was assuming that such a renewal would go ahead. The judge expressed himself in terms of risk. In other words, he was effectively making the unobjectionable observation that the lower the renewal rent, the greater the risk of it reducing the ERV.
91. Even if the judge had assumed that some renewals might proceed at the compelling rent, the expression of opinion which I have quoted from the judgment is plainly correct (at least on the basis of Mr Lyndon-Stanford's argument). In any event, Mr Florenz's evidence was not that a renewal at such a level of rent would never go ahead, merely that it would be unlikely to do so. Quite apart from this, I find it difficult to accept that, even if this statement had involved an error, it would have been sufficiently important, bearing in mind the wealth of other reasons, to undermine the judge's selection of OLVIE as the appropriate valuation basis.
92. Ninthly, it was contended that the judge failed to appreciate, or to give proper weight to, the fact that Mr Deane's adoption of OLIVIE with a 30% haircut would produce a basis which was normally less than forced liquidation value. That is a point which goes nowhere. The judge did not adopt OLVIE with any haircut, let alone a 30% haircut. Accordingly, he must have agreed that the basis adopted by Mr Deane was too low; indeed, he said so in a passage which I have already quoted from paragraph 102 of his judgment.
93. The only criticisms of the judgment in this connection would have to be that the judge did not expressly make the point that OLVIE with a 30% haircut was below FLV, and that the judge's conclusion in paragraph 102 was not expressed strongly enough. Neither criticism is sustainable. A judge is not always, indeed could only rarely be, obliged to express every reason for rejecting a certain basis of valuation. Indeed, in this case, as in many cases, it would have been wholly impracticable to take such a course. It would also require a wholly exceptional case before it was even arguable that a correct first instance decision was appealable on the ground that it was expressed with insufficient vehemence.
94. Tenthly, it was said that the judge wrongly criticised Mr Florenz for not grappling with the arguments in favour of OLVIE after Mr Deane had explained his reasons for opting for that basis. Having been taken to the parts of Mr Florenz's evidence which are said to confound the judge's opinion, I am bound to say that the opinion was one which the judge was entitled to reach. In the passages relied on, Mr Florenz was concerned with raising points in support of the selection of OLVIE (and supporting FMVIE), rather than answering the points raised on behalf of the claimants in support of OLVIE.
95. Mr Lyndon-Stanford eleventhly contended that the judge misrepresented, and then relied on, the evidence of Mr Deane at the end of paragraph 101 of the judgment. In the passage in question, the judge said that he thought that "Mr Deane was right in saying that it is a mistake to place any reliance on the prospect of achieving a negotiated renewal on terms that are beneficial overall." I accept that Mr Deane did not say in terms that which appears to be attributed to him in the words which I have just quoted. However, I consider that the point does not cast doubt on the conclusion reached by the judge essentially for two reasons.
96. First, the judge was not in fact saying that the possibility of renewal was irrelevant to the assessment of ERV in every individual case. Such a conclusion would be inconsistent with his detailed discussion elsewhere in the judgment; thus in paragraph 103, he said that "renewals will sometimes be profitable for the lessor". What the judge was saying was that, for the purposes of the rather constrained and somewhat artificial exercise he was required to carry out (namely to choose between OLVIE and FMVIE as the appropriate valuation basis for 200 leases), it would be a mistake to assume that taking renewal rents into account would inflate ERVs. In other words, if, as was the case, the judge would otherwise conclude that OLVIE was the appropriate valuation basis, the possibility of obtaining beneficial rents on some renewals would not justify departing from that basis and selecting FMVIE instead.
