England and Wales Court of Appeal (Civil Division) Decisions

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Mr. Justice Vos
[2011] EWHC 3428 (Ch)

		Royal Courts of Justice Strand, London, WC2A 2LL
		13 June 2012

Lord Justice Moore-Bick :

1. The principal matter before the court is an application by Mr. Joseph Ackerman ("Joseph") for permission to appeal against the order of Vos J. dismissing his claim for a declaration that a report made by Mr. Andrew Thornhill Q.C. pursuant to an agreement between Joseph and the first respondent, Mrs. Naomi Ackerman ("Naomi") and certain other parties is invalid and without effect. Coupled with that is an application by Joseph for a stay of execution of the judge's order that he make interim payments to the respondents in respect of their costs of the proceedings below.
2. The respondents oppose the grant of permission to appeal, but, in the event that permission is granted, ask the court to impose as conditions of pursuing the appeal a requirement that Joseph satisfy the judge's orders for interim payments and a requirement that he provide security for their costs of the appeal. Joseph opposes both applications on the grounds that he does not have the means to comply with them and that his appeal would be stifled if such conditions were imposed.
3. The proceedings have their origin in a dispute between two sides of the Ackerman family. From the early 1960s Joseph and his brother Jack began to build up a successful property empire, known generally as the Ackerman Group. When Jack died in 1989, his widow, Naomi, acquired his share of the business. Between 1989 and 2004 Joseph continued to run the affairs of the Ackerman Group and from 2001 Barry Ackerman, one of Naomi's sons, began to work part-time with him. However, they did not see eye to eye and from 2004 onwards the relationship between the two branches of the family deteriorated sharply to the point at which they became acrimonious. As a result, in February 2006 Joseph and Naomi decided to separate their interests, but that was not a simple matter, because the affairs of the various companies making up the group were closely intertwined.
4. For many years Joseph had been advised by the third respondent, Mr Andrew Thornhill Q.C., a senior member of the tax Bar. It was agreed that he should be instructed to assist with the demerger, the first stage of which was to carry out a lottery to decide how the interests should be split. The lottery was performed by Mr Thornhill in March 2009, but the results were not disclosed to the parties at that time.
5. In June 2009 Joseph, Naomi, Barry, Mr. Thornhill and others entered into an agreement under which Mr. Thornhill, acting as an expert, was to carry out a separation of the interests. The basic principle underlying the agreement was that there should be an equal distribution of the assets of the group between the two sides of the family, but it was recognised that some adjustments would have to be made to the outcome of the lottery in the interests of convenience and to achieve a fair result. One object of the adjustments was to compensate each side for what were described as "Removed Assets", that being the term used to describe assets that had been used or removed from the group for the benefit of one or other side of the family. Adjustments were also to be made in respect of claims which one side of the family might have against the other in relation to the management of the group's affairs. Under the agreement Mr. Thornhill was required to prepare a Provisional Adjustment Report setting out the adjustments he proposed to make and then within a year to prepare a Final Report after considering further observations from the parties.
6. The agreement contained detailed provisions for the way in which Mr. Thornhill was to carry out his task, including a provision requiring the parties to inform him of any Removed Assets which they or their interests had benefited from and what adjustments they proposed that he should make in dividing the assets between them. It is unnecessary to refer to many of the clauses of the agreement in detail, but at the heart of the dispute lies clause 9(B)(c) which required Mr. Thornhill when preparing his Provisional Adjustment Report to inform Naomi and Joseph of the adjustments which the other had proposed. It was common ground that he also had an implied duty to act fairly as between the parties.
7. On 5^th January 2011 Mr. Thornhill issued his Provisional Adjustment Report ("the Report") in which he concluded

(i) that Naomi had a "claim" against Joseph for over £23 million;

(ii) that the group had little or no value;

(iii) that all the jointly-owned assets (which would have to be valued) should be transferred to Bana One Ltd (a company formed to hold Naomi's and Barry's shares of the assets) to be credited against Naomi's claim; and

(iv) that certain assets held in trust for the children of Joseph and Naomi should also be transferred to Naomi's company in return for debentures payable at a future date.

