COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM QUEEN'S BENCH DIVISION
MR JUSTICE WALKER
2008 folio No: 548
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE CARNWATH
LORD JUSTICE STANLEY BURNTON
| ING BANK NV
|- and -
|ROS ROCA SA
Charles Graham QC & Simon Colton (instructed by Messrs Izod Evans) for the Respondent
Hearing dates : Monday 29th & Tuesday 30th November, 2010
Crown Copyright ©
LORD JUSTICE CARNWATH :
The Hawk Retainer
"in connection with the search of a partner to subscribe a capital increase in Ros Roca…("the Transaction") on the terms set out in this letter ("the Engagement")"
"a) using information provided by the Company for the purposes of the Engagement, provide the Company with a valuation of the Ros Roca's assets that form part of the transaction;
b) advising on the best long term financial structure for Ros Roca;
c) preparation, with the assistance of the management of the Company, of the information which will be made available to the potential buyers, including the elaboration of a descriptive sale memorandum, with detailed information of the businesses and its economic financial situation;
d) in consultation with the Company, developing, updating and reviewing a list of potential purchasers (the "List") and contacting those in the List which have been approved by the Company;
e) advising the Company on the conduct of the Transaction, including advising on obtaining confidential undertakings from potential purchasers in respect of confidential information, dealing with enquiries from potential purchasers, accompanying potential purchasers as required on due diligence meetings with the Company and management and site visits, and distributing further information;
f) advising and assisting in the negotiations the Company may hold with potential purchasers or any other party in the Transaction and its advisers and/or investors and, if appropriate, the advice on tactics which the Company may wish to adopt in relation to such negotiations;
g) assisting the Company on the final terms of the Transaction;
h) collaboration and co-ordination of the Company's other advisers, which will prepare the economic, financial, administrative, technical, tax and legal information (Vendor Due Diligence and Data room) to be delivered to the potential interested parties; and
i) co-ordination of, and assistance with the preparation of any documentation required to execute the Transaction."
"It is solely the Company's responsibility to ensure that the information and advice relating to any due diligence and the implementation of any transaction contemplated in connection with the Engagement is received and considered by the Company as adequate for its purposes under the Engagement."
"b) an additional Fee based on the Enterprise Value/EBITDA 2006 ("EV/EBITDA 06") entry multiple implicit in the Transaction.
|For an implicit EV/EBITDA 06 multiple in the following range||An additional fee per 0.1x multiple of|
|Below 8.9 x||EUR 0|
|Larger than 8.9 x and below/equal to 9.2 x||EUR 25,000|
|Larger than 9.2 x and below/equal to 9.5 x||EUR 50,000|
|Larger than 9.5 x and below/equal to 10.0 x||EUR 75,000|
|Larger than 10.0 x and below/equal to 10.5 x||EUR 100,000|
|In excess of 10.5 x||EUR 200,000|
In this letter of agreement, the term "Enterprise Value" means the pre-money valuation of the partner's economic offer for its equity investment, plus any debt outstanding in Ros Roca before completion.
Illustrative example: in case of total equity raising from a financial partner of EUR 60m at an entry EV/EBITDA 06 multiple of 9.5x, proceeds for ING would amount to a total of EUR 825,000 (fixed fee of EUR 600,000 plus additional fee of EUR 75,000 + EUR 150,000)."
The construction issue
"the Enterprise Value/EBITDA 2006 ("EV/EBITDA 06") entry multiple implicit in the Transaction."
"… the higher the EV/EBITDA multiple, the higher the capital value which the purchaser is prepared to ascribe to the Company in comparison with what is known about its underlying profits."
Additional background facts
"(1) The Hawk Retainer was part of the arrangements that were required in order to enable Ros Roca's purchase of DEG to take place in late 2006, and it and ING's underwriting of the bridging finance were mutually conditional.
(2) At the time of the Hawk Retainer neither party could say what form the offer(s) to invest would take.
(3) If Project Hawk achieved its aim, the successful bid to invest might explicitly identify an Enterprise Value in the sense used in the Hawk Retainer. If it did not then, because bidders would have to say how many shares they wanted for a fixed amount of money, it would always be possible to extrapolate that value.
