England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM HHJ HAVELOCK-ALLEN Q.C.
SITTING AS A JUDGE OF THE HIGH COURT QUEEN'S BENCH DIVISION
HQ 10X00116

		Royal Courts of Justice Strand, London, WC2A 2LL
		21st. December 2011

Sir Mark Waller:

Introduction

1. This is an appeal by Petrodel Resources Limited (Petrodel) against part of the judgment given against them by His Honour Judge Havelock-Allen QC sitting as a Deputy Judge of the High Court. He handed down a judgment on 1^st April 2011 in which he dealt with three money claims made by Timothy Le Breton (TLB) following termination of TLB's employment by Petrodel in June 2008.The first claim related to a bonus said to be due; the second related to an incentive payment under a "resource pool" allocation; and the third was a claim for unpaid salary, TLB asserting that his salary had been increased as from 1^st January 2007 from $150,000 to $250,000 but that the increase had never been paid. The Judge found in favour of TLB on the first and third claims. The second claim as pleaded failed, but the consequence of the Defendant's defence in respect of the second claim (the Resource Allocation claim) was that it was admitted that a different sum fell due, and the Defendant consented to the judgment reflecting that alternative sum. The appeal relates simply to the salary claim and if that fails, to a point on the award of interest on that claim.

The facts relevant to the salary claim

2. Petrodel is a company registered in the Isle of Man. The company has at all material times been controlled by Michael J. Prest (MJP) who although not appointed a director was a shadow director and in overall strategic command. Petrodel was at the material times engaged in the trading of crude oil and refined petroleum products principally in sub-Saharan Africa and shipping. In 2006 its business expanded into what is termed up-stream activities exploration and production.
3. TLB was first employed by Petrodel in 2001 and was made Group Manager in around February 2005 under a written contract of employment at a salary of $150,000. The contract referred to a discretionary bonus hence the bonus claim; there was also between 2005 and 2006 an incentive arrangement known as the "resource pool" allocation. That arrangement was withdrawn from all staff at the end of 2006 but gave rise to the incentive claim.
4. Up to the end of 2006 TLB was engaged mainly with the trading and shipping aspects of the business. Towards the end of 2006 MLP asked TLB to head up the exploration and production (E & P) side of the business. TLB had been active with MJP in Petrodel acquiring licences to explore for oil and gas in certain areas of Tanzania. Petrodel had entered into certain Product Sharing Arrangements (PSAs) with the Tanzanian Government and the Tanzanian Petroleum Development Corporation (TPDC). Those PSAs required Petrodel to spend certain sums on research and development. Royalties were to be paid to the Tanzanian Government on the net profits from the sale of oil or gas.
5. As the judge put it "the upshot" of the discussion between TLB and MJP about how the E & P was to be developed was that it was agreed that TLB would become the chief executive officer of a new company to be established to operate the E & P business. The interest in the exploration licences would be transferred to the new company. TLB's annual salary in his new role would be increased from $150,000 to $250,000 and he would devote 70% of his time to E & P and the remainder of his time to the trading side performing much the same role as before but on a reduced basis.
6. The plan was for the new company to be formed in early 2007; a fund raising- process was planned for the capitalisation of the new company for the spring of 2007, but it was agreed that TLB's new salary and responsibilities should be treated as if they took effect from 1^st January 2007. Indeed as the judge found TLB took responsibility for the E & P side of the business from 1^st January 2007.
7. The new company Petrodel Upstream Limited (PUL) was only incorporated on 7^th February 2007. Prior to that date all the contemporaneous documents indicated that TLB was to be employed with the increase in salary but as emphasised by Mr Dougherty (appearing for Petrodel on this appeal) all assumed that PUL would be the employer.
8. Any hope of early capitalisation was confounded at a meeting with the Royal Bank of Canada (RBC) on 8^th February 2007. In the result PUL lacked the resources to employ TLB at any salary never mind an increased salary. TLB remained employed by Petrodel. He devoted the major part of his time to the E & P business and this remained the position until TLB's departure in June 2008. Furthermore in circumstances critical to the issue on this appeal to which I shall return below, Petrodel paid TLB only at the rate of $150,000 a year until his departure.
9. At all material times up to June 2008 and beyond the E & P activities were funded by Petrodel and booked in Petrodel's accounts as a debt due from PUL to Petrodel. Within Petrodel the E & P side of the business was often referred to by the shorthand PUL. The charge to PUL included TLB's salary at the increased amount. Quarterly reports to TPDC also showed TLB's salary payable by Petrodel at $250,000 although it is right to emphasise that one quarterly report was for the last quarter of 2006 at which time it is common ground an increase in salary was not due.