8. Mr. Thornhill implemented the Report by transferring all the assets to Bana One using powers of attorney that had been executed in his favour by Joseph for that purpose.
9. Joseph was surprised to find that Mr. Thornhill had allocated the whole of the assets to Naomi and thought that he had exceeded his powers under the agreement. He was also angry that he had been divested of the whole of his interest in the Ackerman Group. He therefore brought proceedings against Naomi, Barry and Mr. Thornhill seeking (among other things) to have the Report set aside on a variety of different grounds.
10. The trial was heard by Vos J. He found that in the course of carrying out the work to enable him to prepare the Report Mr. Thornhill had received from Naomi a proposal that the jointly-owned assets and the assets held in trust for the children should all be transferred to her, but that in breach of clause 9(B)(c) and of his implied obligation to act fairly, he had failed to inform Joseph of that fact. Joseph argued that this invalidated the Report because Mr. Thornhill had not carried out the exercise that he had been instructed to perform. As a result, the report was not that for which the parties had contracted and was therefore not binding. Moreover, he argued that Mr. Thornhill's departure from the agreed procedure demonstrated that he was unable or unwilling to act fairly in the performance of his functions under the agreement which had thereby been repudiated. As a result, the agreement had been discharged.
11. When dealing with this argument the judge drew a distinction between a departure from agreed procedure (i.e. carrying out the right function but in the wrong way) and a departure from instructions as to matters of substance (i.e. carrying out the wrong function). Having considered the authorities he held (paragraph 380) that

" . . . a departure from substantive instructions will be material and automatically invalidate a decision unless it is trivial or de minimis, but that a departure from express or implied procedural instructions or an unfairness will not always do so."

12. He found that Joseph might well have wanted to make submissions both as to the solution that Mr Thornhill should adopt and the way in which it should be effected, but he thought that he would have come to the same conclusions whatever Joseph had said. In paragraph 381 of the judgment he said:

"I cannot possibly say that the final terms of the documentation would inevitably have been the same whatever representations Joseph and his advisers had made. But I am satisfied that they would not have been very much different."

He therefore held that the Report was valid and binding.

13. It is this part of the judge's decision which has given rise to the first ground of appeal.
14. The judge also found that following the transfer of the assets to Naomi on 30^th December 2010, Mr. Thornhill failed to give Joseph full information about what he had done in implementation of the Report, that he expressed the view to the group's bank that there were unlikely to be changes to the Report and that he failed to provide Joseph with the documents by which the transfers of the assets had been put into effect. Joseph contended that, taken in conjunction with the failure to inform him of Naomi's proposals, to which I have just referred, Mr. Thornhill's conduct demonstrated an unwillingness or inability to act fairly in completing the demerger exercise. However, the judge rejected that submission. He did not think that these matters, viewed individually or in combination, demonstrated unfair behaviour on the part of Mr. Thornhill, much less an inability or unwillingness to complete his task with the necessary impartiality and fairness. He found that although Mr. Thornhill had not told Joseph the whole story about what he had done to implement the Report, what he had told him was truthful and that he had not acted unfairly. As to the provision of transaction documents, Mr. Thornhill had not deliberately acted unfairly: he had simply "taken his eye off the ball". The comment to the bank was an isolated incident into which nothing of any significance could be read.
15. The judge's decision in relation to those matters forms the basis of the second ground of appeal.
16. In the course of reaching his decision the judge had to decide a number of points on the construction of the agreement relating to Mr. Thornhill's authority to make adjustments. They were:

(i) whether he had power to make adjustments that materially eroded the principle that the parties were to be left with equal shares of the assets;

(ii) whether the power to make adjustments in respect of "claims" was limited to properly formulated and sustainable legal claims; and

(iii) whether he had power to make adjustments which resulted in a transfer of all the assets to Naomi as well as giving her a money claim against Joseph.