(4) At the time of the Hawk Retainer it was not contemplated that ING would have any control over which offer was eventually accepted, which was always a matter for Ros Roca (and in reality for Ros Roca's shareholders). Indeed, there was to be no obligation on the part of Ros Roca to accept the 'highest' offer. In this regard there was an element of risk to ING.
(5) At the time of the Hawk Retainer neither the EBITDA for 2006 nor the EBITDA for 2007 could be known as a definite number. But the parties had forecasts of the EBITDA for both 2006 and 2007. The forecast for EBITDA 2006 for the combined enterprise of Ros Roca and Dennis Eagle was about €28 million. The forecast for EBITDA 2007 was just over €30 million – a figure which made no allowance for 'synergies' resulting from merger, such synergies not being expected to increase gross margin until 2010 onwards. Of these forecasts, the forecast for 2006 could be expected to be more accurate than that for 2007, since it could be based on 9–10 months of actual performance whereas the projection for 2007 was a pure estimate.
(6) At the time of the Hawk Retainer Ros Roca was acquiring Dennis Eagle at an 8.6 multiple, and both parties knew that two current purchases in the sector were taking place at entry multiples relative to EBITDA of 9.0 and 9.4. A minority share would attract, other things being equal, a lower valuation than that for purchase of the entire share capital of a company. As against that, however, the prospect of synergies increasing gross margin from 2010 onwards would tend to increase the valuation of Ros Roca following the imminent acquisition of DEG.
(7) It was market practice that when valuing a company, or comparing valuations, the 'current' figures for Enterprise Value and EBITDA would generally be used – and in the case of EBITDA the 'current' figure might well be a forecast." (para 23)
"While I do not have the benefit of expert evidence, the matters set out at paragraph 23(6) and 23(7) above demonstrate the use of EV/EBITDA comparables in the market. They reflect the acceptance by ING's witnesses that valuations for actual transactions would use the figures for enterprise value and EBITDA current at the time of the transaction – which in the case of EBITDA might be a forecast."
The judge's view
"(a) ING's view
One must determine a value for the concept in question by identifying the value for the concept stated or implied in the Transaction. ING acknowledges that on this basis the denominator it contends for ("EBITDA 2006") is not implicit in the Transaction and accordingly it says that the words "implicit in the Transaction" apply only to the numerator:
(b) Ros Roca's view
One must determine a value for the concept in question by using figures current at the time when the Transaction was completed – which might or might not have been stated or implied in the Transaction. Ros Roca accepted that their interpretation involved ignoring the reference to 2006."
"it is clear that something has gone wrong with the language, and if so is it clear what a reasonable person would have understood the parties to have meant?".
"42… I do not consider that ING's construction of the words used to express the Entry Ratio is merely idiosyncratic. In my view it is so unreasonable in its result that the parties cannot have intended it – or if they had intended it they would have taken steps to make that intention abundantly clear.
43. The key point here is not only that valuations generally use current values for both numerator and denominator when computing an entry multiple, but also that this is done for good reason. Only by using the EBITDA which is "current" for the actual or proposed purchase in question can one measure the extent to which the purchase price constitutes a high or low assessment of the company's intrinsic worth by reference to its earnings. The obvious purpose of an additional fee is to give ING a success fee over and above its fixed fee to reflect the extent to which the eventual purchaser has made a high rather than a low assessment of Ros Roca's intrinsic worth. On the assumption that EBITDA 2006 would be the current EBITDA at the time of the Transaction this was exactly what the words used to express the Entry Ratio achieved."
"neither party spotted that this overlooked the possibility that 2006 might no longer be apposite at the time of the Transaction."
