England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		9th November 2004

Mr. Justice Lewison:

Introduction

1. Baskerville House, Centenary Square, Birmingham was one of Birmingham's great civic buildings. It is named after John Baskerville, a Birmingham printer and the eponymous designer of the famous typeface. It was designed in 1935 by T Cecil Howitt in the Monumental Classical style. Construction began in 1938, but the war delayed its completion. It was to have formed part of a new civic centre, but the civic centre was never completed. Birmingham City Council own the building, and occupied it as municipal offices until 1997, when it became surplus to requirements. It is a big building, potentially consisting of a little less than 200,000 square feet.
2. At about the time that it was moving out, the City Council put on the market a proposal for the grant of a 250 year lease of the building, with a view to its development. Mr Ardeshir Naghshineh got to hear about this in the early summer of 1997. Towards the end of 1997 he submitted a development proposal to the City Council; and in November 1997 he learned that he was on the short list of three developers. As part of the proposal he offered £10.5 million for the lease. He made a presentation to the City Council in January 1998, and in April 1998 he learned that his offer had been accepted.
3. Lengthy negotiations with the City Council followed, and on 7 December 1999 they culminated in the entry into an agreement for lease.

Mr Naghshineh and Targetfollow

4. Mr Naghshineh is a civil engineer by training. However, he has been involved in the property world since about 1986, initially as a property broker. In 1992 he set up a company as a vehicle for property acquisitions. The current holding company is Targetfollow Group Ltd ("TGL"). The directors of TGL were Mr Naghshineh himself, Mrs Vanessa Fletcher (who is a chartered accountant and the finance director) and (probably) Mr Shapoor Naghshineh, who is Mr Naghshineh's brother (although the documents are somewhat confusing about this).
5. TGL has a number of subsidiaries. One of them is Bloomsbury Property Investments Ltd ("BPIL"), which owns an interest in the Holiday Inn Hotel in Bloomsbury, and an adjacent office building. Another is Targetfollow (Birmingham) Ltd ("TBL"), which was set up specifically to acquire the lease of Baskerville House. Apart from its interest in Baskerville House it has no significant assets. TGL has other subsidiaries too, but the details of these do not matter. Where it is not necessary to differentiate between TGL and TBL I shall use the expression "Targetfollow".
6. As at February 2002 the asset value of the combined group was of the order of £189 million, although there was secured lending in place to the extent of £114 million. Morgan Stanley was the lender. Its lending was secured by a first charge on the assets of the group. Mr Naghshineh was the largest (though not the majority) shareholder in the group.

The agreement for lease

7. The agreement for lease was made between the City Council and TBL. Neither TGL nor any of its other subsidiaries was required to guarantee TBL's obligations. The purchase price for the lease was £10,500,000. Under clause 3.1 TBL paid a deposit of £100,000. Clause 13 made the agreement conditional on obtaining planning permission for the development and subsequent use of the premises as a hotel; and the grant of an on-licence. Completion was to take place seven working days after the condition had been satisfied. The form of the lease agreed to be granted was annexed to the agreement. It contained a tenant's obligation to redevelop the building as a hotel and to complete the works within 24 months of the grant of the lease (although the City Council had power to extend time). It also required the payment of the premium of £10.5 million in stages:

i) £1 million on the grant of the lease (i.e. on completion of the agreement for lease);

ii) £4.75 million within 10 working days after practical completion of the redevelopment; and

iii) the remaining £4.75 million within twelve months after practical completion of the redevelopment.

8. Planning permission for the redevelopment and change of use was granted on 25 May 2000. In the events the agreement for lease was due for completion in February 2001. However, it was not then completed in accordance with its terms. On 28 February 2001 TBL paid the City Council a further £900,000, expressed to be a further deposit, in exchange for the postponement of the completion date to 28 September 2001. All this money was borrowed money, mostly from outside sources. By a further agreement made on 23 October 2001 the completion date was again extended, this time to 4 January 2002. In exchange for this extension, TBL agreed that:

i) The first instalment of the premium, payable on the grant of the lease, would be increased from £1 million to £3 million;

ii) The second instalment of £4.75 million would be paid by 1 July 2003; and

iii) The balance (now reduced to £2.75 million) would be paid by 1 July 2004.

9. However, since TBL had paid a deposit and further deposit totalling £1 million, the balance of the first payment of the premium due on the grant of the lease was in fact £2 million. TBL had also spent money on professional fees and finance costs. The total costs committed amounted to some £2.3 million by February 2002.
10. In the meantime (on 2 May 2001) the building had been listed as a building of special architectural or historic interest.

Completion

11. TBL did not complete on the contractual completion date of 4 January 2002. So on 9 January 2002 the City Council served notice to complete, specifying a completion date of 31 January 2002, and making time of the essence of the contract. TBL did not have the £2 million it needed to complete. It needed to find it by the expiry of the notice to complete (which was in the event extended until 4 and then 5 February), otherwise it was at risk of losing its deposit and the development opportunity afforded by the deal.
12. Completion finally took place on 5 February when TBL paid the City Council the balance of the first instalment of premium amounting to £2 million. As I have said, TBL did not have £2 million. TGL also needed a further £500,000 for working capital. The money came through the good offices of Mr Malvinder Singh from two companies called Kilcarne Holdings Ltd ("Kilcarne") and Rosedale Ltd ("Rosedale"), which are ultimately owned by trustees of an offshore trust under which Mr Singh is one of the class of beneficiaries.

The issues

13. This case is concerned with the basis on which the money was made available to TBL, and the legal consequences following from that. I am concerned with questions of liability only. Mr Charles Purle QC, Mr Christopher Russell and Ms Shelley White appeared for Kilcarne; and Mr Christopher Nugee QC and Ms Joanne Wicks appeared for Targetfollow.
14. More specifically, the main issues I have to decide are:

i) Whether the dealings in early February 2002 between Mr Naghshineh and Mr Singh constituted a legally enforceable agreement between Kilcarne and Targetfollow for a joint venture for the development of Baskerville House;

ii) Whether any equity has arisen in Kilcarne's favour as a result of those dealings and, if so, how it should be satisfied;

iii) Whether TBL is under a duty to Kilcarne to progress the development with due dispatch;

iv) Whether Kilcarne is entitled to compensation (on a quantum meruit) for services provided by Mr Singh in connection with the development of Baskerville House.

15. There were other issues raised on the pleadings, but these fell away in the course of the trial.

Mr Singh, Kilcarne and Rosedale

16. Mr Singh's academic background is in commerce and business administration. He has been in the property world for some time. For many years he ran a large construction company in Iraq. His and his family's business interests are organised through off-shore trust arrangements. The principal trust is the Jadriya Trust. It is a discretionary trust for Mr Singh and his family and was established by Mr Singh as settlor. He also wrote a letter of wishes to the trustees, indicating that he wished them to administer the trust during his lifetime in accordance with his wishes. At the time of the events in question the trustee of that trust was Standard Chartered Grindlays Trust Company. The trust owns the share capital in a BVI company called Daphne Caprice Company Inc. The shareholders in Kilcarne are two nominee companies bearing names associated with Standard Chartered. It is said that Daphne Caprice is the ultimate owner of both Kilcarne and Rosedale; but the precise structure of ownership is obscure. Daphne Caprice is also said to own another company called Josten Ltd, which features briefly in the story. The principal activity of these companies in the UK (when they are active at all) is investing in property (not development). Mr Singh is at pains to point out that he does not control Daphne Caprice and is not a director of or otherwise connected with Kilcarne or Rosedale. Although Kilcarne and Rosedale are incorporated in different places, they are administered from Jersey.
17. Kilcarne's articles of association provide for the business of the company to be administered by the directors. A meeting of directors at which a quorum is present may exercise all the powers given to the directors by the articles (article 68). A quorum is two (article 83). The directors may appoint a person to be the agent of the company (article 69); and may delegate their powers to a committee consisting of one or more directors (article 70).
18. The relevant directors of Kilcarne (and, I think, Rosedale and Josten) at the time were Ms Justine Wilkinson, who is a manager with Standard Chartered Grindlays Trust Company, and Mr Clive Black, the managing director of Standard Chartered Grindlays Trust Company. Mr Black did not attend any relevant board meetings. There was at least one other director but she plays no part in the story, apart from having attended two board meetings and having signed documents. The trusteeship of the Jadriya Trust has since passed to HSBC. This may explain why neither Ms Wilkinson nor anyone else from Standard Chartered Grindlays Trust Company gave evidence at the trial.
19. Mr Singh is, however, the managing director of Sitac Ltd, which, he says, acted for Kilcarne. Mr Singh is also the majority shareholder in Sitac. He describes Sitac as an adviser to companies in the Daphne Caprice Group.

Mr Naghshineh and Mr Singh

20. Mr Naghshineh and Mr Singh met in about 1988. At the time Mr Naghshineh was a property broker. He and Mr Singh went into business together as shareholders in a company called Thompson Estates Ltd. Mr Singh had 50 per cent of the shares and Mr Naghshineh had 25 per cent. However, Thompson Estates Ltd collapsed in about 1990. Since then, Mr Naghshineh and Mr Singh had not worked together.
21. Mr Singh, supported by a number of other witnesses, said that Mr Naghshineh had learned about property from him. Mr Naghshineh agreed that he had learned from Mr Singh, although he said that he had learned from others as well. However, by the time of the events with which I am concerned, Mr Naghshineh had been operating for over ten years on his own, and had built up an extensive portfolio of properties. Mr Singh describes Mr Naghshineh as essentially a property dealer, rather than a developer. Mr Naghshineh, on the other hand, says that TGL was an experienced developer.
22. Although both Mr Singh and Mr Naghshineh made criticisms of each other, each recognised that the other had talent. Both of them are astute and experienced businessmen.

The first commercial deal

23. Since the agreement for lease had first been made in December 1999 the proposed development had become a lot more difficult. First, the building had been listed in May 2001, which inevitably meant that the planning process would be a lot more difficult, and probably meant that there was less scope for radical alteration of the building. Second, the terrorist attacks in the USA on September 11 2001 had effectively killed off investment in new hotels. Those same attacks had also depressed the office market in the UK. The radical changes in the market also meant that the price that TBL had agreed to pay for the lease was far in excess of anything that Birmingham City Council could expect to get if the property were to be put back onto the market. This explains the City Council's willingness to extend time limits under the agreement for lease.
24. Towards the end of January 2002 Mr Naghshineh and Mr Singh met. Mr Naghshineh (or more accurately TBL) was under considerable pressure to raise the money needed to complete the lease of Baskerville House. Although Mr Naghshineh was pursuing a number of avenues for finance, none of the potential financiers had come up with the money.
25. It is agreed that the first meeting took place over drinks at Harvey Nichols in Knightsbridge (although Mr Singh says that Mr Naghshineh came to his house beforehand, and they talked for an hour or so). Mr Naghshineh says that it was on Friday 25 January 2002. He produced a bar receipt for that date. Although Mr Singh said in his witness statement that it was on 20 January, he was prepared to accept that Mr Naghshineh was right about the date. It was not originally intended to be a business meeting. But Mr Singh and Mr Naghshineh were old friends, and often talked about business. At the meeting Mr Naghshineh explained that he was having problems with the Baskerville House project. He explained that he needed £2 million to complete the agreement for lease, and £500,000 for working capital; and said that he was speaking to other people to raise the money. Mr Singh expressed interest in putting up the money if Mr Naghshineh's other potential lenders failed.
26. The two men spoke on the telephone over the weekend. Mr Singh says that Mr Naghshineh explained that his potential lenders had backed out. I accept Mr Naghshineh's evidence that even at that stage Mr Singh was not his only hope of raising the money. Mr Naghshineh still had other potential financiers in view, although nothing concrete had, thus far, emerged. But Mr Singh knew that Mr Naghshineh was offering huge returns for the loan, including (he thought) 50 per cent of the "upside" of the Holiday Inn in Bloomsbury (i.e. any increase in its value). There was no question in Mr Singh's mind that if he stepped in, he would get a very generous return.
27. Another meeting took place at the Holiday Inn in Bloomsbury. The Holiday Inn was chosen because Mr Singh wanted to see the building. Mr Singh made notes at that meeting on a blank Holiday Inn invoice. The note is undated, but it is probable that the meeting took place on Monday 28 January. At that stage the proposal was for a loan of £2.5 million to TGL (or BPIL guaranteed by TGL). The money would be paid on completion of a loan agreement. The identity of the lender was uncertain. It might be Mr Singh himself, or a UK company or an offshore company. Mr Naghshineh would guarantee the loan, and take out Keyman insurance on himself for £3 million until the loan was repaid. The loan was to be for four months or less. At the end of four months, the lender would be repaid £3 million plus 7.5 per cent of the difference between the sale price of the Holiday Inn and £14 million. The loan would be secured by a floating charge over the assets of TGL and its subsidiaries. There was a question over a deed of priority with Morgan Stanley (in order to regulate priority as between secured lenders) and the possibility of the extension of the term of the loan by two months. Mr Singh was aware that there was a deadline to complete the deal with Birmingham City Council which, at that stage, was 31 January.
28. According to Mr Singh, these terms were agreed in principle on or about 29 January 2002. At one point in his oral evidence Mr Singh went so far as to say that: "as far as I am concerned, the deal was as we agreed on the Holiday Inn paper". As he saw it, he had done a commercial deal with Mr Naghshineh, and although there were legal technicalities to be sorted out, that was, in his phrase, "the detail of the structure, of putting it to bed". From Mr Singh's perspective the deal seemed a good one. In return for lending £2.5 million, not only would he be repaid £3 million after a maximum of six months, he would also get what was effectively a profit share on the sale of the hotel. He was under the impression that Mr Naghshineh wanted to sell it. Mr Singh's view was that the hotel was worth at least £20 million, which would give him an additional payment of at least £450,000. In fact Mr Naghshineh had received an offer to buy it for over £35 million, which he mentioned to Mr Singh, but Mr Singh did not regard this as a serious offer. It is worth noting, at this stage, that although Mr Naghshineh needed the money to complete the agreement for lease on Baskerville House, and hence this was the trigger for the agreement in principle between him and Mr Singh, the agreement did not give Mr Singh (or the other potential lenders) any interest in, or security over, Baskerville House itself. This and other aspects of the commercial deal were to change in due course. Mr Singh said that, even without seeing Baskerville House, he could see considerable development potential in it, although he did not believe that development as a hotel was a viable proposition. According to him an office development was the way forward. Mr Naghshineh accepted that an agreement in principle was reached at this stage, which was at least enough to cause him to stop looking for alternative sources of finance.

Solicitors get involved

Tuesday 29 January 2002

29. Both Mr Singh and Mr Naghshineh instructed solicitors on 29 January 2002. Druces & Attlee (Mr Mitchell and Mr Whittaker) acted for Mr Singh's side. Walker Morris (Mr Akitt and Mr Cooper) acted for Targetfollow. In his letter of 29 January Mr Whittaker described the deal as follows:

"It is proposed that my client will advance the sum of £2.5M for a period of four months although it may be that the repayment can be postponed for a further two months. On repayment the sum of £3M will be due. In addition my client will receive 7.5% of the profits on the sale of the Holiday Inn Bloomsbury which I understand is held by your client."

30. In substance, Druces & Attlee regarded Standard Chartered Grindlays as their client, although they also took instructions from Mr Singh himself. Mr Whittaker referred to the secured borrowings from Morgan Stanley who were to "issue a priority deed" to enable the transaction to proceed. Mr Whittaker described the priority deed as "critical" and asked for a copy. He also said that his client required Mr Naghshineh's guarantee. Mr Akitt replied that he was taking instructions, but nevertheless sent Mr Whittaker a draft of a loan note instrument and a draft deed of priority. At this stage the lender was not identified. The draft deed of priority had been prepared by Denton Wilde Sapte, who were acting for Morgan Stanley. At this stage, as Mr Singh agreed, the transaction was a relatively straightforward one, which would take the form of a secured loan. It still did not involve the creation of any interest in, or security over, Baskerville House.
31. At 13.27 Mrs Fletcher e-mailed Ms Wilkinson some information about TGL (including details of its shareholders and a balance sheet). At 16.29 Mr Akitt was asked to call Ms Wilkinson, but it is not known whether he did.
32. Mr Singh says that at some time on 29 January he had a telephone conversation with Ms Wilkinson in Jersey, in the course of which he was given authority to do a deal. I return to this evidence later.

Wednesday 30 January 2002

33. On 30 January Ms Wilkinson confirmed instructions to Druces & Attlee to act on Kilcarne's and Rosedale's behalf. The board of Kilcarne had, that day, formally resolved to instruct Druces & Attlee "to review the documentation". Ms Wilkinson described Kilcarne as "the vehicle which we intend to use".
34. At 16.37 Mr Whittaker sent Mr Akitt by e-mail drafts of a floating charge and a guarantee. He copied them to Mr Singh and to Ms Wilkinson.
35. At 18.16 Mr Singh sent an e-mail to Ms Wilkinson and Mr Whittaker. He said that the security arrangements were now:

i) A second floating charge on the assets of TGL and

ii) A second fixed charge on the assets of BPIL, which included both the hotel and the adjacent office building;

iii) An agreement with Morgan Stanley as first mortgagee that TGL would not sell or refinance any of its properties without Kilcarne's consent.

36. Another alternative proposed was a second fixed charge on all TGL's assets, if the agreement with Morgan Stanley was not enforceable. Mr Singh asked Ms Wilkinson and Mr Whittaker what they recommended as security for Rosedale. This e-mail was also copied to a Mr Webber, who was giving tax advice to the Jersey trust. It is not entirely clear when Rosedale first came onto the scene. I do not think that the precise timing of this matters.
37. At 19.50 Mr Menhennet (the solicitor at Denton Wilde Sapte acting for Morgan Stanley) sent Mr Akitt a draft side letter dealing with how Morgan Stanley would respond to a request by a second mortgagee to release monies achieved on a sale by Morgan Stanley for the purpose of paying off a second charge.

The second commercial deal

Wednesday 30 January 2002

38. Later that evening Mr Singh and Mr Naghshineh spoke again. As a result of that conversation the commercial deal changed again. What was now agreed was that:

i) Kilcarne would lend £2.4 million to TGL by purchasing deep discounted loan notes with a nominal value of £3 million, repayable within 6 months;

ii) Rosedale would lend £100,000 through a second series of loan notes. In return Rosedale would receive 7.5 per cent of the net proceeds of sale of the Holiday Inn Bloomsbury, payable on sale. If the hotel had not been sold by the date of the rent review due under the lease (in 2019), then Rosedale would receive 7.5 per cent of the difference between the then value of the hotel and the level of borrowings against it in January 2002 (which were £14 million);

iii) The loans were to be secured by floating charges over the assets of TGL and its subsidiaries.

39. Mr Singh, however, did not see this as changing the commercial deal. He regarded the deal as having been done between him and Mr Naghshineh. The appropriate structure for the deal was a matter for the lawyers. However, he recognised that "things had to be done properly". All the more so since it was envisaged that the money would come from Standard Chartered Grindlays. They would be concerned that any money coming from the trust would be "well protected". The change from one loan to two loans was Mr Singh's idea, and reflected the fact that one loan was short term, and the other long term. In Mr Singh's eyes this was simply a change in structure. However, the changed arrangements about the hotel meant that the receipt of the 7.5 per cent share in the "upside" was no longer dependent on a sale of the hotel. Mr Singh explained that part of his deal with Mr Naghshineh was that the latter would provide the maximum possible security.
40. At 21.36 he relayed this to Ms Wilkinson and Mr Whittaker. Part of the security arrangements would be a third charge on the Bloomsbury hotel in favour of Rosedale.

Thursday 31 January 2002

41. On 31 January 2002 at 7.37 Ms Wilkinson sent an e-mail to Mr Singh. She said that she had been expecting to receive documentation with a view to signing that afternoon, but she had not had sight of them. She said that she was not able to progress matters until she had received and reviewed them. Later that morning Mr Akitt sent draft board minutes to Mr Whittaker.
42. At 10.40 Mr Whittaker e-mailed Druces & Attlee's comments on the draft deed of priority. He copied his e-mail to Mr Singh and Ms Wilkinson. There were a number of concerns. The draft not only postponed his clients' security to Morgan Stanley, but it also precluded them from enforcing their security unless Morgan Stanley did likewise; and also prevented them from obtaining value on redemption in certain circumstances. Mr Whittaker described the position as "wholly unsatisfactory as far as my clients are concerned." This e-mail was forwarded to Mr Mehennet, who replied at 13.57 that Morgan Stanley were not prepared to permit the enforcement of the second charge without their consent. At 14.38 Mr Mitchell accepted this point, but was concerned that his clients' right to receive repayment under the loan notes at the due time needed to be acknowledged. At this stage the deal appeared to have been abandoned, as Mr Singh reported to Mr Whittaker on the telephone. Mr Webber also had a conversation with Ms Wilkinson in which she told him that the deal was off as it had not been possible to agree a satisfactory charge over the property.
43. However, later that day, Mr Singh and Mr Naghshineh had further discussions on the telephone. Mr Naghshineh was thinking of pulling out of the Baskerville House project. If he did, he would have to write off the expenditure incurred thus far, which was in the region of £2.3 million. Mr Singh was keen to rescue the deal, because it was a good one for him, and dissuaded him. So they bounced ideas off each other. In the course of these discussions the question of a profit share in Baskerville House came up. This was completely new, because thus far all the discussions had centred on the Bloomsbury hotel. As Mr Naghshineh said, and Mr Singh agreed, it was Mr Naghshineh's proposal. Mr Singh says that they discussed reducing TGL's risk by providing that £1 million of the £2.5 million would go direct to TBL as equity in a joint venture participation, and that it would not, therefore, be repayable by TGL. Mr Singh says that he told Mr Naghshineh that each of them would put in new money on an equal basis, with equal rights and obligations. Mr Singh would have no responsibility for the £2.3 million which TGL had already committed to the project, but it would get its £2.3 million back with interest before any eventual profits were shared. Mr Singh says that Mr Naghshineh asked Mr Singh to manage the project; but Mr Singh said "No; if we are going to do a profit share, it needs to be structured where it is on an equity basis." Mr Singh accepts that there was no agreement at that stage. He asked Mr Naghshineh to send him an e-mail setting down his thoughts, for him to have a look at.
44. At 16.50 Mr Naghshineh sent Mr Singh an e-mail. It was captioned "£2.5m Investment/Loan Targetfollow Group Limited". He explained his strategy for recovering £2.5 million from the sale of various group assets or from a refinancing. The e-mail continued:

"The proposal of £1.4m in Targetfollow Group plus £100,000 in BPIL with 7.5% of the net upside profit will remain. £1m to be invested on a JV basis in Targetfollow (Birmingham) Ltd based on a joint venture agreement where the current money invested, circa £2.3m, gets paid off plus a coupon and the upside of that project is then shared on a 50/50 basis with Targetfollow Group Ltd.