17. The judge held:

(i) that "adjustments" in clause 9(B)(a) and (c) meant the same as in clause 10(a), namely, adjustments of a kind that would

". . . achieve fairness or convenience between the parties in regard to the matters raised hitherto by either side or any other matters he thinks fit, including the respective contributions of [Joseph] and [Naomi] to the development of the business . . . and any claims . . . in relation to the prior conduct of the affairs of the [group];"

(ii) that this provision gave Mr. Thornhill the broadest possible discretion to make adjustments in respect of any matters he thought fit and in whichever of the specified forms he thought fit, including a cash payment;

(iii) that "claims" included not only claims for negligence or mismanagement but any claims which Mr. Thornhill thought could reasonably be advanced; and

(iv) that a combination of these powers gave Mr. Thornhill power to allocate all the assets to Naomi and give her in addition a money claim against Joseph.

18. Joseph challenges each of those conclusions, which together form the third ground of appeal.

Failure to follow the correct procedure

19. In my view the complaint that Mr. Thornhill failed to comply with the agreed procedure is the most significant ground of appeal. The leading case on the failure of an expert to follow his instructions is the decision of this court in Veba Oil Supply & Trading GmbH v. Petrotrade Inc [2001] EWCA Civ 1832, [2002] 1 All ER 703. In that case Petrotrade sold Veba a cargo of gasoil F.O.B. Antwerp. The contract provided that the density of the product was to be tested using method ASTM D1298 and that quantity and quality were to be determined by a mutually agreed independent inspector at the loading installation in the manner customary at such installation. A cargo was loaded on the mt 'Robin' at Antwerp. Caleb Brett, the agreed inspector, reported that it was within the contractual specification using test method D4052, which was the more modern and accurate test customarily used at Antwerp. On arrival and testing the density of the oil was found to exceed the contractual maximum. Veba made a claim against Petrotrade on the basis that the inspector's determination was wrong and was not binding because the wrong testing method had been used. Petrotrade argued that Caleb Brett had not been required to use test method ASTM D1298 (because it was not customary to use it at Antwerp) and that in any event, since, as was conceded, the result would have been the same using D1298, any departure from the agreed method was immaterial.
20. The court held that the test method was a contractual stipulation and that, if the expert departed from his instructions in a material respect, the parties were not bound by the result because they had not agreed to it. In order to be material for these purposes it was not necessary for a departure from instructions to have made a material difference to the result; it was sufficient that it was not de minimis. Caleb Brett had been required to determine the quality of the cargo using test method D1298; it had not done so and the parties had not agreed to be bound by a determination of quality by any other method.
21. In the present case the judge drew a distinction between departures from substantive instructions and departures from procedural instructions, relying on what was said by May L.J. in Amec Civil Engineering Ltd v. Secretary of State for Transport [2005] WLR 2339 and by Kitchin J. in Worrall v. Topp [2007] EWHC 1809 (Ch). He held that Mr. Thornhill's failure to inform Joseph of Naomi's proposals was a departure from his instructions, but was not material because the outcome would not have been very much different in any event. He therefore held that the error did not invalidate the Report.
22. In my view it is arguable that the judge was wrong to hold that the parties were bound by a report made following a failure to adhere to the agreed procedure and that neither Amec Civil Engineering Ltd v. Secretary of State for Transport nor Worrall v. Topp support his conclusion. The fact that the outcome would have been the same is arguably irrelevant (see Veba v Petrotrade, in which it was conceded that the outcome would have been the same, whichever test method had been used). The authorities tend to support the conclusion that the critical question is whether the expert adopted a non-contractual method, or (which is the same thing) departed to a more than insignificant degree from the procedure that had been agreed. In this case I think it is arguable that he did, and that the parties did not agree to be bound by a report made otherwise than in accordance with the agreed procedure.
23. The respondents say, however, that an appeal on this point alone would serve no useful purpose because, as the judge held, the Report did not contain a final determination but only a provisional determination that is subject to review and correction in the Final Report. It remains open to Joseph, therefore, to challenge the Report and to argue that the adjustments were inappropriate and that their implementation should be reversed wholly or in part. Joseph takes a much more serious view of the matter. He argued that Mr. Thornhill's failure to follow his instructions in such an important respect went to the root of the agreement and together with the other instances of his failure to act fairly destroyed the trust and confidence in him which was fundamental to its performance.
24. The judge went out of his way to emphasise that Mr. Thornhill had at all times acted in good faith and with the utmost probity. He also expressed himself entirely satisfied that Mr. Thornhill would proceed to undertake the third stage of the determination process impartially, independently and fairly, if allowed to do so. He found that it was unreasonable of Joseph to think otherwise.
25. Those findings depend to a high degree on the judge's assessment of Mr. Thornhill formed after reading the documents and, importantly, seeing him give evidence. This court is invariably reluctant to interfere with findings of that kind, being very conscious of the fact that the trial judge is far better placed to evaluate the evidence. In the present case nothing has been drawn to our attention which suggests to me there is a real prospect of overturning the judge's findings on appeal. In those circumstances I do not think that Mr. Thornhill's failure to follow the agreed procedure arguably provides a basis for treating the agreement as discharged.
26. In those circumstances the most that Joseph can hope to achieve by this ground of appeal is a re-drawing of the Report and the restoration to him in the meantime of the assets transferred to Naomi. No doubt the redrawing of the Report would occupy a certain amount of time, which has led the respondents to suggest that the present appeal is no more than a cynical attempt by Joseph to disrupt the demerger process. In effect they say that it is a spoiling tactic. They point, in particular, to the following:

(i) that having pressed for an expedited trial, Joseph has not sought to have the appeal expedited;

(ii) that he has not pursued the appeal with any diligence, having declined to make an application for permission at the time of handing down of the judgment;

(iii) that the continuing uncertainty resulting from an appeal will hamper attempts to turn the group's fortunes around; and

(iv) that Joseph's attitude during the trial was that if he cannot control the group, there should be no group left for anyone to control.

27. In my view there is a good deal of force in some of those observations, but ultimately they run up against the fact that the agreement called for a Report produced in accordance with a prescribed procedure. That procedure was obviously intended to fulfil a purpose. The agreement contemplated that the parties should provide all the information necessary to enable Mr. Thornhill to carry out the adjustments and that they should also deploy all the arguments they wished him to take into account when reaching a decision. The Report, although only provisional, was intended to be the blueprint for the Final Report, subject only to such alterations (perhaps in the form of fine tuning) as might follow from further representations.
28. Having said that, I think one is entitled to wonder whether the parties can have intended that a procedural error in drawing up what was never more than an interim report might lead to its being set aside. As a result of the judge's decision Mr. Thornhill will continue to perform his functions under the agreement, including the preparation of a Final Report, in the course of which Joseph can seek to persuade him that he made mistakes in preparing the Provisional Report. There may be a strong argument, therefore, for saying that, since the agreement itself contains its own means for rectifying an error of this kind, Mr. Thornhill's failure to comply with the agreed procedure at the interim stage can be regarded as contractually irrelevant.
29. However, despite the attraction of that argument, I do not think that it is so strong as to deprive Joseph of any real prospect of succeeding on appeal. I think it is too simplistic to say that the failure to inform Joseph of Naomi's proposals is irrelevant because everything is open to revision at the stage of the Final Report. That does not reflect the nature and terms of the agreement itself and quite apart from that there is a real danger that the Report will have acquired a certain status which it will be difficult to dislodge. In any event, if it is arguable that the Report is not binding, Joseph is entitled to have his rights in that respect vindicated and a fresh report prepared after following the correct procedure. Moreover, success on the appeal may result in the restoration of property to Joseph and may also have an effect on the judge's order for costs.
30. As to the argument that in seeking to appeal Joseph is motivated primarily by a desire to undermine the demerger process and damage Naomi's chances of rescuing the group, I think that the court must exercise caution before acting on considerations of that kind. In general, the court is not concerned with a person's motivation for prosecuting or defending proceedings, unless it is satisfied that he is acting in a way that amounts to an abuse of the process. In my view the material before the court does not support the conclusion that Joseph's prosecution of an appeal would amount to an abuse of the process.
31. For these reasons I would give permission to appeal on this ground, but would limit that permission to the question whether the Report is binding on Joseph.