He did not rest his decision on "the undoubted fact" that ING's construction would lead to a high overall fee:
"The crucial points here are that on this premise one will not be comparing like with like, and there is no obvious relationship between a denominator of EBITDA 2006 and a numerator achieved by calculating the Enterprise Value for a Transaction at a time when EBITDA 2006 is no longer current." (para 44-5)
"It is common ground that when valuing or comparing values it is general practice to identify such an EBITDA, which may be a forecast rather than an actual figure. If this can be done as a matter of general practice then there is no reason to conclude that it will involve insuperable commercial problems in the context of the Hawk Retainer." (para 48)
"I consider it clear that a reasonable person would have understood the parties, when using the words they did in expressing the Entry Ratio, to have included references to 2006 by oversight, and to have intended that the denominator should be EBITDA without linking this to a specified year." (para 49)
"Only by using the EBITDA which is 'current' for the actual or proposed purchase in question can one measure the extent to which the purchase price constitutes a high or low assessment of the company's intrinsic worth by reference to its earnings...." (para 43 – see above)
His explanation for the reference to "EBITDA 2006" was that the parties had expected the transaction to be concluded reasonably promptly, and had overlooked the possibility that it might be overtaken by events.
"At the time of the Hawk Retainer neither the EBITDA for 2006 nor the EBITDA for 2007 could be known as a definite number. But the parties had forecasts of the EBITDA for both 2006 and 2007. The forecast for EBITDA 2006 for the combined enterprise of Ros Roca and Dennis Eagle was about €28 million…." (para 23(5))
This passage to my mind is consistent with ING's submission that there is not necessarily a "current EBITDA" objectively ascertainable at any time. It is a matter of judgment depending on the circumstances, and involving a choice between actual and forecast figures. As Mr Phillips QC put it in his skeleton:
"The choice of EBITDA will always involve elements of judgment. Suppose, for instance, a valuation made mid-year; no exactly equivalent EBITDA figure (e.g. an EBITDA figure for the 12 months immediately preceding the valuation date) will be available. Comparison is necessarily to either a historical figure (e.g. the last audited figure) or to a forecast figure, which incorporates elements of speculation about what will happen after the valuation date."
Estoppel by convention – the cross-appeal
The factual case in outline
The judge's view
"1. Ros Roca's total transaction costs for Project Hawk, for ING and for its other advisers, would be in the region of €4 million; and
2. This €4 million transaction costs figure was calculated on the basis of an Additional Fee calculated using an "EV/EBITDA... entry multiple implicit in the Transaction" of 10.35x" (para 53).
Assumption 1, in his view, did not go far enough; it did not imply that ING could not claim a fee over the estimate (para 57). Assumption 2 was unsupported by the evidence:
"Ros Roca is wholly unable to point to any part of the history which involved an express assertion by either party that the Entry Ratio in the Hawk Retainer was 10.35 or was to be computed by reference to anything other than EBITDA 2006….
At best from Ros Roca's point of view all that can be said is that a figure of €4 million as transaction costs could have been derived by using 10.35 as the Entry Ratio applicable under the Hawk Retainer. Consistently with all these matters, however, ING – and for that matter Ros Roca - could have identified €4 million as transaction costs on the basis that it appeared to be a reasonable "ball park" figure without going to the trouble of working out what the Entry Ratio would be." (para 60-2)
The evidence reviewed
"Looking at the mandate, I couldn't resist calculating the fees (attached) and I don't know if Excel has gone wrong (and isn't calculating properly) or this is going to cost RR 0.6% of the RR capital."
"At some point in November, .. I recall asking Mr Muro-Lara whether €3,000,000 or the €4,000,000 stated in the September 2007 management presentation should be used for transaction costs. Mr Muro-Lara suggested that €4,000,000 would be more appropriate in order to maintain consistency with the management presentation of September 2007."
His evidence was that these estimates were not made by any "scientific calculation", nor in particular by reference to the entry multiple formula. Of the calculation of ING's fees in his email to Mr Muro-Lara, he said that he had done the exercise "out of curiosity", and that it "did not cross (his) mind" that there was an inconsistency with the figure being used for transaction costs.
":… there would have been a clear opposition on the side of Ros Roca…. We would have done our best, including to seek the assistance of the lending banks, to settle the issue in reasonable terms. €7.3 million represents almost 13 per cent of the total capital raised… We would certainly also have explored the possibility of changing the terms upon which Deya was investing (to increase the agreed Enterprise Value) so as to offset the additional and unexpected cost of the transaction."