Please let me know if this is in [principle] acceptable to you. The time period for repayment of the £1.4m plus £600,000 fee to be 4 months but with an extension for a further 2 months as a final deadline. This is to ensure that the [above] strategies can produce in good time.

The personal guarantee for AN to be on £1.4m plus £600,000."

45. The two men spoke again on the telephone late in the evening of 31 January. On the same day, at 23.10 Mr Singh sent an e-mail to Ms Wilkinson and Mr Whittaker. It was also copied to Mr Naghshineh. Attached to the e-mail was Mr Naghshineh's "PROPOSAL … FOR YOUR CONSIDERATION". Although the attachment was described as Mr Naghshineh's proposal, it was in fact drafted by Mr Singh. It began by noting that the loan by Kilcarne of £2.4 million had been reduced to a loan of £1.4 million, and the repayment had been reduced from £3 million to £2 million. Repayment would be after six months (rather than four with the possibility of a two month extension). Kilcarne was to have a first charge on Baskerville House. The Rosedale deal remained unchanged. Under the heading "Baskerville House" it said:

"Josten/or other will invest £1m as equity as will Ardeshir's company/target follow group, which is (£2M) to be paid to Birmingham City Council for development/refurbishment of the site for which they will issue a 250 yr lease.

Expenses incurred to date including payments made to the council previously, not to exceed £2.3m, will be capitalised as non-voting preference shares earning a 6% rate of interest per annum both principal and interest are to be paid on a sale of the JV interest in Baskerville House, after which both parties will share the profits equally. TFG has already spent close to £2.3m (for which they will provide support). You will need to consider other aspects of the JV agreement."

46. Mr Singh explained that "you" in the last sentence meant both Ms Wilkinson and Mr Whittaker. He said that: "Sitac can act on behalf of Jostens investment." He ended with the suggestion:

"May I suggest that since most of the documents are done both sides lawyers should send the revised documents (ASAP) and agree on the JV deed/document while you are considering this.

Can you please consider and confirm your interest?"

47. At this stage the deal outlined, in so far as it related to Baskerville House, consisted of the following principal elements:

i) Josten or another company would invest £1 million in TBL as equity (i.e. as ordinary share capital);

ii) TGL would also invest £1 million in TBL as equity;

iii) Neither investment would be secured;

iv) TGL's expenses to date would be converted into preference shares (i.e. debt would be exchanged for the preference shares) carrying interest at the rate of 6 per cent;

v) The preference shares would be redeemed on a sale of Baskerville House;

vi) Thereafter both parties would share the profits equally.

The revised commercial deal

Friday 1 February 2002

48. On the following day, 1 February 2002, the two men spoke on the telephone again. Mr Singh says that Mr Naghshineh proposed that the £1 million to be put in by each side should not be put in as equity, but as a loan which each could withdraw if, as expected, funding was raised on the lease of Baskerville House. According to Mr Singh, Mr Naghshineh said that he wanted something simple with equal rights and obligations to provide further funding. He said that there must be a deadlock provision to sell the project if they did not agree on any aspect of the agreement. Mr Singh says that he accepted all this and that he asked Mr Naghshineh whether he was happy with the contents of Mr Singh's e-mail of the previous day. Mr Naghshineh said that he was; and in response to Mr Singh's question whether he was sure that a joint venture was what he preferred, said that it was. Mr Naghshineh, however, says that the revised terms were proposed by Mr Singh. At 11.00, Mr Singh sent another e-mail to Ms Wilkinson (again copied to Mr Naghshineh). It was captioned "A NAGHSHINEH PROPOSAL V.2". Mr Singh pointed out the changed figures for the loans to BPIL. The main loan (of £1.4 million) was to be discharged by payment of £2 million. The time for repayment was now 6 months (or on earlier sale of the Bloomsbury hotel), and a default rate of interest, at 5 per cent over base rate, was to apply in default of repayment. Kilcarne was to have a first charge on Baskerville House, but that would be postponed to a second charge if funds were borrowed for development. Targetfollow and BPIL would embark on a programme of property sales in order to repay the loan. This time the proposal, so far as Baskerville House was concerned, was described as follows:

"It is a hotel/residential/office project in a prime location in Birmingham. Ardeshir is providing a project summary.

Josten/or other will invest £1m100 [this should read £100] as equity as will Ardeshir's company/target follow group, Josten will lend £1m as senior debt which will pay a coupon of base plus a quarter percent and Ardeshir's company will lend with a charge following Senior debt £1m at a coupon of base plus 2% which is (£2M) to be paid to Birmingham City Council for development/refurbishment of the site for which they will issue a 250yr lease.

Expenses incurred to date including payments made to the Council previously, not to exceed £2.3m, will be treated as a loan combined with [Ardeshir's] company loan of £1m making the junior loan totalling 3.3m at base plus 2% capitalised as non-voting preference shares earning a 6% rate of interest per annum both principal and interest are to be paid on the sale of the JV interest in Baskerville House, after which both parties will share the profits equally. TFG has already spent close to £2.3m (for which they will provide support). You will need to consider other aspects of the JV agreement.

Ardeshir and his team will confirm the arrangement with the council and any stamp duty implications for transfer of the lease to the JV.

Sitac can act on behalf of Jostens investment."

49. This version of the deal had clearly changed from the version outlined at 23.10 on the previous day. Now the deal proposed was:

i) Kilcarne would lend £1.4 million to BPIL repayable in six months or on earlier sale of the Bloomsbury hotel;

ii) Josten or another company would invest £100 in TBL or possibly in a new joint venture company as equity (i.e. as ordinary share capital);

iii) TGL would also invest £100 in TBL or the new joint venture company as equity;

iv) Josten (or other) would lend TBL or the new joint venture company £1 million;

v) TGL would also lend TBL or the new joint venture company £1 million;

vi) Josten's loan to TBL or the new joint venture company would carry interest at base rate plus ¼ per cent;

vii) TGL's loan would carry interest at base rate plus 2 per cent;

viii) Both loans would be secured, with Josten's loan having priority over TGL's;

ix) The transfer of the lease to the new joint venture company would be considered;

x) What is to happen to the expenses already incurred is obscure. On the one hand the e-mail says that they are to be treated as part of an aggregate secured loan of £3.3 million by TGL, carrying interest at base rate plus 2 per cent. On the other hand, it says that they are to be capitalised as preference shares carrying interest at the fixed rate of 6 per cent. It seems unlikely that Mr Singh intended TGL to be entitled both to repayment of a secured loan of £3.3 million and also to preference shares with a nominal value of the same amount. Mr Naghshineh was unable to explain what was envisaged, and Mr Singh did not attempt to do so.

50. Mr Singh says that he discussed this e-mail both with personnel of Standard Chartered Grindlays and Mr Naghshineh. I return to his discussions with Standard Chartered Grindlays later. He says that he asked Mr Naghshineh whether he was agreed on the basis set out in the e-mail; and Mr Naghshineh said that he was. Mr Singh says that, as far as he was concerned, by the end of his telephone conversation with Mr Naghshineh he and Mr Naghshineh had entered into a binding oral agreement on the following terms (which he summarised in his witness statement):

i) The Baskerville House project was structured as a joint venture, for which Kilcarne and TGL would each hold 100 £1 shares in a joint venture company to be set up and to which Kilcarne would lend £1 million with interest at base plus ¼%. TGL would also lend £1 million at interest of base plus 2%, which made up the £2 million needed by TBL to pay Birmingham City Council in order to complete the lease. Pending setting up the JV company, the loan of £1 million would be by Kilcarne to TBL, to enable it to complete the lease;

ii) The lease would be transferred to the JV company, which would carry out the development. TGL and Kilcarne would each be responsible for contributing equally as funds were needed, and each of them had equal rights in relation to the venture;

iii) TGL would receive an additional £600,000, described as a management fee, to equalise the position of Kilcarne and TGL; this was the difference between the £2 million to be repaid to Kilcarne by BPIL for being advanced £1.4 million, and £1.4 million;

iv) The £2.3 million already incurred by TGL was to be repaid out of profits of the joint venture, with interest at base plus 2 per cent; preference shares were to be issued to TGL to give effect to this;

v) Mr Singh was to be responsible for handling all aspects of the Baskerville House development project and Mr Naghshineh was to be responsible for raising any finance required;

vi) After repayment of the loan of £2 million, with interest as agreed, and the sum of £2.3 million incurred to date by TGL, and payment of the £600,000 management fee to TGL, the profit realised from the joint venture, whenever and in whatever form it was realised, was to be divided between Kilcarne and TGL in equal shares. The Baskerville House lease was to be charged to Kilcarne as security for repayment of its loan of £1 million and half share of the profits of the joint venture;

vii) These terms as to the joint venture were to be put into a written agreement, which was to include terms as to what costs incurred in relation to the development or its funding either side would be able to charge to the venture before the profit was shared;

viii) If there was disagreement between TGL and Kilcarne over any part of the JV, a deadlock provision would come into effect, whereby the lease and the project would be put up for sale, and the net proceeds divided equally. Each side would be free to bid.

51. It is this agreement on which Kilcarne relies in the Particulars of Claim as amounting to a binding agreement for a joint venture. There are, however, a number of elements of the deal described by Mr Singh that are not spelled out in the preceding e-mail. Thus:

i) The £600,000 to be paid to TGL out of the profits is not mentioned at all;

ii) Although Josten or other was to have security for its loan of £1 million, the nature of the security is undefined, and the security is not said to extend to the profit share;

iii) The apparent contradiction between the issue of preference shares and the treatment of TGL's sunk costs as part of its secured loan is simply glossed over without explanation;

iv) Nothing is said about the division of responsibility for managing the project on the one hand, and raising finance on the other;

v) Nothing is said about a deadlock provision;

vi) Kilcarne is not identified at all.

52. Mr Naghshineh does not accept that a binding agreement was made. What he says is that it was "agreed in principle that we would discuss replacing the Loan Notes with a new agreement, but important details were left for further discussion, and for clarification in written documentation." He also says that it was fundamental, at least from his point of view, that TGL's risk capital (that is to say the £2.3 million sunk costs) should be extracted from the project, together with a reasonable rate of return, and only then would any question of sharing the "upside" with Mr Singh arise. This latter point featured more prominently in his oral evidence than in his witness statement. In his oral evidence he said that the discussions proceeded on the basis that TGL would extract not only the £2.3 million of sunk costs, but also the £2.5 million that was to be borrowed from Mr Singh or the Jersey companies, and which Mr Naghshineh also regarded as risk capital for his account. In my judgment the conversation went beyond an agreement merely to "discuss" replacing the loan notes with a joint venture agreement. I find that Mr Singh and Mr Naghshineh both positively intended that a joint venture agreement of some sort should be entered into, and both were confident that agreement on its terms would be reached. But I accept Mr Naghshineh's evidence that further important details were left for future discussion, and that both he and Mr Singh envisaged that the joint venture agreement would be a written one.
53. At some stage on 1 February Mr Menhennet circulated Morgan Stanley's response to the points that had been raised on the priority deed. He said that Morgan Stanley were not prepared to agree to the enforcement of any security affecting the assets of the Targetfollow group without their consent. Also at some stage on 1 February Mr Singh spoke to Mr Whittaker and Mr Mitchell (the attendance note, although dated, is not timed). One of the matters discussed was "the proposed joint venture agreement". Mr Mitchell was concerned about the draft deed of priority and whether the Birmingham property would fall within the senior debt charged to Morgan Stanley. He was also cautious about "the new part of the deal relating to a joint venture on a Birmingham property" where he had no information about the property. Discussion then turned to "the proposed joint venture arrangement". There was a discussion about how to deal with the possibility that the Birmingham property might fall within Morgan Stanley's security. The note ended:

"MS said that these matters could be sorted out very quickly but PLRM said that proper care was needed to ascertain a quite complex position and we could not recommend ANZ Grindlays Trust entering into a transaction unless these matters had been clearly settled. Provided they were, and a joint venture agreement could be produced and a company established which could be a party to it, the primary obstacles to the transaction would be removed. MS said that he appreciated D&A's caution on the matter and would not want to proceed unless we had advised that the documents were in a suitable condition."

54. At 13.48 Mr Whittaker followed up his discussion with Mr Singh by e-mailing Mr Cooper about "the arrangement proposed in respect of the Birmingham Development Project". He pointed out that he could not say whether this fell within Morgan Stanley's security, and asked for a warranty that it did not. Mr Cooper passed on this request to Mr Menhennet.
55. At 16.18 Mr Cooper sent Mr Whittaker the latest drafts of the Series A and B loan notes (i.e. the loans to be made by Kilcarne and Rosedale respectively on the security of the Bloomsbury hotel) and the loan note to be issued by TBL. The e-mail and its attachments were copied to Mr Singh. The draft loan note to be issued by TBL contemplated a loan by Kilcarne of £1 million. The loan would not carry interest; and would be repayable on the maturity date. This was defined as the completion of a sale of the property. On redemption Kilcarne would be entitled to repayment of £1 million plus 50 per cent of the "Net Sale Proceeds" of Baskerville House. "Net Sale Proceeds" were comprehensively defined. The definition specified what deductions could be made from the gross proceeds of sale. Accordingly, under this form of the draft:

i) TBL would not be obliged to repay the loan until Baskerville House had been sold;

ii) There was no long stop date either for repayment of the loan or a sale, with the consequence that Kilcarne could have to wait for repayment indefinitely; and

iii) On a sale, whenever it took place, Kilcarne would receive 50 per cent of the Net Proceeds of Sale (as defined).

56. At 16.31 on 1 February 2002 Mr Singh e-mailed his recommendation to Ms Wilkinson. He said:

"As explained on the telephone, my friend was going to take the lease but given his position post sept 11 he decided not to proceed with the deal. I have seen letters from Meridien, Hilton and Knight Frank and Rutley expressing keen [interest] to buy/lease/jointly develop. The intention is to turn the project soon, and since your exposure is £1m, as secured creditor with 1^st charge, the [risk] return opportunity is excellent. I have personally known Ardeshir since late 80's and know that he has very high integrity, and can recommend this deal to you strongly."

57. This e-mail also forwarded an e-mail to Mr Singh from Ian Fox at Targetfollow. Mr Fox's e-mail attached certain unspecified documents "for this project". It is probable that the attached documents consisted of a statement of TBL's debts and costs incurred to date, together with a development appraisal dated 1 February 2002. The latter started with a figure for gross investment value of £52 million; continued with deductions for site costs, construction costs, fees and finance costs; and ended with an anticipated profit of £36 million. The estimated construction costs exceeded £22 million; and there was still £9.5 million to pay by way of premium for the lease. None of the figures are explained or supported by any reasoning. Some of them do not make sense (for instance the cost of financing the purchase price of £10.5 million assumes interest charges on only £1 million). What is clear, however, is that the project envisaged was the development of a hotel. As I have said, Mr Singh thought that a hotel was not a viable development. This was the only development appraisal that was ever sent to Kilcarne.
58. At 16.56 Mr Singh forwarded to Ms Wilkinson the e-mail from Mr Cooper that he had received at 16.18. At 19.11 Mr Webber e-mailed Mr Singh. He said that he had spoken to Ms Wilkinson about the first version of the proposal but not the second. He had some concerns about the tax structure of the arrangements and concluded by saying that he would need to see draft documents before commenting further on tax aspects.
59. At 19.35 on the same day, Mr Cooper sent a draft side letter to Mr Naghshineh (not at this stage copied to Mr Singh). He had prepared it at Mr Naghshineh's request. Paragraph 4 of the draft said:

"In relation to the above funding arrangements we confirm our intention to enter into good faith negotiations in order to complete a joint venture agreement whereby from the date of the proposed funding above all costs incurred in relation to the development, purchase and running of Baskerville House will be shared between [TBL] and one of your companies."

60. The draft letter concluded:

"This letter does not constitute a legally binding obligation."

61. Very shortly afterwards Mr Cooper e-mailed Mr Whittaker, asking him if he expected to hear from Denton Wilde Sapte that evening.
62. At some time on Friday, Mr Cooper discussed the draft side letter with Mr Naghshineh. Mr Naghshineh raised with Mr Cooper the possibility of asking for an obligation on Kilcarne's part to share in the costs. Mr Cooper thought that to make this request would complicate matters; and that this would all be dealt with in a joint venture agreement. (Mr Cooper has no recollection of this, but I draw this inference from his e-mail of Monday 4 February, sent at 10.27).
63. At 20.01 Mr Singh sent Mr Mitchell his comments on the Series A loan notes. Almost immediately afterwards Mr Whittaker raised the question of a guarantee of the Birmingham loan notes. Mr Singh commented at 20.18 that the agreement not to have a guarantee was on the assumption that there would be a first charge on the lease. However, he was concerned that "without any control on the deal or jv or an option which can be secured the 1m is completely unsecure."
64. At 20.40 Mr Mitchell passed on to Mr Cooper Mr Singh's comments on the Series A loan notes.
65. At 21.00 on the same day Mr Singh sent an e-mail to Mr Mitchell. He copied it to Mr Naghshineh and Mr Whittaker. The caption was "RE BIRMINGHAM". It read:

"THE BASIS OF THE DOCUMENT APPEARS TO BE UNSUITABLE FOR THE DEAL AGREED. THE DEAL AGREED WITH ARDESHIR AND AS PER PROPOSAL V2 WAS AS IT WAS MEANT TO BE A PARTNERSHIP SORT OF ARRANGEMENT FUNDED BY £1M FROM KILCARNE? AS SENIOR DEBT PAYING BASE PLUS QUARTER PER CENT AND FRESH £1M FROM ARDESHIR (FROM £1.4M LOANED UNDER NOTE A) WHICH WAS TO BE PAID TO B'HAM COUNCIL TO COMPLETE THE LEASE.

ARDESHIR'S £1M AND THEIR 2.3M OF MONEY ALREADY SPENT ON THE PROJECT WAS TO BE JUNIOR DEBT EARNING BASE PLUS 2%.

BASE EQUITY WAS TO BE TOKEN £100 EACH, AND KILCARNE WOULD HAVE EQUAL RIGHTS AND FUND ADDITIONAL MONIES AS REQUIRED – THERE WAS A JOINT VENTURE AGREEMENT – RELATIVELY SIMPLE WHICH WOULD HAVE A "DEADLOCK" CLAUSE TO SELL THE PROJECT AND FOR EITHER PARTY TO BUY IT AT THE PRICE SALEABLE OR MUTUALLY "BID".

INTEREST/LOAN WOULD BE REPAID FROM EITHER SALE/JV/REFINANCE AS MUTUALLY AGREED.

Document proposed is not doing the job and Ardeshir knew this when it was first proposed and he had asked it to be so."

66. Clearly, these comments represented Mr Singh's first reaction to the Birmingham loan notes. However, there are a number of differences between this description of the deal and that set out in the e-mail of 11.00 of 1 February. Thus this description of the deal says:

i) The deal was meant to be a partnership arrangement;

ii) The TGL debt and expenses already incurred were simply to carry interest; the preference shares idea had disappeared;

iii) Kilcarne was to fund additional monies as required (presumably in equal shares with TGL);

iv) There was a joint venture agreement which would have a deadlock clause;

v) The interest and the loan were to be repaid not only on a sale, but also on a refinancing and on "JV" (which I take to be either entry into a joint venture agreement or the transfer of the lease to a joint venture company);

vi) There was no specific mention of security for the debt, although this may have been implicit in the description "senior debt" and "junior debt", which at least presupposes some sort of agreement on the relative priorities of the two tranches of debt.

67. At 23.51 that same evening, Mr Cooper sent revised drafts of the loan notes to Mr Whittaker (with copies to Mr Singh). Mr Cooper commented in his e-mail:

"Please note that I have added a new clause 8 to the £1,000,000 loan note at Ardeshir's request, providing that the Loan Note may be amended or even replaced by both parties, once the extent of the JV agreement is known."

