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England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Marplace (Number 512) Ltd v Chaffe Street (a firm) [2006] EWHC 1919 (Ch) (27 July 2006)
URL: http://www.bailii.org/ew/cases/EWHC/Ch/2006/1919.html
Cite as: [2006] EWHC 1919 (Ch)
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CHANCERY DIVISION
Strand London WC2A 2LL |
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B e f o r e :
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| MARPLACE (NUMBER 512) LIMITED |
Claimant |
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| and |
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| CHAFFE STREET(a firm) |
Defendants |
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Mr Justin Fenwick QC and Mr Jamie Smith (instructed by Beachcroft Wansbroughs) for the Defendants
Hearing: April 27, 28, May 2, 3, 4, 8, 9, 10, 11, 12, 16, 17, 18, 19, June 8, 9, 2006
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Crown Copyright ©
- Ebrahim ("Ebby") Jebreel and his brother Jacob Jebreel are businessmen, mainly interested in property transactions. I shall refer to them together as "the Jebreels." In mid-September 2000, the Jebreels were interested in acquiring properties in receivership situations through their family property company (which also involved their father and their brother, Houshy Jebreel). They learned that Coats Viyella plc ("CVP") was anxious to sell or close down its clothing division, which was a manufacturing operation carried on by and through its subsidiary Coats Viyella Clothing Ltd ("CVC"). CVC's main customer was Marks and Spencer plc ("M&S"), but CVC was not thriving. CVP preferred to sell CVC, rather than close it down, in order to avoid CVP having to go through a massive closure and redundancy process involving 3,000 to 5,000 employees employed at factories some of which were clustered in parts of the country in which CVP had always had a major presence, which would involve adverse publicity.
- Deloitte & Touche ("Deloittes") were advising CVP, and were also auditors of CVC. Ultimately the main person at Deloittes who was involved in the transaction was Mr Maghsoud Einollahi. The Jebreels first discussed a plan whereby they would acquire inter-company indebtedness of CVC to CVP, and then put CVC into receivership and acquire its properties.
- Through Deloittes the Jebreels were introduced to Mr Graham McInnes, a partner in corporate finance advisers TMG Corporate Finance ("TMG"), who was assisted by his partners Mr Ian Hill and Mr Philip Travis. Through Eversheds (CVP's solicitors) the Jebreels were introduced to the defendants, Chaffe Street (since dissolved), to act as solicitors. Chaffe Street was at the time a relatively small Manchester boutique firm specialising in corporate law. The partners principally concerned were Mr Robert Street and Mr Mark Brandwood on the corporate side, and Mr Shaun Rearden on the banking side. The Jebreels were also advised by the accountants, Lathams, who were to effect the due diligence exercise, and where Mr John Daly was the partner principally concerned.
- Ultimately the Jebreels (through the Claimant, which is an off-the-shelf company supplied by Chaffe Street) entered in to an agreement ("the Agreement") which was exchanged on November 10, 2000, under which the Claimant acquired an option to purchase CVC with the use of bank finance secured on the assets of CVC.
- As the financing for the transaction was to be secured on CVC assets, it was going to be necessary for the statutory whitewash procedure to take place pursuant to sections 155 and 156 of the Companies Act 1985. This required the directors of CVC to make a statutory declaration under section 156(2) that, as at completion of the transaction, their opinion was that CVC was then and would be able during the next 12 months to pay its debts as they fell due. Accordingly, CVC needed to be cash flow solvent in that 12 month period. Mr McInnes was to become a director of CVC for this purpose and Deloittes were going to give the auditors' report required by section 156(4) that they had enquired into the affairs of CVC and were not aware of anything to indicate that the opinion of the directors was unreasonable.
- I should add at this point that other persons who play a role in the narrative include Sir Harry Djanogly, the Chairman of CVP, Ms Kazia Kantor, who was at the relevant time the finance director of CVP, and Sir David Alliance (now Lord Alliance), who is the Jebreels' uncle (his sister is their mother) and had been chairman, and was at the relevant time still a major shareholder, of CVP.
- The Claimant's case is, very broadly and simplified for the purpose of setting the scene, as follows. An important part of the transaction was that CVC would continue to receive, following completion, payments from M&S on a continuing regular basis for stock called off by M&S. The Option was exercisable not later than November 28, 2000. After the Agreement was exchanged the Claimant learned that CVP had agreed with M&S that payments of some £14 million which would ordinarily have been paid after completion, were to be paid prior to completion, and used to reduce inter-company debt. CVP would not agree to reverse the effect of these pre-payments, and the Claimant says that it was unable to exercise the Option because the effect on cash flow would have been such that the whitewash procedure would have been impossible. As a result the deal fell through. The Claimant says that as a form of consolation or compromise CVP agreed to pay the professional fees incurred by the Claimant, and to give it an option to purchase CVP's surplus properties at forced sale valuations. The compromise agreement was not put in writing, and CVP subsequently denied that it had made any agreement to pay professional fees, other than those of TMG and Chaffe Street, or to grant an option over its surplus properties.
- This is an action for negligence against Chaffe Street. There are three basic claims. The first is that Chaffe Street negligently failed to advise the Claimant that CVP was in breach of the Agreement and failed to advise on remedies in relation to that Agreement, as a result of which the Claimant was deprived of the opportunity of forcing CVP to reverse the M&S accelerated payments and of the opportunity that would have given the Claimant to exercise the Option, or the Claimant was thereby deprived of a valuable right to damages against CVP. The second claim is an alternative claim: if, contrary to the Claimant's primary submission, the procurement of the M&S accelerated payments was not in breach of the Agreement, Chaffe Street's drafting of the Agreement was negligent in that it should have drafted to ensure that no such acceleration took place. The third claim is that Chaffe Street failed to advise the Claimant that the compromise agreement should be in writing. Chaffe Street denies negligence in all the alleged respects.
- In this section, I set out for convenience the principal relevant provisions of the Agreement.
- By clause 1(A):
- By clause 1(D):
- By clause 2
- By clause 3:
- By clause 4:
- By clause 5:
- By clause 6:
- By clause 8:
- The Third Schedule contained the following warranties:
- In this section I will set out the basic documents and facts, and where appropriate, indicate the principal differences between the parties and set out my findings of fact to the extent that such findings are necessary in this part of the judgment.
- As I have said, in mid-September 2000, Ebby and Jacob Jebreel were interested in acquiring properties in receivership situations through their family property company. After the Jebreels learned from Deloittes that CVP was interested in selling CVC, on September 22, 2000 Jacob Jebreel signed a confidentiality agreement on behalf of the Jebreels' property company, Maryland Securities Ltd, in order to receive CVC's property details. While awaiting the property details, Mr Kourosh Mehrabani, the then director of corporate finance at Deloittes in Manchester, told Ebby Jebreel of an opportunity to acquire the whole of CVC. This was attractive to the Jebreels because the potential deal included a large number of freehold properties which made the deal interesting to them.
- On October 4 Ebby Jebreel met Mr Einollahi of Deloittes, who told Ebby Jebreel that CVP was anxious to sell or close CVC, but would prefer to sell it as that would avoid CVP having to go through a massive closure and redundancy process involving 3,000 to 5,000 employees employed at factories some which were clustered within limited geographical areas in which CVP had always had a major presence, which would involve adverse publicity.
- The original proposal by CVP was that debt owed by CVC to CVP would be consolidated into a debenture securing £50 million, following which the Jebreels could buy the debenture for £10 million from CVP and then put CVC into receivership, so that there would be enough assets available for them to be able to obtain £50 million from it. Mr Einollahi told Ebby Jebreel that he was trying to do a deal with no or only limited warranties.
- For finance the Jebreels approached Anglo-Irish Bank ("AIB"), and met Mr Richard Heggie, who was then senior manager at its Manchester branch, on October 6. For corporate finance advice, the Jebreels first approached Ernst & Young, but they were unable to act, because they considered that they could not be seen to be acting as corporate financiers in the purchase of CVC and then immediately as insolvency practitioners closing the business at the request of the Jebreels as debenture holders. Mr Einollahi then recommended his former boss at Spicer and Oppenheim (later part of Deloittes), Mr Graham McInnes, who was then a partner with TMG, to act as corporate finance adviser.
- Eversheds (who were CVP's solicitors) suggested to the Jebreels that they should use Chaffe Street as solicitors, and on about October 10 the Jebreels were in touch with Mr Chris Lumsden of Chaffe Street with a view to instructing the firm on the transaction.
- On October 11 the Jebreels met Mr McInnes and Mr Philip Travis of TMG. Following the meeting Mr McInnes wrote to Ebby Jebreel to say that the TMG team would be led by Mr Travis and Mr McInnes and that their role would "centre around the structuring and negotiation of a transaction and its project management through to completion, in liaison with you and your other advisors." Mr McInnes recommended that a central implementation team would need to be put in place, drawn from existing management and augmented by the Jebreels' own business skills and some new executive blood. TMG's charges would be a cash fee of £500,000, and a participation in the equity to a value of £500,000.
- On October 10 or October 11 Ebby Jebreel met Mr Lumsden and Mr Burton of Chaffe Street. Following that meeting Mr Lumsden wrote to Ebby Jebreel to advise against the debenture route, because (among other reasons) it might be attacked as a preference. In the course of the letter he said:
- It is plain from Mr Burton's notes and from Mr Lumsden's letter that Chaffe Street were aware of the approximate level of M&S debt; and that they knew in general terms that M&S placed orders and that they called off finished goods in accordance with their requirements. They also knew that CVC was, after taking account of inter-group debt, balance sheet insolvent; and that if there was to be financial assistance there would be a need for a whitewash. But I do not consider that Chaffe Street were informed of the critical importance of cash flow, nor that they were informed of the details of the arrangements with M&S.
- On October 17 Mr McInnes met Mr Einollahi and reported to the Jebreels that Mr Einollahi was asking for an outline offer and structure, with confirmation of funding, by the end of the week (i.e. by October 20). TMG had requested a meeting with Mr Mike Hartley (who was chief executive of the CVP clothing division) as it was key that they got him onside if they were going to be successful. Mr McInnes said that one of the key factors in the matter was the Jebreels' ability to raise the consideration of £10 million from sources which would not require security on the assets that they were looking to acquire.
- By October 18 Mr Einollahi had told Ebby Jebreel that the price was to be £12 million, and that CVP also required a further £5 million fidelity bond to pay any part of the workforce which might become redundant. At this time or shortly afterwards, CVP also required a further £3 million deferred cash consideration from the liquidation of certain assets after paying creditors. The increase in the purchase price, which Ebby Jebreel agreed to accept, was a result of a perceived increase in the net assets of CVC.
- There was a meeting on October 19 at Chaffe Street's premises. Those present included the Jebreels, Mr Robert Street, Mr Shan Spencer and Mr Sebastian Jackson of Chaffe Street, and Mr McInnes. Mr McInnes outlined the basic structure of the transaction on flipcharts. A document headed "Outline Deal outcome and Mechanism" was presented but it was not concerned with cash flow.
- Mr McInnes' witness statement said that he presented the proposal in detail to Chaffe Street at the meeting, and that Chaffe Street, having had all the dynamics of the proposal, including the regular weekly cash flow from M&S receipts, confirmed that it was workable and would allow CVC and its board to meet the requirements of the necessary financial assistance whitewash.
- Ebby Jebreel's witness statement said that the question of the M&S debt was discussed as a matter of great importance as it was the only immediately realisable asset, but he could not recall precisely what was said. In the witness box he could not recall the meeting, and said that he did not think that the link between the existence of the M&S debt and cash flow was mentioned, because it was stating the obvious.
- The evidence of Mr Street was that (a) he knew that CVC's major customer (90%) was M&S; (b) he knew that CVC would receive payments from M&S, but he had no knowledge of their timing/regularity; (d) he was unaware of the details of the M&S "call off" process and its link to debt/cash; (e) he knew nothing of its cash flow and was not involved in any discussion about it; (f) he did consider, and it was discussed, that the decline in trading between M&S and CVC would seriously impact on CVC's ongoing solvency and the ability to whitewash; (g) Mr McInnes did not say that it was necessary to fix the asset composition and asset worth of CVC as at completion so as to enable the whitewash to occur; (h) the M&S debt was discussed only in relation to security for bank financing, and the focus was not on insuring a minimum amount of M&S debt, but that such debt as existed would be the subject of security.
- From the handwritten notes made by Ms Spencer and Mr Jackson at the meeting, it is plain that the business with M&S was discussed, including the level of M&S debt (£18 million) and the finished stock for M&S (£39 million). There was also discussion of a whitewash, since security would be granted to AIB over CVC assets including the M&S debt. There was also discussion of anticipated future trading losses being within the new subsidiaries. The Claimant says that Chaffe Street (by Ms Spencer) advised (or at least gave the impression to) Mr McInnes that this would not prevent the whitewash as long as security was only being granted by CVC. Although the evidence (particularly Mr Street's cross-examination) does not clearly bear out this submission, I consider that it is likely that such an impression was given.
- It is plain that the M&S debt was discussed in the context of the assets of CVC, and probably mentioned in relation to cash flow, but my assessment of the evidence is that Chaffe Street were not told that the level of M&S debt was critical for whitewash purposes.
- On October 19 Mr Heggie of AIB wrote to Ebby Jebreel to confirm AIB's willingness to provide a financing package of up to £15 million on terms discussed, subject to normal due diligence and formal board ratification.
- On October 20 Mr Travis and Ebby Jebreel had separate meetings with Deloittes, and later that day Mr Travis telephoned Mr Lumsden to say that the discussions with Deloittes had been substantially successful and that Mr Travis was in the process of drafting a formal offer letter subject to contract for consideration by CVP, the offer being £12 million on completion with £3 million deferred and a £5 million fidelity bond to cover redundancy costs. CVP was likely to consider the matter early the following week, so that a decision would be forthcoming on Wednesday or Thursday, October 25 or October 26. Mr Lumsden recorded in an attendance note that Mr Travis told him that Deloittes was "apparently 'in the frame' for the 'limited' accounting due diligence required both for the transaction and for the financial assistance 'white wash'… "
- Later that day Mr Travis sent to Jacob Jebreel a draft of an offer letter to be addressed by TMG to CVP. The offer to be made by TMG to CVP was as follows: (a) the purchaser, via a new company, would purchase the entire share capital of CVC for £1; (b) the purchaser would purchase CVP's loan to CVC for £15 million (£12 million at completion; and £3 million deferred for a period to be agreed, with a period of 12 months tentatively suggested); (c) to protect the position of employees, the purchaser would provide a fidelity bond in the sum £5 million for 1 year secured on unencumbered plant; (d) among the conditions were that net assets, net working capital and total levels of trade debtors and finished goods acquired at completion were not materially less than the position at September 30, 2000 (i.e. £117 million in net assets (before finance leases), £53 million in net working capital (before finance leases) and £65 million in trade debtors and finished goods respectively); (e) the purchaser would require limited financial and legal due diligence focussing on property and plant and machinery valuations, plus debtors and creditors. The purchaser would "require limited warranties, plus a Tax Deed".