".. when Mr Fernandez calculated ING's potential contractual fee under the Retainer Letter, on 6 November 2007, it was not for the purpose of checking the Transaction Costs figure. I did not, at any time, discuss with Mr Fernandez whether the Transaction Costs figure should be amended to reflect the calculation of 6 November. I was generally aware that the potential contractual fee under the Retainer Letter was higher than the Transaction Costs figure but did not consider the difference to be material for the purposes of what Annex 6.8.1 required... In any event, it was not in any of the parties' interests to change the Transaction Costs figure given the limited significance attached to the figure (as opposed to the fact the item was included at all) and given the potential disruption that changing it may have caused to the transaction."
In cross-examination, when asked what he meant by "potential disruption", he referred to the "situations" mentioned by Mr Gomà in the passage quoted above.
Comments on the evidence
"ING's position at the trial – from which it does not resile on this appeal – was that the most that could be said of these communications was that (as set out in its closing outline submissions, emphasis added) 'In the period from late September 2007 up to and including December 2007, the parties shared an assumption (sufficiently evidenced by mutual communications between them) that a reasonable figure for total transaction costs for the purposes of preparing the estimated net debt required by an Annex to the agreement with Deyà was in the region of €4 million…'
The italicized words are important. The estimate was only an estimate: it was not intended to be precisely accurate, as Mr Gomà accepted. And it was an estimate for a particular purpose, namely inclusion in the estimated net debt calculation, with respect to which it constituted (a) only a very small part of a much larger whole and (b) in relation to which underestimation was, from Ros Roca's perspective, clearly preferable to overestimation."
Ros Roca's evolving case
"(a) Was there a shared common assumption of the parties as to the effect of the phrase 'the Enterprise Value/EBITDA 2006 ("EV/EBITDA 06") entry multiple implicit in the Transaction', as manifested by conduct crossing the line between the parties?
(b) Did the Claimant clearly and unequivocally represent to the Defendant at any material time that its Additional Fee would be calculated by reference to the relevant EBITDA current at the time of the Transaction?"
(I take the expression "crossing the line" as a reference to the words of Kerr LJ in K.Lokumal v Lotte Shipping ("The August Leonhardt")  2 Lloyd's Rep 28, 35: something done "across the line between the parties".)
"(i) Ros Roca's total transaction costs for Project Hawk, for ING and for its other advisers, would be in the region of €4 million; and
(ii) this €4 million transaction costs figure was calculated on the basis of an Additional Fee calculated using an 'EV/EBITDA... entry multiple implicit in the Transaction' of 10.35x."
It having been pointed out to him that the former was an "assumption as to the future", rather than one of fact or law, he proposed an alternative based on promissory estoppel. The judge was reluctant to allow such a late reformulation of the case, but in any event could not find "any basis for identifying any express or implicit promise…" (para 51-6).
"…. the parties had shared the mistaken assumption that €4,000,000 was a reasonable estimate of the Transaction Costs.
It was implicit in that assumption that the Additional Fee in the ING element of transaction costs would not be charged on the basis of an EV/EBITDA 2006 multiple, but rather on the basis of the current EV/EBITDA multiple, being EV/EBITDA 2007."
They maintained their alternative case based on promissory estoppel, relying on ING's alleged "promise" not to charge a fee "which would take the total Transaction Costs over about €4 million".
Estoppel by convention – the law
"It is settled that an estoppel by convention may arise where parties to a transaction act on an assumed state of facts or law, the assumption being either shared by them both or made by one and acquiesced in by the other. The effect of an estoppel by convention is to preclude a party from denying the assumed facts or law if it would be unjust to allow him to go back on the assumption: The August Leonhardt  2 Lloyd's Rep. 28; The Vistafjord  2 Lloyd's Rep. 343; Treitel, Law of Contracts, 9th ed., at 112-113. It is not enough that each of the two parties acts on an assumption not communicated to the other. But it was rightly accepted by counsel for both parties that a concluded agreement is not a requirement for an estoppel by convention."