68. The new clause 8 said:

"The Noteholders [i.e. Kilcarne and Rosedale] and the Company [i.e. TBL] confirm that this Loan Note Instrument may be supplemented and/or replaced by an agreement in writing between both parties in relation to the proposed joint development of the Property."

Saturday 2 February 2002

69. On the following day, 2 February 2002 at 00.04 Mr Whittaker sent an e-mail to Mr Mitchell, copied to Mr Singh. He said that he would e-mail Mr Singh's comments on the Birmingham loan notes (which he called the "C notes"). He added:

"Walker Morris say that the C note deal is the best that we can come up with in the time allowed. Presumably they can be surrendered as and when the JV is put in place. I think Malvinder agrees."

70. He said that Mr Singh would look at the documents "tomorrow" (although since the e-mail was sent just after midnight he must have meant "later today"). At 11.48, Mr Singh sent an e-mail to Mr Whittaker captioned "TFG comments re b'ham loan note". He commented on the draft of the Birmingham loan note as follows:

"This is actually better as there is no obligation for further funding."

71. This e-mail, unlike Mr Singh's initial comments, was not copied to anyone on Mr Naghshineh's side.
72. At 16.57 on that day, Mr Cooper, at Mr Naghshineh's request, sent an e-mail to Mr Singh. The e-mail said that a copy of the side letter was attached. However, Mr Singh says that the side letter was not in fact attached to it; and that he never received it. The attachment to this e-mail has not been found either among Mr Singh's documents, or in Walker Morris' file, or on its back up tapes. Indeed the e-mail itself cannot be found on Walker Morris' system. I must conclude that Mr Singh never received this attachment.
73. At 17.45 Mr Whittaker e-mailed Mr Cooper (with copies to Mr Singh and Ms Wilkinson). He began by saying that he had not heard from Denton Wilde Sapte about the deed of priority, although he thought that some accommodation would be reached. He proposed a number of amendments to the drafts of the loan notes relating to TBL. First, he proposed that TBL should enter into a floating charge in favour of Kilcarne relating to the payment of the notes, to take priority over any other indebtedness. Second, he proposed changing the definition of "Maturity Date" so that it would be the earliest of (i) the date of completion of a sale of the property (ii) the entry into formal joint venture arrangements between TBL and Kilcarne and (iii) 31 January 2007. Mr Cooper was not happy with these proposed changes. He did not think that the loan should be repaid on entry into the joint venture agreement. He also raised the question to himself: what happens if 31 January 2007 arrives and there is no sale? It does not appear that this question was ever directly confronted.
74. At 19.01 Mr Whittaker raised a number of questions about the standing of TBL and asked for the documents between it and Birmingham City Council to be faxed over on the following Monday, with evidence of payments made.

Sunday 3 February 2002

75. Mr Cooper's response to Mr Whittaker came on the following day, 3 February 2002. It was copied both to Mr Singh and to Mr Naghshineh. As to the first suggestion he replied:

"Not agreed. The spirit of this part of the transaction is one of a joint venture, where your client is likely to make disproportionate gains on his investment. Seeking to obtain security is not acceptable to my client. My client will discuss this point directly with your client."

76. As to the second, he replied:

"Not agreed. It would appear that your client is seeking a repayment on the completion of a JV agreement or by a long stop date. This is not what has been agreed commercially, and in any event would not work in the document as repayment is based on Sale Proceeds which are only realised on a Sale."

77. Thus Mr Cooper pointed out that repayment based on sale proceeds would only work if there were a sale; and that neither entry into the JV agreement, nor the long stop date, would amount to a sale.
78. On 3 February 2002 Mr Singh and Mr Naghshineh spoke again. Mr Naghshineh was unhappy with the deal in its current form. After discussion, certain changes were agreed. They were:

i) Instead of receiving £2 million on repayment of the Series A loan notes, Kilcarne would accept £1.83 million;

ii) Instead of receiving 7.5 per cent of the net sale proceeds or value of the Bloomsbury hotel, Rosedale would receive the greater of 5 per cent of those proceeds or value and £450,000;

iii) Instead of bearing interest at ¼% over base rate, the Kilcarne loan to TBL would bear interest at 2% over base rate;

iv) The Kilcarne loan to TBL would be secured.

79. There were also discussions about the circumstances in which Mr Naghshineh's personal guarantee might be released. What was proposed was that it might be released if it were replaced by shares in a special purpose vehicle holding the lease of the Holiday Inn, Bloomsbury. Mr Singh said in an e-mail that he thought he "could persuade Jersey to accept" that proposal on certain terms. Mr Naghshineh replied to the effect that he thought he "could persuade my shareholders" to accept Mr Singh's formulation with slight modifications.
80. At 20.28 Mr Singh circulated an e-mail captioned "FINAL AMENDMENTS TO DEAL". It was sent to both solicitors as well as to Ms Wilkinson and Mr Naghshineh. It was headed "AS PROPOSED BY ARDESHIR AND [RECOMMENDED] BY US FOR ACCEPTANCE". So far as relevant it read:

"1. Loan A to be £1.830m instead of 2.0M -- £1.4m remains unchanged

2. Loan B instead of 7.5% of net sale proceeds etc – it is to be the greater of 5% or £450,000

3. Kilcarne Loan to "Birmingham" will bear base rate plus 2% and will be senior loan over loan/advances by others including TFG, except to financial institutions who advance funds for development of the project, in which case there will be a 2^nd charge. Till such time there is a lease in place Kilcarne will have a floating charge on TFG Birmingham/JV when put in place."

81. He ended by saying that they were waiting for Denton Wilde Sapte's confirmation that Mr Naghshineh's guarantee was outside Morgan Stanley's "loop".
82. About half an hour later, at 20.55, Mr Cooper circulated revised drafts of the Loan Notes, which superseded earlier drafts. He also circulated draft board minutes for the various Targetfollow companies. In relation to the Birmingham loan notes he said:

"Loan Note (C) – has been amended to reflect that your clients "£1m" attracts interest at 2% above base, and your clients wish that his "£1m (plus interest)" is paid before any profit, and that a Floating Charge will now be given, subject to its release when a legal charge over the Birmingham property is in place."

83. At 21.12 Mr Singh circulated an e-mail in which he said he had spoken to Mr Naghshineh, who was happy with everything in the e-mail captioned "Final Deal". He thanked everyone for being so patient with the constant changes. The e-mail was copied to Mr Naghshineh.

Progress towards completion

Monday 4 February 2002

84. On 4 February at 9.00 Mr Whittaker e-mailed Mr Cooper. Among other things, he said that the issues on the deed of priority remained "critical and must be addressed". At 10.14 he reminded Mr Cooper that he still needed to see the documents with Birmingham City Council and asked for them to be faxed as soon as possible. Also at 10.14 Ms Wilkinson sent Mr Whittaker detailed comments on the drafting of the three sets of loan notes and the draft board minutes. She acknowledged receipt of faxed documents and said that she would review them.
85. At 10.27 Mr Cooper sent an e-mail to Mr Naghshineh, which he copied to Mr Singh. The e-mail read:

"I attach the side letter we discussed on Friday. I have provided that it should be signed by all parties as their intention to enter into good faith negotiations re JV and cost sharing.

To request an obligation in the loan note at this stage requiring Kilcarne to share in the costs going forward will only prompt requests for a mechanism for them to share in decisions. This will properly dealt with in a JV agreement.

I suggest that you discuss this letter with Malvinder."

86. It appears, therefore, as I have already said that Mr Naghshineh had raised the question of asking for a funding obligation from Kilcarne and had been advised by Mr Cooper not to do so at this stage.
87. As indicated in the e-mail, a draft letter was attached. It was addressed to Kilcarne and Rosedale. It began by saying:

"This letter confirms our understanding of a joint venture agreement we wish to complete with yourselves, following the completion of the proposed Funding and subsequent development of Baskerville House."

88. Paragraph 4 of the draft letter followed the previous draft. It said:

"In relation to the above funding arrangements we confirm our intention to enter into good faith negotiations in order to complete a joint venture agreement whereby from the date of the proposed funding above all costs incurred in relation to the development, purchase and running of Baskerville House will be shared between [TBL] and one of your companies."

89. Although the opening part of the letter envisages a joint venture agreement to be completed following the development of Baskerville House, paragraph 4 envisages that the joint venture (and in particular the cost sharing) would be effective as from the date of funding.
90. It is not disputed that (unlike the previous version on 2 February) this attachment was duly received by Mr Singh. However, Mr Singh says that he did not read it at the time.
91. At 11.00 Mr Mitchell sent Mr Menhennet suggestions for amendments to the draft deed of priority. At 11.03 Mr Cooper confirmed to Mr Whittaker that the documents on Birmingham were being faxed to him.
92. On the same day Mr Naghshineh sent Mr Whittaker copies of the various documents, including the board minutes. According to the minutes, the directors of TGL met at 11.30 on 4 February. Although the minutes are unsigned, Mr Naghshineh and Mrs Fletcher confirmed that they are an accurate record of the meeting. The minutes record the following:

"COMPLETION OF BASKERVILLE HOUSE

Following the capital injection from Kilcarne Holdings Limited and Rosedale Limited, companies advised by Mr Malvinder Singh (an old established contact of Ardeshir Naghshineh) it would be possible to complete the next stage of the purchase of Baskerville House.

TERMS OF THE CAPITAL INJECTION

The possible capital injection of £2.5 million had been achieved but the terms reflect the fact that it is borrowing of last resort, but most importantly involve a very experienced property investor and developer who can share costs on this project on a 50:50 basis and inject fresh ideas into the joint venture. The terms may be summarised as follows:

£1.4 m introduced by way of a deep discounted bond to convert to £1.83 m loan note would have to be repaid no later than 31^st July 2002

£100k payment to enter into a participation agreement, by way of an issue of loan notes, for the sale of the Bloomsbury Holiday Inn. For which there will be a payment equal to the higher of £450,000 and 5.0% of the eventual sales price less the cost of redeeming the MSDW loan on the hotel. Without this element the borrower would not have considered putting in the funds.

£1.0 m introduced to Targetfollow (Birmingham) Limited which will earn a coupon of base rate plus 2% and a 50% share in the profit on the disposal of Baskerville House (defined as net sale proceeds less actual costs, including a £600,000 fee to Targetfollow Group Limited). The lender to participate with costs on a 50:50 basis with Targetfollow (Birmingham) Limited."

93. This last sentence appears to recognise an obligation on the part of the lender to participate in costs on a 50:50 basis (with TBL as opposed to TGL). Nothing, however, is said about the subscription of £100 as share capital (which would have implied a change of control of TBL). The minutes go on to discuss the possibility of selling TBL's interest (i.e. the agreement for lease). Having set out the site value and the existing liabilities, the minutes go on to say that: "Kilcarne will be entitled to 50% of the profit on the transaction." The figures given for the liabilities are not easy to understand. One of the liabilities is given as £1.83 million to Kilcarne (although this money was in fact owed by BPIL). Another was half the stamp duty payable on the grant of the lease, which seems tacitly to presuppose that Kilcarne would pay the other half. The board's formal resolution was:

"to proceed with the finalisation of the loan documentation relating to the capital injection and complete on the purchase of Baskerville House."

94. By 13.24 Denton Wilde Sapte had still not responded, although Mr Cooper had put several calls in. At 13.37 on 4 February 2002 Mr Cooper circulated an e-mail in which he said that he had been told that if the deal did not complete that day, the Council would definitely terminate the deal. An attempt was made to send the money from Jersey direct to Birmingham City Council, to be held to the order of Druces & Atlee. At first the City Council said that they were not prepared to accept anything other than funds in their account that day. However, they relented; and agreed that completion could take place on the following day, 5 February 2002. In truth there was no real prospect that the City Council would terminate the contract on 4 February; because even with a forfeited deposit they would still have been worse off financially by re-offering the property to the market. Moreover, if the property had been re-offered, there was no real prospect that any alternative developer would be interested in a hotel. Possible alternative uses would have been office use (since the building was, after all, a vacant office building) or residential. But since the development had been "sold" by officers to the council members on the basis that the building would be turned into a hotel, this would have been politically embarrassing.
95. At 14.43 Mr Cooper sent an e-mail to (among others) Mr Whittaker, Mr Singh and Mr Naghshineh attaching the final form of the loan notes. The Birmingham Loan Notes now defined "Maturity Date" as the earliest (sic) of (i) a Sale and (ii) 31 January 2007. Clause 3.1 provided that on the Maturity Date the notes "shall be redeemed in full" by the payment of £1 million plus interest plus 50 per cent of the Net Sale Proceeds, "subject to there being Net Sale Proceeds". This definition seems to have been a compromise in response to Mr Whittaker's proposal of 2 February. It does not seem to have been something that was specifically discussed between Mr Singh and Mr Naghshineh. No one on Mr Singh's side seems to have realised this at the time, but these changes fundamentally altered the position. Whereas under previous drafts, the loan would not be repaid unless and until there was a sale, there was now a fixed date for payment, and no express obligation to sell before that fixed date. If no sale took place before 31 January 2007, there would be no Net Sale Proceeds. Consequently, Kilcarne was no longer guaranteed its 50 per cent share in profits. All it was guaranteed was repayment of £1 million plus interest, with the chance of a 50 per cent share in profits, if a sale took place before 31 January 2007. On the other hand, it no longer had to wait indefinitely for repayment of the £1 million, which would carry interest at a commercial rate in the meantime. Mr Cooper had, of course, pointed out to Druces & Attlee that without a sale there could be no net proceeds of sale, but the implications of this do not seem to have been thought through.
96. At 15.14 Mr Mitchell sent an e-mail to Mr Cooper. He referred to "Jersey Trust's unwillingness to allow us to release funds until executed documents for all aspects of the transaction are in their hands". These documents included the priority deed.
97. Within the next hour or so, Birmingham City Council agreed to extend time for completion of the agreement for lease until the following day, 5 February.
98. At 16.43 Mr Whittaker asked Mr Cooper for revised minutes, as they had to go to Jersey for approval.
99. At 17.13 Mr Menhennet of Denton Wilde Sapte at last replied. Morgan Stanley were prepared to agree to the proposals about the priority of charges, and the release of surplus sale proceeds to be for the repayment of the loan notes. The surplus was intended to mean a sum in excess of 115 per cent of the initial loan value. He said he was circulating a revised draft for approval.
100. At 17.36 Mr Mitchell sent an e-mail to Mr Singh (copied to Mr Cooper). He said that:

"our earlier caution was justified: what Dentons are saying is that the notes can only be paid according to the 115 per cent realisation formula. To the extent that this was not available, you would have to rely on personal guarantees as the charges would be unenforceable until the senior debt had been cleared away."

101. At 18.06 Mr Menhennet circulated a revised draft of the priority deed. Mr Mitchell's first reaction to the draft was that it did not deal with all outstanding matters, and at 19.09 he e-mailed Mr Singh, Mr Naghshineh, Mr Cooper and Ms Wilkinson to this effect. Mr Mehennet replied to Mr Mitchell's concerns at 20.53.

Tuesday 5 February 2002

102. At 9.50 on 5 February Mr Whittaker e-mailed Mr Cooper some last minute changes to the charges to be executed by BPIL. At 10.35 Mr Menhennet sent a side letter dealing with outstanding points on the deed of priority. At 10.51 Mr Whittaker sent an e-mail to Ms Wilkinson and Mr Singh. He pointed out that he had not had time to investigate title to the Bloomsbury hotel and had not seen "any paperwork evidencing the deal in place between the Council and [TBL]." However, he said that Mr Singh was happy to rely on the fact that Morgan Stanley were content with their security over the hotel "and, as to Birmingham, his personal knowledge of the borrower."
103. At about lunchtime on 5 February Mr Naghshineh sent a fax to Mr Singh, enclosing a letter of advice to him from Walker Morris. The letter urged Mr Naghshineh not to proceed with the transaction because:

"you have not secured long term funding for the balance of the purchase monies and cost of development and/or a hotel operator to acquire either Targetfollow's leasehold interest or an occupational lease following completion of the development."

104. Mr Naghshineh did not follow that advice. Mr Singh did not, at the time, suggest that Mr Naghshineh had in fact secured long term funding through the mechanism of a binding joint venture agreement.
105. Some time on 5 February the board of Kilcarne met in Jersey. The board resolved to proceed with the transaction. According to the board minutes, the essence of the transaction consisted of two investments:

i) The investment of £1.83 million in the Series A loan notes issued by BPIL, backed by various forms of security, including a second-ranking floating charge over the assets of TGL, a legal charge over the Bloomsbury hotel, and a personal guarantee to be given by Mr Naghshineh; and

ii) The investment of £1 million in the loan notes issued by TBL repayable at base plus 2 per cent, plus 50 per cent of the net proceeds of sale of Baskerville House, also backed by security, including a legal charge over Baskerville House, and a personal guarantee to be given by Mr Naghshineh.

106. The board minutes say nothing about a joint venture agreement.
107. The documents were completed in the afternoon of 5 February. By the time of completion, Mr Singh had still not seen Baskerville House, although he had seen some photographs.

The Bible

108. A large number of documents were completed on 5 February 2002. I shall return to the detailed terms of some of them in the next section of this judgment. In summary, they were as follows:

i) A Priority Agreement made between Kilcarne and Rosedale (1) TGL (2) European Loan Conduit No 5 plc (3) Morgan Stanley Mortgage Servicing Ltd (4) and BPIL (5). In essence, this agreement gave European Loan Conduit priority as to £114 million of lending, but postponed any balance outstanding to TGL's and BPIL's liabilities to Kilcarne and Rosedale;

ii) The issue of loan notes by BPIL (Series A loan notes) with a nominal value of £1.83 million, to be issued to Kilcarne in consideration of £1.4 million (a discount of 23.5 per cent). The loan was repayable on 31 July 2002 or on an earlier sale (as defined) of 40 Bernard Street and the Forte Crest Hotel, Bloomsbury ("the Property"). The loan was to be secured by:

a) A floating charge over TGL's assets;

b) Mr Naghshineh's personal guarantee; and

c) The grant of a legal charge by BPIL over the Property.

iii) The grant by BPIL of the legal charge contemplated by the Series A loan notes;

iv) The grant by TGL of the floating charge contemplated by the Series A loan notes;

v) Mr Naghshineh's personal guarantee;

vi) The issue of loan notes by BPIL (Series B loan notes) to Rosedale with a nominal value of £100,000. Although these loan notes were not issued at a discount, the repayment terms entitled Rosedale to participate in the value of the hotel. On redemption of the notes, Rosedale would be entitled to the greater of £450,000 or 5 per cent of the net sale proceeds or net value of the hotel. The long stop date for payment was 2019 (when a rent review under the lease of the hotel was due). This loan was to be secured by a third charge over the hotel;

vii) The grant of a legal charge by BPIL to Rosedale as contemplated by the Series B loan notes;

viii) The issue by TBL of loan notes with a nominal value of £1 million ("the Birmingham Loan Notes"). These were to be issued to Kilcarne for £1 million. The loan is repayable on 31 January 2007 or on an earlier sale (as defined) of TBL's interest in Baskerville House. On such a sale, Kilcarne is entitled both to repayment of £1 million plus interest and also to 50 per cent of the Net Proceeds of Sale (as defined). If no sale takes place by 31 January 2007, then Kilcarne receives only its £1 million plus interest. Clause 8 records the parties' confirmation that "this Loan Note instrument may be supplemented and/or replaced by an agreement in writing between both parties in relation to the proposed joint development of the Property". This loan was to be secured by a floating charge granted by TBL and by Mr Naghshineh's personal guarantee;

ix) The grant of a floating charge by TBL to Kilcarne as contemplated by the loan notes;

x) Mr Naghshineh's personal guarantee as contemplated by the loan notes;

xi) The lease of Baskerville House granted by Birmingham City Council to TBL.

More detailed terms

109. The Priority Agreement. In this agreement Kilcarne and Rosedale are described as "the Noteholders". TGL is described as "the Borrower" and BPIL as "the Security Provider". Clause 1.1 contains a number of definitions, including:

"Junior Liabilities"	All liabilities of the Borrower and/or the Security Provider to the Noteholders
"Junior Security Documents"	(a) the second debenture dated today between the Borrower (1) and the First Noteholder (b) the second legal charge over the Property dated today between the Security Provider (1) and the First Noteholder (2) (c) the third legal charge over the property dated today between the Security Provider and the Second Noteholder (d) any guarantee and any document creating security executed and delivered after today's date as security for any of the obligations and liabilities of the Borrower or the Security Provider to either or both of the Noteholders from any of the Borrower the Security Provider or any other Security Providers (e) the Noteholder Instruments
"Liabilities"	All present and future sums, liabilities and obligations payable or owing by the Borrower and/or the Security Provider (whether actual or contingent, jointly or severally or otherwise howsoever)

110. Clause 7.1 said that:

"This Agreement and the Junior Security Documents form the entire agreement as to the Junior Liabilities"

111. Clause 7.3 said that:

"If there are any other terms relating to the Junior Liabilities existing at the date hereof and not comprised in the Agreement or the Junior Security Documents such terms shall be of no further force and effect."