- At about 2.30 pm Jacob Jebreel sent the draft to Mr Lumsden, asking Mr Lumsden to "have a look at this" and call him by 3.50 pm. Mr Lumsden returned the document at about 4.25 pm with some comments, one of which indicates that he queried the concept of limited warranties.
- On October 22 Mr McInnes wrote to Ebby Jebreel to say that Mr McInnes had been left with the impression that Ebby Jebreel felt that Mr McInnes had agreed to too generous terms for the acquisition, having increased the offer to £15 million and agreed a fidelity bond to cover the employee position. Mr McInnes said that that was not the case, given the dynamics of working capital since the information memoranda had been published in June. Since then the group had invested a further £20 million in finished goods and debtors by way of loan (or bank debt to be replaced by loan), all of which was recoverable and which had increased net assets by £20 million. By completion this would have reduced to around £15 million. Thus the current offer, increased from the original £10 million by £5 million (of which £3 million was deferred) provided £15 million more of readily realisable assets, which was a bargain. The fidelity bond would only bite if they were not true to their word in setting the framework for a chance of survival of the businesses. The consideration would buy £71 million of net assets. The purchaser would need to secure funds of close to £14 million to effect the deal and he was relying on Ebby Jebreel's assurances and the letter from AIB to demonstrate that that was available. The cash flows showed that all debt could be repaid over 3 months.
- Mr McInnes' fax attached cash flows. CVC was shown as broadly cash flow solvent from November 2000 through to the end of 2001, based on a specified rate of conversion of CVC's M&S debt and finished goods into cash.
- On October 23 Mr Travis faxed Mr Street with a final draft offer letter which had already been sent to Deloittes. This provided that the deferred consideration would be paid 12 months after completion provided that the debtors and finished goods at completion had realised their book value and therefore fully extinguished all external creditors at completion.
- At around this time Mr McInnes prepared cash flows which, according to the Claimant, demonstrated that the proposal would be viable in the short term and thereafter highly profitable.
- On October 24 Jacob Jebreel sent a fax to Mr Street and Mr Lumsden from TMG's offices seeking comments on a further draft offer letter with amendments in bold, and Mr Lumsden faxed back with some drafting alterations to terms of exclusivity.
- The following provision was first included in an October 24 draft of the letter :
- The final version of the offer letter was drafted by TMG, probably in conjunction with Jacob Jebreel, following a meeting with Deloittes on October 24. Before it was sent, at 11.24 a.m. on October 25, Jacob Jebreel faxed from TMG to Mr Street a copy of the October 25 offer letter. He told Mr Street that the deadline for the offer was 1 pm and asked him to "have a look at this" and to telephone Jacob Jebreel at TMG by 12.15 pm. Jacob Jebreel said that "this may be rushed" but they had been working through the night. Mr Street's specific advice was sought on (i) whether there was a risk of claims by redundant employees and (ii) whether, in relation to the wording relating to prohibition on the disposal of assets otherwise than in the ordinary course of business, they could "firm up the wording to avoid any reduction in assets or incur any liabilities compared to present position". Mr Street made manuscript comments on the proposed warranty on liabilities and assets. He advised by telephone of the risk of employee claims.
- Mr Street says that he settled the original wording of the paragraph dealing with acquisition or disposal of assets etc other than in the ordinary course of business, but it is likely from the sequence of events that he is mistaken.
- The formal offer was sent on October 25. Accompanying the letter were two pages indicating the net asset position of CVC as at September 30, 2000 and the anticipated position as at completion. The effect of the net asset schedules was that, after taking account of the clothing divisions which were not to be included in the sale and some other matters, the figure for "sold" finished goods and external trade debtors would be reduced to an anticipated £47 million after taking account of a "planned unwind of receivables" of £8.8 million, and then an "increased unwind of receivables" of £2.2 million. The schedules made it clear that the "unwind" would be used to reduce CVP group loans.
- I should mention at this stage that the first page of these schedules became the Sixth Schedule of the Agreement, and that the Claimant's case, denied by Chaffe Street, is that Chaffe Street understood, or should have understood, its importance from an early stage in the transaction.
- The offer letter referred to the offer being made "on the basis of the anticipated operating asset position of the division at completion as set out on page 1 of the enclosed analysis", and went on:
- The Claimant says that Chaffe Street was consulted thoroughly about the drafts. The offer letter made clear the importance of the "unwind" of sold goods and debtors to be limited to £8.8 million and proposed a warranty as to the value of debtors and sold goods to £60.2 million, and that CVP would pay off all bank debt before completion. It also made clear that only limited warranties were being contemplated, and the letter sought a pre-emption right in relation to CV Group property. The provision about the disposal of assets was clearly not restricted to "fixed assets".
- On the evidence I am satisfied that the only advice which Chaffe Street was expressly asked to give was (a) comments on the drafts; and (b) answers to the specific queries raised by Jacob Jebreel. There was no reason for Chaffe Street to have been sent the schedules, and on the evidence I do not consider that the schedules were supplied to them at this stage.
- In this period TMG sent the Jebreels drafts of their terms of engagement, under which TMG was to "project manage the transaction on your behalf" and to (inter alia) "coordinate matters with your other Advisors, project managing the whole assignment through to completion."
- On November 1 AIB wrote to Ebby Jebreel with terms on which £15 million would be advanced. Under the heading of repayment, the facility letter said that the bank would require all cash generated from disposals to be applied in reduction of the facility.
- Following the discussions with Mr Einollahi on the offer letter, a revised offer letter was drafted by Mr Travis, versions of which were sent to Mr Brandwood, but no action was requested.
- On November 1 TMG sent a revised offer letter which provided:
- Accordingly, the final version of the offer letter contemplated "only limited warranties" but including a warranty that net assets were to be no less than £94 million and sold finished goods and trade debtors less trade creditors would be reduced by no more than £8.8 million, but if reduced by less, then the purchaser would add to the difference to the deferred consideration, provided the operating assets exceeded £94 million by an equivalent amount. The overall effect of the two letters is that TMG was seeking an agreement that the net operating assets would be £94 million and the book value of sold finished goods and collectable debtors (to include CVP Group trading debtors) would not be less than £60.2 million at completion.
- Mr Brandwood read the two offer letters. Mr Street's evidence was that he ran through the key points with Mr Brandwood.
- The Claimant says that the offer letters represented an agreed position between itself and CVP. I accept Chaffe Street's contention that the terms of the offer letter were not agreed, and consider that Mr McInnes' evidence to the contrary is mistaken. The documents show that CVP did not agree to either warranty: (a) Mr Travis' manuscript notes of the October 30 meeting with Mr Einollahi record Deloittes querying the rationale of the warranties; (b) paragraph 14 of the November 1 letter is written in terms which indicate a continuing negotiation.
- In the light of the limited warranties that CVP was prepared to give, Mr Street advised the Jebreels that they had materially lower protection. His note of a conversation (accepted to have been in early November, probably around November 6) with Ebby Jebreel refers to "limited warranties" and "limited due diligence" and says "inevitably materially lower potential protection"
- In his letter of November 6 enclosing a formal client retainer letter in duplicate, Mr Street stated that the structure being adopted for the transaction was potentially disadvantageous to the Jebreels compared to that which was ordinarily followed. Normal structure entailed carrying out both legal and accountancy due diligence before the acquisition agreement was entered into, to enable the purchaser to assess the financial position of the company to be acquired and to identify the composition of its business. The agreement would contain specific warranties and indemnities in respect of any actual or potential problems or liabilities which became apparent through due diligence. In the present case it might transpire that the Jebreels would have wished to have negotiated a different deal or to have incorporated different contractual provisions or that there were problems or liabilities which they would liked to have covered. If that arose and the vendor was not willing to amend the contract then they would have the choice of either proceeding on the contract terms (assuming that the bank was willing to fund the transaction on that basis) or of allowing the Option to lapse.
- I accept the Claimant's contention that the consequences are not so serious where the option holder can walk away from the transaction, but Mr Street was warning about a matter which might have caused genuine concern.
- On November 2 Mr Travis sent to Mr Brandwood the final version of the offer letter, and Mr Brandwood produced a draft of the Agreement on November 2 and a later version that evening, which was sent to Mr McInnes and Mr Travis, and which the Jebreels were to collect directly from Mr Travis. The deferred consideration of £3 million was, in his first draft, to be payable from cash generated from the realisation of sold finished goods stock and collectable debtors exceeding all liabilities assumed plus a sum to cover costs and contingencies of £8 million. The first draft included warranties that the net tangible assets at completion would be not less than £94 million, and that the book value of sold finished goods and collectable debtors would be not less than £60.2 million. It also contained a provision that no assets had been disposed of nor had any liabilities been incurred other than in the ordinary course of business since (as subsequently added) September 30, 2000.
- At about this time the Jebreels voiced some complaints about TMG, including their anonymity not being preserved, and the lack of personal involvement by Mr McInnes. Mr McInnes made it clear in the witness box that Ebby Jebreel had used some very strong language to which Mr McInnes objected.
- On November 3 Chaffe Street drafted a letter of engagement, and a final version was sent to, or handed to, the Jebreels on November 6. Mr Street's evidence is that he met the Jebreels on November 6 and discussed TMG's draft retainer letter and probably also handed over the Chaffe Street retainer letter and discussed it. The Claimant says that no such meeting took place, but the evidence of the timesheets of Mr Brandwood and Mr Street, and Mr Street's diary, leads me to the conclusion that the meeting did take in fact place. The letter stated that fees were based on the scope of work and assumptions outlined in Appendix 1, which was as follows:
- The engagement was subject to standard terms of business in Appendix 2, which provided under "Limitation of Liability": "You agree that … our maximum aggregate liability to you in the event of professional negligence on any matter in relation to which we are instructed shall be £20 million…" But the letter also said: "Should you want to vary these limitations we shall be pleased to discuss it with you but we reserve the right to vary our fees accordingly."
- The retainer letter of Chaffe Street was signed by Ebby Jebreel on behalf of the Claimant on November 16. There appears to have been no discussion or advice as to the list of anticipated work.
- I deal in section F below with the evidence of what was said at this meeting.
- On November 3 Mr Brandwood produced a further draft of the Agreement which was sent to Ebby Jebreel.
- The third version of the draft Agreement contained in the deferred consideration clause a provision for an increase in deferred consideration by reference to the amount by which the book value of sold finished goods and collectable debtors less the aggregate liabilities as at completion had reduced by less than £8.8 million from the position at September 30, 2000 of £32 million, provided that the value of net tangible assets exceeded £94 million by at least an equivalent amount to the shortfall below the £8.8 million.
- The third schedule contained warranties: (a) that CVC and its subsidiaries had vested in them the assets etc. required to run the businesses (Warranty 1) (b) that the net assets at completion would be not less than £94 million (Warranty 6); (c) that the book value of "sold" finished goods and collectable debtors less the aggregate liabilities had reduced by no more than £8.8 million from the position as at September 30, 2000 of £32 million (Warranty 7) and (d) that "no assets of the Businesses have been disposed of nor have any liabilities been incurred in respect of the Businesses other than disposals of stock in the ordinary course of trading since 30th September 2000" (Warranty 10).
- On Mr McInnes' copy of the draft he has written words to the effect: no sales not in ordinary course of business; "no asset strip". His evidence was that he told Mr Brandwood on November 6 that there was to be no asset stripping and no sales not in the ordinary course of business. There is no record of this in Mr Brandwood's note of the conversation, but it seems from Mr Street's evidence that there was some talk of a prohibition of asset-stripping.
- This meeting on the night of November 7/8 was at the offices of Deloittes and began at about midnight. The persons present were Mr Street and Mr Brandwood, Mr Einollahi, the Jebreels, Mr Dillon and Mr Shaw (of Deloittes), Mr McInnes and Mr Hill (of TMG), and also Mr Tinsley of Eversheds. The Claimant says that the meeting lasted well into the early hours, and not, as Mr Brandwood says, 1.30 am, but nothing turns on this difference.
- Chaffe Street say that at the outset of the meeting Mr Einollahi and Mr McInnes said that agreement had been reached and they outlined the terms agreed and there was no negotiation, although there was some element of clarification and debate. The purpose of the meeting was to enable the lawyers to draft the main agreement in accordance with what had been agreed commercially. The Claimant says that there was much more of a discussion and negotiation. I do not consider that anything turns on this.
- Mr Brandwood's notes record that (a) Mr Einollahi originally wanted security for the deferred payment, but subsequently accepted a percentage of all payments of M&S debt "at fastest rate that doesn't jeopardise business – percentage can't be agreed before contract signed – say 25% - longstop date of 3 months"; (b) Deloittes would sign off on the financial assistance report, conditional on Mr McInnes being on the board of CVC; (c) Mr Einollahi was treating it as a "receivership deal"; (d) Mr Einollahi would give a warranty that no assets disposed of other than in ordinary course of business, and if any asset is taken out "we get full recovery"; (e) there was discussion of what became the Excluded Debt provision, and a discussion of CVP leaving cash in, if there was a greater than £8.8 million unwind; (f) it was agreed that the warranties on net assets, and the unwind were to be deleted; (g) Chaffe Street told the Jebreels that they had only "weak warranties, subject to disclosure."
- According to the Claimant, it was agreed that: (1) the deferred consideration was agreed to be paid from M&S payments, with Mr Einollahi saying that such was to be "at fastest rate that doesn't jeopardise business" (then 25%); (2) CVP would give a warranty that no assets would be disposed of after the date of the September management accounts other than in the ordinary course of business and that if CVP did so take out assets then the Claimant would receive full recovery; (3) if there was more than a £8.8 million unwind then CVP would leave the cash in; (4) some warranties would be deleted and others modified.
- Chaffe Street's case is that during the meeting the following points were discussed:
- Clause 5(9) at this stage provided that the Excluded Debt would be paid by CVC from 25% of the M&S debt and in any event within 3 months of Completion.
- There is a dispute as to whether the Sixth Schedule document was on the table and discussed. Mr Hill said that although he could not recall for certain, he was confident that Chaffe Street would have seen and have had explained to them the Sixth Schedule document before November 8. He is sure that Mr McInnes would have gone through it with them. The Sixth Schedule document was not just created, it evolved. At the very least, it was definitely discussed at the meeting on November 8. His recollection is that Chaffe Street were fully au fait with the matters discussed at the meeting on November 8, including the Sixth Schedule. He would not have expected Chaffe Street to have allowed the Sixth Schedule to have gone into the Agreement without it having been fully discussed with them. It was key to the transaction from the financial perspective. He did not see how Chaffe Street could have drafted the Agreement if they did not know what was happening financially. Mr McInnes said that he could not be specific as to how and when the document was copied to Chaffe Street, but he believed that it was given to them and fully explained before they drafted the Agreement. In the witness box he could not remember when and how the document was copied to Chaffe Street or who explained it to them.
- I think it probable that the document was on the table and the subject of some discussion between the principals and their financial advisers, but that Chaffe Street were not concerned in any discussion about the figures, and that it was not referred or shown to Mr Street or Mr Brandwood at this stage.