Delay in making any claim to the increase

10. It is a fact much relied on by Petrodel that TLB when he left Petrodel in June 2008 made the claims for bonus, the incentive payment and some unpaid salary, but that the claim did not include a claim on the basis that his salary had been increased to $250,000 as from 1^st January 2007. The increased salary claim was made for the first time after TLB received a letter from Dr David Mestres-Ridge dated 6^th March 2009 which was in the following terms:

"I tried reaching you unsuccessfully to ask for your comments on the following:

I understand that, in 2006, you received $150,000 from Petrodel Resources as a salary or salary equivalent. I understand further that this was increased to $250,000 per annum in 2007 and that this was the level of consideration that applied when you left in June 2008. It appears from our records that only $150,000 was paid in 2007 and a further $75,000 was paid in the first half of 2008.

I have not seen any formal agreement between you and any company within the Petrodel group, or any correspondence that might support the view that the salary was increased to $250,000 in 2007. I would be grateful if you could let me have copies of any such agreement that you consider relevant, as this will provide justification to our auditors.

Notwithstanding this, it appears that Petrodel Resources owes you the unpaid portion of the salary for that period (being $100,000 for 2007 and a further $50,000 for 2008). I propose that this should be accrued in our books and that you therefore are listed as a creditor to the company until the point at which it is able to fulfil its obligations.

Please confirm that you are in agreement with the above."

11. This letter seems to have been written in the context of the preparation of accounts for Petrodel. The Judge records how some late disclosure shed light on how the letter came to be written. It included a document from Dr Mestres-Ridge seeking answers from MJP which referred to a note from MJP. The note could not be found but the Judge found that the note must have given Dr Mestres-Ridge to understand that TLB's annual salary in 2007 and 2008 was $250,000 and that it was payable by Petrodel [see paragraph 62].
12. TLB's response by letter of 4^th April 2009 was to confirm that his salary had been raised and that the amount of the increase was due and to refuse any further postponement of payment. From this time but only from this time TLB's claim included the claim for the increased salary.
13. The Judge records that no claim had been advanced on the basis that the 6^th March letter was an acknowledgement of the debt. He took the view it was no more than evidence of what Petrodel believed its obligation to be in March 2009; "it does not assist in interpreting what was in fact agreed between MJP and TLB in December 2006 or March 2007." When during the hearing of the appeal the court made some reference to the letter and the way the accounts were being drawn up, Mr Dougherty very properly drew attention to the fact that there was no respondent's notice seeking to make something out of the letter and the judge's finding as to MJP's note. The question that the Judge addressed was thus (without reference to the above) what was agreed in December 2006; and what happened and/or was agreed in February/March 2007 once plans for early capitalisation had foundered, and it is on that that I should concentrate on this appeal.

Negotiations relating to an increase

14. There is little dispute about certain facts. Up until 8^th February 2007 it was assumed PUL would become TLB's employer at the increased salary. After that date and the meeting with RBC and thus with no early capitalisation of PUL, the assets of the E & P business remained with Petrodel; TLB's employment stayed with Petrodel looking after the E & P business. The question is on what terms?
15. In March 2007 TLB agreed with MJP "that payment of the salary uplift of $8,333.33 per month would be deferred until PUL was in a position to pay"; the Judge accepted that this was agreed because it was consistent with an e-mail from MJP to TLB of 3^rd August 2007 one sentence of which said "You told me that you were prepared to stick with your PRL [Petrodel] salary despite the fact I know that your PUL salary was much higher."
16. The judge in construing that sentence recognised that it could be read as an agreement "to forego his entitlement to the new salary", but the judge found it was "equally consistent with his agreement to postpone payment of it" [see paragraph 53].
17. The Judge then addressed three questions – (1) was the agreement between MJP and TLB in and after December 2006 that TLB would only be entitled to the higher salary if PUL raised finance; (2) if not, what was agreed should happen if fund-raising failed or did not proceed; and (3) did TLB's concession preclude him from bringing his claim?

Submissions of Mr Dougherty

18. Mr Dougherty's first point on the appeal is that in considering those questions the Judge did not address Petrodel's primary defence which was that if there was a liability to the increased salary that liability was PUL's and not Petrodel. He drew attention to the fact that in the 3^rd August e-mail the reference is to TLB's "PUL salary". He further points out that in no document is there a recognition of a liability by Petrodel to an increase in salary. He submits that this primary point was not dealt with by the judge. It was only a secondary case that if Petrodel was liable its liability depended on the raising of capital.
19. He further submits that the judge was simply wrong to accept TLB's explanation as to why (if an increase in salary was due from Petrodel) he had not raised the salary issue at an earlier stage. As he emphasised (i) the evidence demonstrated TLB was far from shy in demanding what he thought his entitlement was; (ii) the claim for salary was in fact by far the largest of the money claims; and (iii) TLB's only explanation was that it was a "hot button" issue which he preferred to avoid until a more propitious time which in the event was never reached; that explanation (if it was ever credible) he submits could not conceivably apply once he had left.
20. Thus Mr Dougherty submits the only tenable explanation for not raising the issue has to be because TLB did not believe he had a claim either because he appreciated any claim would be against PUL or because he realised he had accepted that he would not be entitled to more than his original $150,000 a year until PUL was in a position to pay.