97. Secondly, as one would expect, there was evidence to support this conclusion, even if it is not in the precise words the judge used. Mr Deane referred to the fact that he knew of no leasing company, and of no practice, which "simply assume[d] that there are going to be 12 months of renewal payments" unless there was a binding contract to that effect. Indeed, perhaps rather more to the point, he suggested that, based on 30 years' experience, "renewals are a method for collecting [ERVs]". In other words, a renewal does not enhance ERV, it merely enables the ERV to be realised. (It is significant that Mr Florenz said almost the same thing, namely that "a renewal would go towards satisfying the residual value"). It seems to me that supporting evidence on the point also came from Mr Dight, who said that "renewal assumptions, if…used to influence the pricing…[are] kind of putting additional risk on to your transaction" which he described as "a foolish mistake on the part of a lessor". The judge appears to have accepted that evidence, and I see no reason why he should not have done so.
98. Twelfthly, it was said that the judge was wrong when he said, in paragraph 105 of his judgment, that "the task of the court in this case is not to value the portfolio as such but to identify the principles which determine what value a particular lease would have commanded in the market at the time of its purchase by the Fund." With all due respect to Mr Lyndon-Stanford, far from being wrong, it appears to me that this observation was precisely correct. The problem in this case was that it was necessary to take something of an overall view in order to decide on the single valuation basis appropriate to each of the 200 leases. However, that in no way vitiates the point that one is ultimately seeking to determine whether UBK provided negligent valuation advice in relation to each lease when it was acquired. UBK was intended to advise on the value of individual leases; UBK was not advising on the value of a portfolio of leases.
99. Thirteenthly, Mr Lyndon-Stanford suggested that the judge had wrongly assessed the nature of the market in which the sort of leases owned by the Fund were traded. I am quite unconvinced that the judge made any such error. Even if he had made that error, I have grave doubts whether it would justify interfering with his ultimate conclusion on the correct basis upon which to value the ERV's. The precise nature of the market, although of course fundamental to the expert valuers, played a very minor, if any, part in the judge's assessment of their evidence, in connection with ERV valuation.
100. Fourteenthly, Mr Lyndon-Stanford relied on provisions in the Prospectus issued for the Fund, which, he said, established that the judge was wrong not to take into account the possibility of renewals. I do not consider that the contents of the Prospectus assist. They cannot determine the basis upon which a careful valuer or other expert would assess the value of a lease when it was being considered for purchase by the Fund. The contents of the Prospectus relied on in this connection were only concerned with valuations for auditing purposes, and not for the purpose for which UBK was engaged.
101. Fifteenthly, Mr Lyndon-Stanford said that, since judgment had been given, it had come to light that the evidence of Mr Dight, which was largely accepted by the judge, was inaccurate in some respects. The inaccuracy was as follows. At trial, Mr Dight said that, in relation to some valuations, he had first looked to market evidence, and then had turned to valuing by reference to cost, whereas, in fact in relation to those valuations, he had started with the cost approach and then looked at market material.
102. An appellate court must look particularly carefully at materiality when it is established that some of the evidence before the judge was not accurate. In this case, I am quite satisfied by Mr Brindle that Mr Dight's error plainly made no difference to the outcome of the case before Moore-Bick J. The evidence went to the specific value of a few (but not necessarily unimportant) leases, and could be relevant at the next hearing when valuing of individual leases will be necessary, but it has no direct relevance at this stage. I regard it as fanciful to believe, as Mr Lyndon-Stanford invited us to do, that the judge might have taken a different view of Mr Dight as a witness, or a different view of the effect of the evidence, if he had been aware of this small error.
103. ERV Valuation Issue: Conclusion

