England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM BIRMINGHAM MERCANTILE COURT
(HIS HONOUR JUDGE McCAHILL QC)

		Royal Courts of Justice Strand, London, WC2A 2LL
		14 September 2007

Lord Justice Moore-Bick:

1. This is a renewed application for permission to appeal against the order of HHJ McCahill QC, sitting in the Birmingham Mercantile Court, following refusal of permission on paper by Waller LJ.
2. The action involves a dispute between three brothers, Warren, Richard and Roger Manton. Although the arrangements which have given rise to these proceedings also involved their wives and certain companies which they controlled, it is generally convenient to refer simply to each brother by name when referring to the branch of the family which he represents. Any such reference should be understood to include, where relevant, his wife and the relevant company and to refer to all of them whether acting in a personal capacity or as trustees.
3. The first claimant in this case, County Garages (Birmingham) Limited, was established by the brothers' father, Edward ("Ted") Manton. The shares in the company are owned by the brothers personally, and as trustees of various trusts established by Ted and his wife Lilian for the benefit of members of the family. Since March 1999, County has been effectively controlled by Roger. It went into administrative receivership in October 2003.
4. There is a long history of mutual antipathy between Richard and Roger, as described by the judge, and it seems that Richard may hold Roger responsible for the decline in County's fortunes and its descent into receivership. However, during their father's lifetime the brothers respected his wishes and submerged their differences. After his death in 1994 those differences could no longer be contained and their inability to work together effectively paralysed the family businesses. They realised, however, that they would have to reach some kind of compromise and as a result each of them appointed a representative to hammer out some sort of agreement on their behalf, those representatives becoming known in the family as the "Three Wise Men".
5. The Three Wise Men proposed an agreement under which the family wealth would be divided three ways and transferred to the next generation, that is, to Ted and Lilian's grandchildren, but it was essential that the means by which that was achieved should not give rise to a significant tax liability. On 9 March 1999, a Shareholders' Agreement was executed under which the family assets held principally by another company, Hilat Limited, were to be notionally separated into what were described as three "undertakings", each of which was to be under the sole control of one of the brothers. The hope was that in due course the assets would be transferred into three new companies, each controlled by one brother as shareholder, director and trustee. At the same time, the articles of Hilat were amended to provide for the issue of three classes of shares and for the company's business assets and liabilities to be reorganised into three separate undertakings, each controlled by one class of shareholders. The scheme was that each brother was to be the holder of one class of shares and would thus control the undertaking attributable to those shares. The Shareholders' Agreement envisaged that in due course the reorganisation would, or at any rate might, proceed to a second stage by the demerger from Hilat of the three undertakings. That, of course, depended to a large extent on whether it could be undertaken without exposing the company or the brothers to a substantial tax liability.
6. Having received advice that the proposed demerger could be achieved without incurring significant liability to tax, on 20 March 2000 a document known as the Reconstruction Agreement was executed to carry out the separation of the assets, approximately two thirds of which were to be transferred to two new companies: Manton Interlink Limited, controlled by Warren, and Manton Securities Limited, controlled by Richard, leaving the balance in Hilat, which would be controlled by Roger. The shares in Hilat corresponding to the interests of Warren and Richard were therefore to be sold to Roger and his wife for a nominal consideration, leaving them in sole control of that company.
7. The Shareholders' Agreement contained what is described as a "windfall profits" provision, under which all three families would be entitled to share in the benefit if any of certain identified assets were sold at a price in excess of an agreed amount within a prescribed period of time. It was reflected in Section 6 of the amended Articles of Hilat, which contained detailed provisions for the sharing of windfall profits realised by the sale of certain identified assets forming part of each of the three undertakings.
8. Following their mother's death in May 2000, her executors called in a loan that had been made to Roger, which was repaid by using funds derived from the sale of a property at The Radleys, which was one of those subject to the windfall provisions. It appears that County's indebtedness to its bankers had been secured on the assets of Hilat, and when County went into administration they had to be met by the sale of another property, Alum Rock, also subject to the windfall provisions. As a result of those disposals, Warren and Richard made a claim to a share of the proceeds of sale of those two properties. Roger contended that the windfall provisions did not survive the Reconstruction Agreement and the steps taken to implement it, and that the right to share in any windfall was enjoyed by the shareholders of Hilat alone. Roger and his wife, of course, had by then become the sole shareholders of Hilat as a result of transfers made pursuant to the Reconstruction Agreement.
9. Between February 2004 and May 2005 several different claims were made in various ways in three separate sets of proceedings by and between the brothers and their respective wives and the companies controlled by them, but the only claims that are relevant for present purposes are those made by Richard and Warren against Roger, his wife, County Garages, and Hilat, to recover under the windfall provisions part of the proceeds of sale of the two properties to which I have referred.
10. After a lengthy trial, the judge held that the windfall provisions did apply to the receipts of sale, and ordered Hilat to pay £110,025.25 each to Warren and Richard, together with interest. He said that, if he had come to a different view about the effect of the agreements, he would have ordered their rectification to cause them to have that effect. He ordered Roger to pay 80 per cent of Richard's costs and 85 per cent of Warren's costs of the proceedings as a whole, in each case on the indemnity basis.
11. Roger has filed a Notice of Appeal seeking to reverse the judge's decision in respect of all these matters. His main argument, in summary, is that the judge failed to construe the relevant agreements correctly: in particular, he failed to hold that the right to share in any windfall profit attached only to the shareholders in Hilat. He also says the judge reached the wrong decision on rectification. As regards the judge's order for costs, it is said that he was wrong to make what is described as a "global" order dealing with the costs of all the proceedings as one, that he was wrong to award costs on the indemnity basis, and wrong in any event to award Warren and Richard such a large proportion of their costs.
12. Before turning to the judge's reasons and the submissions made this morning in support of this application, it is necessary to refer briefly first to clause 9.2 of the Shareholders' Agreement, which provides for the distribution of windfall profits. I think it is probably helpful if I read out clauses 9.1 and 9.2 and part of clause 9.3 of the agreement. They read as follows:

"9. WINDFALL PROFITS

9.1 The partition of the assets and liabilities of Hilat in accordance with the Asset Schedule and the partition of the shares in Hilat is intended to reflect an equitable partition of the assets and liabilities of Hilat and the Manton Family Trust between the different branches of the Manton family.

9.2 The parties agree that where within 10 years of the date of this Agreement a property is sold for a price greater than the valuation assumed for the purposes of the Asset Schedule the sale proceeds should be shared between the three Undertakings in the manner set out at Article 6 in the Partition Articles.

9.3 If any of the assets listed in clause 9.4 below or any part of such assets are sold within a period of 10 years from the date of this Agreement by the relevant Trust shown in clause 9.4 (or any other person to whom a transfer of such assets has been made otherwise than by way of bargain at arm's length) for a price greater than the notional amount shown in clause 9.4 ('the Notional Amount') then, subject to clause 9.5 below, that gain (the 'Windfall Profit') shall be divided between the Trusts as follows . . . . . . ."

and then there is set out the specific division.

13. The "Partition Articles" to which clause 9 refers are the Amended Articles of Association of Hilat Limited, which were adopted by a special resolution on 8 March. They contain provisions for the issue of three classes of shares, A shares, B shares and C shares, and for the establishment within the company of three undertakings corresponding to those classes of shares, the A Undertaking, the B Undertaking and the C Undertaking. For present purposes, it is necessary only to note that Section 6 of the Articles deals with windfall profits and makes provision for the allocation to the different Undertakings of different proportions of windfall profits on the sale of specific assets in excess of a valuation set out in the schedule. Clause 6.1 of the Articles provides:

"If any of the properties listed in the Asset Schedule are sold within a period of 10 years from the date of adoption of these Articles for a price greater than that shown on the Asset Schedule then, subject to clause 6.2 below, that gain ('the Windfall Profit') shall be divided as follows . . . . . . "

and then there are set out detailed provisions for the division of the gain. It will be seen that those provisions correspond to clause 9.2 of the Shareholders' Agreement, although they set out the provisions for distribution in much greater detail.