Discussion

21. As to the three questions and whether the Judge addressed Petrodel's primary case, I would accept that the Judge may not have set out the questions so as to indicate clearly that he was dealing with Petrodel's case that if any company was liable it was PUL. But it seems to me clear that he did have that question in mind. Furthermore the reference in the 3^rd August e-mail to a PUL salary is not indicative either way because PUL was used interchangeably as identifying the company and the E & P business as carried on by Petrodel. He found (as he was bound to do) that there was a conversation in March between TLB and MJP following the foundering of the financing on 8^th February. In that conversation he found that it must have been agreed at least implicitly that TLB was to continue to be employed by Petrodel at a salary due from Petrodel (and he was clearly right about that). The only question was what was the salary to be.
22. He then considered what had been agreed as to the salary on the basis assumed until 8^th February 2007 that TLB was moving to PUL i.e. was there anything conditional about that arrangement in particular conditional as to the raising of finance. He found as a fact that nothing had been said about what was to happen if PUL was not capitalised until Petrodel was faced with that reality in February 2007 [see the last two sentences of para 54]. He then concluded that in the discussions in March which recognised the continued employment by Petrodel there was implicit in the agreement to "defer" any increase in salary, that Petrodel as the employer was accepting a liability for that increase to accrue as from 1^st January 2007. But it was agreed that the increase would only be paid when the money was available. He supported that conclusion with these words – "Any other interpretation involves accepting that TLB was prepared to take on the responsibility for the E & P business just as if PUL had been capitalised, but forego the entitlement to the new salary and instead accept remuneration which was less than he had been paid in 2006 (after taking account of his participation in the resource pool)." This last comment is a reference to the fact that the incentive scheme had been withdrawn for 2007.
23. The Judge also accepted TLB's explanation as to why he did not press for the increase.
24. I see force in Mr Dougherty's points on this last finding by the judge, and see also how if the judge were wrong about accepting that explanation it would support a case that what occurred in March was an acceptance that no increase was due while TLB remained employed by Petrodel. But this is a case where the judge has seen the witnesses. He has appreciated the difficulties but has concluded (1) as was clearly right, TLB was from March now to remain employed by Petrodel; (2) that for the job he was now doing it would have been odd if the increased salary was not to be payable; (3) that the agreement to "defer" was just that because otherwise MJP could have said as at March, there is no entitlement to an increase at all.

Conclusion

25. The judge having seen and assessed the witnesses was entitled to accept TLB's explanation as to why he did not press for the increase, and entitled to conclude on the basis he did what must have been implicitly agreed in March 2007.
26. As I have already indicated the judge does not support his finding by reference to the letter of 6^th March and the note he found to have been sent by MJP to Dr Mestres-Ridge. In my view he would have been entitled to do so. It seems to me that if a note was written as the judge found, that would support a conclusion that MJP believed to have been agreed what the judge found implicitly to have been agreed, but since there was no respondent's notice, I have not based my conclusion on that note.

Second ground of appeal

27. Mr Dougherty did not address orally Petrodel's second ground of appeal, that any increase in salary was conditional on finance being raised. As appears from paragraph 22 above, the judge held that prior to 8^th February 2007 there was no discussion about salary increase being conditional on the raising of finance. All were assuming finance would be raised. The judge's finding as to the implicit agreement in March and his conclusion that "defer" meant accrue but postpone were as I have indicated findings open to him. Such findings are inconsistent with an agreement conditional on finance being raised, and there is thus nothing in the second ground of appeal.
28. I accordingly would dismiss Petrodel's appeal against the judgment for the increased portion of TLB's salary.

Interest

29. The judge awarded interest on the salary claim as from the date when TLB left Petrodel in July 2008 that being accepted as the earliest date from which it should run by Mr Higgins for TLB. Mr Dougherty submits as he did to the judge that the earliest date should be the date of the first demand i.e. the letter of 4^th April 2009 following that of 6^th March 2009 from Dr Mestres-Ridge.
30. There is force in Mr Dougherty's argument but as he accepted interest is an exercise by the judge of discretion. Mr Dougherty has to show that the judge was plainly wrong or that he was outside the ambit of reasonable disagreement. Whether I would have reached the same decision as the judge is not to the point. It is arguable that Petrodel should have paid this salary when TLB left, and it cannot be said that the judge was plainly wrong to prefer that argument. I would dismiss this aspect of the appeal as well.

Lord Justice Lewison: I agree

Lord Justice Mummery: I also agree