- Mr Street says that during or shortly after the meeting he advised the Jebreels that (1) they only had weak warranties, (2) the deal depended on Deloittes agreeing to carry out the whitewash procedure, and (3) if they changed their mind the deal would fall apart. Ebby Jebreel said that he could not recall advice on the first and third points, but agreed that Mr Street advised on the second point. I accept Mr Street's evidence.
- Mr Street and Mr Brandwood went with Mr Hill into a smaller room at Deloittes and asked Mr Hill to clarify and expand the main financial provisions to enable the drafting process to begin. Mr Hill stayed for between 30 and 60 minutes, then left as he had a bad back.
- Mr Street and Mr Brandwood then spent the rest of the night alone in the small meeting room drafting a revised agreement. They started with the draft which Mr Street had marked up during the plenary session and, mostly in Mr Brandwood's handwriting, the revised wording was set out.
- Mr Hill returned later in the morning and reviewed, checked and approved the draft agreement. I accept Mr Street's evidence that he raised with Mr Hill the specific issue that the definition of NWC was a shifting pool of assets and liabilities which would change and that there would be no control over its composition, and that Mr Hill agreed with this point.
- Chaffe Street say that the Jebreels joined Mr Street, Mr Brandwood and Mr Hill in the small meeting room at Deloittes between 9 and 10 a.m. on November 8, although Ebby Jebreel's recollection was that the discussions took place in the evening of November 8. I accept Chaffe Street's evidence that the Jebreels were taken through the draft agreement on November 8. But it is likely that they read only those parts to which their attention was specifically drawn. I also accept the evidence of Mr Street and Mr Brandwood that Mr Street gave the explanations and advice set out in the schedule of advice dated May 4, 2006 (scheduled as an answer to a request for information), and in particular explained the NWC adjustment mechanism and its relationship with the Excluded Debt, and that he would have told the Jebreels that the thrust of clause 5(5) was to protect against disposal of fixed assets etc. in circumstances where CVP had refused to give a net asset warranty.
- A further version of the draft Agreement ("the red version") probably resulted from additional comments received from Eversheds during the morning of November 8, and further thoughts from Mr Brandwood and Mr Street. Mr Street and Mr Brandwood then returned to their offices and had typed up the latest draft, which was sent to the Jebreels and to TMG at about 4 pm. Mr McInnes did not recall it or recall reviewing any draft after November 3, and Ebby Jebreel did not recall reading it.
- I accept Chaffe Street's evidence that clause 5(5) was discussed primarily in the context of fixed assets. Its wording derived from the deleted Warranty 10, and not the deleted Warranty 6, although commercially it gave some protection in place of the net asset warranty. Chaffe Street gave no advice about the unwind restriction because it was no longer on the table.
- There was a meeting on the night of November 8/9. The following (at least) attended: Mr Einollahi, Mr McInnes, Ms Kazia Kantor, Mr Street, Mr Brandwood and the Jebreels. Mr McInnes walked out of the meeting because he was unhappy with the way CVP was conducting it, and Jacob Jebreel then asked Chaffe Street to leave. Ebby Jebreel proceeded to negotiate with Mr Einollahi and Ms Kantor a reduction in the Excluded Debt from £5 million to £4.6 million and an alteration to the percentage application of the M&S payments to pay off the Excluded Debt.
- On the morning of November 9 Ebby Jebreel telephoned Mr Brandwood to report on the alterations to the terms agreed and to instruct Chaffe Street to ensure that the changes were included in the draft agreement.
- The Agreement was redrafted on November 9. The amendments included a change to the figure of 25% to 20% for the proportion of M&S payments to be applied for payment of the Excluded Debt, and the insertion of a provision at the end of clause 5(9) so to make clear that the Excluded Debt was to be payable only when 20% of the M&S payments were sufficient to pay it, and in any event within 3 months after completion.
- It also provided in clause 5(10) that the NWC would be calculated at November 26, 2000 rather than at completion.
- Mr Street met Ebby Jebreel and Mr Hill and raised some points on the draft Agreement, including the risk involved in the NWC valuation date being November 26, four days before anticipated completion. I accept Mr Street's evidence that he would have discussed with the Jebreels the implications of the reduction in the Excluded Debt from £5 million to £4.6 million, namely that there was a £400,000 gap between the level of NWC at which the excluded debt became nil (£39.4 million) and the level of NWC beneath which CVP needed to leave cash in CVC (£39 million);
- I accept Mr Street's and Mr Brandwood's evidence that they were not provided with a copy of the Sixth Schedule document until the afternoon of November 9; and that their understanding of the essential function of the document was that it set out the September 2000 management accounts, as referred to in certain clauses of the Agreement, and essentially fixed the "bases, policies and practices" by which CVC's assets and liabilities were stated. They were also told that it set out the anticipated completion position, but I am satisfied that it was never suggested to them that it was a crucial document designed to show the outcome of the deal.
- Ebby Jebreel signed the Agreement on November 9 but it was not exchanged because CVP was saying that a further potential purchaser had appeared. Ebby Jebreel accepted that he had read the Agreement when he executed it, and was happy with its terms on the commercial points.
- There was a meeting at the offices of Deloittes on November 10 which involved Jacob Jebreel, Sir David Alliance (now Lord Alliance), Mr Brandwood, Mr Einollahi and Ms Kantor. Jacob Jebreel was asked by Sir David Alliance to attend the meeting, and Jacob Jebreel asked Mr Brandwood to come with him. Sir David Alliance is the uncle of the Jebreels, and the former chairman of CVP, and still a major shareholder.
- The meeting resulted in Sir David Alliance signing two documents. The documents which Sir David Alliance signed are available only in their draft forms. Each was addressed to CVP. In one of the documents he referred to the agreement which CVP was proposing to conclude with the Claimant, which was associated with the Jebreels. In the unamended version of this was a reference to "my family and in particular Ebbey [sic] Jebreel and Jacob Jebreel." He referred to the meeting which he had had with the Jebreels because he was concerned about the reputation of CVP, his reputation through being associated with the Jebreels and CVP, and the future of the business of CVC and the large number of employees who were dependent on that future. He confirmed that he believed that the Claimant would honour the terms of the agreement and in particular would not seek to renegotiate the price, and that he had specifically sought this confirmation from the Jebreels and it was given to him. He stated that following the meeting, he believed that the position of CVP in relation to the transaction was significantly stronger than it was prior to the meeting, in that the Jebreels would not let down the family or do anything that affected him or CVP in an adverse way. In a sentence that appears to have been deleted he said: "I agree that I will sign the existing agreement relating to the Transaction, in place of Marplace (512) Limited [the Claimant] if Coats Viyella so requests". The second letter referred to the Agreement and, as amended, said: "Subject to due diligence reasonably acceptable to me, I agree to provide the financing required to complete the Agreement". In the unamended version it said that he agreed to stand behind the financing obligations of the buyer under the Agreement.
- After Sir David Alliance signed the documents, Jacob Jebreel re-dated and re-signed the Agreement, CVP signed it, and the Agreement was exchanged.
- As I said more than once during the hearing, I am not satisfied that the Jebreels have told the court the whole story relating to the intervention of Sir David Alliance. Their apparent lack of recollection of what must have been a very important and vivid business connection with their uncle (the first and only significant business dealing they had had with him) contrasts strongly with their detailed recollection of what was allegedly said to Chaffe Street at meetings in this period.
- On November 13 AIB set out terms for the facility, and revised terms for the arrangement fee and the redemption fee were sent on November 16. In the November 13 letter the loan was to be repaid by way of realisation of the proceeds of stock, debtors and work in progress together with the disposal of other fixed assets as appropriate. The letter of November 16 referred to the loan "as a short term deal on the lines of a bridging loan whilst receivables are collected." The initial fees were based on the first four months of the loan, with further fees payable should the loan be outstanding for longer than 4 months. The full course of the loan was said to be 9 months. The letter stated:
- On November 20, 2000 Mr Rearden was instructed to deal with the banking aspects, and Mr Whatnall of Halliwells was instructed for AIB.
- A note by Mr Rearden of a conversation on November 22 with Mr Whatnall records that there was concern over the level of M&S debt: "need confirm from someone of substance". A note by Mr Rearden of a subsequent telephone conversation with Mr Travis on the same day records that Mr Travis believed that Chaffe Street should sort out the level of debt, and that Mr Rearden advised Mr Brandwood and Mr Street of the conversations.
- On November 22, Mr Rearden faxed to Ebby Jebreel with queries relating to AIB's requirements, including confirmation that M&S receivables were correctly due and payable within 90 days and were not subject to any third party interest.
- At this time Ebby Jebreel was also talking to Burdale Finance Ltd about a £14 million facility, including security over amounts owing by M&S of approximately £14 million.
- On November 20, Lathams, the Jebreels' accountants, sent a draft executive summary of their report to Jacob Jebreel. The draft stated that the combined business was profitable, but was exposed to a single customer (M&S) in one segment, and it made the following points (inter alia):
- Appendix 3 showed the current M&S debt to be about £16.6 million (of which £113,000 was over one month).
- On November 20, 2000 Jacob Jebreel sent the Lathams' draft report to Mr Hill at TMG and to Mr Brandwood. On the same day he asked Mr Shaw of Deloittes for the information requested by Lathams as to the estimate of closure costs of each division. He also asked for copy valuations of each of the properties. Mr Shaw responded by saying that he should have received valuations by then.
- The Claimant says that the Lathams' report did not reveal anything which was of any substantial concern as to the viability of the proposed acquisition, since the Claimant was paying £15 million for net assets supposedly worth £94 million, and any suggested write-downs or trading queries did not take out anything like the apparent £79 million surplus, and where the whitewash was not dependent on the trading performance of the subsidiaries.
- Chaffe Street's position is as follows. Lathams never produced a signed off due diligence report. Mr McInnes did not read the draft report, and AIB was never sent it. Chaffe Street pointed to the fact that Ebby Jebreel sought to provide reasons why the interim conclusions as to viability did not concern him. For example, as to Stevensons, Lathams were not being asked to explore other potentials with that business or with the property involved, and he considered himself better qualified to assess the appropriate write-down for M&S old stock. But a feature of his evidence was the total absence of hard evidence that he had been able to, and had taken the opportunity to, sit down, either himself or with Mr McInnes, and assess the viability of each operating business. The true position was that both Ebby Jebreel and Mr McInnes knew that the key information they were missing was the assessment by the management of the viability of each operating unit. The information was missing as at November 28 and the plans were never supplied. In the absence of that information, Ebby Jebreel could not safely proceed with the acquisition on the terms that had been agreed. All of the developments (including, but not only, the Lathams' report) were enough to put Ebby Jebreel off doing the deal.
- In my judgment, the Claimant's evidence that the Lathams' report did not give the Jebreels or TMG any concern is uncommercial and not believable.
- On November 21 Lathams sent to Mr Hill and Mr McInnes, and to Mr Brandwood, a copy of a letter from CVC to M&S. The covering fax said that the letter seemed to imply that advance payments would be made by M&S which would mean that cash receipts in the first 2 weeks of December were reduced.
- The letter from CVC to M&S was dated November 21. After referring to a letter from M&S of the previous day (which is not among the papers), the letter stated that CVC understood that the proposed speed payments would be reversed by no merchandise payment from M&S in the weeks ended December 4 and December 11. The letter went on to say that the proposed impacts on management accounts were internal and not for public disclosure and CVC did not believe M&S' query about "window dressing" therefore applied as it would not affect overall cash receipts prior to the year end. The assets of CVC were not subject to any charges which would be contravened by the payment proposal.
- Mr Brandwood read the fax and telephoned Mr Daly of Lathams for clarification. Mr Daly confirmed the implication that he had set out in the fax cover sheet, and told Mr Brandwood that TMG was looking into the issue, and negotiating with Deloittes. Mr Street found out about the fax, probably on the next day.
- Mr Brandwood accepted in the witness box that he understood that this would result in M&S payments being accelerated to prior to Completion when ordinarily they would have been paid following Completion, and that the M&S accelerated payments were not going to be left in CVC but were to be taken out against Debt.
- On November 22 the letter notifying intention to exercise the Option under clause 2(4) was served. This was not itself the exercise of the Option.
- On November 22 Mr Street suggested to Ebby Jebreel that the Jebreels, Chaffe Street, TMG and Lathams should meet to resolve how to deal with outstanding matters. A meeting was fixed for November 24 between Mr Street, Mr Brandwood, Mr McInnes, and the three Jebreel brothers. The agenda items (dated November 23 and drafted by Mr Street) for the meeting include as item 4 "Lathams' fax: re M&S debt expedition."
- On November 23 Mr Hall of Eversheds sent to Mr Brandwood a fax saying: "As discussed on 20 November, please find attached first draft of an agreement to clarify certain matters in relation to the sale and purchase agreement." He also said: "I understand that the working capital clause has been discussed with TMG. The precise mechanics (timing) for the adjustment may change." Copies were sent to various people at CVC and Deloittes.
- The enclosed draft dealt with what was described as the working capital clause, namely the gap period between November 26 and completion in relation to the definition of Excluded Debt, and also included in clause 2.1.7 a new sub-clause (d) at the end of Clause 5(5) as follows:
- Mr Brandwood's notes taken at the meeting on November 24 include these words:
- Against the agenda item 4 relating to Lathams' fax re M&S expedition, Mr Street wrote "TMG". He also wrote the following:-
- The Claimant says that the M&S accelerated payment were explained to be £14 million and to amount to 2 weeks. Mr Street's note refers to 7 to 14 days. Mr Brandwood's note refers to £14 million to £7 million. The Claimant says that both are correct. Mr Street accepted that, if he had thought about it, he would have realised that the payments would have been applied to inter-company debt.
- It is possible to reconstruct the gist of what was said and not said. First, no advice was expressly sought from, and no advice was given by, and no inquiry was made by, Chaffe Street as to the rights and wrongs of the accelerated payments and what CVP was proposing to do. Second, Mr McInnes was complaining to Mr Einollahi about what was happening and was attempting to negotiate as best he could to keep as much money as possible in CVC, with Mr Einollahi indicating a preparedness to leave £5 million to £6 million. Third, it was agreed that TMG would take on responsibility for dealing with this issue. I also accept the evidence of Chaffe Street that Mr McInnes gave the impression that the problem would be solved.
- Mr Brandwood briefly outlined the terms of the draft Amendment Agreement at the meeting, and Mr Brandwood agreed to pass a copy of the draft to Mr McInnes and the Jebreels for them to consider further.
- Following the November 24 meeting Mr Brandwood forwarded the draft Amendment Agreement to the Jebreels, Mr Hill, Mr Travis and Mr McInnes with a cover sheet stating that these were the amendments which CVP were proposing. Eversheds produced a revised draft on November 24, which Mr Brandwood received but did not circulate. The Claimant says that neither Ebby Jebreel nor Mr McInnes understood what they were given and both relied on Chaffe Street to say if anything was relevant.
- Mr Brandwood's evidence is that he believed he read through the draft Amendment Agreement briefly in the time available before the meeting on November 24, but Mr Street did not read it. The draft was only mentioned at the November 24 meeting very briefly and not by reference to specific elements of its contents.
- When Mr Brandwood considered the first draft Amendment Agreement he wrote "in the ordinary course of trading" into the clause 5(5) amendment in clause 2.1.7. Mr Brandwood accepted in evidence that clause 2.1.7 was prompted by the fact of the M&S accelerated payments.