14. The findings made by the judge below show that in broad terms the object of the Shareholders' Agreement, as is recorded in clause 9.1, was to divide the family assets equitably between the three brothers and their respective families. The agreement sought to achieve a fair split on the basis of current valuations of the assets, but it was recognised in the report prepared by the Three Wise Men, to which the judge refers, that some of the assets were of a nature which rendered them difficult to value and that their value might be significantly affected by future events over which no one had any control. They therefore proposed in their report the adoption of some windfall provisions, in order to maintain the equitable division of the assets over the medium term.
15. In his judgment the judge set out at length the exchanges which preceded the execution of the Shareholders' Agreement. They clearly support his conclusion, both that the agreement was intended to be the first of two stages of an overall reorganisation of Hilat and the assets it contained, and that the windfall arrangements were expected to remain in effect after the second stage until they expired by a fluxion of time in accordance with their terms.
16. As I have already indicated, at the time that the Shareholders' Agreement was executed the Articles of Hilat were amended to give effect to the terms of the agreement. That was necessary, of course, because Hilat itself remained in existence as a single entity in its dealings with the outside world, despite the fact that internally its assets had been divided into three separate groups, control of which had been placed in the hands of separate shareholders.
17. As I have already mentioned, the effect of implementing the Reconstruction Agreement which was executed on 20 March 2000 was that Roger and his wife became the sole shareholders in Hilat. At the trial, it was argued on his behalf that the Shareholders' Agreement made no provision for the division of any windfall gain which was entirely regulated by the company's Articles. The Articles provided for the division of any windfall between the three Undertakings, but the windfall as a whole remained in the company and did not have to be distributed to anyone who was not a shareholder. Since following the reorganisation neither Warren nor Richard remained a shareholder, neither of them, it was said, had any right to share in any windfall, nor, of course, any obligation to account for any windfall profits made in relation to properties which had passed into their sole control.
18. The judge rejected that argument. He held that the Shareholders' Agreement and the amended Articles contained a contract between Warren, Richard and Roger that was expressed both in the Articles and in the agreement, in particular, clause 9.2 of the agreement, which expressly referred to Section 6 of the Articles. He did so because he found (see paragraph 127 of his judgment) that the windfall provisions were a crucial element of the agreement, necessary to give effect to the overriding objective of achieving an equitable division of the assets between the three families. He noted that the Shareholders' Agreement was directed to matters other than those affecting the parties purely in their capacity as shareholders and concluded that the windfall provisions were intended to survive any arrangements that might, or might not, be made to give further effect to the principles embodied in it.
19. Mr Darton, on behalf of Roger, has submitted that on the true construction of all the documents the agreement to share windfall profits can be carried out only by means of allocating them to the separate Undertakings within Hilat in accordance with the terms of the company's Articles. In my view, however, the judge's conclusion on this issue was correct. The windfall provisions were clearly a fundamental element in the agreement for the division of the assets between these three branches of the Manton family. Following the execution of the Shareholders' Agreement, I think that there can be no real doubt that there existed binding obligations by and between the parties to that agreement, including, of course, the three brothers and Hilat itself, to share windfall gains in accordance with the detailed provisions set out in the amended Articles. Mr Darton submits that because clause 9.2 of the Shareholders' Agreement refers to sharing between the three Undertakings in the manner set out at clause 6 of the Partition Articles, it provides for a windfall gain to be shared only by allocation to the Undertakings and that it has no wider effect. However, in the context of the agreement as a whole I think it is clear that it was not intended to have such limited effect, and that the purpose of the reference in clause 9.2 to clause 6 of the Partition Articles was to incorporate into the agreement the proportions and manner of distribution which were provided for in detail in the Articles.
20. The judge went on to consider the background to the Reconstruction Agreement and its terms. That document must, of course, be considered in the context of the pre-existing Shareholders' Agreement, which provided in terms for the windfall profit arrangements to continue for ten years, notwithstanding that there might be a second stage to the reorganisation. The judge concluded that there was nothing in the background to the Reconstruction Agreement, nor in the Reconstruction Agreement itself, to suggest that the brothers had consciously agreed at that stage to alter in a fundamental way the scheme that they had put in place only a year earlier. Mr Darton on behalf of Roger says that it was clear from the terms of the Reconstruction Agreement, which left Roger as holder of all the shares in Hilat, that there had in fact been a variation of what had previously been put in place and that Roger acted on that understanding. It is unnecessary to comment on what Roger's understanding of the position may have been, but looking simply at the facts of the relationship between the parties, there is nothing in the evidence and nothing in the judge's findings to suggest that any negotiations took place between the parties to the Shareholders' Agreement of a kind that might be expected if they were intending to alter in such a fundamental respect the scheme to ensure the equitable division of the assets as a whole which had been put in place, as I say, only a year earlier.
21. The judge reached the conclusion that there was nothing in the Reconstruction Agreement to undermine the obligations contained in the Shareholders' Agreement, and in my view his conclusion was clearly correct. I have to say that I think there is no real prospect that this court, considering the Shareholders' Agreement, the Partition Articles and the Reconstruction Agreement individually or as a whole, would construe the documents in the manner suggested by Roger, since to do so would plainly contradict the parties' intentions. I am fortified in that view by the answer Mr Darton gave when I asked him whether the parties had actually agreed to abandon or depart from the windfall arrangements. He very fairly accepted that there had been no conscious agreement, in the sense of an agreement based on discussion and negotiation, although he did submit that they had in fact departed from those arrangements, albeit inadvertently. In my view, that is not a sound or promising basis for persuading this court that the brothers agreed to abandon the scheme which they had previously put in place.
22. That leaves, however, the related question whether the parties did achieve in law that which they set out to achieve, or whether, as Roger argues, they failed to achieve their object because neither Warren nor Richard retained any right to recover a share of the windfall gains. The judge was of the view that they could recover their shares of the windfall gains on one or other of four bases: (i) that the companies that had taken over the A and B Undertakings (Manton Interlink which is controlled by Warren, and Manton Securities which is controlled by Richard) became parties to the Shareholders' Agreement and so were in a position to enforce it in law against the other parties, including Hilat; (ii) that the right to recover a share of the windfall profits was in the nature of a proprietary right forming part of the relevant Undertakings which were transferred to the companies pursuant to the Reconstruction Agreement; (iii) that since following the implementation of the Reconstruction Agreement Hilat was the owner only of the C Undertaking, it was obliged to pay the trustees of the other Undertakings their shares of the windfall pursuant to the Shareholders' Agreement; (iv) that the trustees were trustees of Hilat's promise to pay their shares of any windfall profits to the other parties.
23. I have to say that, in my view, the first of these analyses strikes me as very doubtful. The point is made in Mr Darton's skeleton argument that clause 11 of the Reconstruction Agreement on which the judge relied did not render the companies parties to that agreement for all purposes. Clause 11 of the Reconstruction Agreement begins by using the words:

"By way of further implementation of the indemnity given by Interlink in Clause 2.2 above".

It thus refers back to clause 2.2, which deals with an indemnity against claims and liabilities in relation to the A undertaking given by Manton Interlink to Hilat and Manton Securities as part of the reconstruction arrangements. A similar undertaking was given by Manton Securities in relation to the B Undertaking, although there is clearly an erroneous cross reference in clause 11.2. In my view, there is force in the submission that clause 11 does not render the companies parties to the shareholders' agreement for all purposes, although it does render them parties to that agreement for the more limited purposes referred to in the clause.

24. The judge's second ground, however, is in my view clearly well founded. The amended Articles creating the separate A, B and C Undertakings gave rise to enforceable obligations on Hilat, which formed part of the undertakings when they were transferred to Manton Interlink and Manton Securities. They included the right as against Hilat to obtain a share of any windfall profit, as well, of course, as an obligation to share with Hilat any relevant windfall profits they might obtain on the disposal of their assets.
25. In my view, the judge's third ground is also well founded. Warren, Richard and Hilat were all parties to the Shareholders' Agreement and Warren and Richard, in their capacities as trustees of the respective family trusts, were in my view entitled to enforce against Hilat any of the obligations it owed to the trustees under that agreement.
26. In those circumstances, I find it unnecessary to consider the judge's fourth basis, and I can move straight to the next point raised in support of the appeal which concerns the restriction on assignment contained in clause 17.2 of the Shareholders' Agreement. That provides, in straightforward terms, as follows:

"None of the parties may assign his rights or obligations in whole or in part without the prior written consent of the other parties".