Later in the same passage he referred to "estoppel by acquiescence"
"That brings me to estoppel by acquiescence. The parties were agreed that the test for the existence of this kind of estoppel is to be found in the dissenting speech of Lord Wilberforce in Moorgate Mercantile Co. Ltd. v. Twitchings  A.C. 890. Lord Wilberforce said that the question is ". . . whether, having regard to the situation in which the relevant transaction occurred, as known to both parties, a reasonable man, in the position of the 'acquirer' of the property, would expect the 'owner' acting honestly and responsibly, if he claimed any title to the property, to take steps to make that claim known . . . ." at 903. Making due allowance for the proprietary context in which Lord Wilberforce spoke, the observation is helpful as indicating the general principle underlying estoppel by acquiescence."
Lord Steyn rejected the suggestion that the two concepts should be treated as aspects of "one overarching principle", in order not to blur "the necessarily separate requirements and distinct terrain of application" of the two kinds of estoppel (p 914C).
"It is submitted, notwithstanding the refusal of Lord Steyn in The 'Indian Endurance', to formulate an overarching principle, that the only distinction between an estoppel by convention and other forms of estoppel now lies in the manner in which the party to be estopped assumes responsibility for the proposition from which he is to be estopped from departing, namely by mutual assent rather than unilateral assertion"
Other have expressed doubts about the desirability of sub-division of this "most flexible" of doctrines (see e.g. per Judge LJ in Baird Textile Holdings v Marks & Spencer plc  CLC 999, citing Robert Goff J in the Amalgamated Investment case).
"(i) An assumption of 'fact' must be an assumption of present fact, and not as to the future: Argy Trading & Development Co Ltd v Lapid Development Ltd  1 WLR 444, 457A–B (Croom Johnson LJ).
(ii) The shared common assumption must be sufficiently certain: see Troop v Gibson  1 EGLR 1, at 6D–F.
(iii) The parties should have had the objective intention to make, affect or confirm a legal relationship: Baird Textiles Holdings v Marks & Spencer plc  CLC 999, at  (Mance LJ).
(iv) The estoppel must arise in the context of a particular transaction, and is effective only for the purposes of that transaction: Troop v Gibson  1 EGLR 1, 5M–6A.
(v) It must be unconscionable for the party estopped to be permitted to depart from the shared common assumption. See, e.g., Credit Suisse v Allerdale BC  1 Lloyd's Rep 315, 367 (aff'd on other grounds  QB 362). That means that the party asserting that there is an estoppel must show that it has relied on the shared assumption to its detriment."
i) Present fact. This proposition accurately records what was said in the 1977 case. But that was relatively early in the development of the law, before even the general restatement of the principles in the Amalgamated Investment case (1982). It is inconsistent with the basis on which the Indian Endurance case proceeded at all levels. Although Lord Steyn spoke of an assumption of "fact", the alleged assumption related to what was expected to happen in the English proceedings in the future. The parties' common understanding on that issue, if established, would have been sufficient to found the estoppel. That shows that the understanding may relate to the factual or legal basis on which a current transaction is proceeding, even if that understanding includes reference to events in the future.
ii) Sufficiently certain. The proposition refers to a comment in the concurring judgment of Ralph Gibson LJ in Troop v Gibson, on a point which he acknowledged was unnecessary for the decision. With respect, I find more persuasive the way in which the point was expressed in the leading judgment of Sir John Arnold P. After referring to the extensive argument on the need for a "representation" to be clear and unequivocal to found an estoppel, he said that the same question did not arise in relation to estoppel by convention:
"Since this is of a consensual character and the terms of the convention, just as those of a contract once the language is established by the evidence, must be interpreted by the court and the only true meaning is that decided upon by the court." (p 3K-L)
iii) Intention to affect legal relationship. This again comes from a concurring judgment, rather than one agreed by the other members of the court, and on a point which was not essential to the decision. Although Mance LJ treated the proposition as relevant to "both "promissory and conventional estoppel", the direct reference is to a case on the former (Combe v Combe  2 KB 215).
iv) Particular transaction. This proposition is based on a passage in the concurring judgment of Purchas LJ in Troop v Gibson, not adopted in the other judgments. That refers in turn to a statement by Eveleigh LJ in the Amalgamated Investments case ( QB 84, 126):
"The estoppel does not go beyond the transaction in which it arose. The representation or assumed state of facts are not to be held irrefutable beyond the purpose for which the representation or assumption were made."