- On about November 23 Lathams sent Jacob Jebreel a schedule of the redundancy costs as supplied by Mr Hartley as being "necessary to result in a residue of viable businesses", which amounted to about £12.5 million.
- There was a meeting on November 26 between (at least) Ebby Jebreel, TMG and Mr Shotton at which these figures were discussed. Mr Shotton's figures (£9.1 million) were lower than Mr Hartley's and are added in handwriting.
- In this period further correspondence relating to the speed payments emerged. On November 24 Mr Hartley sent to Lathams a copy of a letter from M&S to Mr Hartley dated October 23. The letter said: "In order to be as helpful as possible during the period of disengagement we agreed to speed-pay all call-offs" but complained about what seems to have been a lack of stock available for call-off and said that M&S was going to suspend the exercise until the problem was rectified. On November 26 Mr Moss of Eversheds sent a fax to Mr Brandwood:
- Together with the formal disclosure, Eversheds also supplied to Mr Brandwood a copy of a letter from M&S to Sir Harry Djanogly dated September 19. The letter showed that in September Sir Harry Djanogly and Sir Victor Blank (a director of CVP) had been to see Mr Peter Salsbury of M&S, who had said that M&S would be helpful with respect to a more prompt payment for the call off over the next 2 months against agreed invoices. Mr Brandwood circulated a copy of this letter to the Jebreels, TMG and Lathams.
- On November 27 Mr Rearden sent to Ebby Jebreel a draft credit facility agreement for the AIB loan. The loan was to be the lesser of £15 million and an amount equal to 80% of the aggregate value of the M&S debt. Clause 9.5 provided that the Claimant would procure that all amounts received by it or by CVC in respect of the gross M&S debt would be paid into a receivables account, which AIB would be entitled to apply towards repayment.
- The Claimant says that although the documents provided that all M&S payments would be made to AIB, they did not provide that AIB would necessarily use them to reduce the lending. On November 27 Mr Rearden sent the AIB draft documents to Ebby Jebreel, and he sent Ebby Jebreel a fax later in the day referring to AIB's concerns about the verification of the amount of the M&S debt, and to Mr Rearden's understanding that Ebby Jebreel was discussing the matter with Mr Heggie. The Claimant submits that Ebby Jebreel was negotiating with Mr Heggie and achieving some form of potential resolution, which he thought he had achieved, that would explain why Ebby Jebreel told Mr Rearden to forget about proceeding with Burdale (which he did on November 28).
- On November 27, Deloittes provided Ebby Jebreel with an estimate of projected M&S debt to November 30, showing speed payments of £6.4 million on November 22 and £6.5 million (estimated) on November 27.
- The following matters occurred on November 28, which was the last day for the exercise of the Option: (1) Ebby Jebreel told Mr Rearden that he was not proceeding with finance from Burdale; (2) Deloittes provided TMG with working capital estimates and cash flow calculations which, according to the Claimant, showed negative cash flow and an inability to pay debts due to the accelerated payments; (3) Eversheds wrote to Mr Brandwood to raise a problem about letters of credit; (4) Chestertons prepared valuations of the properties for AIB, which indicated in relation to the CVC properties a £4 million difference between open market value (£14 million) and an estimated £10.3 million "restricted realisation price" (i.e. what AIB would achieve in distressed conditions with a maximum of six months to completion); (5) Mr Street had a discussion with Ebby Jebreel about the exercise of the Option, and drafted an Option Notice for Ebby Jebreel to serve; (6) Mr Street and Mr McInnes had a telephone conversation about the viability of the deal; (7) Mr Brandwood was sent a revised draft of the Amendment Agreement; (8) there was a meeting at Deloittes that night, about which Ebby Jebreel told Mr Street, but neither Mr Street nor Mr Brandwood attended; (9) in the course of the meeting the Option period was formally extended to 6 am (and informally until later), but no agreement was reached on outstanding matters, and the Option was not exercised.
- On November 28 Eversheds sent to Mr Brandwood a fax to say that the fact that the September balance sheet did not make provision for goods ordered but still to be delivered against letters of credit which had been issued on behalf of the CVC group would have to be dealt with in the amendment agreement. Entries were only made once the goods came into the United Kingdom, and accordingly there was a liability to pay a sum which was believed to be of the order of £5 million balanced by stock of equivalent value. Mr Moss of Eversheds said:
- Accordingly, it was "provisionally proposed" that the letters of credit would be satisfied by CVP as part of external indebtedness and that the stock which was currently not on the September balance sheet would be added for the purposes of calculating working capital in accordance with the Agreement. Mr Brandwood copied the letter without comment to the Jebreels and TMG.
- On November 28 Eversheds sent Mr Brandwood a further draft of the Amendment Agreement which had on the front the words "Note: need to insert wording to deal with cash now being left in the Businesses at Completion" and a new clause 2.1.2 revising the definition of NWC to deal with the letters of credit problem. Mr Brandwood copied the revised draft Amendment Agreement to the Claimant and to TMG for information.
- There was a telephone conversation (not the subject of any note) between Mr Street and Ebby Jebreel. Mr Street's evidence is that (a) Ebby Jebreel called Mr Street to tell him that he intended to renegotiate the terms of the deal because the financial position of CVC was not what he was planning on when he entered into the Agreement; (b) Ebby Jebreel did not mention the acceleration of the M&S payments at all during the call or any impact it might have on the whitewash; (c) Ebby Jebreel asked Mr Street whether he should exercise the Option in those circumstances as he was concerned that exercising it would send out the wrong message and would weaken his negotiating position by giving the impression that he was prepared to proceed on the terms of the existing Agreement. Ebby Jebreel's evidence was that he did not recall the conversation.
- Following the conversation Mr Street drafted a form of notice exercising the Option, which he sent to Ebby Jebreel under cover of a letter which said: "I also confirm your instructions that until we receive notice from you to the contrary we should continue to work towards completion of the transaction notwithstanding the current difficulties." Mr Street now accepts that it was poor advice to a client to serve a notice when it was not in a position to honour its obligation to complete the transaction. Ebby Jebreel in fact did not serve the notice.
- There was then a telephone conversation between Mr Street and Mr McInnes. The Claimant's case is that during this call Mr McInnes told Mr Street that M&S payments were being accelerated and used to reduce the inter-company debt; CVP would not leave cash in CVC; and this would result in the whitewash procedure being rendered impossible; and it was being investigated whether the deal could be done in a way which would avoid the need for financial assistance. Chaffe Street dispute that Mr McInnes indicated any express link between the acceleration of the payments and any ability to carry out the whitewash, or that CVP was acting or intending to act in any way contrary to expectation or to the agreement.
- Mr Street's handwritten attendance note indicates that the MBOs were not ready and there would be a £1 million cost in redundancies at Stevensons. The Jebreels were not going to do financial assistance, and Mr McInnes was trying to speak to Mr Einollahi to do a deal with no financial assistance. There was no M&S debt, which had been accelerated the previous week. The note states:
- In his witness statement Mr McInnes said he could not recall the conversation, but he said he was puzzled about the reference to not going to do financial assistance, since he was still negotiating with Mr Einollahi to carry out the existing deal. In the witness box he said that he was still in discussion with Mr Einollahi, and that he might have said to Mr Street that if things stayed as they were, they would not be able to do the financial assistance whitewash. He did not believe the position was hopeless, but they had reached a point where the amount of cash being offered to be put back was insufficient for what was needed.
- Mr Street's evidence was that it was in the context of the problems relating to Stevensons that Mr McInnes stated that he was looking to negotiate a deal that did not require financial assistance, and did not state that the acceleration of the M&S debt was the reason for the inability to carry out the financial assistance.
- I am satisfied that Mr Street's note accurately records that Mr McInnes was relaying the fact that there were a number of problems with the transaction, and that a solution was being sought.
- Ebby Jebreel and Mr McInnes were then requested by Deloittes to attend a meeting at Deloittes' offices, and at about 5pm Ebby Jebreel phoned Mr Street and asked for Mr Street (or Mr Brandwood) to attend but was told that they could not. Mr Street says that he told Ebby Jebreel that he had to prepare for a meeting the next morning with High Peak Borough Council and that neither he nor Mr Brandwood could attend. Ebby Jebreel says that he was told by Mr Street that Mr Street had to go to a meeting. Mr Brandwood was asked but said he could not come. This was due (although this was not advised to Ebby Jebreel) to a lack of someone to look after his children. Ebby Jebreel did not then press for someone else to attend, although Mr Street's evidence was that he asked Ebby Jebreel if he wanted someone else from Chaffe Street.
- The meeting took place in Deloittes' offices attended by Ebby Jebreel, Jacob Jebreel, Mr McInnes, Mr Einollahi and Mr Dale of Eversheds. A letter from Ms Kantor extending the Option period to 6 am on November 29 was provided, but in practice the negotiations proceeded on the basis that the deadline was being extended until their conclusion.
- At the meeting Mr McInnes produced a list of points for discussion, headed "Issues for Resolution". His note contained three headings: (1) Information; (2) Working Capital and (3) Debt. The section under information stated that during his period of involvement as their prospective business leader, Mr Hartley dissembled and prevaricated, leading to a paucity of information and the provision of misleadingly inaccurate data. Since his replacement by Mr Shotton, it appeared that Mr Hartley was still trying to restrict their full knowledge and understanding. As a result, they had been denied the time to properly access ongoing viability. Despite repeated requests and promises, they had not been given a full set of forecasts of future activity and cash flows over December and January, let alone beyond. The business unit managers were not ready to take control, and up to November 27 they had not been provided with 2001 trading forecasts for Northern Ireland and Belgium. As a result the Claimant would have to acquire blind, with the risk of insolvent failure residing within CVC.
- On working capital, Mr McInnes' note stated that due diligence on the October accounts revealed working capital adjustments of £3 million with a further £7 million in doubt (largely "old" M&S finished goods stock). The speed payments from M&S had taken the deferred consideration out, reduced working capital to £34 million and removed their plank of bank security. Exceptional costs to be incurred from completion to the end of February had been disclosed at £9 million to £12 million which were not reserved in the working capital equation. As regards debt, the disclosure letter suggested that their would be debt and charges in Northern Ireland and Belgium, contrary to the underlying agreement.
- The Claimant says that as far as Ebby Jebreel (and Mr McInnes) were concerned, the only real problem was the M&S accelerated payments (with CVP's stance on the letters of credit forming part of and exacerbating this). Mr McInnes said in evidence that if the money had been returned in full "I would have been advising the business to proceed so long as there was not an unfunded requirement to provide a bank guarantee for the letter of credit." If Ebby Jebreel (or Mr McInnes) had been thinking that the transaction was altogether unviable then they would not have been receptive to Mr Einollahi's simple alternative (but rather would have tried to renegotiate matters generally) and would not have then sought to take it forward.
- Ebby Jebreel telephoned Chaffe Street on the morning of Wednesday November 29 to advise them of what had happened and that Mr Einollahi was proposing a restructuring of the deal.
- The only document is Mr Rearden's note of his conversation with Ebby Jebreel which states: "deal being restructured – no reqt for bank debt to complete. SJR to advise HL". The note records that Mr Rearden did tell Mr Whatnall.
- Mr Brandwood says that he recollects speaking to Mr McInnes on the morning of November 29 when Mr McInnes told him that, at the meeting the evening before, Mr Dale of Eversheds had devised a plan to restructure the transaction to avoid financial assistance, and Mr McInnes invited Mr Brandwood to speak to Eversheds to explore that option further. His recollection is not that Mr Einollahi was refusing to honour the contractual commitment necessitating the contribution of £8 million, but that the poor financial condition of the intended operating units and the reduction in the M&S debt and consequential reduction in net working capital, combined with a number of other issues, created a situation where the liquidity/solvency of the businesses was insufficient to allow the financial assistance whitewash to proceed. Mr Brandwood says he spoke to Eversheds and considered the alternative structure which had been proposed by Mr Dale to avoid the necessity of a whitewash, and had to dismiss it because he felt it would not in fact work and, once he talked it through with him Mr Moss agreed. Mr Brandwood says he also discussed his view of the Eversheds' financial assistance solution with Ebby Jebreel and reported to him after discussing it with Eversheds that it would not work. Neither the Jebreels nor anyone from TMG or Eversheds gave him any account of what else was discussed at the meeting on November 28/29 other than as regards the Eversheds' proposed solution to the financial assistance issue. Neither the Jebreels nor TMG sought any advice from him in respect of any other issues.
- Mr McInnes' witness statement does not deal specifically with the telephone call, and the topic was not covered in his oral evidence, although he does say that he informed Chaffe Street of the remaining barriers to completing the deal.
- Mr Rearden says that on the morning of November 29 when he sought instructions from Ebby Jebreel as to various matters in relation to security, Ebby Jebreel told him that the deal was being restructured and there was no requirement for any bank debt to complete. Ebby Jebreel instructed him to advise Halliwells that he would not need funding to complete the purchase. After speaking to Ebby Jebreel he spoke to Mr Brandwood to update him as to the instructions. Mr Rearden explained Ebby Jebreel's comments and they discussed the possibility that the Agreement would be amended and that completion would not take place on November 30. After speaking to Mr Brandwood, Mr Rearden telephoned Mr Whatnall of Halliwells to tell him that the Jebreels did not need funding from AIB.
- A meeting was arranged to start at about 6 p.m. on November 29 at the offices of Deloittes. Initially there were present Mr Brandwood and Mr Rearden, Mr Moss and Mr Pysden (Eversheds) and Mr Einollahi. Mr Street and Ms Kantor arrived later.
- Mr Rearden made some notes at the meeting, mainly focusing on the proposed new structure for the acquisition of CVC whereby the properties were sold to a third party, Newprop Co. The only reference to M&S debt is in a section apparently reporting something said by Mr Einollahi and referring to Mr McInnes: "M&S Debt – GMcK … Believes that CVC can do fin assist". In the witness box Mr Rearden said that the reference to GMcK meant that Mr McInnes was dealing with the problem.
- According to Chaffe Street, at the meeting Mr Brandwood confirmed (as Eversheds and Mr Einollahi already knew) that TMG had indicated there were issues which called into question the ability to carry out the whitewash. There was a discussion of an alternative structure. Mr Pysden and Mr Einollahi separately indicated at the meeting that they believed the whitewash issue could be resolved. Mr Einollahi mentioned that the M&S debt and redundancy payments were still being discussed with Mr McInnes. No one suggested that either of those issues were preventing completion. Mr Einollahi did not say that he and Mr McInnes were having a major argument about the M&S debt and how to solve the issue. Mr Brandwood considered himself to be in an awkward position because Mr Street had informed him the previous day that Ebby Jebreel wished to renegotiate, he had been told that the Jebreels were apparently happy to do a deal that did not involve the properties, but he did not have direct instructions to that effect. He therefore sought to stall giving definitive answers to Eversheds.
- The meeting lasted about an hour. Mr Einollahi left. Mr Brandwood telephoned Mr Street to ask him to attend. While waiting for Mr Street, Mr Brandwood became aware that Mr Einollahi and Mr McInnes were meeting in a pub across the road.