Having considered Mr Lyndon-Stanford's sustained attack on the judgment below, I reach the conclusion that no error of principle (by which I mean a failure to understand the evidence, taking into account of something which ought not to have been taken into account, or a failure to take into account something which should have been taken into account) on the part of the judge on the ERV valuation issue has been established. Further, it seems to me that UBK has not got even within striking distance of suggesting that the judge reached a conclusion which he could not reasonably have reached.

104. Of course, where, as here, there is a mass of detailed evidence and argument relating to an issue, it is often possible for an appellant to cast doubt on one or two points which may have been made by the judge. Ironically, it is easier when the judge has, as in this case, given a very full and considered judgment. However, in my view, the one or two small criticisms of the judgment on the valuation issues which have been arguably made good do not, even when taken together, get near undermining the judge's decision to adopt OLVIE as the basis of valuing ERV, or indeed the grounds for that decision.
105. The Discount Rates Issue

There were a number of disputes between the two relevant experts, Mr Deane and Mr Fry, on the issue of discount rates. The first was whether the same discount rate should be taken when assessing the present values of the two components of the lessor's interest under a lease, namely (a) the rental income stream and (b) ERV of the underlying assets. The judge described this as an "arid" dispute, as what really mattered was "not whether one or two rates are used, but what rates are adopted" (paragraph 131 of the judgment).

106. So far as the more detailed disputes were concerned, the judge resolved them in the following way. He decided, in paragraph 134, that, for component (a), he would adopt a rate which was at the bottom end of Mr Deane's range (150 – 250 basis points over "US Treasuries"), but exceeded Mr Fry's range, namely 40 – 70 basis points over "US Treasuries" – i.e. over the prevailing rate on US Treasury Bonds. As for component (b), he held, substantially in accordance with the evidence of Mr Fry, UBK's expert, that the appropriate rate was "one which fairly reflects the Fund's overall target rate of return", which was 7 (and subsequently 6)% per annum, and then added another 2%, being "the amount required to meet [the Fund's] expenses" – see paragraph 145. In the next paragraph of his judgment, the judge said that he thought that Mr Fry was also right to suggest that a single rate was appropriate for both components, and said that, in the light of his conclusions so far, this justified a rate of 9% per annum from November 1997, falling to 8% from February 1999.
107. Mr Lyndon-Stanford contended that the judge arrived at an unsupportably large discount. First, it was said that the single discount rates of 9 and 8% per annum arrived at by the judge were larger even than that suggested by the evidence on behalf of UBK. I did not understand that to be a ground of appeal in itself, but more of an indication that the judge must have gone wrong. In my judgment, it does not take matters significantly further. The judge was faced with differing expert views on various components in, and approaches to, the assessment of the appropriate discount rate or rates. He was plainly entitled to prefer the evidence of one witness on one aspect and that of another witness on another aspect. If that resulted in a discount rate which was larger than the ultimate figure either witness supported, then, while I accept that it means that one should look especially carefully at his reasoning, it does not of itself vitiate his conclusion. I accept that it may very well be different if the selected rate was unsupportable by any expert evidence given to him, but (subject to the more specific points to which I now turn) that is not suggested on behalf of UBK here.
108. As I understand it, there are really two specific complaints about the judge's conclusion on discount rates. The first complaint was that, apparently at least in part as a result of what Mr Lyndon-Stanford called "the judge's surprising finding that OLVIE was the correct valuation benchmark", only 14% of the value of the leases came from the ERVs (what I have called component (b)), and 86% from component (a), the rental stream. It was said that this is something which the judge could not have appreciated, and that it vitiates the exercise he carried out to arrive at single discount rate. Accordingly, runs the argument, he should have arrived at lower single discount rates than 9 and 8%, or he should have applied different discount rates to the income stream and ERV components.