27. This ground of appeal proceeds on the footing that neither Roger nor his wife signed the Reconstruction Agreement by which the A and B Undertakings of Hilat were transferred to Manton Interlink and Manton Securities respectively, nor did either of them provide written consent to its terms in any other form. Therefore, it is said, any purported assignment to those companies of rights to share in windfall profits was ineffective.
28. That seems to me to be as bad an argument as it is unmeritorious. As the judge pointed out, insofar as the provisions of the agreement can be enforced by Warren and Richard against Hilat or Roger, they are being enforced by original parties to the agreement. Moreover, Roger in person and his wife acting through her proxy Mr Gower approved the execution of the Reconstruction Agreement by Hilat at an extraordinary general meeting. There can have been no doubt, for the reasons given by the judge, that both of them in fact consented to any assignment needed to implement Reconstruction Agreement and in my view they cannot possibly now be heard to say that it was ineffective on this ground. The matter does not end there, however, because the Shareholders' Agreement, as I have already indicated, clearly contemplated in clause 2.5 a demerger of a kind that would inevitably involve a transfer of rights from Hilat to at least two and possibly three new companies. In my view, the judge was quite right to hold in paragraph 229 of his judgment that as a matter of construction clause 17.1 does not apply to a transfer of that kind. In my view, the prospects of overturning the judge's decision on this part of the case are remote and not sufficient to justify giving permission to appeal. On that footing, it is unnecessary to go on to consider the question of rectification.
29. I turn therefore to the appeal in relation to costs. The complaint is that, having regard to the number of different actions and the number of claims raised by and between the parties to the proceedings, the judge was wrong to make global orders instead of what are sometimes called "issues-based" orders, that is, an order making separate awards of costs in relation to different issues. Rule 44.3(6) of the Civil Procedure Rules contemplates that the court may make various different kinds of orders, including issues-based orders and what I will call "proportional" orders under which a party is ordered to pay a proportion of the other side's total costs, but rule 44.3(7) provides that, where the court would otherwise consider making an issues-based order, it must instead, if practicable, make a proportional order. The court has a wide discretion as to costs, and the fact that two or more actions are tried together, as commonly occurs in the Commercial and Mercantile courts, is no bar to making a single global order in relation to the costs of the proceedings as a whole. Whether it will be appropriate to do so will obviously depend on the nature of the proceedings, the nature of the issues to which they have given rise and the course that they have taken.
30. In the present case, the claims and counterclaims, or at any rate many of the claims and counter claims, were closely related, and it was clearly sensible for them all to be managed and tried together. In those circumstances, I can see no reason in principle why the judge should not have made a global order in relation to costs, provided, of course, that did not give rise to injustice. The considerations that arise when the court is asked to make an order for costs against a person who was not a party to the proceedings in any sense do not arise in this case. I quite accept that not all parties were formally parties to all of the claims, but these were proceedings which very much constituted a single entity, and in which, as the judge himself observed, the evidence and arguments in relation to individual issues were relevant to and had implications for other issues.
31. The judge identified the windfall profits claim as the largest and most complex of the many claims before the court, and it was one on which Warren and Richard clearly succeeded. He described it as "overwhelmingly the major issue in the case". Of the many subsidiary issues, some of which involved relatively modest sums, Warren and Richard were successful on some and unsuccessful on others.
32. The judge reminded himself of Rule 44.3, including paragraphs (6) and (7), which contained the provisions to which I have referred. He concluded that because of the number and nature of the issues and the extent to which they were interrelated, particularly in relation to questions of credibility, a global approach to costs was appropriate as well as being possibly the only practical approach. He expressly reminded himself, however, that a global costs order had to reflect all the circumstances of the case, including the multiplicity of the issues, which parties had won and lost on which issues, the significance of those issues, the time and the costs incurred in dealing with them, and, of course, the conduct of the parties before and during the trial. In my view, the judge's approach cannot be faulted in principle.
33. The judge ordered Roger to pay 85 per cent of Warren's costs and 80 per cent of Richard's costs, but he did not explain in any detail how he had reached those figures. In my view, however, after a trial of this nature it would have been impossible for him to have justified them in actuarial terms because they inevitably and rightly reflected his assessment of many different factors, such as the conduct of the parties, that are not really capable of being quantified in precise arithmetical or monetary terms. Mr Darton has submitted that, in reaching his conclusion, the judge failed to take adequately into account the time spent on individual issues or the costs involved in their preparation or argument, but the judge was far better placed than anyone else could be to form a view of those factors in the context of the case, in which, as I have said, many of the issues were related in one way or another to other issues.
34. This court has said on many occasions that a trial judge has a generous discretion when it comes to dealing with costs and in a case of this kind, when the judge has sat through a long trial in the course of which many issues have been raised, both large and small, it will be particularly reluctant to interfere with his order. Mr Darton has drawn to our attention various aspects of the case which he says the judge failed to reflect adequately in his order, but I am afraid I am wholly unpersuaded that, taken individually or together, there is any real likelihood of persuading this court to overturn or modify the judge's order.
35. For all those reasons, I would refuse permission to appeal.

Lord Justice Longmore:

36. I agree. Mr Darton's valiant submissions in this matter have not persuaded me that there is any realistic prospect of this court coming to any conclusion other than that which the judge himself reached.

Order: Application refused