112. The Birmingham Loan Notes. The Birmingham Loan Notes contained or incorporated the following definitions:

"Maturity Date"	The earliest of (i) a Sale or (ii) 31 January 2007
"Property"	All that piece or parcel of land situated at Centenary Square Broad Street Birmingham, and known as Baskerville House
"Sale"	An outright sale to a third party … of the interest of the Company in the Property or the grant by the Company of a long lease of the Property to such a third party at a premium

113. There was also an elaborate definition of "Net Proceeds of Sale" which need not be set out in full. It detailed the deductions that could be made from the gross proceeds of sale. These deductions included development costs (as defined); and a £600,000 management fee payable to TGL.
114. Clause 3.1 said that:

"On the Maturity Date the Notes shall be redeemed in full by the payment by the Company to the Noteholders of the total nominal value of the Notes in issue of £1,000,000 together with Interest; plus (subject to there being Net Proceeds of Sale) a sum equal to 50 per cent of the Net Sale Proceeds."

115. Clause 8 of the Birmingham Loan Notes Instrument said:

"The Noteholders and the Company confirm that this Loan Note Instrument may be supplemented and/or replaced by an agreement in writing between both parties in relation to the proposed joint development of the Property."

116. The TBL floating charge. The TBL floating charge granted Kilcarne a charge by way of floating charge over all TBL's property rights assets and undertaking. By clause 4.1 TBL covenanted not without Kilcarne's consent to create or attempt to create any fixed or floating charge over any of the charged assets in priority to Kilcarne's charge. Clause 8 provided for the crystallisation of the charge if TBL mortgaged, charged or attempted to mortgage or charge any of the charged assets without Kilcarne's consent. Clause 18 provided for the release of the floating charge on the grant to Kilcarne of a legal mortgage of the Baskerville House lease.

Post-completion changes to the legal documentation

117. The lease of Baskerville House. The lease as granted required TBL to develop the building as a hotel, although the uses permitted under the use clause were wider, and included (among other things) use as offices. It also required TBL to complete the development within 36 months of the date of grant of the lease; that is to say by 5 February 2005. By a deed of variation made on 21 March 2002 it was agreed that the development covenant would be varied, so as to permit TBL to develop the building for any use permitted by the use clause. By a further deed of variation made on 14 January 2004 the development period was extended to 48 months; that is to say until 5 February 2006. On 1 July 2003 TBL paid the second instalment of the premium payable for the lease. This amounted to £4.75 million, which it paid without further help from Kilcarne. On 1 July 2004 it paid the final instalment of "£2.75 million, again without any help from Kilcarne.
118. The refinancing of TGL. TGL refinanced its borrowings on 19 July 2002. It negotiated a secured loan from the Bank of Scotland of £139 million plus a further £6 million bridging loan for the Baskerville House project. These loans enabled TGL to pay off the borrowings of £114 million outstanding to Morgan Stanley. They also enabled TGL to redeem the Series A and Series B loan notes in favour of Kilcarne and Rosedale respectively, and certain other debts. In Rosedale's case, the refinancing also triggered the obligation to pay 5 per cent of the value of the hotel. Thus on 19 July 2002 Kilcarne was paid £1.83 million under the Series A loan notes; and Rosedale was paid £1.05 million under the Series B loan notes. The Birmingham Loan Notes remain outstanding. The position, therefore, is that Kilcarne/Rosedale lent Targetfollow £2.5 million in February 2002; were repaid £2.88 million in July 2002, and Kilcarne is due a further £1 million plus interest on 31 January 2007 plus the possibility of a 50 per cent share in the net proceeds of sale of Baskerville House, if a sale takes place before that date.

What happened after completion

119. On 6 February 2002 Walker Morris submitted their fee note to TGL. In the covering letter Mr Akitt said:

"It now remains for us to put together the joint venture documentation. Is this something you'd look to us to draft in the first instance or are Druces & Attlee putting this together? Please let me know."

120. Mr Naghshineh did not reply to this request. On 7 February 2002 Kilcarne wrote to Mr Singh, as director of Sitac. The letter said that:

"As discussed, we would like Sitac to be involved in the monitoring of progress of this development and should be grateful if you would confirm that you are able to assist us in this matter. We appreciate that, should you agree to take this on, an additional fee will be involved."

121. On 20 February 2002 Mr Naghshineh and Mr Singh went to a meeting with Mr Liddiard at Birmingham City Council. In his follow up letter to Mr Liddiard of 25 February 2002 Mr Naghshineh said:

"As you will appreciate and further to our meeting of 20 February I am writing to confirm that this project is now being done on a joint venture basis with a company advised by Mr Malvinder Singh who you met at that meeting. As noted to you Mr Singh has enormous experience in construction and project management of a number of large projects and this partnership will hopefully result in getting the development off the ground and completed successfully."

122. There are many other contemporaneous documents to or from third parties in which Mr Singh is variously referred to as Mr Naghshineh's "JV partner", "joint venture partner", "partner", "business partner" or where the project is described as a joint venture. Sometimes the reference is to Mr Singh personally, sometimes to Sitac and sometimes to a company advised by Mr Singh. The name "Kilcarne" is not, however, mentioned. Mr Naghshineh said that he was happy to describe Mr Singh in this way, because he was confident that the loan notes would be replaced by a joint venture agreement.
123. On 26 February 2002 Mr Singh asked Mr Fox to take advice from Walker Morris on the question:

"if tfg bham sell the site to a new company as jv or full sale does stamp duty have to be paid by both companies in view that tfg has not paid duty yet."

124. Mr Fox responded on the same day:

"we have to pay duty on both sales. Alternative is to sell SPV to new company/jv and pay only 0.5% on part payment to date ie 0.5% on £3m is £15,000."

125. In March 2002 a developer called Frontier Estates Ltd became interested in participating in the development. A number of options were proposed. All of them involved an injection of funds by Frontier in return for a profit share. At this stage the idea was that Frontier would pay £8 million, and Kilcarne and TGL would each be repaid their loans. Mr Naghshineh was also keen to take out the remainder of his risk capital, which had been committed before 5 February 2002, and to procure the release of his personal guarantee. Mr Singh was not keen on the deal with Frontier. He thought that, if £8 million were to be injected into the project, he would prefer to do it himself, with the help of two friends of his.
126. On 27 March 2002 Mr Naghshineh sent Mr Singh a first draft of his "understanding of the potential deal we have discussed."
127. On 31 March 2002 Mr Singh replied. He set out two possible ways forward. The first involved the provision of £8 million mezzanine finance, and the reduction in TGL's equity to 25 per cent. The second involved a buyout of TGL's equity in TBL. Mr Naghshineh had provided details of how profits might be distributed. Commenting on that, Mr Singh said that he could not comment on the exact numbers but would need "to review the documentation." He then set out his recollection of "our agreement".
128. On 22 April 2002 Frontier put forward draft heads of terms for a joint venture between it and TBL. The joint venture would be formed either by Frontier acquiring a 50 per cent shareholding in TBL or by TBL assigning the lease to a single purpose vehicle. One of the proposed terms was that Frontier would receive a project management fee of 3 per cent of the value of the building contract.
129. There followed correspondence and discussions in which Mr Singh and Mr Naghshineh took different views about how any profits were to be divided under the terms of the Birmingham loan notes. The disagreements related to the permitted deductions. The details do not matter. But each of the two men thought that the other was seeking more than his due.
130. On 7 May Mr Singh sent Mr Naghshineh a long e-mail. The e-mail included:

"… there is some misunderstanding of what the basis of the 50/50 deal was. I agreed to take the 50% risk of not only £1 million of the £2 million required to do the deal, but also agreed to share 50% of the future cost including the balance payment to the Council. I agree that you gave your personal guarantee; but that was only because there was no lease to take charge on because you wanted to use the remaining £500k for something else (possibly Hammersmith) instead of the stamp duty, but at the time I was not aware of what value that was, and in my own way I did take a risk. Had the deal not been done, you would have lost not only £2.3 million but also huge face and loss of reputation. You should look at the £2.3 million as notional profit, and it was an important reason for doing the deal."

131. He continued:

"I completely agree with you that the deal you did was generous and possibly one that I would not have done myself. Of course our mutual approach to risk has always been different and that is why over the last several years you have reached where you have. Since doing the deal, I have added substantial value by giving it a new perspective, but of course that was one of the reasons you did the deal in the first place. On Rosedale you said you don't mind my sharing the upside, the more for me the better for you. Regardless of all this, we are both adults and have been in business for many decades and knowingly agreed and signed on a deal."

132. He went on to set out his view of the way forward:

"Most importantly the deal I would prefer is to do this jointly; that you raise your immediate cash requirements from other sources or against this property and we follow the agreements reached. Difference of opinion on any matter be resolved between our respective lawyers to that the interpretation issue is resolved once and for all. As agreed, we should put in place the joint venture agreement with the deadlock provision that you proposed and agreed if we have a disagreement the project would be sold and either party has the right to purchase it at the best price obtainable within a reasonable time."

133. Mr Naghshineh replied on 9 May. He began by saying:

"In principle, I believe we should work towards financing the Baskerville House project, with say Bank of Scotland, and complete the project on a joint venture basis. The imminent refinancing of Targetfollow Group we believe will provide sums to satisfy our current liabilities within the group."

134. Mr Singh responded on 13 May with requests for clarification. Two of these were:

"2. YOU HAD AGREED A FEE OF 3% FOR SITAC FOR MANAGING THE DEVELOPMENT PAYABLE ONCE THE TFG LOAN IS CLEARED, DOES THAT STILL STAND?

3. YOU HAD AGREED AN OPTION FOR KILCARNE TO BUY TFG'S SHARES AT VALUATION CONSIDERING VALUE OF [PROPERTY] AT VALUATION LESS 10%, AFTER PROVIDING FOR ALL LIABILITIES. PLEASE CONFIRM?"

135. On or about 13 May there was a difficult conversation between the two men. Mr Singh sent Mr Naghshineh an e-mail on 15 May, summarising his position. He concluded:

"LETS JUST CALM THIS VOLATILITY AND GET ON WITH IT, STICK TO WHAT HAS ALREADY BEEN AGREED IN WRITING AND PROFIT FROM EACH OTHERS INPUT INSTEAD OF TRYING TO TAKE FROM THE OTHER."

136. On 22 May Mr Singh sent an e-mail to Mr Dodge. Mr Dodge was a financial adviser to Mr Naghshineh; and Mr Singh thought that he might be able to mediate a solution to the disagreement. Mr Singh said that he and Mr Naghshineh had:

"discussed to put a proposal together to put the joint venture in place that will take into consideration the agreement as signed as well as Ardeshir's desire to be on equal risk footing with Kilcarne by raising debt from a bank, be it at a substantially higher interest, and at the earliest. We are both working towards that end."

137. Mr Singh and Mr Naghshineh spoke on the telephone on 27 May 2002. On the following day Mr Singh sent Mr Naghshineh an e-mail in which he said:

"AS MENTIONED PREVIOUSLY, WHEN YOUR LAWYERS PROPOSED THE J.V. I TOLD YOU THAT I DIDN'T MIND A LOAN NOTE BUT THIS WAS NOT GOOD FOR YOU. YOU SAID ITS OK I DON'T MIND WE WILL SORT IT OUT LATER. YOU CANT NOW HOLD THIS AGAINST ME – I WAS COMPLETELY OPEN ABOUT WHAT YOUR EXPOSURE CONSEQUENCES WERE INCLUDING THAT THERE WAS NO OBLIGATION FOR SHARING IN THE 7.5M [DEFERRED] PAYMENT.

ONCE YOU HAVE CONSIDERED ALL THIS AND PREVIOUS COMMUNICATION YOU WILL FIND THAT THE AGREEMENT ACTUALLY SETS DOWN WHAT WAS AGREED."

138. By mid-June it was clear that Mr Dodge's efforts to broker a solution had not succeeded. Mr Singh e-mailed him on 13 June to express his appreciation for his efforts. In the course of his e-mail he said:

"THE AGREEMENT WHICH WAS DISCUSSED IN GREAT DETAIL WITH EXPENSIVE LAWYERS FROM BOTH SIDES SETS OUT WHAT WAS AGREED."

139. Nevertheless, Mr Singh offered to accept Mr Naghshineh's interpretation of the agreement, and to waive his claim for compensation for his time and effort. He was not prepared to change any part of the Rosedale deal. This offer did not, however, resolve the differences.
140. Through the summer of 2002 Mr Naghshineh was attempting to refinance Targetfollow. He was particularly concerned that the money payable to Kilcarne and Rosedale (secured on the Bloomsbury hotel) would become payable on 31 July and that he had given a personal guarantee for those repayments. He asked Mr Singh whether the repayment date could be extended. Although Mr Singh said that he would ask Kilcarne, he does not appear to have done so. Mr Naghshineh was therefore surprised, and a little alarmed, to receive from Kilcarne and Rosedale, on or shortly after 8 July, letters requiring repayment on 31 July. This episode marked the beginning of a deterioration in the relationship between Mr Naghshineh and Mr Singh.
141. On 29 June Mr Singh went on a trip to China. He returned on about 15 July, and was due to leave for France on 17 July.
142. On 15 July Mrs Fletcher e-mailed Mr Singh to say that Targetfollow had secured finance from HBOS amounting to £6 million from which it intended to repay Kilcarne and Rosedale, certain other loans that TBL or TGL owed, and stamp duty on the lease. The aggregate of these earmarked payments was £5.7 million; leaving a balance unaccounted for of £300,000. The monies being lent by HBOS would be required to be secured on the lease of Baskerville House. This in turn required Kilcarne's consent. On that day (or possibly on 16 July) Mr Singh spoke to Mrs Fletcher at TGL. Mr Singh asked for an undertaking that the joint venture agreement would be entered into by the end of September. Mrs Fletcher thought that an "undertaking" meant something drafted by lawyers; and thought that she should consult Mr Naghshineh. Mr Naghshineh thought that the end of September was a realistic deadline; and Mrs Fetcher suggested to TGL's solicitors that an undertaking could be drafted on 18 July when Mr Naghshineh was due at a meeting with them. In the meantime, Mr Singh's recommendation to Kilcarne was that although the debenture over TBL's assets should not be released, it could be postponed to lending by HBOS. He continued:

"This will then leave the JV to be completed, and if possible, we should seek their undertaking/assurance (but not a condition to the above if they insist not to provide it) as to the date by which the JV agreement will be in place."

143. There is no indication in the papers that this was followed up by Kilcarne or its solicitors. Drawdown of the HBOS loan (and postponement of Kilcarne's charge) took place on 17 July.
144. In July 2002, largely at the instigation of Mr Singh, the decision was made to change architects for the scheme. Rolfe Judd were selected. The question arose: by whom should their appointment be made. Walker Morris wrote on 24 July to say:

"I presume that if we are proceeding with a Joint Venture company, then the appointment should be made by that JV Company. If the JV may come along at a later date, then we need to reserve the right to novate the appointment to a JV …"

145. Mr Singh replied on 1 August to the effect that "it may be a JV or equity in TBL". By September 2002 Mr Naghshineh had taken legal advice. In a meeting with Mr Singh he told Mr Singh that the advice that he had received was that the documentation was flawed; and that he could "drive a coach and horses through it". Kilcarne now looked more closely at the documents. The significance of the change in definition of "Maturity Date" in the Birmingham loan notes became clear to Mr Singh. He realised that Kilcarne would not get its 50 per cent profit share unless a sale of the Baskerville House lease had taken place by the end of January 2007. He saw this as a potentially serious problem and one that Mr Naghshineh was prepared to exploit. Mr Singh now began to press more strongly for the preparation and execution of a joint venture agreement. However, Mr Naghshineh's reaction, conveyed through Mrs Fletcher, was that the basis of the joint venture agreement was that set out in the Birmingham loan notes, and that there was no need for any further written agreement.
146. TBL's application for planning permission was due to come before the planning committee of the Birmingham City Council on 19 December 2002. The plans included a glass dome on the top of the building. This design had the support of the planning officers, and everyone was confident that the application would be granted. In anticipation of the grant, press releases were prepared in draft, in which the project was described as a joint venture between TGL and Sitac. However, at the meeting of the planning committee, several members, apparently against the advice of the officers, spoke against the dome. In consequence the application was deferred. This was a bitter blow.
147. By December 2002 what had been a warm and friendly relationship between Mr Singh and Mr Naghshineh had broken down. The deferral of the planning application was the end of the road. Mr Singh was, in his eyes, "excluded" from the project. He hoped that he and Mr Naghshineh would reach an agreement to resolve their differences; but unfortunately no such agreement was reached. In consequence, this action came to trial.
148. I should record that planning permission was subsequently granted in February 2003. A letter of intent in relation to the building contract has been recently issued, although work on site has not begun.

Was a legally enforceable joint venture agreement made in February 2002?

149. The issues under this head can be subdivided as follows:

i) Was there an intention to create legal relations?

ii) Are the terms of any agreement sufficiently certain to amount to a binding contract?

iii) Did Mr Naghshineh and Mr Singh respectively have authority to reach a binding agreement?

iv) If there was an oral contract which would otherwise have been binding, was it invalidated by section 2 of the Law of Property (Miscellaneous Provisions) Act 1989?

v) Was the alleged agreement superseded by the Birmingham Loan Notes?

vi) Do the terms of the written contractual documents rob any antecedent oral agreement of binding effect?

150. Although I have divided these issues, the first two of them overlap to a large extent. Thus, the more embryonic the oral "agreement", the less likely it is that the parties intended to create legal relations at that stage: see e.g. Baird Textiles Ltd v. Marks & Spencer plc [2001] CLC 999.

Intention to create legal relations

151. TBL puts its defence in two ways. First it says that the discussions between Mr Singh and Mr Naghshineh were expressly or impliedly "subject to contract". In other words, neither of them intended to be bound unless and until formal documents were drawn up by the respective lawyers and executed by the parties. Second, it says that an examination of the course of dealing shows that the parties were in a state of negotiation throughout the period leading up to completion on 5 February; and by that time no concluded joint venture agreement had been made.
152. Mr Naghshineh says in his witness statement that "all our discussions were subject to contract". However, none of the voluminous disclosed documents in the case bears the heading "subject to contract". Mr Naghshineh explained that the phrase "subject to contract" was not one that was used in the conversations between him and Mr Singh. However, his understanding was that because both sides had instructed lawyers and because the lawyers would have to document the deal in due course, nothing would be binding until the documents had been drawn up and signed off. Since this was Mr Naghshineh's understanding, rather than something communicated to Mr Singh, I do not think that I can treat this as a case in which negotiations were expressly made "subject to contract". The contrary was not suggested to Mr Singh in cross-examination.
153. Nevertheless, whether the parties intended to be bound by an oral agreement for a joint venture must be considered in its objective context. Both sides had instructed solicitors on 29 January. They were working hard on the documents. The pleaded oral agreement was said to have come into existence on 1 February. The essence of the alleged agreement, according to Mr Singh, was that each party would contribute £1 million by way of loan and £100 as equity in a joint venture company; that on a sale of Baskerville House each party would be repaid their loans, and TGL would be repaid its sunk costs, with the profits (if there were any) being split equally. In the meantime, each party would have an obligation to contribute equally to any funding required. The required funding would include the remaining instalments of premium due under the lease plus the costs of development.
154. 1 February was pleaded as being, in effect, the cut-off date by which the contract had been concluded. In a case of this kind, where dealings straddle the date at which a contract is said to have been made, the principle I must apply is that summarised by Lord Cairns LC in Hussey v. Horne-Payne (1879) 4 App. Cas. 311, 316:

"… it is one of the first principles applicable to a case of the kind that where you have to find your contract, or your note or memorandum of the terms of the contract in letters, you must take into consideration the whole of the correspondence which has passed. You must not at one particular time draw a line and say, "We will look at the letters up to this point and find in them a contract or not, but we will look at nothing beyond." In order fairly to estimate what was arranged and agreed, if anything was agreed between the parties, you must look at the whole of that which took place and passed between them."