- At the meeting in the pub between Mr Einollahi and Mr McInnes, it became clear that the deal would not go ahead.
- Mr McInnes' witness statement said that Mr Einollahi told him that CVP no longer wished to deal with the Jebreels because of actions taken by a group of substantial shareholders in CVP who were said to be questioning the decisions of its board and demanding the appointment of four non-executive directors of their choosing. The leader of the group was said to be Sir David Alliance, and Mr Einollahi indicated that this action was to be the subject of an article in the Financial Times the following day. As a result Mr Einollahi indicated that he could no longer arrange for any of the M&S cash to be refunded, nor for the letters of credit to continue to be covered by CVP.
- But Mr Einollahi then outlined a compromise proposal as a consolation for the Claimant, in that if TMG and Chaffe Street were released to act for Mr Shotton to allow the MBO led by Mr Shotton to progress in time, Mr Einollahi would ensure that all of the professional costs of the Jebreels were met and procure that they be offered the opportunity to "cherry pick" acquisitions from all the surplus properties owned by CVP at "forced sale" values.
- Mr McInnes and Mr Einollahi spoke to Ebby Jebreel by telephone from the pub. Ebby Jebreel's evidence was he was told that Mr Einollahi had suggested that to compensate for loss of the deal he would let them have an option to cherry pick CVP's surplus properties at forced sale values, and for novating their team of professionals he would pay all their expenses so far. He could not recall whether Mr Shotton's name was mentioned, although in the back of his mind he knew that the novation would be to him. Nor could he recall whether there was any reference to the White Book of CVP's property holdings, but he was clear that Mr Einollahi was referring to CVP's worldwide property holdings.
- It was agreed that they would meet at Deloittes' offices. Before the Jebreels arrived, Mr McInnes brought Mr Street, Mr Brandwood and Mr Rearden up to date. Mr Travis and Mr Hill were also present.
- Mr McInnes says that he then recapped the position with Chaffe Street and the Jebreels when they arrived, and explained why the remaining barriers to completing the deal (CVP refunding the accelerated M&S payments taken out and continuing to guarantee the letters of credit) could not be overcome and reiterating the "consolation prize". Some discussions ensued, during which he says that he asked Chaffe Street something like "surely they cannot do this?" to which the reply (from Mr Brandwood, he thinks) was something like "you can walk away from the deal." In the witness box Mr McInnes said that he had to admit that it was not a particularly strong recollection and it was not a long discussion. It was a comment that he recollected making and a response which he recollected.
- Ebby Jebreel says that Mr McInnes explained to him, his brothers and Chaffe Street, and possibly Mr Hill and/or Mr Travis, the proposal, being both the option over the surplus CVP properties at forced sale value and the novation of the professional teams and the full payment of their fees and expenses.
- Mr Street's evidence (and that of Mr Brandwood) was that Mr McInnes told them that the Jebreels were not going to proceed with the deal. The transaction was not proceeding because the financial position of CVC was weaker than expected, there were solvency problems with the hive down to trading units as the businesses were loss making, the closure costs were greater than expected and the M&S payments had been accelerated. Mr McInnes did not say anything that led them to believe that there had been any breach of the Agreement by CVP. He told them that there was an MBO team waiting in the wings and that Mr Einollahi had indicated that CVP would be prepared to offer the Jebreels by way of consolation what it considered to be a favourable price on any surplus properties from its portfolio. Mr McInnes also said that if the deal with the MBO team was successful, CVP would agree to cover Chaffe Street's costs to date and the costs of TMG. He did not go into any detail concerning the proposal regarding the properties. When the Jebreels arrived Mr McInnes outlined the position in essentially identical terms. He made no reference to anything which could have been construed as a breach of the Agreement, nor did the Jebreels raise any concerns or raise any complaints about CVP. Mr Street and Mr Brandwood say that at no point did Mr McInnes say anything to imply that the M&S issue was any more significant than the others raised. He did not recall that Mr McInnes used the words "scupper the deal" in connection with the M&S issue or any of the other points he mentioned. He did not suggest that "CVP should not be able to do this" and neither Mr Brandwood nor he said anything to the effect that "the claimant could always walk away from the transaction".
- There was then a series of meetings involving, at various times, some or all of Mr McInnes, Mr Travis and Mr Hill; Mr Einollahi; Ms Kantor; Mr Street, Mr Brandwood, and Mr Rearden.
- What happened as a result was that (a) Mr Einollahi persuaded Ms Kantor to agree to the Shotton management buy-out; (b) Ms Kantor agreed to pay the Jebreels' professional fees if the Shotton buy-out completed (although the extent of the agreement is in dispute); (c) the Jebreels agreed to sign releases which enabled TMG and Chaffe Street to act for Mr Shotton; (d) Jacob Jebreel left the meeting, and Ebby Jebreel signed the releases on Jacob Jebreel's behalf as well as for the Claimant and himself.
- Mr McInnes says that the property aspect of the compromise was not discussed in the presence of Ms Kantor. He got the impression that the property aspect of the consolation prize was something that Mr Einollahi intended to deliver quietly using his apparent delegated authority from, and possibly, with the consent of the chairman of CVP, without other members of the CVP board being actively involved.
- The parties rely in particular on the following matters which are said to have occurred in the meetings:
- Chaffe Street say that neither at this time nor any other time did Ms Kantor or anyone else agree to pay the fees of any professionals other than Chaffe Street and TMG. Even as at the end of the series of meetings early on November 30 Ms Kantor had not agreed that CVP would pay Chaffe Street's costs to date. Ebby Jebreel's instructions at that time were for Mr Street to seek to negotiate the best deal he could on the solicitors' costs. It was never suggested that the signing of the release and the property option were inter-conditional.
- The Claimant's case is that it was made clear that CVP would pay all of the Claimant's costs conditional on a successful sale of CVC to Mr Shotton. Mr Einollahi then asked Mr Street to draw up two releases formally recording that Chaffe Street and TMG could act for Mr Shotton. Mr McInnes said to Ebby Jebreel that the Claimant would not have the property option unless Ebby Jebreel signed the releases.
- Chaffe Street refer to the following factors said to undermine the Claimant's evidence: it made commercial sense for CVP to be willing to pay for the fees of the advisers who were going to be novated to Mr Shotton. It made far less sense for it to pay for any other professional fees; and while Mr McInnes considered that costs were mentioned in terms of "all professionals", his evidence was that the only fees discussed in any detail were those of Chaffe Street.
- The Claimant's case is that Ebby Jebreel instructed Mr Brandwood and Mr Street that the Claimant wished to accept the two elements of the compromise proposal and Ebby Jebreel and Mr McInnes made it clear to Chaffe Street that they regarded the property element in the compromise proposal as an inherent and essential part of the compromise proposal.
- The Claimant says that Mr Street's and Mr Brandwood's evidence that Ebby Jebreel expressed disinterest in the property element is incorrect. It is denied by Ebby Jebreel, Jacob Jebreel, and Mr McInnes. It seems bizarre that such an obviously important issue was dealt with in such a casual way by solicitors without their taking any note. It seems very odd that Ebby Jebreel (with his property business, and his initial interest in the acquisition based on properties, and his desire for a similar pre-emption right in the letter of October 25 and the Chestertons report of November 28 to AIB, which indicated in relation to the CVC properties a £4 million difference between open market value and estimated "restricted realisation price"(i.e. what AIB would achieve in distressed conditions with a maximum of six months to completion) would have been disinterested in what was potentially a very valuable right involving hundreds of CVP group properties which would not cost the Claimant anything. Ebby Jebreel did go and see Mr Einollahi and Mr Mehrabani about properties on December 5, and corresponded thereafter. Even if Ebby Jebreel did say anything negative, it was on the basis that he was not picking properties then but would wish to take up the matter in the following week. If the conversation occurred, it was on the basis that Ebby Jebreel (who was tired and disappointed by what had happened) believed that he had an agreement and which would be binding.
- Chaffe Street say that in sharp contrast to the Claimant's pleaded case, Ebby Jebreel's written evidence did not suggest that he had given positive instructions to Chaffe Street to proceed with any deal relating to CVP's properties. Ebby Jebreel's oral evidence was that once Mr McInnes brought up the topic of the property option in the presence of Chaffe Street: "there was no other discussions [sic] with anyone from Chaffe Street specifically regarding the properties." He was asked if he gave Chaffe Street any instructions as to what he wanted to do as to the properties, and his answer was "No, I did not." He accepted that, at the time he went home, he had no idea whether his solicitors had discussed the property option with Eversheds or Deloittes or not.
- This would be a very startling position for Ebby Jebreel to have taken in relation to an allegedly very valuable property deal. As a minimum he surely would have given instructions to his solicitors to go ahead. The fact that he does not attempt to give such evidence strongly supports what Mr Street and Mr Brandwood say – that he had formed the view that he did not want to take the option that night and told his solicitors that.
- Jacob Jebreel claims that in a telephone call on November 30 he told Mr Brandwood of his concern that Ebby Jebreel could not have been in the correct frame of mind to sign the release without formal proof of the rest of the deal, and that Mr Brandwood acknowledged his understanding that all the Claimant's fees would be paid by CVP.
- Chaffe Street says that Jacob Jebreel's account of his telephone conversation with Mr Brandwood on November 30 should be rejected save where it accords with Mr Brandwood's evidence, which was: (1) Jacob Jebreel called for an update as to what had happened after he left the meeting; (2) Jacob Jebreel said nothing about Ebby Jebreel's not having signed documentation in relation to the fees or the properties.
- Ebby Jebreel's evidence is that on the same day he was telephoned by Mr Shotton and asked whether, if he did the deal, Mr Shotton would have the backing of the Jebreels and Sir David Alliance. He telephoned Sir David Alliance, who confirmed he would offer his backing to Mr Shotton. Subsequently Mr Shotton told Ebby Jebreel that he wanted to do the deal without their backing.
- TMG and Chaffe Street worked for the Shotton MBO team and the deal was completed on December 4 . Mr Shotton agreed (through another Chaffe Street off the shelf company Marplace (Number 514) Ltd), to acquire CVC (leasing the properties) for £1 with loans from CVP to CVC. By clause 11 each party was to pay its own costs, except that CVP would pay £243,000 to Chaffe Street and £293,750 to TMG in respect of the buyer's professional fees, and "additionally to Chaffe Street on behalf of other professionals fees £70,500" (i.e. £60,000 plus VAT). Clause 9(A) provided that the agreement was not to be assignable.
- The evidence of Mr Street and Mr Brandwood is that the provision for the payment of £70,500 was inserted at the suggestion of Mr Street, who was concerned that other professionals, especially Lathams, might otherwise not be paid, and CVP agreed, but £60,000 plus VAT was the most it would pay. Mr Hill says that Mr McInnes insisted on it, and Ms Kantor was there and knew what it was for. The Claimant says that the evidence of Mr Street and Mr Brandwood is incredible and should be rejected.
- On or before December 5 Ebby Jebreel had a telephone conversation with Mr Heggie, which is reflected in Mr Heggie's letter of that date to him, in which Mr Heggie said that he was very disappointed to hear that Ebby Jebreel had been unable to secure the purchase of CVC. He said:
- Mr Heggie's oral evidence as to the telephone call preceding the letter was that Ebby Jebreel told him that the deal had fallen through and the inability to carry out the whitewash was "one of the reasons" the transaction did not proceed. He had no recollection of Ebby Jebreel mentioning a property option or of forced sale values.
- Also on December 5 Mr Brandwood faxed Jacob Jebreel to say that they were due to receive from CVP £70,500 in respect of professional fees incurred by the Jebreels other than with TMG and Chaffe Street, namely covering Lathams, Chestertons and Halliwells. He asked Jacob Jebreel if he could let Mr Brandwood know as soon possible what amount was payable to each party and he would arrange to make the relevant payments direct. On the same day he wrote to Ms Parker at Deloittes asking for £607,250 (namely the fees of TMG and Chaffe Street and the others).
- In the witness box Ebby Jebreel said that up to the time he went to see his lawyers, he assumed that a verbal contract stood and was enough.
- On December 5 Ebby Jebreel met Mr Einollahi and Mr Mehrabani to negotiate a price for the acquisition of the property portfolio. But Mr Einollahi referred to a meeting that Ebby Jebreel had had with the unions, and accused Ebby Jebreel of trying to sabotage the Shotton deal by stirring up the unions and said that for that reason CVP would not pay the Claimant's fees or sell it any properties or, at least, would only sell them at what Ebby Jebreel said were "unrealistic prices".
- Ebby Jebreel had in fact been to see the unions for a meeting which had been arranged before the deal fell through, but his evidence is that he did not criticise the Shotton deal and thought that he supported it. Mr McInnes' evidence is that he had advised Ebby Jebreel not to inflame the situation, and he had no reason to believe Ebby Jebreel did not intend to follow his advice.
- Ebby Jebreel's evidence was that when he went to see Mr Einollahi and was told that CVP would not sell properties he did not "thump the table" because he did not have an option agreement in writing. But when it was put to him that at that time, on December 6, he did not think that he needed an agreement in writing, he said that he did not thump the table because Mr Einollahi was making a strong statement and he would not thump the table unless he knew he could win.
- Jacob Jebreel went to Mr Andrew Fairlie (a Manchester based litigation solicitor) on the same day and thereafter during December (although privilege is not waived).
- On December 6 Ebby Jebreel wrote a letter (which had been drafted by Jacob Jebreel) to Mr Einollahi (with copies to Sir Harry Djanogly and Ms Kantor) in which he said that he was writing to put the record straight in relation to comments which had been made that either he, or one of his brothers, might have suggested to the unions that they should take some form of industrial action with a view to blocking or sabotaging the deal between CVP and Mr Shotton. He said that Mr Einollahi would have been aware for some time that the unions and Ebby Jebreel had been in discussion in the hope of obtaining their continued support and involvement following the proposed completion of the Claimant's acquisition, but he wrote to confirm that at no stage during, or after, the discussions and dealing did either he, or his brothers, make any such suggestion.
- On December 8, Mr Einollahi wrote to Ebby Jebreel further to the meeting on December 5 with a list of properties leased to the MBO and their rentals, and asking for binding offers in respect of properties listed in an extract from the Chestertons' valuation report.
- In reply, on December 11, Ebby Jebreel said that as the basis for the acquisition had changed the valuations which they had obtained were, to a certain extent, obsolete in view of the assumptions which had been made, and in the circumstances he had referred the matter back to Chestertons and AIB for their further comments. On the same day he sent Chestertons a copy of the letter from Mr Einollahi. He said he assumed the remaining properties which were not listed were being sold with vacant possession, and he asked for an opinion of the values with the lease and rental figures in mind.
- On December 19 Chestertons advised against purchasing the investment properties because the rents bore no relation to the current open market rental value of the properties, and they would not advise any investment purchaser to purchase a property which was subject to a lease to a prospective tenant of unknown covenant status.