109. The point may have had some force if made below, but I am satisfied that it does not justify our interfering with the judge's conclusion on this issue. UBK and its advisers should have been perfectly well aware that the judge might select OLVIE as the valuation basis for ERV. They knew that it was the basis which the claimants and their expert witnesses were supporting ahead of the trial and throughout the seven week hearing; indeed, it was actually significantly higher than the valuation which the claimants were supporting, as Mr Deane was also suggesting the application of a 30% haircut.
110. Accordingly, the evidence (and in particular the statements of UBK's experts and cross-examination of the claimants' experts) and arguments as to discount rates could and should have taken that possibility into account. If UBK failed to proceed on that basis at trial, it would be quite wrong to let it open up the point now; if it did proceed on that basis, then, in order to make good its case on appeal, it would be necessary to identify evidence which shows that the judge could not have arrived at the discount rates that he did, in the light of his adoption of OLVIE or in the light of the 14/86 split described above. Nowhere in UBK's submissions was there any reference to the evidence in this connection.
111. My view is well illustrated by reference to UBK's suggestion that the judge should not have selected a single discount rate for the two valuation components. It was UBK and its expert who argued that there should be a single rate, and the claimants and their expert who supported two different rates. The judge accepted UBK's case on that issue. It cannot be right to let UBK contend on appeal that the judge should have accepted the claimants' case on that issue, unless it was made clear on behalf of UBK at trial that, at least in the events which happened, two different rates were appropriate. Mr Lyndon-Stanford did not submit to us that he had advanced such a contention at trial.
112. The second complaint raised by UBK in connection with the discount rates was that the judge ought not to have added on to the 7 and 6%, a further 2% to allow for the Fund's expenses. It was said that the addition was wrong in principle, or, if it was justified, it was too much. I have difficulties with both points, in the light of evidence given by the two expert witnesses called by UBK. It appears from the transcript of his cross-examination that Mr Florenz, accepted that the "front end fees paid to lease managers" and general expenses such as auditors' fees, directors' remuneration etc" would not otherwise be taken into account. Mr Fry said that he "would probably agree" the principle of adding a percentage to allow for the Fund's expenses; he did "not necessarily" agree with the figure of 2%, but accepted that 1.5% was right "for the GIA and TSE per annum [and] 0.2% for the administrator per annum". It is true that, as Mr Lyndon-Stanford says, the contractual costs (being more or less those put to Mr Fry) amounted to 1.8%, not 2%, but, on the evidence (and in accordance with common sense), the Fund would have significant "non-contractual" recurring costs (being the sort of expenses accepted by Mr Florenz).
113. The evidence on this aspect appears to me to accord with principle, in that an entity such as the Fund plainly has annual expenses, and one would expect those expenses to be taken into account when assessing the return (and in particular the internal rate of return, which is what was primarily involved in this case) it enjoys from its assets. In the light of that evidence, it is hard to quarrel with the judge's decision to add a figure of 2% per annum to allow for the Fund's expenses. Indeed, at least in the light of the evidence to which we have been referred, I would go further. It seems to me that a decision not to add a figure for annual expenses, or to add a figure which was significantly different from 2%, would have been appealable.
114. Accordingly, I would reject the appeal in so far as it seeks to challenge the judge's decision on the discount rates issue.
115. The permissible range issue