155. The pleadings and argument concentrated on the allegation that a contract for a joint venture was agreed. However the joint venture was only part of the overall picture. Mr Naghshineh's objective was to raise £2.5 million, partly to fund the instalment of premium payable to Birmingham City Council and partly for working capital. Mr Singh knew that that was the object of the deal. It is unrealistic to attempt to separate out the individual components of the deal. If terms could not be agreed for the whole of the £2.5 million, the overall deal would not have gone ahead. If the £2.5 million (or at least £2 million of it) could not be obtained, then the agreement for lease could not be completed, and there could, of necessity, have been no joint venture for the development of Baskerville House. But Kilcarne and Rosedale were not prepared to make £2.5 million available except on the basis that, as to £1.4 million, the loan was properly secured on the Bloomsbury hotel; and as to £100,000 to be lent by Rosedale, it, too, was properly secured on the Bloomsbury hotel, and that Rosedale would be entitled to participate in any increase in value of the hotel. It would, therefore, require extremely strong evidence to establish that a binding agreement for a joint venture came into existence in advance of a binding agreement on the part of Kilcarne and Rosedale to make their respective secured advances. The commercial terms of those loans (that is, the Series A and B loan notes to be issued by BPIL and the loan notes to be issued by TBL) were not finalised until the evening of 3 February. Without commercial agreement on the £2 million needed to pay Birmingham City Council, the Council would have been entitled to terminate the agreement for lease, thus rendering any joint venture agreement relating to Baskerville House pointless. Although I have concluded that the City Council would not have in fact done so, neither Mr Singh nor Mr Naghshineh knew that at the time. It is not realistic to conclude that the parties were contractually committed to a joint venture agreement before the terms of the loan had been finalised. Nor, in my judgment, is it realistic to analyse the communications as being variations of an already concluded agreement; they were continuing negotiations.
156. In addition, it is, to my mind, clear that Kilcarne and Rosedale would not commit themselves to lending money to BPIL unless and until they were satisfied with the enforceability of the security intended to be granted. That, in turn, depended on negotiating a satisfactory priority deed with Morgan Stanley. On 1 February Druces & Attlee were still of the view that the documents were not satisfactory and that they could not advise Standard Chartered Grindlays Trust Company to proceed. Only the previous day, they had described the draft priority deed as "wholly unsatisfactory"; and Denton Wilde Sapte had not yet met their concerns. The final form of the deed was not agreed until the day of completion itself, 5 February.
157. Accordingly, if I look at "the big picture", it is clear, to my mind, that no binding contract could have come into existence on 1 February.
158. Even if I concentrate on those aspects of the deal that related to Baskerville House alone I reach the same conclusion; for the following reasons:

i) Although each party was to contribute £1 million, Mr Singh's contribution was to be "senior debt" and Mr Naghshineh's contribution was to be "junior debt". In other words Mr Singh's contribution was to have priority over Mr Naghshineh's. Mr Singh said that there would definitely have to be some kind of security to establish these priorities, but that he and Mr Naghshineh had "not really" discussed what kind;

ii) In his e-mail to Ms Wilkinson sent at 11.00 on 1 February (copied to Mr Naghshineh) Mr Singh described the deal as a "proposal for your consideration". This is not consistent with a binding contract having been made.

iii) In that same e-mail Mr Singh said that: "you" (i.e. Ms Wilkinson and the lawyers) "will need to consider other aspects of the JV agreement". He explained that by "the JV agreement" he meant a written agreement, and that he was expecting a written agreement to be signed between "Targetfollow and Kilcarne or Sitac or whatever it would be". Neither the e-mail, nor Mr Singh's explanation seems to me to contemplate that a binding agreement would come into existence before those aspects of the JV agreement had at least been considered;

iv) In his e-mail to Ms Wilkinson sent at 16.31 on 1 February, Mr Singh said that: "your exposure is £1m, as secured creditor with 1^st charge". If, as suggested, Mr Singh had already contractually committed Kilcarne to a binding obligation to contribute to required funding, this statement would have been quite untrue, as would his description of the risk/return profile;

v) In the same e-mail Mr Singh ended by saying that he could "[recommend] this deal to you strongly". As Mr Singh accepted, this does not read as though a binding agreement had already been reached. He explained that Ms Wilkinson asked him for something she could put in her file and "have a look what the deal is all about". But this particular e-mail, as I have said, speaks only of a secured loan. It says nothing about a joint venture. If, therefore, Ms Wilkinson had asked for something to put in her file to tell her what the deal was all about, and if a binding agreement for a joint venture had already been made, this e-mail would have been woefully inadequate. I do not accept Mr Singh's explanation of the purpose of this e-mail;

vi) After his initial reaction to the draft documents, he commented on the Birmingham loan notes at 11.48 on 2 February 2002: "This is actually better as there is no obligation for further funding". Again, if Mr Singh had already committed Kilcarne to a binding obligation to contribute to required funding, this would have been an inappropriate comment;

vii) Whether or not Mr Singh received the side letter attached to Mr Cooper's e-mail sent at 16.57 on 2 February, he did receive the side letter attached to Mr Cooper's e-mail sent at 10.27 on 4 February. That side letter stated clearly that it was intended to enter into good faith negotiations for a joint venture agreement, but that it was not to be legally binding. It is, in my judgment, a good indication of Mr Naghshineh's intention at the time, which he attempted to communicate to Mr Singh. Mr Nugee submitted, and I agree, that since Mr Singh held himself out as being willing to receive communications by e-mail, the arrival in his inbox of the side letter must be treated in law as having been adequately communicated to him (see Chitty on Contracts 29^th ed. para. 2-045);

viii) The covering e-mail itself contained Mr Cooper's advice to Mr Naghshineh that he should not "request" an obligation on Kilcarne's part to share in the costs. A "request" for an obligation is inconsistent with an obligation having already arisen;

ix) Mr Singh asserted in his e-mail of 27 May 2002 that he had told Mr Naghshineh at the time that the loan notes were not good for him, because there was no obligation to contribute to the remaining instalments of the premium payable for the lease. This, too is inconsistent with a binding oral agreement having been made (or at least having been made and not superseded by the Birmingham loan notes). In that same e-mail he said that: "the agreement actually sets down what was agreed". The reference to "the agreement" can only be a reference to the written agreement embodied in the Birmingham loan notes;

x) On at least two further occasions in June 2002 Mr Singh asserted that the written agreement (i.e. the Birmingham loan notes) accurately set out what had been agreed;

xi) It is, in my judgment, inherently improbable that two experienced businessmen would commit themselves orally to a joint venture agreement, which is inevitably a complex document, at a time when lawyers had already been instructed to prepare and scrutinise the legal documentation;

xii) It is equally improbable that the directors of Kilcarne (or the trustees of the trust) would allow themselves to be committed to what was apparently an open-ended commitment to contribute to the funding of the development, estimated at the time to cost over £22 million, and the future instalments of premium amounting to £7.5 million, especially since only a very rudimentary development appraisal appears ever to have been submitted to them for consideration. Moreover that development appraisal was for the development of Baskerville House as a hotel, which Mr Singh did not think was a viable development, and appears to have been submitted to Jersey after the time of the telephone conversation in which the alleged oral agreement was made;

xiii) Although Mr Whittaker had been pressing for sight of the contractual documents in place between TBL and Birmingham City Council, he had not received them, even by the time of completion on 5 February. It seems to me to be improbable that Kilcarne would have committed itself to a joint venture to be carried out under a lease that it had not even seen. I add, also, that Mr Singh had not even seen the building itself before completion.

159. Mr Purle relied strongly on the post-completion references to Mr Naghshineh's "JV partner", "joint venture partner", "partner" or "business partner"; and to documents where the project is described as a joint venture. I do not consider that they will bear the weight that he seeks to attribute to them. First, they were all addressed to third parties who had no interest in the precise legal relations between TGL and Kilcarne. Second, they do not mention Kilcarne at all. Third, Kilcarne did in fact have a potential 50 per cent share in profit, and no one had focussed on the temporal limitations on that entitlement. Fourth, they are balanced, if not outweighed, by Mr Singh's post-completion assertions that the deal was contained in the written documents. As Mr Singh put it in his e-mail of 7 May: "we are both adults and have been in business for many decades and knowingly agreed and signed on a deal." Mr Purle also relied strongly on the minutes of the board meeting of TGL on 4 February in which it was recorded that "the lender" (i.e. Kilcarne) "to participate with costs on a 50:50 basis with Targetfollow (Birmingham) Limited". I agree that this is some evidence that the directors of TGL thought that some kind of agreement had been reached about participation in costs. But the minutes describe the deal as a "possible" capital injection; and the formal resolution of the board was to "proceed with the finalisation of the documentation relating to the capital injection and complete on the purchase of Baskerville House." That resolution clearly envisages that the documentation, once finalised, will contain the terms on which the capital injection is to be made. I do not consider that it envisages TGL being bound by an informal oral agreement. The apparent recognition of an agreement is also inconsistent with Mr Naghshineh's query to Mr Cooper about asking for an obligation from Kilcarne to provide funding and Mr Cooper's advice (copied to Mr Singh) that that should be left over for the joint venture agreement, and also Walker Morris' advice to Mr Naghshineh of 5 February (seen by Mr Singh) that Targetfollow had not secured long term funding for the balance of the purchase price and the costs of development. In addition, there is no equivalent resolution for TBL. The resolution of TGL's board does not, in my judgment, outweigh all the other contradictory evidence.
160. I conclude, therefore, that no binding contract for a joint venture came into existence on 1 February 2002.
161. In his closing submissions, Mr Purle did not concentrate on 1 February (when the pleaded agreement is said to have come into existence). Instead he submitted that a binding agreement for a joint venture came into existence by the time of completion on 5 February. Mr Nugee did not strenuously object to this reformulation of Kilcarne's case. However, as I see it, the difficulty with this way of putting the case in contract is that there is no relevant meeting or telephone conversation to which Mr Purle can point as amounting to the occasion on which the contract was made. It follows, therefore, that if a contract came into existence after 1 February 2002 it must have come into existence by means of written communications.
162. In Gibson v. Manchester City Council [1979] 1 WLR 294 the House of Lords considered whether a contract for the sale of a council house to Mr Gibson had come into existence. In the Court of Appeal the majority had held that the court must look at all the correspondence and at the conduct of the parties and from that see whether the parties had agreed everything that was material. The House of Lords rejected that approach. Lord Diplock said:

"My Lords, there may be certain types of contract, though I think they are exceptional, which do not fit easily into the normal analysis of a contract as being constituted by offer and acceptance; but a contract alleged to have been made by an exchange of correspondence between the parties in which the successive communications other than the first are in reply to one another, is not one of these. I can see no reason in the instant case for departing from the conventional approach of looking at the handful of documents relied upon as constituting the contract sued upon and seeing whether upon their true construction there is to be found in them a contractual offer by the corporation to sell the house to Mr. Gibson and an acceptance of that offer by Mr. Gibson."

163. Mr Purle was not able to identify the documents which could have amounted to an offer or an acceptance. In my judgment, on the footing that I am right in deciding that no oral contract had come into existence on 1 February, no contract came into existence between then and 5 February (apart, of course, from the formal written contracts completed on that day).

Certainty of terms

164. One of the pleaded terms of the agreement was that:

"The written joint venture agreement to be entered into between Kilcarne and Targetfollow would also include provisions about the costs which each party would be entitled to charge for their work in relation to the development of the Property, and its funding, before any profit was shared."

165. The financial provisions of a joint venture agreement are plainly essential terms. Without agreement on what costs can be deducted from the gross sale price the agreement is, in my judgment, too uncertain to enforce. Likewise, the manner in which any development is to be funded is also an essential term. Mr Singh also said in evidence that among the other matters that would have to be sorted out were the "normal operational issues of a JV": things like who would be managing director, who would be running it, who could sign cheques, and so on. In addition, as I have mentioned there was also the outstanding question of what kind of security would be provided for the loan. On the face of it, therefore, the pleaded agreement was incomplete, and left further important matters for future agreement.
166. However, in his oral evidence Mr Singh was clear that the definition of "Net Proceeds of Sale" in the Birmingham loan notes embodied the agreement about the distribution of profits that was to apply to the joint venture agreement. The drafting chronology of this definition was as follows:

i) The first draft was prepared by Mr Cooper and circulated at 16.18 on 1 February;

ii) The second draft (which did not change the definition) was circulated at 23.51 on the same day;

iii) That draft was amended in red and re-amended in green on 2 February, Mr Whittaker having e-mailed his amendments at 17.45;

iv) A clean copy was produced on 3 February and sent by Mr Cooper to Mr Whittaker at 15.21. The principal change of substance was that TGL's £1 million was to carry interest and was to be deducted from the gross proceeds of sale, whereas in the first draft it was only the principal sum of £1 million that was deducted. One further change was that deductible VAT was restricted to VAT that was irrecoverable as input tax by TBL. In addition, Kilcarne's £1 million loan was to carry interest. Although this did not involve a change in the wording of the definition of "Net Proceeds of Sale", it altered the substance, because the interest (being within the concept of deductible "finance costs") would have to be deducted from the gross proceeds of sale, before the profit was distributed;

v) Further changes (not affecting the definition or effect of the definition of Net Proceeds of Sale) were made on 4 February, and the final draft was circulated at 14.43 on that day.

167. In the light of this chronology, it seems to me to be impossible to conclude that a binding oral agreement about the manner in which profit was to be calculated had come into effect before the first draft of the definition had even been prepared, let alone agreed.
168. However, it is necessary to consider whether, by taking the cut off date for the contract as 5 February, rather than 1 February, Kilcarne is able to overcome the objections based on want of certainty. By 5 February the definition of "Net Proceeds of Sale" and the extent of Kilcarne's security had been agreed. But they had been agreed for the purpose of the charge in favour of Kilcarne and not the proposed joint venture. Moreover, operational issues had not been agreed. Mr Purle described these as "nuts and bolts", and said that Mr Singh and Mr Naghshineh did not fall out over operational issues. I do not agree that these operational issues can be downplayed as mere "nuts and bolts". How the development was to be run and managed, what efforts were to be made to raise finance from outside sources, how decisions were to be made were all important questions. Mr Cooper thought that they were important enough to preclude Mr Naghshineh from requesting an obligation on Kilcarne's part to share costs, and copied his advice to Mr Singh. It is true that Mr Singh and Mr Naghshineh did not quarrel about these things (at least until late in 2002) but that does not mean that they were actually agreed. So far as the evidence goes, they were never discussed at all. In my judgment Kilcarne does not overcome the objection based on lack of certainty.

Authority

169. Mr Singh's authority. Kilcarne says that Sitac had actual authority to contract on its behalf and that Mr Singh had the authority of Sitac to do so. Alternatively it says that Mr Singh himself had the necessary authority. It says that Mr Naghshineh had actual authority, express or implied, to contract on behalf of TGL and TBL. TBL says that Mr Singh did not have Kilcarne's authority to contract on its behalf, and Mr Naghshineh did not have authority to bind either TGL or TBL.
170. When Mr Singh formulated the revised proposal on 31 January, he sent it to Ms Wilkinson "for your consideration" and ended by asking her to confirm her interest. This was copied to Mr Naghshineh. Clearly it does not purport to bind Kilcarne, and in my judgment it represented to Mr Naghshineh that Mr Singh had no such authority. The version sent through to Ms Wilkinson on 1 February also described the proposal as "for your consideration". This, too, was copied to Mr Naghshineh. Also on 1 February he said that he could "recommend" the deal to Ms Wilkinson strongly. When, on 3 February, the question came up of the circumstances in which Mr Naghshineh's personal guarantee could be released, Mr Singh e-mailed Mr Naghshineh to say that he thought he "could persuade Jersey to accept a proposal as follows".
171. Approval of the various documents is also contained in formal board minutes of the directors of Kilcarne. Mr Singh was not a director or other officer of Kilcarne. Nor was he a shareholder in Kilcarne. As I have already said he is at pains to point out that he does not control Daphne Caprice and is not connected with Kilcarne.
172. None of this suggests that Mr Singh had authority to bind Kilcarne. What is there on the other side of the equation? In his witness statement Mr Singh said that after sending his e-mail at 11.00 on 1 February he discussed its contents with Standard Chartered Grindlays by telephone and obtained their approval. Since the question of his authority was squarely raised on the pleadings, this was somewhat laconic evidence. However, following the provision of further information very shortly before the trial began, Mr Singh gave oral evidence about the telephone call in his evidence in chief. He said that he spoke first to Mr Hunter, the London-based managing director of Standard Chartered Grindlays. This call seems to have been of no consequence. Then he spoke to Mr Black, the managing director of Standard Chartered Grindlays Trust Company. He complained to Mr Black that he had not heard from Ms Wilkinson in response to his e-mail. He had, however, been told by Mr Whittaker that Ms Wilkinson was not happy with the deal, and he was angry that his judgment had been questioned. Mr Black said: "We will do what you need us to do, go ahead, I will let Justine Wilkinson know, she will call you." A few minutes later Ms Wilkinson called Mr Singh. She apologised for not having returned his call. She said that she would do whatever required to be done from her side, but that Mr Singh "should go ahead and do the deal that had been set out, and it was okay with them." This evidence was clearly directed to the conversation referred to in Mr Singh's witness statement, namely a conversation relating to his e-mail at 11.00 on 1 February. On his return to the witness box in the next session of the trial (which for unimportant reasons was interrupted for four days), Mr Singh said that his evidence in chief had been wrong. He now said that he had had a conversation with Ms Wilkinson on 29 January. In the course of that conversation, he and Ms Wilkinson had discussed the question whether the transaction should be structured through an offshore company, or whether the trust should simply lend money to Mr Singh, which he could, in turn, lend Mr Naghshineh. Ms Wilkinson said: "you can go ahead and do the deal you need to do". Now, at that stage in the story, the contemplated deal was simply a secured loan, with the prospect of participation in the increased value of the Bloomsbury hotel. The question of lending direct to TBL on the security of the Baskerville House lease had not yet arisen. Nor had any question of a joint venture or profit share in the development of Baskerville House. It seems to me, therefore, that this conversation cannot have amounted to authority to Mr Singh to commit Kilcarne contractually to a joint venture or, more importantly, to an obligation to contribute funding to the project. Mr Singh went on to say that he had several conversations on or about 1 February, although he could not be exactly sure about which time or which day. He thought that he had had a conversation with Mr Hunter, several conversations with Mr Black and several conversations with Ms Wilkinson. Ms Wilkinson, he said, was aware that "this was a temporary document and going to be changed and what was going on about the papers". This account of the conversation does not, to my mind, suggest that Mr Singh was authorised to bind Kilcarne by an oral agreement, before the paperwork was finalised. Mr Singh agreed in cross-examination that Ms Wilkinson had to "sign off" on the paperwork which, again, suggests that Kilcarne was not to be bound before the paperwork was finalised. Moreover, I do not consider that it was established that Ms Wilkinson herself had authority to commit Kilcarne or to authorise Mr Singh to do so. There is no evidence that the board ever delegated its powers to a committee consisting of Ms Wilkinson.
173. However, Mr Singh said that in his own mind he was already working with "a certain authority to agree a deal", because of his previous relationship with the trust. He said that it was agreed with Mr Black that he (Mr Singh) would agree whatever he agreed and they would document what was required to be documented. He subsequently described this as "general authority" and "overriding authority". This authority, he said, was given to him by Mr Black.
174. The difficulty with this evidence is that although Mr Black may have been a director or officer of Kilcarne he was not the board, and was not present at any relevant board meeting. There is no evidence that the board ever delegated its powers to a committee consisting of Mr Black. It is difficult, therefore, to see how Mr Black, in his capacity as only one of Kilcarne's directors, could have given Mr Singh authority to contract on behalf of the company. In his closing address Mr Purle suggested that Mr Black, as managing director of Standard Chartered Grindlays Trust Company, was able to give authority to Mr Singh in his capacity as shareholder. The principle he invoked was that in Re Duomatic Ltd [1969] 2 Ch. 365, namely: that where it can be shown that all shareholders who have a right to attend and vote at a general meeting of the company assent to some matter which a general meeting of the company could carry into effect, that assent is as binding as a resolution in general meeting would be. However, the shareholders in Kilcarne are two limited companies. Although they each include the words "Standard Chartered Nominees" in their corporate names, I know nothing else about them; except that in some way they are ultimately owned by Daphne Caprice. I am not prepared to infer that Mr Black personally is to be treated as the sole shareholder in Kilcarne.
175. In addition, as Mr Nugee pointed out, the proposal in Mr Singh's 11.00 e-mail on 1 February was that the transaction would be entered into by "Josten or other". Kilcarne was not expressly mentioned at all. In a sense this is understandable, because as far as Mr Singh was concerned the deal was a personal deal between him and Mr Naghshineh, based on a personal friendship and trust going back for more than a decade. The corporate vehicles for carrying through the deal were, in commercial terms, unimportant details. But if the question is whether Mr Singh had authority to bind a particular company, giving rise to legally enforceable rights and obligations, these details become of critical importance.
176. There are two pieces of "non-evidence" that I also take into account. First, although the question of Mr Singh's authority was clearly raised in the statements of case, neither Ms Wilkinson nor Mr Black nor any other officer of Kilcarne was called to give evidence or put in witness statements. So there was no corroboration of Mr Singh's account of his telephone conversations with Ms Wilkinson or Mr Black; and the details of those conversations were rather confused. Although, as I have said, the trusteeship of the Jadriya trust (and hence ultimate control of Kilcarne) has since passed from Standard Chartered Grindlays Trust Company to HSBC, the omission to call Ms Wilkinson and Mr Black is striking. Second, the board minute approving entry into the various legal agreements contains no hint that Kilcarne was already contractually committed to the transaction. If Mr Singh had already contractually committed Kilcarne to a joint venture, it must also follow that he had already committed Kilcarne to lend the £2.4 million. On the contrary, the board minute records merely that the company had been "in negotiation" and that the various documents were produced to the board "for consideration". In relation to each such document, the minute then records the board's decision to "proceed". In other words, each component of the transaction was presented on the basis that the board was free to decide either to proceed or not to proceed.
177. I conclude that Mr Singh did not have authority to bind Kilcarne to a joint venture which might have had the effect of committing it to fund half the costs of a development estimated to cost over £20 million. Even assuming that Ms Wilkinson did say to Mr Singh that he should go ahead and "do the deal", which is the highest that it can be put, I would not have regarded that as having conferred on Mr Singh actual authority to bind Kilcarne contractually, without sight of any legal documentation. It is equally capable of meaning that Mr Singh should go ahead and do the commercial deal. I do not accept Mr Singh's evidence to the contrary.
178. Mr Naghshineh's authority. The articles of association of TGL and TBL did not confer authority to bind the company on anyone other than its board of directors. It was not suggested that the board of either company had delegated authority to Mr Naghshineh in any formal way. It was suggested that Mr Naghshineh was the decision-maker within the company, in the sense of being the person who negotiated commercial deals. I think that this suggestion was a sound one. But I do not consider that this can be equated with a capacity to bind either company without a board decision. Leaving aside the formal resolutions prepared by the lawyers, the minutes of the board meeting of TGL of 4 February are telling. These were prepared for internal consumption. They take the form of a report to the board of a "possible" commercial deal and the board's decision to proceed. The form of the minutes is strongly suggestive of a real decision by the board and not merely a rubber-stamping of a binding commitment already agreed by Mr Naghshineh. There is commercial substance to this conclusion. Although, as I have said, Mr Naghshineh was the largest shareholder in TGL, he was not the majority shareholder. There was a significant minority shareholding that belonged to someone who was not connected with Mr Naghshineh by family ties and whose interests would have to be taken into account. Moreover, Mr Naghshineh made it clear to Mr Singh that he had shareholders to "persuade". It was not suggested that this was a deception on Mr Naghshineh's part. I am entitled to take this at face value as indicating that Mr Naghshineh did not have authority to bind TGL.
179. I conclude that Mr Naghshineh did not have authority to bind either TGL or TBL.