- Chaffe Street say that what Ebby Jebreel did after the meeting on December 5 was entirely inconsistent with the notion that he believed himself to have a binding property option in that (a) at the meeting itself he did not "thump the table" and tell Mr Einollahi that he was in breach of the agreement; (b) he wrote to CVP about the allegations concerning his visit to the unions, without any mention of CVP having repudiated an agreement relating to the properties; and (c) he corresponded with Deloittes and Chestertons about the properties without any suggestion that CVP had been in breach.
- Chaffe Street say that events are more consistent with the fact that at November 29/30 Ebby Jebreel did not believe himself to have a binding property option, and his thinking, as he told Mr Street, was that, if he chose, he could meet with CVP at a future stage to discuss possible property deals, and that in response to CVP's offer to sell a limited number of properties, Ebby Jebreel formed the view that it was not a good deal and so did not pursue it. There is no evidence that any legal advice influenced Ebby Jebreel, and in the absence of a waiver of privilege, the court must discount any suggestion that his conduct was influenced by advice.
- The Claimant says that the court should accept the Jebreels' evidence that they believed there was an agreement, and they were psychologically and emotionally knocked back by Mr Einollahi's (and Mr Mehrabani's) unequivocal statements as to the attitude of the board of CVP. They were concerned to try and put matters right on the record and to mend fences regarding the Trade Union point by the letter dated December 6. They could not instruct Chaffe Street (which was acting for Mr Shotton). They instructed Mr Fairlie and then Halliwells; and they were concerned to obtain full legal advice on the basis of a full instruction to lawyers as to the entirety of relevant material before committing themselves to legal claims on paper (which is an entirely sensible and natural course for experienced businessmen to adopt). Once they had instructed Halliwells in early January 2001 appropriate letters were written on February 28, 2001 and May 25, 2001 and thereafter.
- By a letter to CVP of February 28, 2001 Halliwell Landau, on behalf of the Claimant, formulated the property option (which they exercised by letter of May 25, 2001) , in the following terms:
- On May 31, 2001 Eversheds replied on behalf of CVP to say that there was no agreement with regard either to the properties or the additional fees. They also said:
- On July 26, 2001 Mr Morris and Mr Thomas (accompanied by Ebby Jebreel) went to see Mr Street and Mr Brandwood. Mr Morris took handwritten notes and prepared typed notes afterwards. The Claimant relies, in particular, on statements said to have been made by Mr Street that (a) in relation to the Lathams' letter about the accelerated payments, he changed the net current assets analysis, but "the truth is we did not get involved in this issue"; (b) the basis of clause 5(5) was not to dispose of fixed assets, and he did not think it was to do with debtors and book debts; (c) the fact that the agreement relating to the properties was not in writing did not mean that there was no agreement.
- The Claimant says that the comment from Mr Street that an agreement would be enforceable even if not in writing was clearly made in the context of the properties element (and not the costs element) The statements as to Ebby Jebreel not putting any store on the properties element do say that he was disinterested but not that he positively instructed Chaffe Street to do nothing.
- Chaffe Street's position is that very many points noted by Mr Morris accord with Mr Street's and Mr Brandwood's evidence and with Chaffe Street's defence to this claim. In particular they said at the meeting: (i) the solicitors' attitude to clause 5(5) was that it was designed to prevent disposal of fixed assets; (ii) Ebby Jebreel said that on November 28, 2000 the deal changed completely; (iii) Mr Street and Mr Brandwood both said that on November 28/29, 2000 Ebby Jebreel had indicated that he was not interested in the property option. In relation to the comment in the manuscript notes: "Just bcse you ? have it reduced to writing ? mean you ? agree it" Mr Street's evidence is that he made this comment in relation to the question of costs, not in relation to the supposed property option. In support of this Mr Street referred to the fact that he had experience in commercial conveyancing work and knew that a written agreement would be required for a property option.
- The essence of the first claim is that Chaffe Street knew of the facts constituting (a) the M&S accelerated payments issue and (b) the letters of credit issue, and of their prejudicial and destructive effects, and that CVP was seeking to legitimise what it was doing by the draft Amendment Agreement. Chaffe Street had enough knowledge that they should have advised that CVP was acting in (at least highly arguable) breach of the Agreement in relation to the M&S accelerated payments, and that CVP was not entitled to act as it was proposing to do in relation to the letters of credit, and thus was threatening to act in breach of the Agreement.
- Chaffe Street should therefore at all times on and following November 21 and in particular on November 24 and November 28 and also on November 29 have advised that CVP was acting and had acted and was proposing to act in (at least highly arguable) breach and as to the resultant available rights and remedies both by negotiation and by the service of a Rescission Notice (which for these purposes includes acceptance of a common law repudiation) and by service of an Option Notice (with subsequent claims and enforcement). However, as the Claimant did not serve either an Option Notice or a Rescission Notice, it lost all rights and remedies under clause 2(2) of the Agreement and generally.
- CVP's action in procuring the M&S accelerated payments and applying them to inter-company debt was clearly a very substantial and material breach of (at least) clause 5(5) of the Agreement.
- The effect of what CVP did with regard to the M&S accelerated payments alone (even if CVP had been prepared to ignore the letters of credit in calculating what was required to make up the minimum NWC of £39 million) would have (a) caused the Claimant to lose the benefit of the deferred consideration provisions by, in effect, causing CVC to pay the Excluded Debt "up-front"; (b) had a destructive effect on the security being proffered to and required by AIB, and thus on AIB's preparedness to lend; and (c) caused queries to arise with regard to the whitewash (although it possibly may not have rendered it impossible). Such matters were or should have been known and obvious to Chaffe Street.
- What CVP proposed regarding the letters of credit, being to take over sole liability and apply the equivalent amount in the calculation of NWC (so as to diminish the amount payable by CVP), would clearly have been incorrect, and a very substantial and material breach of clause 5(10) and, further, the letters of credit were to be dealt with under clauses 5(4) and/or 5(16).
- The effect of what CVP proposed in relation to the letters of credit and NWC, when combined with what CVP had done with regard to the M&S accelerated payments, would have (a) caused CVC to have to pay in advance for goods not yet delivered; (b) had a destructive effect on the cash-flow of CVC causing it to run out of money in the first two weeks; and (c) rendered the whitewash impossible. It is accepted that the letters of credit issue on its own would not have had such a destructive effect.
- The correct advice (which the Claimant would have accepted) would have been to clarify with the Claimant its expectation of availability of finance (and therefore its ability to effect the whitewash) and the Claimant's intentions with regard to exercise of the Option, and (1) if finance did not seem to be available (or the Claimant did not want to proceed on the terms of the Agreement for any reason), then to serve the Rescission Notice; and (2) if finance did seem to be potentially available (and the Claimant wished to proceed), then to negotiate (including for any time extensions) and (a) if such negotiation succeeded in CVP agreeing to comply with its obligations as above, to serve the Option Notice, and (b) if such negotiation failed, to serve the Rescission Notice.
- If Chaffe Street had given the correct advice, then: (1) as the Claimant thought that the finance was available and wished to proceed, it would have negotiated, and: (a) there is real and substantial chance that CVP would have agreed to comply with its obligations, in which case the Claimant would have served and relied on the Option Notice; (b) or there is a real and substantial chance that CVP would have refused to comply with its obligations, in which case the Claimant would have served a Rescission Notice and sued CVP, and there is a real and substantial chance that the Claimant would have succeeded in such litigation; (2) but if the Claimant had not thought that the finance was available or had not wished to proceed, then the Claimant would have served the Rescission Notice, and there is a real and substantial chance that (a) the Claimant would then have sued CVP, and that the Claimant would have succeeded in such litigation; or (b) that the Claimant would have negotiated an acceptable solution with CVP to enable the Claimant to acquire CVC.
- It is clear that CVP was and/or was threatening to be in breach of the Agreement (and, if that is wrong, then such was highly arguable) for these reasons:
- The most obvious breach is of clause 5(5):
- The M&S debt was being "disposed of" by way of its being accelerated and being paid (and thus turned from a debt payable in the future into present cash/bank credit). The proceeds (being cash/bank credit) were being "disposed of" by being applied to repay inter-company debt (or, if that was the case, to repay bank debt). That amounts to a "disposal" notwithstanding that it does not affect the "balance-sheet" position (and, for example, that is why Mareva freezing injunctions have to have exclusions for repayment of debts (as they fall due)). There is also an initial disposal being of the stock which was called off so as to give rise to the M&S debt. While the initial disposal was "in the ordinary course of trading" what then happened was not as it represented a very substantial and significant departure from the ordinary terms and course of the trading by way of acceleration. But "the ordinary course of trading" only applies to the exception regarding "disposals of stock"; it does not permit any other disposal "in the ordinary course of trading" and such a construction would be grammatically impossible.
- These disposals are each (and together) of "any asset of the Businesses". The word "asset" is unrestricted. The document uses the words "current assets" when it means that: see clause 5(4). Classes of asset are clearly set out in the Sixth Schedule to include debtors, "sold finished goods" and cash. There is the specific exception of "disposals of stock in the ordinary course of trading" and so "assets" cannot be limited to "fixed assets" as "stock" is a current asset (and it is within the NWC definition). The fact that there is a covenant 5(10) as to the amount of NWC is not relevant, as that only provides for a minimum of £39 million (and the provisions about Excluded Debt, e.g. clause 5(9), contemplate that the figure will be higher) and clause 5(5) is designed to regulate the conduct of CVC until Completion (and further support for this appears from the "anticipated completion column" of the Sixth Schedule).
- The fact that what occurred did not affect the balance sheet position of CVC is irrelevant. Clause 5(5) says nothing about balance sheet position. It is also clear from other elements of the Agreement, and in particular, those relating to the Claimant purchasing the Debt (capitalised or as Debt: clauses 3 and 5(3)) and also the Sixth Schedule and the clauses relating to the Excluded Debt and Warranties 4 and 7 as to the absence of Bank Debt and assignability of M&S debt, that it could not have been contemplated that assets (and in particular M&S debt) could simply be taken from the balance sheet to discharge Debt (or Bank Debt). If the contrary was the case, then CVP could simply have had CVC assign to it the M&S debt (or any other assets) in discharge of Debt (or in consideration of monies then used to discharge Bank Debt). Clause 5(10) regarding minimum Net Working Capital of £39 million is also irrelevant – that is merely a minimum of an amalgam of assets and a different clause.
- Accordingly, what CVP did (and threatened) was a clear and obvious breach of clause 5(5). CVP had (at least) a considerable concern, hence its attempts to "clarify or amend" in the draft Amendment Agreement.
- CVP was also in breach of implied terms of the Agreement, and in particular:
- CVP's conduct was also in breach of a general implied term that CVP as grantor of the relevant option would not do anything to manipulate the values of the underlying assets/liabilities. The Agreement clearly contemplated (see the definition in Clause 1(A)) that NWC would be in the region of (and might very well exceed) £44 million, and it must have been implied that CVP would not take steps to procure that CVC would reduce the level of NWC (and in particular to below this figure (or £39 million)), and also (the Sixth Schedule) that receivables would be worth in the region of £55 million at completion.
- CVP's stance of taking the letters of credit into account in calculating NWC by way of adding such to what otherwise would have been the figure and thus (after taking account of the M&S accelerated payments and their use to repay Debt) in reducing the amount which would otherwise be payable under clause 5(10) amounted to further clear breaches of the Agreement. If the use of the M&S accelerated payments had been reversed, then this would simply have resulted in a post-Completion dispute as to the quantum of the Excluded Debt. However, in the absence of such a reversal (and replacement of the M&S accelerated payments), this resulted in CVP saying that it would pay £3.883 million less than it would (assuming the M&S accelerated payments having been legitimately taken to repay Debt) under clause 5(10) and also otherwise breaching the Agreement. This had the severe effect of meaning that a liability only arising (and stock only being received) some 4-5 months in the future would be effectively paid for by CVC as at Completion with consequent effect on cash-flow (and pushed those received from Deloittes into negative figures).
- This follows for three reasons. First, there was no justification for simply adding the quantum of the letters of credit in calculating NWC on the basis of CVP unilaterally taking over the liability. It was wrong to bring either the letters of credit or the purchased stock into account as such was purely in the future. However, if anything was to be brought into account then both the stock and CVC's obligation to pay for it should have been taken into account thus resulting in a netted-off nil figure. What was wrong was for CVP to unilaterally insist that it would take on the liability and thus that the future stock would be taken into account (as an addition) but the liability (as a minus) would not. Second, the liability to pay for the stock had been omitted from the September Management Accounts and should have been reimbursed to CVC under clause 5(4)(a). Third, the liability of CVP was in the nature of a guarantee or indemnity and therefore clause 5(16) would apply and it was for the Claimant to use all reasonable endeavours following Completion to procure CVP's release but with its default obligation being merely to indemnify i.e. in practice to pay the liability when it fell due in 2001. CVP was clearly threatening to breach the Agreement in this respect also.
- CVP was in actual and threatening breach and it was apparent that it was and would be in breach (and also that such was highly arguable). These matters related to many millions of pounds and had obvious and very substantial effects on cash-flow and the proposed security and the whole concept of the Excluded Debt. They were clearly both material and fundamental in nature, and were changing the nature of what was being agreed to be sold. The Claimant therefore had the right to serve a Rescission Notice under clause 6(D) and to accept a common law repudiation with full contractual remedies (and cf. clauses 8(C) and 8(G)(iii)). However, as a result of the Claimant neither serving an Option Notice nor serving a Rescission Notice, the Claimant lost all rights and remedies (see clause 2(3) and the common law position).
- The ordinary common law remedies for breach of contract exist in relation to an option: Barnsley, Land Options, 10-021, referring to Commonwealth authority Lee Hooi Lian v Kuay Guan Kay 1990 2 MLJ 345 takes this view. Instead, the Claimant lost its rights both by not taking these steps and under clause 2(3).
- Such a claim would give rise to loss of bargain relief. Such a claim would not require the Claimant to show that it could have completed the Agreement: Chitty, Contracts, 29th ed, para 24-021—3; Chiemgauer v The New Millennium, December 15, 2000, at paras 46-60, 72, notwithstanding Singh v Kaur [2002] EWHC 380, at paras 59-60.
- Chaffe Street were negligent for a number of reasons, which should have led Chaffe Street to (1) giving advice; (2) giving advice that CVP was in or proposing to be in clear breach; and (3) giving advice that the Rescission Notice route was available as well as opportunities to try to force CVP in negotiation to put back the M&S accelerated payments (and to change its stance on the letters of credit).
- Events occurred which should have resulted, both individually and cumulatively, in Chaffe Street giving the relevant advice and/or which involved Chaffe Street acting negligently and in breach of duty. At numerous points (and on a continuing basis) Chaffe Street had the knowledge to establish (or at least argue) breach and the ability to serve a Rescission Notice, and Chaffe Street had the duty to advise: it was a clear legal risk/opportunity in front of Chaffe Street; it related to legal documents provided by Eversheds to Chaffe Street; and the Claimant/TMG was expressly or impliedly asking for advice and/or clearly assuming that there was no advice to give.