In so far as there is a tension between the first sentence, which might be said to limit consideration to the ambit of a particular transaction, and the second which looks more widely at its "purpose", I would prefer the latter; but I doubt if Purchas LJ intended such a precise definition.
v) Need for detriment. This proposition is not particularly controversial, but it is not clear what is gained by referring to a 1995 first instance decision. It would have been more useful to refer to a recent statement in the Court of Appeal of the correct approach to "detriment", requiring–
"… a broad enquiry as to whether repudiation of an assurance is or is not unconscionable in all the circumstances" (per Robert Walker LJ in Gillett v Holt  Ch 210, 232D; discussed in Spencer Bower op cit para V.5.16-7)
i) Was there a relevant assumption of fact or law, either shared by the two parties, or made by Ros Roca and acquiesced in by ING?
ii) If so, would it be unjust (or "unconscionable") to allow ING to go back on the assumption?
By "relevant", I mean one which can be linked directly to the use of EBITDA 2007, rather than 2006, in the calculation of fees.
"a reasonable figure for total transaction costs for the purposes of preparing the estimated net debt required by an Annex to the agreement with Deyà was in the region of €4 million"
He says that it is not relevant in the sense I have defined, because it was only an estimate, not intended to be precise; and because it was an estimate for a particular purpose, namely inclusion in the estimated net debt calculation, not for calculating ING's fees.
LORD JUSTICE STANLEY BURNTON :
"In essence, the Pt 8 procedure, is in general terms designed for the determination of relevant claims without elaborate pleadings. If the procedure is misused, the defendant can object and equally the court of its own motion, and as part of its function to manage claims, will order the claim to proceed under the general procedure and allocate a track and give appropriate directions."
LORD JUSTICE RIX :
The construction issue
"first, there must be a clear mistake on the face of the instrument; secondly, it must be clear what correction ought to be made in order to cure the mistake."
In the latter case, Carnwath LJ pointed out that in deciding whether there is a clear mistake, the court is not confined to reading the document without regard to its background or context.
"The Company [Ros Roca] agrees with ING Corporate Finance that ING Corporate Finance will not be responsible for the verification of any such information and shall accept no responsibility for its accuracy and completeness."
However, in my judgment that is an exemption clause against liability. It does not prevent otherwise due legal effect being given to an estoppel based either on a shared understanding of the methodology of the contract or on ING's representations as to the fees to be charged under it. Ros Roca is not seeking to hold ING liable for any verification or any inaccuracy, but to operate the contract according to their shared assumptions and/or ING's representations as to its own fees.
"For the same reason it is not possible to set up an estoppel on the basis of an omission to disclose unless a duty to disclose can be established in the particular circumstances of the case. Tacit acquiescence in another's self-deception does not itself amount to misrepresentation, provided that it has not previously been caused by a positive misrepresentation."
"More recently, Lord Wilberforce in Moorgate…provided persuasive authority for the proposition that the duty necessary to found an estoppel by silence or acquiescence arises where a reasonable man would expect the person against whom the estoppel is raised, acting honestly and responsibly, to bring the true facts to the attention of the other party known by him to be under a mistake as to their respective rights and obligations. (Lord Wilberforce dissented on the outcome, and expressed the principle in proprietary terms appropriate to that case, but neither of these things in my judgment diminishes the significance of what he said.)"
"The relationship of owner and charterer is not one of the utmost good faith. One must be careful not to impute unrealistically onerous obligations to those who may choose to conduct their relations in a tough and uncompromising way. There is nonetheless a duty not to conduct oneself in such a way as to mislead. I have no doubt that the owners knew that the charterers believed they had paid the right amount. It was their duty, acting honestly and responsibly, to disclose their own view to the charterers. They did not do so and indeed thwarted the charterers' attempts to discover their views. Their omission to disclose their own calculation led the charterers to think, until a very late stage, that no objection was taken to their calculation. It would in my view be unjust in the circumstances if the owners could rely on the incorrectness of a deduction which they had every opportunity to point out at an earlier stage and which their failure to point out caused the charterers to overlook. I answer this question in favour of the charterers."