Ratification

180. One of Kilcarne's answers to Mr Singh's lack of authority is that his actions were ratified by Kilcarne. The board of directors of Kilcarne held a meeting on 29 September 2004. By then the litigation was on foot, and questions about Mr Singh's authority had been raised on the pleadings. The Re-Amended Particulars of Claim were produced to the meeting. That pleading alleged the making of a binding agreement for the joint venture. The meeting passed a resolution confirming that Sitac or Mr Singh had authority to enter into the agreement or arrangements described in the Re-Amended Particulars of Claim, and ratifying and adopting the agreement or arrangements as the acts of the company.
181. There is no objection to the resolution in point of form. Although Mr Nugee submitted (rather faintly) that the resolution had not been proved, he did not, in the end, challenge its authenticity.
182. In so far as the resolution purported to confirm that Mr Singh had actual authority to conclude the alleged agreement in February 2002, I cannot give it any real weight. The directors who passed the resolution were not the directors of the company at the material time, and there is no indication in the resolution of what material they considered in coming to their conclusion. However, ratification is a different matter.
183. It is common ground that an effective ratification has retrospective effect. However, there are limits on the power of a principal to ratify the unauthorised acts of his agent. These limits were discussed by the Court of Appeal in Smith v. Henniker-Major & Co [2003] Ch 182. Robert Walker LJ referred to the rule stated in Bowstead & Reynolds on Agency as follows:

"Ratification is not effective where to permit it would unfairly prejudice a third party, and in particular—(1) where it is essential to the validity of an act that it should be done within a certain time, the act cannot be ratified after the expiration of that time, to the prejudice of any third party; (2) the ratification of a contract can only be relied on by the principal if effected within a time after the act ratified was done which is reasonable in all the circumstances."

184. Having referred to a number of previous cases, he concluded:

"I am inclined to think that this debate (as to whether the exception is limited to ratification affecting property rights) may not be particularly profitable. Even though the operation of the Limitation Act 1980 is normally to bar the remedy rather than to extinguish the right, an accrued defence under the Act has often been spoken of in terms approximating to a property right of which a party ought not to be deprived. In my view the right approach would be to regard the deprivation of an accrued right as an important example of the general rationale identified in Bowstead & Reynolds's article 19, that is, unfair prejudice."

185. The general rationale, therefore, of the limits on the ability to ratify is the prevention of unfair prejudice to the other party to the putative contract. Whether unfair prejudice would be caused by allowing ratification is, as Robert Walker LJ said, "a judgmental application of principle".
186. Mr Purle submitted that the only prejudice that TGL and TBL might suffer if ratification were allowed was the loss of an action that they might otherwise win. That was not relevant prejudice, since an effective ratification would always change what would otherwise have been the legal relations between the putative principal and the third party. There is no absolute bar which precludes ratification after action brought. Indeed, the very commencement of proceedings may itself amount to ratification. Nor is there any possible limitation defence, since the ratification was some two and a half years after the making of the putative contract. I accept these submissions. Moreover, because the ratification came late in the day, then TGL and TBL could be adequately compensated in costs if Kilcarne were to win only because of the ratification.
187. Had it mattered, I would have held that the ratification was effective retrospectively to authorise any apparently binding contract that Mr Singh had purported to make on behalf of Kilcarne.

Lack of writing

188. Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 provides (so far as material):

"(1) A contract for the sale or other disposition of an interest in land can only be made in writing and only by incorporating all the terms which the parties have expressly agreed in one document or, where contracts are exchanged, in each.

(2) The terms may be incorporated in a document either by being set out in it or by reference to some other document.

(3) The document incorporating the terms or, where contracts are exchanged, one of the documents incorporating them (but not necessarily the same one) must be signed by or on behalf of each party to the contract.

(4) …

(5) This section does not apply in relation to [certain types of contract]

and nothing in this section affects the creation or operation of resulting, implied or constructive trusts.

(6) In this section—

"disposition" has the same meaning as in the Law of Property Act 1925;

"interest in land" means any estate, interest or charge in or over land."

189. The first task is to identify the putative contract, before asking whether it is a contract for the sale or other disposition of an interest in land. Although it may be possible for parties to hive off parts of their arrangements into separate and distinct contracts (Tootal Clothing Ltd v. Guinea Properties Ltd Management Ltd [1992] 2 EGLR 80), the court should be wary of artificially dividing what is in truth a composite transaction (Grossman v. Hooper [2001] 2 EGLR 82). If part of a composite transaction is a contract for the sale or other disposition of an interest in land, then the contract as a whole must satisfy the statutory requirements (Godden v. Merthyr Tydfil Housing Association (1997) 74 P & CR D1).
190. On one view, the contract was the overall bargain by which £2.5 million was to be made available to the Targetfollow Group. This would include the secured loans to be made by Kilcarne and Rosedale respectively to BPIL, the secured loan to be made by Kilcarne to TBL, Mr Naghshineh's personal guarantee and the joint venture agreement. The alternative view is that the joint venture agreement alone is the relevant contract, and that the other elements of the overall bargain can be ignored. I have already said that the commercial reality was that none of these components would have proceeded without the other. In my judgment, therefore, the contract was the overall bargain. Mr Purle objected that there were at least three contracts: one between Kilcarne and BPIL; a second between Rosedale and BPIL and a third between Kilcarne and TBL. In a sense this is a question of semantics. In my judgment there was only one contract, in the sense of one overall bargain, different parts of which were to be performed by different parties to the composite bargain.
191. It is common ground that there was no single document incorporating all the terms of the composite agreement signed by all parties. It is also common ground that there was no exchange of contracts in the sense envisaged by section 2 (1) of the 1989 Act. If, therefore, the "contract" for the purposes of section 2 is the overall bargain, then no contract can have come into existence.
192. Let me assume, however, that the relevant "contract" is the putative contract for a joint venture. Again it is common ground that there was no single document incorporating all the terms of the joint venture agreement signed by both parties, and no exchange of contracts. Indeed it is by no means clear whether the joint venture agreement is one that was made between Kilcarne and TGL or between Kilcarne and TBL or between Kilcarne and both TGL and TBL. But the question is: was the joint venture agreement a contract for the sale or other disposition of an interest in land?
193. I have set out the terms of the joint venture agreement that Mr Singh says was made on 1 February 2002 (see para. 50 above). There are at least two elements of that agreement that seem to me to be "land-related". The first is that part of the agreement under which the lease of Baskerville House was to be transferred by TBL to a joint venture company. The second is that part of the agreement which required the lease of Baskerville House to be charged in order to secure the parties' respective loans of £1 million each and their profit shares. Both these elements are, in my judgment, part of a composite bargain, even if I restrict my gaze to the joint venture agreement.
194. There is no doubt that a fixed charge over a lease is an interest in land. Part of the agreement, therefore, was an agreement that an interest in land would be created. But even if the agreement had been an agreement to create a floating charge, that would still have counted as an interest in land. That was the position under the old law (Driver v. Broad [1893] 1 QB 744); and there is no reason to suppose that the position has changed in this respect under the new law (Nweze v. Nwoko [2004] EWCA Civ 379 per Carnwath LJ). The agreement to assign (or procure the assignment of) the lease from TBL to the new joint venture company would also appear to be a contract for the disposition of an interest in land.
195. On the face of it, therefore, the overall bargain between TBL and Kilcarne, in so far as it related to Baskerville House and the joint venture, was potentially a contract for the creation or disposition of at least one interest in land. On the face of it, therefore, no binding contract can have been created because of the lack of signed writing.
196. Mr Purle seeks to outflank section 2 on two grounds. First, he says that the land elements of the bargain have been performed or subsequently excluded from the contract with the result that what is left does not fall within the scope of section 2. Second, he says that the bargain was a bargain for a partnership. The submission is that partnership agreements were not within section 40 of the Law of Property Act 1925 (or its predecessor, section 4 of the Statute of Frauds) and consequently are not within the scope of section 2 either.
197. Unlike section 40 of the Law of Property Act 1925, section 2 does not merely prohibit the enforcement of oral contracts; it prohibits the making of oral contracts. An oral offer and acceptance does not, therefore, amount to a contract at all. I find it difficult to understand the principle upon which something that is not a contract at all can be turned into a legally binding contract (in different terms, because of the discharge by performance of at least one of its terms) by a subsequent act which:

i) Ex hypothesi is not required by any contract, and consequently cannot amount to part performance of any contract;

ii) Ex hypothesi is not referable to any contract; and

iii) Does not itself amount to an offer or acceptance.

198. However, Tootal Clothing Ltd v. Guinea Properties Ltd Management Ltd [1992] 2 EGLR 80 does appear to support Mr Purle's submission; and although other parts of that decision were doubted in Grossman v. Hooper [2001] 2 EGLR 82, this part was not. Tootal binds me; and I must therefore apply it. What Tootal appears to me to decide is that section 2 applies only to an executory contract for the sale or disposition of an interest in land; and that once all the land elements of an alleged contract have been performed, the remaining parts of the alleged contract can be examined without reference to section 2. But Tootal does not cover the case of a contract which, at its inception, falls within section 2 and which is said to escape from section 2 only because of a subsequent variation of it. If a contract falls within section 2 at its inception, any material variation of it must itself comply with section 2: McCausland v. Duncan Lawrie Ltd [1997] 1 W.L.R. 38. In such a case Tootal is distinguishable. In McCausland v. Duncan Lawrie Ltd the Court of Appeal applied the law as laid down by the House of Lords in Morris v. Baron & Co [1918] AC 1. That case drew a distinction between a variation of a contract required to be evidenced in writing, and the rescission (or discharge) of such a contract. The former was itself required to be evidenced in writing; the latter was not.
199. If, therefore, as Mr Purle says, the initial joint venture agreement required the lease to be transferred by TBL to a new joint venture company, and if, as he also says, it was subsequently agreed that the lease need not be transferred (because of a desire to avoid double stamp duty), then both the initial agreement and the subsequent variation were, on the face of it, required to comply with section 2. Neither did. Consequently, on the face of it, there was no valid contract, and no valid variation. It might be said that the subsequent agreement not to transfer the lease to a new joint venture company was the complete rescission of the land elements of the contract, and that, therefore, this falls within the principle in Morris v. Baron & Co that a complete discharge of a contract need not comply with the statutory formalities. But that would overlook the other land element of the transaction, namely the provision of security for Kilcarne's profit share, whenever and however arising. Limited security for the profit share was provided by the Birmingham loan notes and the accompanying charge, but this was limited both in time and by reference to the circumstances in which a profit share would arise, and did not, therefore represent the full extent of the alleged agreement. It cannot, in my judgment, have amounted to performance of that part of the alleged joint venture agreement. There was no agreement complying with section 2 that varied the obligation to provide security for the profit share. I conclude that section 2 is not outflanked on this ground.
200. Mr Purle's second ground for outflanking section 2 was that a special rule applied to partnership agreements. An oral partnership agreement, he said, can be validly made; and if the partnership assets include land, then the land is held on a constructive trust for the partnership. In support of this submission he relied on the discussion in Lindley & Banks on Partnership (18^th ed. pp. 110-115) and two nineteenth century cases: Forster v. Hale (1800) 5 Ves. Jr. 308 and Dale v. Hamilton (1846) 5 Hare 369.
201. At this point I must emphasise that I am considering whether a contract has been made; not whether an equity has arisen. The nineteenth century law was governed by the Statute of Frauds. As is well-known, that statute did not prevent the making of oral contracts; it merely prohibited their enforcement by legal action in court without written evidence. So the legislation did not affect the substantive law of contract; it was an evidential rule. However, the judges created their own evidential rules, supplementing the statutory rule; namely the rules that came to be known as the doctrine of part performance. The impetus behind this development was the determination of the judges not to allow the statute itself to become "an engine of fraud". The fraud in question was the denial of a contract for the sale of land which in fact existed, but proof of which was apparently prohibited by the statute. The judges permitted the contract to be proved, even though it was not evidenced in writing. When the law was codified in the Law of Property Act 1925, section 40 recognised the existence of the doctrine of part performance.
202. Against this background, the nineteenth century partnership cases can be seen as modest extensions of the doctrine of part performance. There was no substantive rule of law which prohibited the making of an oral partnership agreement, even if it involved the disposition of an interest in land. There was merely an evidential bar on proving it. It was that evidential rule that the judges outflanked in the cases on which Mr Purle relies.
203. Since the 1989 Act the law has changed. Now there is a substantive rule of law which prohibits the making of an oral contract for the sale or disposition of an interest in land. I do not consider that a contract for the sale or disposition of an interest in land escapes from this substantive rule of law merely because it is wrapped up in an alleged partnership. In my judgment the nineteenth century cases cannot be taken to represent the modern law. That is not to say that the court is powerless. There may be cases in which the parties reach a mutual understanding which, because of section 2, is not a contract, but where equity can intervene through the medium of a constructive trust. I deal with that equity later in this judgment.
204. In addition, the alleged joint venture package was not simply a contract for a partnership. Not only did it also include the agreement that the lease should be assigned to a joint venture company, it also included the agreement that both joint venturers' loans to that company (or, in the interim, to TBL) should be secured. Indeed, as Mr Nugee submitted, it was not really an agreement for a partnership in the true sense at all. Rather, it was in the nature of a shareholders' agreement. Accordingly, even if a simple contract for a partnership has escaped the changes in the substantive law of contract, the alleged agreement was not such a contract.
205. I conclude that section 2 is not outflanked on this ground either.
206. Mr Nugee also submitted that an agreement to divide the proceeds of sale of land after it had been sold itself amounted to an agreement for the disposition of an interest in land. This, he said, was a third "land element" of the alleged joint venture agreement. This argument raises what, to my mind, are difficult questions of law. They do not arise, and were not fully argued, so I say no more about them.

The Birmingham loan notes

207. Targetfollow's argument under this head is that even if a binding oral agreement had come into existence on 1 February 2002, it was superseded by the Birmingham loan notes and its accompanying floating charge. In terms of orthodox contractual analysis, the submission is that the binding oral agreement was discharged by agreement.
208. I have held that, if a binding oral agreement did come into existence, it was one to which section 2 of the 1989 Act applied. I have also said, following the decision of the Court of Appeal in McCausland v. Duncan Lawrie Ltd and that of the House of Lords in Morris v. Baron & Co, that although any material variation of such an agreement must itself satisfy section 2, a complete rescission (or discharge) of the agreement need not do so. Apart from the statute, the common law does not require any particular formality to be observed in order to discharge a contract. There must, however, be an accord and satisfaction. Entry into an agreement whose terms are inconsistent with a prior agreement may be good evidence of an accord and satisfaction.
209. Targetfollow rely on the following:

i) Mr Singh's e-mail of 11.48 on 2 February in which he said that the loan notes were "actually better as there is no obligation for further funding". However, since this was not communicated to Mr Naghshineh or his team, I cannot place reliance on this;

ii) A conversation which took place on 1 February between Mr Singh and Mr Naghshineh in which Mr Singh says that he accepted that there was no time to draft a joint venture agreement and that "the JV deal we had agreed should, as an interim measure only, be set up by loan notes, but which were to be replaced as soon as possible with the agreed JV written agreement". This seems to me to acknowledge that the parties' legal rights and obligations were, if only as an interim measure, to be found in the loan notes;

iii) Mr Singh's later assertion in his e-mail of 28 May 2002 that "when your lawyers proposed the j.v. I told you that I didn't mind a loan note but this was not good for you. You said it's OK, I don't mind: we will sort it out later." Although this is not specific about the time when the statement was made, from its context ("when your lawyers proposed") it appears to relate to a time before completion. Mr Naghshineh did not remember this conversation, but I have no reason to doubt that it did take place. It was a statement made to and agreed by Mr Naghshineh. This statement does seem to me to amount to an agreement that the binding arrangements will be embodied in the loan notes rather than in a joint venture agreement;

iv) Clause 3.1 of the Birmingham loan notes. This provides that the loan made by Kilcarne to TBL is to be repaid by TBL to Kilcarne by 31 January 2007 whether or not a profit has been realised from Baskerville House. Thus the contract into which the parties entered insulates Kilcarne from any liability for loss and is inconsistent with a joint venture under which both parties would wait until a profit was realised before taking out their risk capital;

v) Clause 8 of the Birmingham loan notes themselves which "confirm" that the loan notes "may" be replaced by a joint venture agreement. This seems to me to be inconsistent with a contention that a binding agreement for a joint venture survived.

210. In my judgment, if a binding oral agreement did come into existence it was discharged by entry into the Birmingham loan notes in the context I have described.

The entire agreement clause

211. The argument under this head is very much a fall-back position and is advanced on behalf of TGL alone.
212. Clause 7.1 of the Priority Agreement (to which Kilcarne Rosedale and TGL were all parties) said that:

"This Agreement and the Junior Security Documents form the entire agreement as to the Junior Liabilities"

213. Clause 7.3 of the same agreement said that:

"If there are any other terms relating to the Junior Liabilities existing at the date hereof and not comprised in the Agreement or the Junior Security Documents such terms shall be of no further force and effect."

214. The definition of "Junior Liabilities" includes all liabilities of TGL to Kilcarne. Thus it is said that this definition encompasses an alleged obligation on the part of TGL to contribute to funding the development of Baskerville House and an obligation requiring it to procure the transfer of the lease from TBL to a new joint venture company. But the definition of "Junior Security Documents" does not include any such liabilities. Therefore, the parties have agreed that any obligation of TGL to Kilcarne which exists outside the four corners of the Junior Security Documents is of no effect.
215. The difficulty with this argument, as it seems to me, is that the lease of Baskerville House fell outside Morgan Stanley's charge and hence outside the scope of the Priority Agreement; and Morgan Stanley were not interested in it. So to read the definition of Junior Liabilities as encompassing matters which were unlikely to have been of any concern to the parties may be unduly literal and acontextual. However, since this is very much a fall-back argument, I express no concluded view.

Was a binding deadlock agreement made on 1 February 2002?

216. The case was pleaded and opened on the basis that even if there was no binding joint venture agreement, nevertheless it was orally agreed that if Mr Singh and Mr Naghshineh failed to reach agreement on the terms of a joint venture agreement, Baskerville House would be sold and the proceeds divided equally between them (or the two companies). Accordingly, even if there was no other contractual agreement between them, Mr Naghshineh and Mr Singh entered into a binding agreement to sell Baskerville House if Mr Singh wanted him to and to hand over half the proceeds of sale to Mr Singh.
217. Mr Purle wisely abandoned this argument when it came to his closing address. I therefore say no more about it.

Does a Pallant v. Morgan equity arise?

218. The claim under this head is that either TBL holds the lease of Baskerville House on trust for itself and Kilcarne in equal shares; or that TGL holds its shares in TBL on trust for itself and Kilcarne in equal shares. The legal foundation for the claim is the equity known as a Pallant v. Morgan equity (see Pallant v. Morgan [1953] Ch. 43), as explained by the Court of Appeal in Banner Homes Group plc v. Luff Developments Ltd [2000] Ch 372, and subsequent cases.

The principle

219. Essentially, the principle is that (i) if A and B agree that A will acquire some specific property for the joint benefit of A and B, and (ii) B, in reliance on A's agreement, refrains from attempting to acquire the property, then equity will not permit A, when he acquires the property, to keep it for his own benefit, to the exclusion of B. Because this equity is in the nature of a constructive trust, it is unaffected by section 2 (1) of the Law of Property (Miscellaneous Provisions) Act 1989.
220. In Banner Homes Banner Homes and Luff were both potential purchasers of a site which they proposed to acquire and develop together through a joint venture company. The relevant principals agreed at a meeting on 14 July 1995 (a) that the site should be purchased from its owner at a price of £3.4 million with a sub-sale to a third party at £1.2 million, leaving a balance of £2.2 million to be funded by Luff and Banner Homes as joint venturers; (b) that up to £100,000 would be spent on initial work, to include demolition, marketing, roads and any requirement imposed by the local authority; (c) that the purchase and initial work would be effected through a new single enterprise company to be acquired for the purpose and to be owned 50:50 by Luff and Banner Homes; (d) that, at the end of nine months from the acquisition, unless Luff and Banner Homes had reached agreement as to the development of that part of the site remaining after the sub-sale, that remaining part of the site would be the subject of a "Texas shoot-out" or disposed of on the open market at the best price that could be obtained. A "Texas shoot-out" was understood to mean an arrangement under which either party could offer put and call options at a specified price or prices which the other could accept or refuse. This agreement in principle was recorded in a memorandum dated 16 August 1995 which read as follows:

"1. 50:50 deadlocked company each having a board member. 2. A nine-month period during which we renew outline consent and we market site via agents. 3. We spend jointly up to £100,000 on demolition, preparatory works, subsequent to receipt of renewed planning consent. 4. After nine months from completion of purchase, if no agreement on how to proceed we have a "Texas Shoot-out," either party can buy out the other, i.e. one party makes a bid and the other party can buy or sell. In the event that this doesn't work the site can be put on the market and sold at best price. 5. All expenses/costs are to be mutually agreed and shared."