The third and final valuation issue arises in this way. As I have mentioned when dealing with the first and main valuation issue, relating to the valuation of ERV, having arrived at the "right" figure, namely OLVIE, the judge then decided that the permissible range (i.e. a non-negligent valuation) would be within 15% of this figure.

116. The first complaint made by UBK was that the judge should have fixed a wider margin. What is suggested as the appropriate margin by Mr Lyndon-Stanford is 15% below the mid-point of OLVIE to 15% above the mid-point of FMVIE. In my judgment, this is either an attempt to revisit the argument on the ERV issue, or else it is an attempt to challenge the width of the permissible margin as being too small. The first possibility is plainly not open to UBK: having rejected their case on the first and main valuation issue, it is plainly inappropriate to allow it to be resurrected in this way. As to the second possibility, it flies in the face of the judge's statement in paragraph 128 of the judgment that "there was general agreement among the experts" that an assessment of ERV in a particular case "could reasonably fall within a range of 10-15% of either side of the mid-point".
117. The second complaint of UBK was that the judge failed to consider the permissible range in relation to the valuation of a lease as a whole. In other words, although, in relation to each lease, the judge identified the permissible range for component (b), the complaint is that he failed to identify the permissible range for the ultimate valuation, i.e. the aggregate of components (a) and (b).
118. I see the force of the point, but I do not regard it as a valid ground of criticism of the judgment, in the light of the terms of the contractual documentation, and also in the light of the way in which the case was argued before Moore-Bick J.
119. So far as the contractual documents are concerned, the most significant is the TSA, clause 2.5(c) of which specifically required UBK to "analys[e] the Asset Managers' estimate of residual value and renewal assumptions…". As Mr Brindle pointed out, the importance of estimating the ERVs was also emphasised in other contemporaneous documentation, including the Heads of Agreement and the Administrative Procedures. In particular, the Prospectus emphasised the "Residual Value Risks", and explained that the value of the Fund would be "negatively impacted" if the ERVs turned out to be inaccurate. Quite apart from this, the ERV would not merely have been an important component in the value of a lease in itself; if the ERV had been a very substantial component of the overall value, then the lease would normally have been too risky an investment for the Fund to acquire.
120. In my judgment, unlike many cases based on negligent valuation and the like (e.g. as in Merivale Moore plc v Strutt & Parker [1999] 2 EGLR 171), this was not a case where it was open to the defendant to rely on the contention that its overall valuation was in the permissible "bracket". UBK was specifically asked to advise on one of the two components of the overall valuation, namely ERV (albeit not to the exclusion of the other) and was well aware of its independent importance to the Fund. Therefore, the claimants should be able to recover damages in any case where UBK gave negligent advice (ie advice which was outside the permissible range of 15% of the mid-point of OLVIE) as to the value of ERV.
121. This is consistent with the way in which the case was argued before the judge. As he recorded in paragraph 156 of his judgment, it was "accepted" by Mr Lyndon-Stanford that "if UBK is liable to the Fund for giving bad advice about the characteristics of any particular lease, the Fund is entitled to recover the difference, if any, between the amount it paid for the lease and its actual value on the date it was purchased" (emphasis added). In UBK's closing submission before the judge, it was said that "all the claimants' arguments boil down to one thing, namely that the ERV figures recommended by UBK were too high, resulting in the leases… being overvalued".
122. Mr Brindle suggested that it would only be the ERV whose valuation could ultimately determine the question of whether or not the valuations approved by UBK could have been negligent. Particularly in the light of the argument in this court and below as to the discount rates, I am not convinced that that argument is necessarily right. In any event, it is neither necessary nor appropriate to rule on it.
123. For the reasons given, I would dismiss the appeal on this third valuation point.

Lord Justice Buxton:

124. I agree that the appeal on the duty of care issue must be dismissed. I add some words of my own on that question only because we were told that the issues raised by this case were of some general interest in commercial circles.
125. UBK's failure, so found by the judge in paragraph 154 of the judgment in terms that are not challenged, was that it put itself in a position in which it was not able to give proper advice to the Fund. That finding directly puts the case into the Hedley Byrne area of jurisprudence. The features of that jurisprudence relevant to the present case can be summarised as follows.
126. First, liability depends on whether the adviser objectively knew that his advice would be acted upon by the advisee. That is explained by Lord Oliver in Caparo v Dickman [1990] 2 AC 605 at p 638 B-E. Those requirements may be in doubt where, as in the case hypothesised by Lord Oliver, there are intermediaries between the adviser and the advisee. Any attempt in our case to suggest that UBK was insulated from responsibility merely by the fact that its advice was passed through RBE was however excluded by the specific findings of the judge in his paragraphs 55-56:

"It must have been obvious to UBK, therefore, not only that RBE would rely on its advice in deciding how to structure the Fund, but that once the board of the Fund became the body ultimately responsible for investment decisions it would rely on the advice emanating from UBK in deciding whether to buy leases offered to it. That expectation was reflected in the Outline Proposal and the draft Administrative Procedures, each of which specifically contemplated that UBK would attend board meetings of the Fund in an advisory capacity as required.

[56] In my view UBK clearly did profess to have a certain expertise which it offered to make available to the Fund in the form of advice on the acceptability of ERVs and renewals (and thus rates of return) put forward by the asset managers and the suitability of leases offered as investments to the Fund. UBK was well aware that even if that advice was provided to RBE, RBE would be likely to pass it on to the board of the Fund without qualification since it did not consider itself competent to form an independent judgment. Unless the nature of the contractual arrangements suggests otherwise, therefore, I think this clearly is a case in which UBK did undertake responsibility to the Fund to take reasonable care to ensure that the advice it gave on these matters was sound."