- Chaffe Street following the Agreement knew or should have known that:
- Chaffe Street on November 21 received the CVC-M&S letter from Lathams. It made clear that M&S payments were being accelerated from post-Completion to pre- Completion and it was obvious that they would be taken out by CVP. It would follow that this would be likely to have serious effects on cash flow and AIB security, and that this was unusual and unexpected, and therefore consideration and advice should have been given to and regarding the "non-disposal" clause 5(5). At the July 2001 meeting Mr Street accepted that it might affect cash flow and security "we knew it was a big financial issue."
- Chaffe Street on November 23 received the first draft Amendment Agreement and covering letter referred to "working capital clause" and an understanding that there had been a discussion with TMG. This should have led to:
- Chaffe Street on November 24 attended the meeting with the Claimant and Mr McInnes, at which: (a) the sums involved of up to £14 million were revealed; (b) it was clear that CVP was accelerating them to prior to Completion from post-Completion; (c) it was clear that CVP was going to take them out in repayment of Debt; (d) all Mr McInnes said was that he was trying to negotiate for Mr Einollahi to leave as much as possible in CVC and that Mr Einollahi's then proposal was £5-6 million; (e) it was clear on any basis that CVP's conduct would reduce the Excluded Debt to nil and so lose the Claimant the benefit of the deferment; that it would potentially severely effect cash flow; and that it would potentially clearly affect the AIB security; (f) Mr Brandwood mentioned the draft Amendment Agreement but not in a way which suggested any importance including as to these matters; (g) Mr McInnes then and subsequently expressed disquiet as to what CVP were doing and had done; (h) in any event, it should have been clear that the Claimant/TMG were expecting any material legal advice as to these matters to be given.
- At the meeting on November 24 Chaffe Street should have dealt with the draft Amendment Agreement and (a) asked Mr McInnes whether such a discussion as to "working capital clause" had taken place; (b) discussed the wording of clause 2.1.1 (the working capital clause) and clarified with Mr McInnes what he thought and intended; (c) explained clause 2.1.7 of the draft Amendment Agreement and its relevance to the M&S accelerated payments, and how it was seeking to amend clause 5(5) (and the rest of the Agreement); (d) explained both that what CVP was doing was a clear (and certainly highly arguable) actual/threatened breach of (at least) clause 5(5) and the potential for service of the Rescission Notice and that CVP had at least a very real doubt as to what it was; (e) in any event have sought full instructions and which would have resulted in the above taking place. CVP's dealing with the M&S accelerated payments was (even without the draft Amendment Agreement) something highly material and unusual (and a change from what had been expected) and an apparent breach of clause 5(5) which Chaffe Street had itself drafted. The draft Amendment Agreement and clauses 2.1.1 and 2.1.7 were clearly highly relevant in context and related to matters which were clearly of great importance. The document was a legal contractual document which had been provided by Eversheds to Chaffe Street.
- Following the meeting on November 24 Mr Brandwood should not simply have sent the draft Amendment Agreement out with the covering letter without further explanation or seeking any instructions. It could not be right either generally or in the specific context that the client (or TMG) could be expected to understand what was going on and the legal effects or that CVP appeared to have doubts regarding its dealings with the M&S accelerated payments. Full instructions should have been actively sought and advice have been given.
- Following his receipt of the November 26 Eversheds letter with regard to the M&S accelerated payments, Mr Brandwood should not have simply circulated it without comment. This was now a formal legal notification from Eversheds which should have been closely considered and instructions actively sought, and all the more so in the light of the preceding matters.
- Following the stance being taken by AIB as to the M&S Debt on November 27 (and before) with Mr Rearden, Chaffe Street should have been actively considering the legal position and actively seeking instructions and giving advice. It was clear that CVP's conduct would altogether jeopardise the AIB security. The only real conclusion is that Chaffe Street's team was not talking to each other or, possibly, that Mr Street and Mr Brandwood were so blinded by their misconstruction of clause 5(5) that they were shutting their eyes to the problems.
- When Mr Brandwood received the letters of credit letter from Eversheds on November 28:
- When and following when Mr Brandwood received the revised draft Amendment Agreement on November 28:
- In and following Mr Street's telephone conversations with Ebby Jebreel and then Mr McInnes on November 28 and with the letter which Mr Street sent, Chaffe Street should have sought instructions and given advice. Mr Street, in addition, should have:
- Chaffe Street further acted negligently and in breach of duty in failing to attend the evening November 28/29 meeting. Chaffe Street were under a duty to attend in relation to what was a reasonable request in the circumstances. Chaffe Street knew of the urgency and the time-limit to exercise the Option and of the difficulties and therefore that the meeting was of very considerable importance, and such attendance would usually be expected. Someone with knowledge of the matter (or at least an ability to communicate with those who had knowledge) was essential. Chaffe Street were asked to attend in a telephone call of about 5pm (well within normal business hours) and where the same sort of request had been made with similar timing earlier in the history (and there had been no difficulty with their attendance).
- Chaffe Street's justifications for not attending were insufficient. The Claimant's primary case is that Chaffe Street had an absolute duty to attend. However, Mr Street's need to prepare for the High Peak meeting (which preparation was not even time-recorded and could have taken place later) and Mr Brandwood's need to look after his children while his wife was out (and Mr Brandwood does not seem to have looked into alternatives including a baby-sitter or persuading his wife to stay in) were not remotely sufficient in any event. In any event it is inexplicable as to how no-one else could be found, especially in view of the number of corporate partners and other staff at Chaffe Street and their claim to be a corporate boutique practice.
- The fact that Ebby Jebreel did not press the matter is no answer. It was not the client's place to object further in response to an absolute statement that no-one was available. In fact, Ebby Jebreel was probably misled by Mr Street as to Mr Street's going to (rather than merely preparing for) the High Peak meeting.
- If Chaffe Street had attended the meeting, it would have been clear that the problem was CVP's stance and actions regarding the M&S accelerated payments (and also the letters of credit) and Chaffe Street would have been expressly (or at least impliedly) asked to advise and been under a duty to advise regarding such.
- It was also negligent for Chaffe Street not to give the relevant advice at this point bearing in mind that Chaffe Street would not be attending the meeting and the apparent recommended alternative was to serve the Option Notice knowing that finance was not available (and Mr Street now accepts that that was inappropriate; although this would be different if it was thought (even if wrongly) that it would be available). Chaffe Street knew at least of (although the Claimant submits that Chaffe Street knew much more of the problems which the Claimant was facing): the M&S accelerated payments, their size, that they were being applied to CVP Debt, and their effect on cash-flow and AIB security; the difficulties, including the fact that financial assistance could not be done and in particular because of the M&S accelerated payments; the transaction was falling apart; CVP was seeking an Amendment Agreement to legitimise the M&S accelerated payments, and to reduce their liabilities in relation to clause 5(10) NWC in relation to the letters of credit.
- Chaffe Street should also have given the advice in the evening of November 29 and in particular because (in addition to the above):
- Chaffe Street were acting as specialists but, in any event, the facts and the obviousness of what CVP was doing (and that such amounted to breaches of the Agreement and attempts to amend it), as well as the failure to attend the November 28/29 meeting made it such that Chaffe Street should have given the correct advice and were negligent and in breach of duty. The reality is probably that Chaffe Street had taken on a transaction that was beyond them.
- That advice, especially in the context of the urgency, should have extended beyond the facts/arguments of breach(es) to the available remedies and, in particular, the potentially highly advantageous course of the Rescission Notice which would both have avoided the need to produce the completion monies (as the Agreement would be terminated) and also (as a matter of law) the need to show that such could be produced.
- Chaffe Street's basic point is that in the absence of a request from the client, or in the absence of a matter which placed them on notice that there was a legal issue to be considered on which the client wanted or needed advice (and was unaware of that need), Chaffe Street owed the Claimant no duty to proffer unsolicited advice.
- Chaffe Street accept that they did not advise on any of the CVP claims; or attend the meeting of November 28/29; or give detailed advice on the draft Amendment Agreements. Chaffe Street's basic defence is that nothing put them on notice of the existence of the CVP claims and the need to give legal advice to their client about them.
- TMG and the Jebreels would be able to detect whether CVP was acting or was threatening to act in a way that was contrary to commercial expectation and such as to imperil the transaction and then instruct Chaffe Street to consider the legal consequences of CVP's conduct, and provide them with the necessary commercial information to enable legal advice to be given.
- Chaffe Street do not accept that there was sufficient evidence that the M&S accelerated payments were (i) materially different from the arrangements previously made in September 2000 or (ii) were procured by CVP outside the ordinary course of its trading. Chaffe Street do not admit what CVP did with the cash received in from M&S. The only firm conclusion that can be reached is that the monies would have been received in to CVP's group banking facility.
- In any event there was no breach of the Agreement:
- There is no basis for the implication of the terms alleged by the Claimant. In particular: (a) the terms are not necessary to give business efficacy to the Agreement nor do they arise as an obvious inference; (b) indeed, the terms, far from representing what the parties must have intended, are flatly contradictory to the clear commercial bargain unambiguously outlined by the express terms; (c) the Agreement contains an entire agreement clause in Clause 8(G)(i).
- If it were the case that CVC's NWC as at November 26 (the date for calculation of NWC under the Agreement) was less than £39 million and if it were the case that Mr Einollahi had said that CVP would not inject cash into CVC to increase the NWC to £39 million, it is denied that such a statement itself would be sufficient to invoke the contractual doctrine of renunciation.
- Neither Mr Street nor Mr Brandwood knew: (a) the trading terms between M&S and CVC, and therefore they did not know exactly or approximately when and at what rate debt and finished goods would convert to cash; (b) CVC's cash flow requirements following completion; (c) the critical level of M&S debt in relation to bank financing.
- As to the meaning and effect of the Agreement, as at November 10 Mr Street and Mr Brandwood believed that current assets were regulated by the NWC adjustment mechanism contained in Clause 1(A) and 5(10); and that fixed assets were governed by clause 5(5).
- Mr Rearden knew that where, as in the case of CVC, a whitewash declaration was needed, this would require an assessment of solvency of the target company over a 12-month period following completion. He therefore knew that cash flow was important, but:
- He knew that M&S was a major customer of CVC, but was not aware of the payment terms of the M&S debt.
- By November 21 Mr Rearden had been sent by Mr Whatnall the two letters that AIB had sent to Ebby Jebreel outlining terms on which AIB was prepared to lend. Mr Rearden knew that AIB was primarily concerned with CVC's properties and the M&S debt by way of security for its lending; that the quantum of the M&S debt appeared to be important to the bank, which required security over an amount of debt equal or greater to the amount of the loan; and that the bank would need to know the amount of the debt at the date of completion.
- As with Mr Street and Mr Brandwood, what Mr Rearden did not focus upon and what he considered to be outside his remit, was the series of questions and inferences leading to the conclusion that: if the M&S debt is reduced between execution of the agreement and completion, that may impact on cash flow, which may in turn impact on the ability to complete the whitewash procedure.
- TMG was sending out the clearest message that it was dealing with the issue of the M&S accelerated payments referred to in Lathams' fax of November 21. Mr Daly told Mr Brandwood this during a phone call following receipt of the fax. Mr McInnes reiterated this stance at the November 24 meeting. The Jebreels were present at the meeting, knew that TMG was taking up this task and could have objected if they wished (or demanded Chaffe Street's involvement). In fact, the assumption of this task by TMG was entirely in accord with the expectations of all parties.
- The Claimant's suggestion that the fact that Chaffe Street called for the November 24 meeting and that Mr Street prepared a list of issues to be reviewed connote that the solicitors had taken upon themselves an over-arching project management role. This is not so. What it does show is that Chaffe Street were acting carefully and competently and seeking to further their client's best interests.
- Following receipt of the November 21 Lathams' fax and the meeting of November 24, it did not occur to Mr Street that there was advice to be given to his client that CVP was or might be acting in breach of the Agreement or that he needed proactively to ask further questions or seek instructions.
- In the circumstances before him, Mr Street was not negligent in only considering the matters he did consider or in not going further and drawing the conclusions he accepts he would have drawn had he thought about matters further. Further, even if he had engaged in the additional thought processes, it would have taken him no further than to the conclusion: (a) CVC was receiving cash derived from trade debtors in advance; (b) the cash was being used to reduce debts; and (c) that process would affect CVC's cash flow and impact on bank security.
- That would not take Mr Street any nearer a conclusion that CVP was acting in breach of the Agreement. Absent detailed accounting input, the logic would not take him any nearer being able to draw conclusions about how the acceleration affected the Claimant's plans to acquire CVC.
- Mr Brandwood's conduct in relation to the draft Amendment Agreement was in accordance with competent practice, to outline to Mr McInnes and the Jebreels the terms of the draft at a face-to-face meeting; and to forward the draft to the client and the corporate financier for their further comment, as had been expressly agreed at the meeting.
- When Mr Brandwood spoke to Mr Daly about Lathams' November 21 fax, Mr Daly confirmed his understanding that certain payments which ordinarily would have been made in the weeks ended December 4 and December 11 were no longer going to be paid. Mr Brandwood knew that the effect of the advance payments of M&S monies was that cash expected to be received after completion would be received before completion. He did not know what would happen to the cash, but he had surmised from what Mr McInnes said at the meeting that it was being used to reduce debt.
- He made a potential link in his mind between the Lathams' fax of November 21 and the proposed clause 2.1.7 of the draft Amendment Agreement. He believed this was purely a matter of clarification of the Agreement, because he saw the application of cash to debts as (i) wholly outside the ambit of clause 5(5), which concerned fixed assets (ii) in any event not a disposal of an asset. For the same reason, Mr Brandwood either did not consider that clause 2.1.7 betrayed a concern on CVP's part that it was acting contrary to clause 5(5) or that point did not cross his mind.
- From Mr McInnes' statements at the November 24 meeting Mr Brandwood believed that CVP was planning to inject cash into CVC, in accordance with clause 5(10) of the Agreement, as a response to the advance M&S payments. He did not know whether the advancement of the M&S payments was or was not in the ordinary course of trading, but in any event did not consider that the Agreement – so far as concerned NWC – required CVP only to act in the ordinary course of trading.
- On this basis, as with Mr Street, it is denied that there was any factor at play that should have caused Mr Brandwood to advise or seek instructions in relation to the M&S accelerated payments. Even if, which he did not, Mr Brandwood gave positive thought to the timing issue arising from a reduction in the Excluded Debt that accompanied reducing NWC (by virtue of clause 1(A) of the Agreement and the definition of the Excluded Debt), this leads only to the conclusion: this is a commercial effect of the negotiation by the client. Similarly, even if, which he did not, Mr Brandwood considered that the acceleration of M&S payments prejudiced bank security, this would lead to the same conclusion: this is the effect of the negotiated deal.
- Mr Rearden's evidence was that he did know that "something was happening" with M&S payments that was "not normal". He knew nothing about the quantum of the payments. He did not know whether the payments would affect bank security. He did not make any connection in his mind between what he had been told about the M&S payments and his communication with AIB/Ebby Jebreel about the level of M&S debt and confirmation of it. Chaffe Street had only become involved in the question of the debt, because Mr Travis had said that the solicitors could deal with it. Mr Rearden could not see how solicitors could address the question, hence he sought to involve Lathams. As at the end of November 27 Mr Rearden's assumption was that there was M&S debt in existence, albeit no-one had yet verified how much.