221. Thereafter, Luff's solicitors acquired a company called Stowhelm Ltd off the shelf as the vehicle for the joint venture; and a draft shareholders' agreement was produced and discussed to give effect to the mutual understanding. However, the shares in Stowhelm were all owned by Luff. Exchange of contracts was expected on 1 November 1995. As at the date of exchange, the trial judge (Blackburne J) found that the position was as follows:

"It is clear, therefore, that, to Banner's knowledge, exchange of contracts was to occur, and did occur, before the parties were signed up to any formal written agreement. It is equally clear that Luff had given Banner to understand that it was content to exchange contracts without requiring any form of separate guarantee committing Banner to contribute one half of the costs of the net site and that the reason for this was that the mutual rights and obligations of the parties would be set out in the shareholder agreement. It is also clear that both sides intended to enter into the shareholder agreement as soon as possible, the only reason for the delay being Mr. Vass's absence on holiday. At no stage was any indication given that reasons existed why the agreement should not be entered into. Specifically nothing was said on either side to indicate that any difference of principle existed which would prevent the parties from agreeing terms."

222. However, having had second thoughts even before exchange of contracts, Luff subsequently decided to proceed without Banner Homes' participation, effecting its purchase of the site through Stowhelm. Banner Homes were thus left out in the cold. Banner Homes claimed to be entitled to an interest in the property either pursuant to contract or by way of a constructive trust over half the shares in the second defendant. Blackburne J found that Luff had led Banner Homes to understand that it intended to enter into a joint venture but subsequently had second thoughts, which it kept to itself for fear that Banner Homes, if alerted, might make a rival bid. He found that no contract was concluded and rejected Banner Homes' claim in equity on the ground that it sought to turn an arrangement or understanding, which was implicitly qualified by the right of either side to withdraw, into an unqualified undertaking. There was no appeal against the judge's finding that there was no contract. However, the Court of Appeal reversed his holding that no equity had arisen.
223. Chadwick LJ began his consideration of the law by discussing the general principles underlying constructive trusts. He referred to observations of Millett LJ in Paragon Finance Plc. v. D. B. Thakerar & Co. [1999] 1 All ER 400, 408-9. Millett LJ had pointed out that constructive trusts fell, broadly into two classes; and said that in his view Pallant v. Morgan fell into the first class. In a case within the first class:

"[The defendant's] possession of the property is coloured from the first by the trust and confidence by means of which he obtained it, and his subsequent appropriation of the property to his own use is a breach of that trust."

224. Chadwick LJ then referred to other cases in the Court of Appeal (Yaxley v. Gotts [2000] Ch 162 and Grant v. Edwards [1986] Ch 638) in which it had been said that the principles underlying the first class of constructive trusts had much in common with the principles underlying proprietary estoppel. It is clear from what Chadwick LJ said at p. 385, at the beginning of his consideration of the authorities at first instance, that he regarded these statements as correct. Chadwick LJ has himself subsequently developed this theme in Oxley v. Hiscock [2004] EWCA Civ 546.
225. Having examined a number of authorities at first instance, Chadwick LJ emphasised the inherent flexibility of equity, but went on to say that a number of propositions could be derived from them. They were:

i) A Pallant v. Morgan equity may arise where the arrangement or understanding on which it is based precedes the acquisition of the relevant property by one party to that arrangement. It is the pre-acquisition arrangement which colours the subsequent acquisition by the defendant and leads to his being treated as a trustee if he seeks to act inconsistently with it. Where the arrangement or understanding is reached in relation to property already owned by one of the parties, he may (if the arrangement is of sufficient certainty to be enforced specifically) thereby constitute himself trustee on the basis that "equity looks on that as done which ought to be done"; or an equity may arise under the principles developed in the proprietary estoppel cases. (I interpose to say that Mr Nugee submitted (without dissent from Mr Purle) that the reference to an arrangement reached in relation to property already owned by one of the parties is a reference to the ordinary rule that a specifically enforceable contract for the disposition of an interest in land itself creates a trusteeship of a kind under which the vendor is a qualified trustee for the purchaser);

ii) It is unnecessary that the arrangement or understanding should be contractually enforceable. Indeed, if there is an agreement which is enforceable as a contract, there is unlikely to be any need to invoke the Pallant v. Morgan equity; equity can act through the remedy of specific performance and will recognise the existence of a corresponding trust. (I interpose to say that this is consistent with the ordinary rule applicable to a specifically enforceable contract mentioned above, under which the trust corresponds with the contract);

iii) It is necessary that the pre-acquisition arrangement or understanding should contemplate that one party ("the acquiring party") will take steps to acquire the relevant property; and that, if he does so, the other party ("the non-acquiring party") will obtain some interest in that property. Further, it is necessary that (whatever private reservations the acquiring party may have) he has not informed the non-acquiring party before the acquisition (or, perhaps more accurately, before it is too late for the parties to be restored to a position of no advantage/no detriment) that he no longer intends to honour the arrangement or understanding;

iv) It is necessary that, in reliance on the arrangement or understanding, the non-acquiring party should do (or omit to do) something which confers an advantage on the acquiring party in relation to the acquisition of the property; or is detrimental to the ability of the non-acquiring party to acquire the property on equal terms. It is the existence of the advantage to the one, or detriment to the other, gained or suffered as a consequence of the arrangement or understanding, which leads to the conclusion that it would be inequitable or unconscionable to allow the acquiring party to retain the property for himself, in a manner inconsistent with the arrangement or understanding which enabled him to acquire it;

v) Although, in many cases, the advantage/detriment will be found in the agreement of the non-acquiring party to keep out of the market, that is not a necessary feature. Although there will usually be advantage to the one and correlative disadvantage to the other, the existence of both advantage and detriment is not essential: either will do. What is essential is that the circumstances make it inequitable for the acquiring party to retain the property for himself in a manner inconsistent with the arrangement or understanding on which the non-acquiring party has acted. Those circumstances may arise where the non-acquiring party was never "in the market" for the whole of the property to be acquired; but (on the faith of an arrangement or understanding that he shall have a part of that property) provides support in relation to the acquisition of the whole which is of advantage to the acquiring party. They may arise where the assistance provided to the acquiring party (in pursuance of the arrangement or understanding) involves no detriment to the non-acquiring party; or where the non-acquiring party acts to his detriment (in pursuance of the arrangement or understanding) without the acquiring party obtaining any advantage therefrom.

226. Chadwick LJ summarised the relationship between the Pallant v. Morgan equity and contract as follows:

"The Pallant v. Morgan equity does not seek to give effect to the parties' bargain, still less to make for them some bargain which they have not themselves made, as the cases to which I have referred make clear. The equity is invoked where the defendant has acquired property in circumstances where it would be inequitable to allow him to treat it as his own; and where, because it would be inequitable to allow him to treat the property as his own, it is necessary to impose on him the obligations of a trustee in relation to it. It is invoked because there is no bargain which is capable of being enforced; if there were an enforceable bargain there would have been no need for equity to intervene in the way that it has done in the cases to which I have referred."

227. The Court of Appeal considered the Pallant v. Morgan equity again in London and Regional Investments Ltd v. TBI plc [2002] EWCA Civ 355. TBI was a property investor and developer. It owned a number of subsidiaries, and agreed to sell some of them to London and Regional. The sale agreement, dated 13 May 1999, provided for the vendor and the purchaser to use reasonable endeavours to agree the terms of a joint venture agreement regarding land at Belfast and Cardiff airports, having regard to the principles set out in an agreed note. The agreed note was headed "subject to contract". One of the issues was whether London and Regional were entitled to rely on the Pallant v. Morgan equity as a result of the assurance or understanding that a joint venture agreement would be entered into. The Court of Appeal held that there was no realistic prospect of London and Regional establishing that claim; and upheld a summary judgment in TBI's favour. The nub of the reasoning is encapsulated in the following paragraph from the judgment of Mummery LJ:

"The "subject to contract" state of the joint venture negotiations at the date of the Sale Agreement indicates that there is nothing unconscionable in TBI's subsequent refusal to proceed with the joint venture after the Sale Agreement was completed. The validity of this conclusion can be tested by asking this question: when did the trust and the estoppel take effect? It is accepted that no constructive trust or estoppel could have arisen after 13 May 1999 when the parties expressly agreed in the Sale Agreement that the joint venture was "subject to contract". In general, it is not unconscionable for a party to negotiations, which are expressly stated to be "subject to contract," to exercise a reserved right to withdraw from the negotiations before a final agreement has been concluded. If that was the effect of the agreement between the parties on 13 May 1999 I do not see how the conduct of TBI before that date can now be relied on to establish unconscionable conduct giving rise to a constructive trust or an estoppel. For the court to hold that a constructive trust existed in those circumstances would be contrary to what the parties had expressly agreed was to be subject to the making of a future agreement." (Emphasis in original)

228. Mummery LJ distinguished Banner Homes in the following two paragraphs:

"[47] It is true that Banner Homes was a "no contract" case in which the equity was invoked; but it was not, as Mr Howard attempted to argue, the same as a "subject to contract" case in which it is part of the bargain between the parties that specific matters remain in a state of negotiation until a future agreement is made. Banner Homes is distinguishable from a case such as this, in which the two large legally represented commercial organisations have negatived an intention to create obligations in respect of the relevant joint venture land (the Belfast Land and the Cardiff Land) and have done so explicitly in a legally drafted, formal agreement (the Sale Agreement). The recorded intentions as to the joint venture implicitly proceeded on the basis that no concluded agreement had been reached and contemplated that such an agreement might never be reached.

[48] Nor was Banner Homes a case, such as this, in which the person sought to be held liable as a constructive trustee has an existing entitlement to the land in question and the claimed agreement to dispose of it, in this case to a joint venture, is too uncertain and vague to be enforced. The effect of accepting L&R's submissions would be that the Belfast Land and Cardiff Land would be held on a constructive trust for L&R and TBI in equal shares, even though the parties have expressly agreed that the joint venture in respect of that land was still in negotiation. L&R seeks to invoke equity not to counter unconscionable conduct by one party which would defeat the informal understanding of both parties, but to reverse the effect of the express agreement they have made and replace it with state of affairs (joint ownership of the land with no joint development) which was never contemplated."

229. The first distinction which Mummery LJ draws seems to me to be a distinction between a simple "no contract" case on the one hand, and an express stipulation that matters are to remain "subject to contract" on the other. The mere fact that no contract exists is not, in itself, a bar to the Pallant v. Morgan equity. Indeed as Chadwick LJ said in Banner Homes, if there were a contract, the equity would be superfluous. On the other hand, if parties have expressly agreed that they are not to be bound unless and until formal contracts have been exchanged, they have expressly negatived an intention to create legal relations; and, in this respect, equity will follow the law.
230. The second distinction that Mummery LJ draws is the distinction between an understanding reached before either party acquires the land in question, and an understanding reached when one of the parties already has an interest in or entitlement to the land. This was a distinction that Chadwick LJ drew in the first and second of the propositions I have summarised above. In the latter case (but not in the former) the arrangement or understanding must be sufficiently certain to be capable of specific performance. Hence Mummery LJ's comment that the claimed agreement was "too vague and uncertain" to enforce.

The role of equity where there is a contract

231. Nr Nugee emphasises Chadwick LJ's statement that the equity is invoked because there is no bargain which is capable of being enforced; if there were an enforceable bargain there would have been no need for equity to intervene. He submits, therefore, that because there was an enforceable bargain (namely the Birmingham loan notes) which gave Kilcarne a return on its money, and the possibility of participation in future profits, equity need not, and therefore should not, intervene. The parties must have chosen to define their legal relationship by means of contractually enforceable rights and obligations, and they should be held to their bargain. The very reason why people enter into written contracts (particularly contracts affecting land) is so that their rights and obligations can be definitively recorded. If the written contract inadequately records what has actually been agreed, then equity can intervene through the remedy of rectification. But rectification does not alter the bargain itself; it merely alters the written record of the bargain. Kilcarne does not claim, in the present case, that the written contractual arrangements should be rectified. Rather, its claim is to alter the bargain itself. In order to leave the starting gate Kilcarne must show that TBL or TGL has been guilty of unconscionable conduct; and it is not unconscionable for TBL and TGL to rely on the contractually binding agreements made between them and Kilcarne. The basis of the equity is trust; not contract.
232. In the paradigm Pallant v. Morgan case the claimant has no entitlement at law. If equity does not intervene, he is left with nothing. It is that which makes it unconscionable for the legal title holder to deny the beneficial interest of the person who trusted him. That is not the position in the present case. In return for making £1.4 million available to TGL, Kilcarne got:

i) A promise to repay £1.83 million;

ii) Security for the promise in the shape of a legal charge over the hotel and a floating charge over TGL's assets together with Mr Naghshineh's personal guarantee.

233. In return for making £1 million available to TBL, Kilcarne got:

i) A promise to repay £1 million plus interest and 50 per cent of the Net Proceeds of Sale of Baskerville House (if a sale takes place before the maturity date);

ii) Security for the promise in the shape of a floating charge over TBL's assets and Mr Naghshineh's personal guarantee.

234. In addition, it is unrealistic to ignore the transaction with Rosedale. In return for making £100,000 available to BPIL, Rosedale got a secured promise to pay £450,000 or 5 per cent of the net value of the hotel, with a long stop date of 2019.
235. All these arrangements were documented by legally binding contracts. In what sense, then, can it be said that Kilcarne trusted TBL or TGL in relation to the former's completion of the agreement for lease? I do not consider that it did. On the contrary, it was Mr Singh's view that Kilcarne was unprotected unless the money to be advanced by Kilcarne was secured. It was always part of the overall arrangement that the loans nominally made to BPIL were to be secured loans. But in relation to Birmingham, Mr Whittaker's suggestion that the loan to TBL should be secured by a floating charge was initially rejected by Mr Cooper on the ground that it was contrary to the spirit of the joint venture. Despite this rejection, and the explicit reference to the spirit of the joint venture, Mr Singh nevertheless persisted in, and obtained, security, albeit of a limited kind. This does not, to my mind, betoken trust.
236. In essence, therefore, I accept Mr Nugee's submission. The existence of the complex network of contracts between the protagonists precludes, or renders unnecessary, the intervention of equity. A similar thought process, I think, underlies the decision of the Court of Appeal in Lloyds Bank plc v. Carrick [1996] 4 All ER 639 (discussed by Robert Walker LJ in Yaxley v. Gotts [2000] Ch 162, 178). In case I am wrong, however, I will proceed to examine the elements of the suggested equity.

No contract or subject to contract?

237. Kilcarne's case under this head presupposes, of course, that there was no binding joint venture agreement. Although Mr Naghshineh says that his understanding was that all discussions were "subject to contract", he does not go so far as to say that this was an express "subject to contract" case. The "subject to contract" label was not, therefore, part of the express bargain. I deal with the question of the side letter later. The first of the distinctions drawn by Mummery LJ does not, therefore, apply in the present case. This is a "no contract" as opposed to a "subject to contract" case.

The arrangement or understanding

238. By definition, what I am looking for is not a contract. It is an altogether looser arrangement. It need not, therefore, be confined within the tramlines of the common law of offer and acceptance. The rules relating to offer and acceptance would require an acceptance to match an offer, and for the contract to have come into existence at a definable moment, by reference to that offer and acceptance. In considering the Pallant v. Morgan equity, I should take into account everything that happened up to completion of the deal on 5 February 2002.
239. I begin by looking at Kilcarne's understanding. Mr Singh's recommendation to Ms Wilkinson of 1 February was expressed in terms of a secured loan. It said nothing about a joint venture agreement. Mr Singh's description of the final amendments to the deal on 3 February, and his recommendation of it, contains a cryptic reference to a "JV", but in the context of explaining what Kilcarne's security will be until a lease is in place. Kilcarne's board also approved the various documents, which included the Birmingham loan notes, containing clause 8. Clause 8 contained the confirmation that the loan notes "may" be supplemented or replaced by a joint venture agreement. Otherwise the minutes of the board meeting say nothing about a joint venture.
240. These, surely, represent Kilcarne's understanding of the transaction it was agreeing to undertake. In the absence of any evidence from Ms Wilkinson, I am not prepared to infer that Kilcarne had any greater understanding. Indeed, I think it is likely that Mr Singh himself had the same understanding, although what is relevant is Kilcarne's understanding rather than Mr Singh's.
241. Broadly, I consider that Targetfollow's understanding was the same as Kilcarne's. But there is this difference. Assuming that Mr Singh did not read the side letter attached to the e-mail of 4 February, Targetfollow would, in my judgment, have been entitled to assume that he had. This, I think, has an obvious bearing on whether it is unconscionable for TBL to set up its title to the lease of Baskerville House as representing its beneficial entitlement. If A claims against B that there is an understanding between them that A will acquire property for the joint benefit of both of them, and B has attempted to make it clear to A, before the acquisition, that the furthest he is prepared to go is to say that he will enter into good faith negotiations, why should B's conscience be affected if, unknown to him, A does not read what he is sent?

Pre-acquisition or post-acquisition arrangement?

242. In the present case, TBL was already contractually committed to the agreement for lease of Baskerville House before Mr Singh or Kilcarne arrived on the scene. Although it needed to find £2 million to pay the instalment of premium due on completion of the agreement for lease, this is not a case of a "pre-acquisition arrangement", in the sense of both parties being equally free to bid. Moreover, TBL had already paid £1 million towards the premium payable under the lease and had expended a further £1.3 million in other costs. There was, of course, the theoretical possibility that if the money for the next instalment of the premium were not found on time, Birmingham City Council might have terminated the contract, following the expiry of the notice to complete. But if that had been done, then Birmingham City Council would have suffered financially, because the agreed price for the lease was far higher than anything that could be obtained in the market. It is true that, in theory, the City Council would have had a claim for damages for breach of contract. But TBL, as far as I can tell, had no assets with which to satisfy a claim. Moreover, if the property had been re-offered on the market, it is not suggested that Kilcarne would have bid for or developed Baskerville House on its own. This is not, therefore, a case in which Kilcarne was kept out of the market as a result of any informal understanding between Mr Naghshineh and Mr Singh. In addition, the price that TBL was obliged to pay for the lease was already agreed long before Kilcarne's appearance on the scene. So this is not a case in which TBL was able to acquire property on better (or more advantageous) terms than it would have done if Kilcarne had not intervened.
243. Accordingly, in my judgment, this is not a case of a pre-acquisition agreement which colours TBL's acquisition of the lease of Baskerville House.

Reliance

244. It is also, I think, necessary for Kilcarne to establish that its belief that a joint venture agreement would be or had been made had a causal influence on its actions in entering into the transaction. That, in my judgment, is what reliance is all about. By "the transaction" I mean the overall arrangements with both BPIL and TBL/TGL. In this connection it is again Kilcarne's actions and beliefs, rather than Mr Singh's, that are important. The obvious starting point for an examination of the reasons why Kilcarne entered into the transaction is the formal record of its decision to do so (i.e. the board minutes). As I have noted, these say nothing about a joint venture. But they emphasise the various forms of security to be given for Kilcarne's two investments. Part of the contractually agreed documents was clause 8 of the Birmingham loan notes, which confirms that the loan notes "may be" (not "will be") replaced or supplemented by a "proposed" joint venture agreement. The next port of call is Mr Singh's recommendation of the transaction to Ms Wilkinson. This was contained in his e-mail of 16.31 on 1 February. He told Ms Wilkinson that Kilcarne's exposure was as secured creditor, not as joint venturer. Third, there is the structure of the transaction itself. Under the terms of the Birmingham loan notes, Kilcarne was potentially entitled to one half of the net proceeds of sale of Baskerville House, without any corresponding liability to fund half the costs of acquisition and development. At the time of the transaction, it was confidently expected that the development would be completed long before 1 January 2007. Indeed there was a real prospect that the lease would be sold even before development took place. In Mr Singh's recommendation to Ms Wilkinson he said that it was expected that they would "turn" the project "soon". Moreover, the implications of the change in the definition of the Maturity Date in the Birmingham loan notes had not been appreciated. In my judgment it is improbable that Kilcarne would have refused to enter into a transaction on the terms it did if it had not believed that a joint venture agreement would be forthcoming. It would have entered into the transaction irrespective of any belief in the possibility of a joint venture. In reaching this conclusion I have again had regard to the fact that no officer of Kilcarne (whether present or past) has given any evidence, whether written or oral; and that there is nothing, therefore, to contradict the documents. Even Mr Singh did not say that Kilcarne would not have entered into the transaction but for a belief that a joint venture agreement would be forthcoming. On the contrary, he acknowledged that, from Kilcarne's perspective, the terms on which it advanced money to BPIL and TBL were very favourable. If, lastly, I take account of Mr Singh's own state of mind, it seems to me that the most significant contemporaneous comment he made on the draft of the Birmingham loan notes was that they were "better" without any obligation for further funding. Since costs sharing would have been at the heart of any joint venture agreement, it seems to me that the inevitable inference that I should draw is that Mr Singh did not want Kilcarne to be committed to further funding and hence committed to a joint venture agreement. It follows from that, in my judgment, that a belief that Kilcarne was committed to an obligation to provide further funding through the mechanism of a joint venture cannot have had any causative effect on the decision to lend. In addition, in his oral evidence Mr Singh said that as far as he was concerned the deal was done at the Holiday Inn, and that all the rest was the detail of the structure in putting the deal to bed. But the deal at the Holiday Inn involved no profit share in Baskerville House at all. The inference I draw is that Mr Singh would have been ready to recommend Kilcarne and Rosedale to lend even without any question of a joint venture.
245. To put it positively, what Kilcarne relied on in entering into the transaction was the form of the written documents embodying the contractual arrangements (which it may not fully have understood), rather than any oral discussions between Mr Singh and Mr Naghshineh or Mr Singh's e-mails recounting those discussions.