127. It should perhaps be added, in connexion with the foregoing passage, that before us much was made of the opening sentence of clause 4.1 of the Technical Services Agreement, that provided that all investment decisions on behalf of the Fund were to be solely made by the directors, advised by RBE. That was suggested in some way to distance UBK from the Fund's decisions. But it was never argued, either in the original or in the Amended Grounds of Appeal, that that caused the judge's conclusions just set out not to be open to him.
128. Second, whilst the concept of "assumption of responsibility" was adopted by all members of House in Hedley Byrne, as recorded by Lord Goff in Henderson v Merrett Syndicates [1995] 2 AC 145 at p 180H, nevertheless it is difficult to resist the view of Lord Oliver in Caparo at p 637F, approved by Lord Goff in Henderson at p 181C, that

"this is a convenient phrase but it is clear that it was not intended to be a test for the existence of the duty for, on analysis, it means no more than that the act of the defendant in making the statement or tendering the advice was voluntary and that the law attributes to it an assumption of responsibility if the statement or advice is inaccurate and is acted upon. It tells us nothing about the circumstances from which such an attribution arises."

129. Third, once the Hedley Byrne requirements are fulfilled in a given case there is no room for a further limitation in terms of the "fair just and reasonable" test made famous by Caparo: see per Lord Goff in Henderson at p 181D.
130. Fourth, we were much pressed with the speech of Lord Steyn in Williams v Natural Life [1998] AC 830, in which he stressed that the reliance of the claimant on assumption of responsibility by (that is, following Lord Oliver cited in paragraph 128 above, legal liability of) the defendant must be reasonable, and the result of the communication to the claimant of that assumption of responsibility on the part of the defendant: see in that connexion in particular [1998] 1 WLR at p 835H. In that case, where it was sought to inculpate the director of a company with personal liability for work done on behalf of the company's client, no doubt very positive indications of a departure from the normal understanding of the tortious liability of an employee would be required, and in the event were not found. But our case is quite different. The judge found as a fact, as set out in paragraph 126 above, that UBK must have known that the Fund was directly relying on its advice. It would have been supererogatory for him to go on and record, in Williams terms, that what the Fund must have known was in fact the case.
131. The judge's findings of fact accordingly very strongly support his finding that UBK was liable to the Fund in Hedley Byrne terms. UBK however argued strongly that such liability should not arise in the present case because of the contractual structure existing between UBK, RBE and the Fund. Because of those contracts, however much the judge may have found, without challenge, that the Fund looked to UBK for advice, UBK was nonetheless not liable to the Fund, as opposed to liable to RBE, for any defects in that advice because contractual steps had been taken to distance UBK from the Fund. This argument had two main elements. First, the judge had adopted the wrong approach to this issue, which led him to undervalue or misunderstand the implications of the contractual structure. Second, the judge had not given weight to relevant authority, that related to a similar issue that arises in connexion with construction contracts. I take those points in turn.
132. The judge understood the first of these arguments, and correctly recorded it at his paragraph 32. But he also importantly understood, as recorded in his paragraph 33, that the argument required not only scrutiny of the various agreements but also, as he put it, scrutiny of the circumstances in which UBK came to act as Technical Adviser. We have already seen the findings that he made on the latter point. UBK however argued that the judge had approached the matter on an incorrect, "two-stage", basis. He should not have found that Hedley Byrne liability was established as it were in principle, and only then gone on to consider whether that liability was excluded by the contractual structure. Rather, the contractual structure was an inherent element in the consideration of the first question, and if it had been taken into account with all of the other facts would have demonstrated that in this case there was no assumption of responsibility on the part of UBK to the Fund.
133. That criticism is only relevant if it can be shown that the judge's approach led him to an incorrect conclusion as to the final, and indeed only relevant, question, of whether on the facts of this case UBK is liable to the Fund. But, before coming to that issue, it should be pointed out that the judge's approach was no more than a way of organising the material and assessing the arguments, in just the same way as Lord Goff approached the material in Henderson. Considering in particular the position of the managing agents Lord Goff said, [1995] 2 AC p 182E-H:

"The Names, as the managing agents well knew, placed implicit reliance on that expertise, in that they gave authority to the managing agents to bind them to contracts of insurance and reinsurance and to settlement of claims. I can see no escape from the conclusion that, in these circumstances, prima facie a duty of care is owed in tort by the managing agents to such Names….This conclusion is, however, subject to the impact, if any, of the contractual context"

134. The judge is not to be criticised for proceeding in the same way. Nor did he lose sight of the significance of the contractual arrangements. He said, in his paragraphs 64 and 67:

"I think that Lord Goff's speech in Henderson v Merrett supports the conclusion that, although one should not approach the matter in a mechanical way, it is appropriate to ask whether the parties to the contractual chain can properly be taken to have intended to exclude any duty of care that would otherwise have arisen under the general law as a result of the relationship between them. That is likely to depend on the general nature of the contractual relationships, as well as their particular terms, and may also be influenced by established practices in the particular field of activity in which the parties are engaged…..

[67]…..it was recognised from the outset that the whole purpose of UBK's involvement was to provide the specialist advice that the Fund required to operate effectively. In my view the nature and terms of the contracts governing the parties' relationships are not inconsistent with an assumption of responsibility by UBK to the Fund for the quality of the advice it provided. Moreover, the manner in which much of that advice was expected to be, and was, given, namely by the attendance of Mr. Weist at meetings of the Fund's board, reinforces the conclusion that it did in fact assume such a responsibility. I am satisfied, therefore, that UBK did owe a duty to the Fund to exercise reasonable care to ensure that the advice it gave was sound."

135. That was a conclusion well open to the judge, striking a balance as it did between the origins of and reasons for setting up the Fund; the involvement of UBK throughout; the judge's findings as to the expectations of the parties; and the contractual structure that they adopted. The relevant circumstances are further analysed in paragraph 49 of the judgment of Neuberger LJ, in terms with which I respectfully and wholly agree.
136. The judge also pointed out that the factual circumstances and contractual arrangements with which he was concerned were very different from those in the typical construction contract. Against that view, reliance was placed before us on an observation of Bingham LJ in Simaan v Pilkington [1988] QB 758 at p 781, which was relied on by Lord Goff in Henderson [1995] 2 AC at p 196C, to distinguish the case of a building contract from that of the managing agents:

"I do not, however, see any basis on which the [nominated suppliers] could be said to have assumed a direct responsibility for the quality of the goods to [the building owners]: such a responsibility is, I think, inconsistent with the structure of the contract the parties have chosen to make."

I have reproduced the statement as set out by Lord Goff. In fact, however, the plaintiffs in Simaan were not the building owners, but the main contractor. The defendants were suppliers to a sub-contractor of the main contractor, but nominated for that purpose by the building owner. It will be seen immediately that the relationships were greatly more formalised, and more complex, than those in our case or, for that matter, those in Henderson. A specific reason given by Bingham LJ for it being implausible that the main contractor relied on the supplier was that the main contractor had not chosen the supplier and had had no dealings with him. He was bound to accept the supplier because that is what his contract with the building owner required him to do: see [1988] QB at p 781E. By contrast however, in a more direct case

"Where a specialist sub-contractor is vetted, selected and nominated by a building owner it may be possible to conclude (as in the Junior Books case [1983] 1 AC 520) that the nominated sub-contractor has assumed a direct responsibility to the building owner": [1988] QB at p 781F.

137. Quite apart therefore from the general differences between an ad hoc contractual arrangement such as we are concerned with and the formalised and multi-party structure of a building contract, the observations in Simaan give no support to an argument that, in a case where there have been and have been expected to be direct dealings between adviser and advisee, a contract that causes the adviser to pass his advice through a third party must as a matter of law protect the adviser from liability to the advisee. All will depend on the particular circumstances; and like my Lords I consider that the factual findings of the judge are conclusive on this issue.
138. On the valuation issues I entirely agree with the judgment of Neuberger LJ, and there is nothing that I wish to add.