Unfair behaviour amounting to repudiation of the agreement

32. The second ground of appeal arises out of the three further respects in which it is said that Mr. Thornhill acted unfairly and so as to demonstrate that he could not be trusted to carry out the remainder of his functions under the agreement. The judge rejected that argument. He did not consider that any of the matters complained of were of significance and reached the clear conclusion by reference to the evidence before him, including the explanations given by Mr. Thornhill himself in the course of giving evidence, that he could and would complete his task fairly. For the reasons I have already given I do not think that there is any real prospect of overturning his findings on appeal. I would therefore refuse permission to appeal on this ground.

Construction

33. That leaves the questions of construction. In my view there is no real prospect of persuading the court that the judge was wrong in his construction of the word "claims". There is nothing, as he said, to support the conclusion that the word was intended to refer only to fully formulated and sustainable legal claims, as opposed to claims which could reasonably be advanced, and there is much force in his observation that it would be surprising if it had been so limited.
34. Clause 10(a) of the agreement provided that adjustments could be made by way of cash payments, property or share transfers, or adjustment of liabilities. Although the overall object of the agreement was to divide the assets equally between the two sides of the family, the provision for adjustments inevitably meant that the parties must have contemplated the possibility that the ultimate allocation of the remaining assets might depart from equality to a considerable degree. In the event Mr. Thornhill's allocation reflected the fact that the group's assets had a relatively low value and that Joseph was liable to account for substantial Removed Assets of one kind or another. The allocation may have represented an extreme outcome of the principles embodied in the agreement, but it is not arguably outside its contemplation.
35. In my view there is no real prospect of persuading the court that the judge's decision on any of these issues of construction was wrong and I would therefore refuse permission to appeal on this ground.