Detriment

246. Kilcarne must establish that it suffered detriment of a relevant kind. In most cases, the detriment to the non-acquiring party will be giving up the opportunity to acquire the property in question for itself. That is not the only kind of relevant detriment, but the detriment must be related to the acquisition of the property. In looking at the question whether there is detriment of the relevant kind, I am, I think, entitled to take a broad view. The first kind of detriment on which Mr Purle relied was the provision of £1 million by Kilcarne to TBL to enable it to complete the agreement for lease. In my judgment this is too narrow a focus. It was an integral part of the whole arrangement not only that Kilcarne would lend £1 million to TBL but also that it would lend £1.4 million to BPIL and that Rosedale would lend £100,000 to BPIL too. The overall terms of the arrangement were very favourable to Kilcarne/Rosedale. To put it crudely, Targetfollow have paid a full price for that detriment.
247. The second kind of detriment that Mr Purle relied on was an allegation that Daphne Caprice had retained cash in order to enable Kilcarne to honour its obligation to fund the development, instead of using that cash in more profitable ventures. I will assume (without deciding) that the retention of cash by Daphne Caprice is sufficiently connected with Kilcarne to count as relevant detriment, all other things being equal. However, there was no real evidence of what these ventures might have been. The very general statements made by Mr Rai (who was looking to become and then became the trust's banker) seemed to me to have amounted to nothing more than a tentative pitch for business. Moreover, the figures relating to Daphne Caprice's finances that Kilcarne presented were obscure; and did not, to my mind, demonstrate that Daphne Caprice had much (if any) spare cash, at least before the refinancing of the Targetfollow group in July 2002. But at that stage Mr Singh was hoping to buy out Targetfollow; and by December 2002 it was clear that Targetfollow was not willing to enter into a joint venture agreement. It is also of some significance, I think, that such expenses as were incurred on the project were paid for by TBL; and that even when expenses were incurred at the instance of Mr Singh himself, the invoices were passed to TBL for payment. Kilcarne did not offer to contribute. I am not satisfied that Daphne Caprice retained any significant amount of cash on the faith of an understanding that Kilcarne would enter into a joint venture agreement.
248. In a very loose sense, it was clearly an advantage to TBL and TGL that the funds to enable completion of the agreement for lease were made available. But, as I have said, they paid a full price for those funds. I do not see that equity should make them pay even more.

Post completion assurances

249. Kilcarne has pleaded certain post-completion assurances made on behalf of TGL that it would enter into a joint venture agreement by the end of September 2002. As a result of these assurances, Kilcarne says that it agreed to postpone its security to the Bank of Scotland when TGL refinanced the group. However, I did not understand Mr Purle to contend that these assurances (if they were made) gave rise to an independent Pallant v. Morgan equity in Kilcarne's favour. He did, however, briefly submit that they gave rise to a claim based on proprietary estoppel. I deal with that below.

Conclusion

250. For all these reasons, I conclude that no Pallant v. Morgan equity has arisen in Kilcarne's favour.

Proprietary estoppel

251. As I have said, Mr Purle did briefly submit in his closing address that the post completion assurances which preceded the refinancing of the Targetfollow group in July 2002 were enough to give rise to a proprietary estoppel in Kilcarne's favour. However, he did not elaborate the submission.
252. Nevertheless the claim is, I think, adequately pleaded in paragraphs 16.3, 16.6 and 20.3 of the Re-Amended Particulars of Claim. The pleaded assurance is that "Targetfollow would enter into a written joint venture agreement". It is not alleged that any post-completion assurance was given that Targetfollow would enter into a joint venture on any specified terms.
253. In Pridean Ltd v. Forest Taverns Ltd (1996) 75 P & CR 447 the claimant owned a public house. It entered into negotiations with the defendant with a view to forming a joint venture company to acquire the premises or at least to take a lease of them. The defendant went into occupation of the pub, and carried out works. Negotiations over the joint venture company continued, but eventually broke down over the form of protection to be given to the claimant's rights as a minority shareholder in the joint venture company. When the claimant demanded possession, the defendant raised the defence of proprietary estoppel. Aldous LJ (with whom Stuart-Smith LJ agreed) said:

"Mr Fetherstonhaugh did not dispute that in appropriate circumstances proprietary estoppel could arise. He submitted that, on the evidence and the findings of fact made by the judge, it did not arise in this case. I believe he is right. It is accepted that the appellants expended money and time on the premises. Thus the pertinent question to ask is – what was the expectation that the appellants were allowed or encouraged by the respondent to assume? The appellants' answer to that question was an expectation that they would be able to occupy and trade from the premises. The Respondent says that it was an expectation that the negotiations would lead to the joint venture company occupying and trading from the premises or it would be purchased if the parties could agree terms. That in fact was the conclusion of the judge. He held that the respondents did not lead the appellants to believe that they would be granted a lease. They did however allow the appellants to expend money and time in the expectation that agreement would soon be reached on the precise terms of the joint venture or after November the premises would be purchased on terms to be agreed. There was no expectation that the appellants could remain if the negotiations for a joint venture failed.

I believe you can test that conclusion by asking – what were the terms upon which the appellants believed that they were entitled to remain and manage the premises? There was no agreement. That was decided by the judge who rejected the appellants' evidence. The answer, I believe must be "terms to be agreed". Those terms were never agreed.

The case for proprietary estoppel failed when the judge rejected the appellants' case that there was an agreement between the parties. If there was no agreement then the only expectation that could arise was an expectation that negotiations would be concluded as anticipated. That being so, there could not have been an expectation, which arose due to any action or inaction of the respondent, that the appellants could remain if the negotiations were not satisfactorily concluded."

254. In my judgment that reasoning applies in the present case. It is reinforced by the terms of clause 8 of the Birmingham loan notes. Moreover, by July Mr Singh and Mr Naghshineh were in disagreement about what, if anything, they had agreed about the terms of the joint venture. In addition, although the question of entry into a joint venture agreement arose before the refinancing was completed, Mr Singh's recommendation to Kilcarne was that an undertaking to enter into a joint venture agreement should not be made a condition of consenting to the postponement of Kilcarne's charge. Kilcarne did not follow up Mr Singh's suggestion that it should ask for an assurance that a joint venture agreement would be entered into; and there is no evidence that Mr Singh told Kilcarne that such an assurance had already been given. This, in my judgment, gives credence to Mrs Fletcher's evidence that she did not give Mr Singh any assurance, but merely said to him that she would discuss it with Mr Naghshineh; which she did. I accept her evidence in this respect. Moreover, the basis on which the loan was made, as set out in Mr Singh's e-mail to Ms Wilkinson of 11.00 on 1 February, and repeated in his e-mail at 20.28 on 3 February, was that Kilcarne was to have a first charge on Baskerville House, but that would be postponed to a second charge if funds were borrowed for development. It was thus part of the arrangements for the loan (not the joint venture) from the start that Kilcarne's security would be postponed to money raised for the development. Finally, Mr Singh (and through him Kilcarne and Rosedale) also had good reason to agree to the refinancing since it enabled Kilcarne and Rosedale to extract almost all their risk capital at a handsome profit. It is difficult, therefore, to see that Kilcarne relied on any assurance in consenting to the postponement of its charge.
255. In my judgment no proprietary estoppel arises.

Does TBL owe Kilcarne a duty to proceed with the development?

256. Paragraph 23 of the Particulars of Claim alleges that TBL owes Kilcarne a duty to proceed with the development with all due dispatch and in accordance with the terms of the lease. This duty is said to arise either in equity as an incident of the fiduciary relationship between TBL and Kilcarne or at common law. The common law duty is said to arise "from the relationship between the parties, on general principles". In his closing address Mr Purle said that the common law duty arose out of the proximity of the parties and an assumption of responsibility by TBL or TGL.
257. I have held that neither TBL nor TGL is a fiduciary for Kilcarne, with the result that the asserted equitable duty cannot arise. But in case I am wrong in my conclusion, I should deal with the argument on the assumption that either TBL holds the lease on trust for itself and Kilcarne or, alternatively, that TGL holds its shares in TBL on trust for itself and Kilcarne. There might be difficulties in making the latter assumption tout court, since TBL was already encumbered with debt at the date when the assumed trust came into being; but I shall make it anyway, since a declaration to that effect is one of Kilcarne's claims.

Can a fiduciary duty arise at all?

258. Mr Nugee submitted that the species of constructive trust under consideration in this case is a remedial constructive trust. It is designed to strip the defendant of any profit that he has made. It is not designed to impose true fiduciary duties upon him. Thus the limit of a defendant's liability is a liability to account as if he were a constructive trustee. It follows, therefore, that neither TBL nor TGL can be under any fiduciary liability in relation to the lease of Baskerville House or the shares in TGL.
259. As I have mentioned, in Paragon Finance Plc. v. D. B. Thakerar & Co. [1999] 1 All ER 400, 408-9 Millett LJ pointed out that constructive trusts fell, broadly into two classes. It is necessary to quote his analysis more extensively in order to evaluate Mr Nugee's submission. Millett LJ said:

"A constructive trust arises by operation of law whenever the circumstances are such that it would be unconscionable for the owner of property (usually but not necessarily the legal estate) to assert his own beneficial interest in the property and deny the beneficial interest of another. In the first class of case, however, the constructive trustee really is a trustee. He does not receive the trust property in his own right but by a transaction by which both parties intend to create a trust from the outset and which is not impugned by the plaintiff. His possession of the property is coloured from the first by the trust and confidence by means of which he obtained it, and his subsequent appropriation of the property to his own use is a breach of that trust. Well-known examples of such a constructive trust are McCormick v Grogan (1869) LR 4 HL 82 (a case of a secret trust) and Rochefoucald v Boustead [1897] 1 Ch 196 (where the defendant agreed to buy property for the plaintiff but the trust was imperfectly recorded). Pallant v Morgan [1952] 2 All ER 951, [1953] Ch 43 (where the defendant sought to keep for himself property which the plaintiff trusted him to buy for both parties) is another. In these cases the plaintiff does not impugn the transaction by which the defendant obtained control of the property. He alleges that the circumstances in which the defendant obtained control make it unconscionable for him thereafter to assert a beneficial interest in the property.

The second class of case is different. It arises when the defendant is implicated in a fraud. Equity has always given relief against fraud by making any person sufficiently implicated in the fraud accountable in equity. In such a case he is traditionally though I think unfortunately described as a constructive trustee and said to be 'liable to account as constructive trustee'. Such a person is not in fact a trustee at all, even though he may be liable to account as if he were. He never assumes the position of a trustee, and if he receives the trust property at all it is adversely to the plaintiff by an unlawful transaction which is impugned by the plaintiff. In such a case the expressions 'constructive trust' and 'constructive trustee' are misleading, for there is no trust and usually no possibility of a proprietary remedy; they are 'nothing more than a formula for equitable relief': Selangor United Rubber Estates Ltd v Cradock (No 3) [1968] 2 All ER 1073 at 1097, [1968] 1 WLR 1555 at 1582 per Ungoed-Thomas J."

260. Thus in the first class of case the defendant "really is a trustee". In the second class of case he is not "in fact a trustee at all". The imposition of a constructive trust in a case of the second class is "nothing more than a formula for equitable relief". But Millett LJ went on to say that Pallant v. Morgan fell into the first class. This analysis and classification seems to me to have been approved by the Court of Appeal in Banner Homes.
261. It follows, in my judgment that if a Pallant v. Morgan equity had been established, a trust of the first class would have arisen, under which TBL or TGL would have had the obligations of a trustee. Whichever of them was the trustee really would have been a trustee. In such circumstances, I do not see why the trustee should not have the ordinary duties of a trustee. It is only in the second class of constructive trust that the constructive trust is no more than a remedial measure designed to strip the defendant of profits. Accordingly, I reject Mr Nugee's submission under this head.

Assuming TBL holds the lease on trust for itself and Kilcarne.

262. The trust would be a trust of land for the purposes of the Trusts of Land and Appointment of Trustees Act 1996, because the definition of "trust of land" in that Act extends to constructive trusts: s. 1 (2) (a). For the purposes of exercising their functions as trustees, the trustees of a trust of land have all the powers of an absolute owner: s. 6 (1). In exercising their powers the trustees must consult the beneficiaries and, so far as consistent with the general interests of the trust, must give effect to the wishes of the beneficiaries, or (in case of dispute) to the wishes of the majority (according to the value of their combined interests): s. 11 (1).
263. Apart from the lease, TBL has no assets of its own to speak of. Under the assumed trust TBL is a beneficiary with an interest amounting to half the value of the trust asset. If (in its capacity as beneficiary) it did not wish to (or could not afford to) develop Baskerville House, then its wishes must be taken into account by TBL in its capacity as trustee. If the two beneficiaries entitled to interests of equal value are deadlocked, it does not seem to me that the trustee must necessarily prefer one to the other.
264. A trustee has, of course, a duty to preserve the trust assets. But I do not consider that it follows from that duty that a trustee of a lease containing onerous development obligations must itself comply with those obligations. One way of preserving the trust asset would be to sell it, before the time for performance of the obligations arises. So I do not consider that the mere fact that TBL is a trustee of the lease necessarily leads to the conclusion that it must develop in accordance with the covenants in the lease.
265. Moreover, since TBL has no assets, it would have had to borrow the money both to pay the remaining instalments of premium, and also the development costs. On any view the construction costs would run into tens of millions of pounds. Mr Naghshineh's evidence was that no lender would have been prepared to lend a sum of that magnitude to TBL without the backing of TGL's guarantee. TBL, being a subsidiary of TGL, has no control over its parent. And I do not understand Mr Purle to argue that the fiduciary obligation he asserts would extend to the provision of a guarantee by TGL. Mr Purle urged me not to accept Mr Naghshineh's evidence on this score, although when I suggested that it was self-evidently correct, he was inclined to agree. Let me assume that Mr Naghshineh is wrong, and that a lender would have lent money to TBL without the backing of TGL's guarantee. The effect would have been that TBL would, in its capacity as trustee, have had to make itself personally liable to repay the debt. In its capacity as beneficiary, it would not have had the capability to indemnify a trustee against half the cost of borrowing, without the support of TGL. The development project is in any event a speculative project. I do not consider that a trustee can be compelled to borrow a very large amount of money on those terms.
266. I do not, therefore, consider that if TBL had held the lease on trust for itself and Kilcarne it would have been under an equitable obligation to develop Baskerville House in accordance with the covenants in the lease. If the alleged duty is reformulated as a duty to develop "with due dispatch" (rather than in accordance with the timetable laid down in the lease) I do not see that it makes any difference.

Assuming TGL holds the shares in TBL on trust for itself and Kilcarne

267. The alternative assumption is that TGL holds the shares in TBL on trust for itself and Kilcarne. On this assumption the trust property is the shareholding in TBL; not the lease itself. In its capacity as trustee TGL would have a duty to preserve the trust asset. Thus its duty would be a duty to preserve the value of the shares in TBL. Once again, it seems to me that one way of preserving the trust asset would have been to sell the shareholding. This was indeed mooted in the context of the possible deal with Frontier, but Mr Singh persuaded Mr Naghshineh not to do the deal. TGL would have been in a position to raise finance for the development. But I do not see that a trustee's duty would extend to giving a charge over his own personal assets, in order to borrow money.
268. Accordingly, on this alternative assumption, I do not consider that the pleaded duty would have arisen.

Common law duty

269. The common law duty is not alleged to be an implied term of any agreement. It is said to arise from the proximity of the parties on general principles, and as a result of an assumption of responsibility. It is not dependent on the existence of any trust property or fiduciary relationship. There are few (if any) common law duties which compel one person to spend his own money in order to prevent pure economic loss to another. The law of tort's primary concern is to protect others from damage to their persons or tangible property. In that context the law of tort may impose a duty on one person to spend his own money to prevent harm to his neighbour (preventing the spread of fire or keeping in repair property adjoining the highway are two examples). The law of tort is not usually concerned with the economic well-being of one's neighbours. There are well-recognised exceptions such as a duty to take care in giving advice or providing references. It is in this context that judges speak of an assumption of responsibility. It is because a person has voluntarily assumed the responsibility of giving advice or providing a reference that the duty to take care arises. But the voluntary assumption of responsibility is a necessary precondition of the existence of a duty to take care. Even then the law only imposes a duty to be careful or to be reasonably skilful. Mr Purle was not able to identify how it came about that, independently of any contract or fiduciary relationship, TBL or TGL assumed a responsibility to Kilcarne; or the species of common law duty which he said would have arisen if responsibility had been assumed.

Conclusion

270. For these reasons, I conclude that TBL does not owe Kilcarne a duty to progress the development of Baskerville House either in equity or at common law.

Is Kilcarne entitled to be paid for services rendered by Mr Singh?

271. The claim under this head presupposes (as I have held) that there was no binding agreement for a joint venture and no Pallant v. Morgan equity. The claim is put in two ways:

i) Mr Singh, acting through Sitac, rendered services connected with the development project on behalf of Kilcarne until December 2002. These services were provided at the request of Targetfollow and for its benefit. Therefore Targetfollow must recompense Kilcarne. Alternatively:

ii) Kilcarne has incurred a liability to pay Sitac for its work done on its behalf in relation to the development. That liability was incurred in anticipation of a contract that did not materialise. Therefore Targetfollow must recompense Kilcarne.

272. It important to stress that this is not a claim brought either by Mr Singh or by Sitac. Sitac was given the opportunity to be joined into the proceedings but declined.
273. So under the first way in which the case is advanced Kilcarne must establish that TBL or TGL requested Kilcarne (not Sitac or Mr Singh) to provide services. There is simply no evidence to this effect. It is not in dispute that Mr Singh did actively involve himself in the progress of the development. The extent and utility of his involvement is another matter; but that is not relevant for present purposes. So far as the outside world is concerned, Mr Singh presented himself either as Mr Singh personally or as Sitac. He did not represent that he was performing any service on behalf of Kilcarne. There is no evidence of any communication between Mr Naghshineh and Kilcarne in Jersey relating to Mr Singh's services; and no evidence that Mr Singh ever passed on to Jersey any request for the provision of his (or anyone else's) services. On the one occasion when Mr Singh raised with Mr Naghshineh the question of payment for his services (following Frontier's approach) it was a payment to Sitac (not Kilcarne) that was under consideration.
274. Moreover, as the noteholder under the Birmingham loan notes, with the prospect of a 50 per cent share in profits if the development were sold before January 2007, Kilcarne had a lively interest of its own in progressing the development. In the event of a sale before January 2007, as Mr Purle accepted, Kilcarne would have had no expectation of payment otherwise than through its profit share. That, to my mind, is the natural explanation of Kilcarne's letter to Sitac of 7 February 2002 in which Kilcarne requested Sitac to "monitor the development" on its behalf in return for a fee. There is no indication of any expectation that any fee paid by Kilcarne to Sitac would be reimbursed by TGL or TBL.
275. Moreover, a sale of the development before 31 January 2007 is still a possibility. In that event, Kilcarne will get everything that it could have thought it was entitled to. I do not consider that the first way in which the case is advanced can succeed.
276. The second way in which the case is advanced depends on establishing that Kilcarne incurred the expense in anticipation of a contract that did not materialise. The obvious question is: what contract? Mr Purle's answer is the joint venture agreement. But in my judgment Kilcarne (as opposed to Mr Singh) had no expectation that a joint venture agreement would materialise. It was merely a possibility for the future, if terms could be agreed. In the meantime, it was content to rely on its security and the possibility of a 50 per cent share in profit if the development were to be sold before 31 January 2007. That possibility, as I have said, explains its decision to incur a liability to Sitac and/or Mr Singh for monitoring the development. Kilcarne's security remains in place, and there is still the possibility of a sale before 31 January 2007.
277. This claim therefore fails too.

Result

278. The action must be dismissed. Kilcarne has registered a caution against Baskerville House. Its cautionable interest is said to be its claim in the action. Targetfollow have counterclaimed for an order vacating the caution. Since I have dismissed Kilcarne's claim, it must follow that the caution must be vacated.