Stay of execution, interim payment and security for costs

36. To a greater or lesser degree these applications all turn on Joseph's current financial position. At the end of the trial Vos J. ordered Joseph to pay the respondents' costs of the action and made an order for an interim payment of £1.1 million in favour of the Ackerman defendants and £268,000 in favour of Mr. Thornhill. Save for the sum of £225,000 standing in court as security for the costs of the Ackerman defendants, the orders for interim payments were stayed pending determination of the application for permission to appeal.
37. Joseph has applied for a stay of execution pending appeal on the grounds that he does not have the means to make those payments, that if required to do so he will be forced into bankruptcy and that his appeal will then be stifled. The respondents oppose the application for a stay of execution and seek an order for security for their costs of the appeal.
38. In August 2011 Roth J. ordered Joseph to provide security for the Ackerman defendants' costs of the action on the grounds that he had taken steps in relation to his assets that would make it difficult to enforce an order for costs against him. At that stage the judge estimated that Joseph's costs might amount to as much as £1.2 million and that even with the benefit of a loan of £775,000 from one of his sons-in-law he did not appear to have sufficient assets to take the case to trial. The Ackerman defendants suggested that he must have other sources of income, but it was accepted that he might have to be more economical in his preparations for trial. Roth J. concluded that Joseph probably had access to more funds than he was prepared to reveal and thought that there were good reasons why his children should be willing and able to help meet the bills, should that really become necessary. He ordered Joseph to provide security in the sum of £600,000, part of which was to be provided by way of a charge on his house. It was not necessary for the judge to reach any conclusion on whether Joseph had access to specific assets which he had not disclosed.
39. Joseph has provided two witness statements dealing with his current financial position. His solicitor, Mr. Marino, has also filed a witness statement in which he says that his firm and Leading Counsel are conducting the appeal on a conditional fee agreement. Junior counsel's fees are payable up to an agreed amount and are thereafter also subject to a conditional fee agreement. Neither Joseph's wife nor his children are apparently willing to provide further funds for the litigation or for the work that remains to be done to complete the demerger of the family's interests.
40. In Hammond Suddard Solicitors v Agrichem International Holdings Ltd [2001] EWCA Civ 2065 the court emphasised the need for cogent evidence in support of an application for a stay of execution and for full and frank disclosure by the applicant of his financial position if it is said that he cannot afford to provide security for costs when there are otherwise good grounds for providing it. The respondents rely on the fact that Joseph has, in his own words, "sought assertively to manage succession and tax planning" and submit that by the use of discretionary trusts and a web of offshore companies he has managed to divest himself of most of his assets while remaining able to live comfortably and finance the present litigation. One source of funds has been a facility of £1.3 million made available to him by a Mr. Sidney Attias who runs an insurance and financial consultancy business in Gibraltar. The respondents have pointed out that the loan is unsecured and on very favourable terms as to interest, which they say suggests that Joseph has access to funds offshore which he has not revealed to the court. Mr. Attias has provided a statement explaining that he was prepared to assist Joseph as a personal favour to Mr. James Levy of Hassans International, a firm of lawyers in Gibraltar used by Joseph in connection with various offshore transactions.
41. I can well understand the respondents' scepticism about Joseph's description of his present financial position, especially in the light of the fact that, despite what he told Roth J., he has been able to find considerable sums of money to maintain the proceedings thus far. On the other hand, they are unable to point to any firm evidence in support of the suggestion that he has access to considerable undisclosed assets and the fact is that his solicitors and counsel are acting under conditional fee agreements. I find it difficult to believe that they would have been prepared to do so unless they were satisfied that it was the only means open to Joseph of funding the appeal.
42. A stay of execution will, of course, prevent the respondents from enforcing their orders for interim payments, but there is no evidence that Joseph can or is likely to dispose of any assets still available to him in a way that will materially prejudice their position in the meantime. On the other hand there are good reasons for thinking that if those orders were to be enforced Joseph would be forced into bankruptcy and it is doubtful, to say the least, whether his trustee would be prepared to pursue the appeal. In those circumstances I have come to the conclusion that the stay imposed by Vos J. on the orders for interim payments should be continued until the determination of the appeal or further order. It follows that I would dismiss the respondents' applications that Joseph be required to satisfy those orders as a condition of being allowed to pursue his appeal.
43. The application for security for costs raises similar issues, but differs in two respects: first, the sums involved are much smaller and second, the pursuit of the appeal will force the respondents to incur yet further costs without, as far as one can see, any real prospect of recovering them if an order for the payment of those costs is made in their favour. In those circumstances there is a strong argument for ordering Joseph to provide some security for the respondents' costs of the appeal, if he has the necessary means available to do so. However, in the light of the evidence before the court I am satisfied that, although some further payments may be due to him from a company called Loch Tummel, at present Joseph does not have the means to provide security in more than a nominal amount. For that reason I do not think that it is appropriate at this stage to make the order which the respondents seek. Having said that, rather than dismiss the application outright, I would adjourn it generally with liberty to apply on 14 days' notice to Joseph so that, if the respondents are able to obtain evidence that he is able to comply with whatever order the court may make, the matter can be reconsidered.

Master of the Rolls:

44. I agree.