- There was nothing to place Mr Rearden on notice that he needed to give the Claimant any advice, from a banking or any wider perspective.
- Ebby Jebreel did not refer, in his first telephone conversation with Mr Street on November 28, expressly or inferentially to any commercial misconduct by CVP, nor did he relay any information which might put the solicitors on notice of such. He said he wanted to renegotiate the deal because CVC's financial position was not what he was planning on when he entered into the Agreement. It was no part of Chaffe Street's duty proactively to ask the client: "do you want us to see if you can use any terms of the Agreement to assist you?"
- Nor did Mr McInnes inform Mr Street in their telephone conversation on November 28 of a link between the acceleration of the M&S payments and an inability to whitewash. The financial assistance problems were said to stem from the lack of readiness to hive down the operating units (a concern discussed at the November 24 meeting). Critically, Mr McInnes gave Mr Street to believe that, whatever the position with the acceleration of the M&S payments and the M&S debt ("No M&S debt"), CVP was intending to inject cash into CVC. While not expressly discussed, Mr Street considered and was entitled to consider that CVP was thereby intending to honour the NWC adjustment mechanism in the Agreement.
- Save as to whether Ebby Jebreel should exercise the Option, neither Ebby Jebreel nor Mr McInnes asked Mr Street for legal advice or, indeed, for any assistance.
- Mr Street was not in possession of information that even hinted at a breach of the Agreement by CVP. Quite the reverse, on the basis of Mr McInnes' call, CVP was intending to honour the Agreement and ensure the £39 million NWC floor was maintained.
- Mr Street had told Mr Brandwood about his first call with Ebby Jebreel and the call with Mr McInnes. There is no reason why Mr Brandwood should thereby have been provoked to give legal advice or to revisit the draft Amendment Agreement.
- Chaffe Street did not attend the November 28/29 meeting. There is no absolute duty on a solicitor to attend a meeting. Ebby Jebreel was not insistent and signalled that he was content for Chaffe Street not to attend.
- Mr Brandwood understood the basic proposal set out in Eversheds' fax of November 28. There was nothing that put him on notice that there was a concern about the letters of credit issue. He not know when the netting off process described in the letter would occur, which is why he passed it to TMG because it was a financial issue rather than a legal issue. He expected TMG to revert if there was a problem with Eversheds' proposal. It did not occur to him to consider the position under the Agreement. He spent a short time reading the draft Amendment Agreement, did not consider the letters of credit point was a concern, and forwarded it to TMG. As with the earlier draft of the Amendment Agreement, Mr Brandwood expected that there would be a subsequent discussion with TMG and the Jebreels when all its terms would be discussed.
- Mr Brandwood's approach to the letters of credit issue was not negligent. There was nothing to put him on notice that the proposal (it was no more than that) did or might indicate an actual or threatened breach of the Agreement by CVP.
- Clause 5(16) of the Agreement provided a method of dealing with the letters of credit. CVP was simply putting forward a proposal. It was not expressly or impliedly renouncing or stating it would act contrary to the terms of the Agreement.
- Mr Brandwood's morning telephone call with Mr McInnes on November 29 was a very short conversation where Mr McInnes told Mr Brandwood that Eversheds had devised a plan to restructure the transaction to avoid financial assistance and invited him to speak to Eversheds to explore that option further. No information passed during this call that did or should have placed Mr Brandwood on notice of a need to advise the Claimant as to potential breaches of the Agreement by CVP.
- Nothing during the meeting on November 29 between Mr Brandwood/Mr Rearden and Eversheds triggered or should have triggered a duty on Mr Brandwood to advise (or gather additional information).
- When Mr McInnes came back from the pub meeting on November 29 and told Mr Brandwood, Mr Street and Mr Rearden that the deal was not proceeding, that was presented as a fait accompli. Mr McInnes outlined four reasons why the deal was not going ahead: (1) CVC's financial position was weaker than expected; (2) solvency problems with the hive-downs of the operating units; (3) greater than expected closure costs; (4) the acceleration of the M&S payments. Mr McInnes did not suggest in any way that CVP had acted contrary to the Agreement or to any commercial expectation. In particular, as to the M&S accelerated payments, Chaffe Street were never given to believe that CVP was refusing to operate the NWC adjustment mechanism by an injection of cash to elevate NWC to no less than £39 million.
- On that basis, Chaffe Street were not negligent for thinking, as Mr Street and Mr Brandwood did, that the deal was dead and there was no advice to give as to whether CVP had acted in breach of the Agreement.
- The causation issues depend upon (i) the timing of when the advice would have been given and (ii) what was in the minds of (a) the Claimant and (b) CVP. The question of whether the Claimant could have actually completed is not for this trial but the questions of whether the Claimant thought it could complete, and whether the Claimant might/would have succeeded against CVP in litigation is for this trial.
- It is the Claimant's primary case that its attitude (whether or not based on any false premises as to availability of finance) would have been to seek to have CVP reverse its stance (intending to serve the Option Notice if CVP did) and if CVP had reversed its stance (and agreed to put back the M&S accelerated payments) then the Claimant would have served the Option Notice (and all the more so if Chaffe Street had only given the correct advice on November 28 or at an attendance at the meeting on November 28/29). Thereafter (although this is a second trial issue) the Claimant would have obtained finance from Mr Heggie and/or Sir David Alliance and/or the Jebreel family. If CVP had not reversed the M&S accelerated payments, the Claimant would have served the Rescission Notice and sued with a very high chance of success.
- The Claimant's secondary case is that if Chaffe Street is right to say that the Claimant regarded finance as unobtainable even if CVP reversed its stance and returned the M&S accelerated payments, then the Claimant would not have negotiated for CVP to reverse its stance (which would have been pointless) but have served a Rescission Notice and then sued (and/or negotiated), with a very high chance of a successful outcome.
- The Claimant's conduct has to be assessed on the balance of probabilities but the conduct of others such as CVP (or AIB) has to be assessed on a loss of chance basis if the Claimant can show some real and substantial relevant chance see e.g. Clarke v Iliffes Booth Bennett [2004] EWHC 1731 (Ch) at para 153; Feakins v Burstow [2005] EWHC 1931 (QB), [2006] PNLR 94 at paras 77-80. The loss of a chance extends to a chance to improve the Claimant's position by negotiation with CVP (either in contractual negotiation at the time or by negotiation in a litigation context) as well as to the direct chance of success in litigation taken to a trial: e.g. Somatra Ltd v Sinclair Roche & Temperley [2003] EWCA Civ 1474, [2003] 2 Lloyd's Rep 855 at para 80-1; Clarke v Iliffes Booth Bennett, ante, at paras 153-4; Sharpe v Addison [2003] EWCA Civ 1189, [2004] PNLR 426, para 46.
- What the Claimant would have done would have been in a belief that the Claimant would be able to complete if the M&S accelerated payments were put back, and would have used these arguments in negotiation with Mr Einollahi.
- If CVP had agreed to put back the M&S accelerated payments (and/or possibly to change its stance on letters of credit) then the Claimant would have served the Option Notice.
- If CVP had not agreed to put back the M&S accelerated payments (and/or possibly to change its stance on letters of credit) then the Claimant would have served the Rescission Notice and sued (unless some other negotiation had succeeded).
- However, if the Claimant did not believe that it would be able to complete if the M&S accelerated payments were put back then it would have served the Rescission Notice and sued.
- The Claimant would have believed (and this is a matter of its subjective belief in the light of the advice and knowledge that it had at the time) that it would be able to complete (and therefore would have served the Option Notice) if the M&S accelerated payments were put back.
- Chaffe Street's claim that the Claimant regarded the transaction as unattractive as a result of its due diligence. This is wrong, and the Claimant relies on the evidence of Ebby Jebreel and Mr McInnes as to the M&S accelerated payments being the only deal-breaking problem.
- The Lathams draft due diligence report does not contain material, and more importantly was not seen by Ebby Jebreel or Mr McInnes to contain material, which threatened the viability of a transaction which had an apparent £79 million inherent profit. Mr Shotton was prepared to and did proceed on virtually the same terms but without the M&S accelerated payments (and merely some equivalent temporary loan finance). Ebby Jebreel and Mr McInnes never went back to Lathams to say that the matters raised were deal-breakers.
- Mr Street's version of his conversation on November 28 with Ebby Jebreel is that Ebby Jebreel told Mr Street that he intended to renegotiate the terms of the deal because the financial position of CVC was not what he was planning on when he entered into the Agreement. But Ebby Jebreel is right to say that he was only expressing problems relating to the M&S accelerated payments and Mr Street does not even say that there were any (or other) deal-breakers. Chaffe Street rely upon Mr Street's version of Mr McInnes' conversation with him on November 28 regarding Stevensons and MBOs, but Stevensons and the MBOs were not essential and were capable of being overcome, the real problem being clearly expressed to be (and recorded in the second paragraph of the notes as being) the M&S accelerated payments. Chaffe Street's case is inconsistent with Ebby Jebreel's apparent preparedness to proceed with (subject to the question of whether financial assistance was still required) Mr Einollahi's "removal of the properties" alternative structure.
- As to Chaffe Street's point that the AIB proposals required the use of M&S payments to pay off the loan, and AIB would not have been prepared to provide finance on the basis required for the whitewash, which may well have involved some use of the M&S payments for post-Completion trading, the relevant question for this trial is as to what the Claimant believed and the Claimant believed that there would be no problem. That is the evidence of Ebby Jebreel, and receives support from the facts that: (1) Mr Heggie had a vague recollection of a conversation with Mr Whatnall to such effect; (2) no-one including Ebby Jebreel, Mr Heggie and Mr Rearden contemplated the loan not lasting a number of months (as does the letter of November 16, which would not have been the case if the M&S payments were simply to be used to repay the loan), and AIB's terms only provided for an entitlement to apply receipts to borrowing); (3) AIB would have ample security, especially in view of the Chestertons valuation of at least £10 million, with the repaid M&S accelerated payments; (4) with regard to AIB's requirement for certification of M&S debt, Deloittes (being CVC's auditor) could produce such and had already done so in part, and a certificate from Deloittes would have satisfied Mr Heggie; (5) Mr Heggie made clear that his position (communicated to Ebby Jebreel) was to seek to assist the customer; (6) Ebby Jebreel instructed Mr Rearden to forget about proceeding with Burdale. In any event, Ebby Jebreel's evidence was that he could go back to Sir David Alliance (subject to the deal not having been changed as had occurred by CVP's dealings with the M&S accelerated payments). Ebby Jebreel and Mr McInnes clearly went into the November 28/29 meeting on the basis that the only finance problem was CVP's stance.
- If Chaffe Street had given its advice at a relatively early stage then there would nonetheless have been time to convince AIB by deploying the available security and other family assets and if necessary Sir David Alliance. Mr Heggie was clearly very keen to assist. Chaffe Street are not saying and cannot say that the Claimant should have gone to the Jebreel family in any event (or that such would have produced the necessary monies in time) in the absence of the return of the M&S accelerated payments. Sir David Alliance would have been unlikely to assist (and would not have been bound to assist) without the M&S accelerated payments being returned. Chaffe Street never suggested going back to Sir David Alliance notwithstanding that it knew of the documents which Sir David Alliance had signed.
- If Chaffe Street had given its advice at a relatively late stage (e.g. November 28) and CVP agreed to replace the M&S accelerated payments and/or change its stance, then there would not have been time to go back to Mr Heggie, and so, in the light of its belief and Mr McInnes' (and Chaffe Street's) advice, the Claimant would have served the Option Notice and then (but this is a second trial issue) sought to finalise matters with AIB (and/or, depending on what happened, Sir David Alliance). It is clear from the evidence and the advice (whether or not flawed) that the Claimant would have served the Option Notice (and this is a very different situation from Ebby Jebreel being advised by Mr McInnes that because of the M&S accelerated payments the whitewash is impossible and finance will not be available).
- Mr McInnes did not believe that the doubts about whether the intended new subsidiaries would make trading losses caused a problem, and that is what would have mattered regarding the decision whether or not to serve the Option Notice. Mr McInnes was probably correct in law. Moreover, he drew comfort from the apparent approval of his plan at the October 19 meeting and Deloittes as auditors were happy with it. Further, he drew comfort from Mr Hartley and then Mr Shotton saying that management would be supportive and Ebby Jebreel and Mr McInnes were right to say that they had strong incentives to be so and reasons to consider that such would be the case. Mr McInnes also drew comfort from his perception of M&S's likely attitude.
- Mr McInnes did not believe that the redundancy payments caused a problem and that is what would have mattered regarding the decision whether or not to serve the Option Notice. Mr McInnes drew comfort from Mr Shotton's revised figures and his later conversations as to what this represented in practice.
- The next question is whether, if the Claimant had negotiated, CVP would have reversed its stance and have returned the M&S accelerated payments. There is a real and substantial chance that it would have done so and equally that it would not have done so – the two chances must add up to 100%. Material points are: (1) CVP seemed to be trying to squeeze the deal, possibly feeling that it had been overgenerous; (2) CVP had taken the M&S accelerated payments and would have been embarrassed in seeking to undo what it had done; (3) the case against CVP on the terms of the Agreement was strong; and (4) CVP must have had considerable doubts about its stance in view of the terms of the draft Amendment Agreement.
- It is possible that the Claimant would have insisted as part of this that CVP extend the time for the service of the Option Notice (and the Claimant would have done so had it had real doubts about finance). In view of the fact that the Claimant's timing problems would have been largely down to CVP's conduct and the threat of a Rescission Notice, there would have been a real and substantial chance CVP would have granted such an extension if it was minded to agree to reverse its stance.
- If CVP had reversed its stance, then the Claimant (having asked CVP to do so) would have served the Option Notice. This must be the case if the reversal had been (as was likely) only at a very late stage. However, if it had been earlier then the Claimant would have had time to clarify matters with and seek to persuade AIB and/or to seek alternative finance from Sir David Alliance (on the basis that CVP was complying with its obligations under and doing what was contemplated by the Agreement, and Sir David Alliance was bound to provide the funding, and Sir David Alliance was supportive), and there would be a real and substantial chance that such would have been forthcoming.
- If CVP had not reversed its stance, then the Claimant (which had nothing to lose) would have served a Rescission Notice. The suggestion that nothing would have been done was not seriously put to Ebby Jebreel, and it is very unclear what other negotiation could have taken place (and Mr Street correctly advised in his letter of November 28 that for the Claimant to simply lose its contractual rights would destroy any negotiating position).
- If the Claimant had served a Rescission Notice then it may have continued to negotiate to an acceptable and viable solution, but instead it has lost its rights as a result of clause 2(3) (no Rescission Notice having been served first) and a failure to accept a common law repudiation. There would have been a real and substantial chance of this as CVP would have perceived its position as weak, and such would either have involved CVP providing loan finance (as with Mr Shotton) and/or replacing the M&S accelerated payments or, possibly, replacing everything with a full beneficial properties option. However, the more likely course is that no deal would have been done. In that case the Claimant would have sued. The Claimant would have pursued this course as Ebby Jebreel had the resources and the claim would have been very strong. It would have had a very high chance of success by judicial resolution or negotiated settlement.
- The Option period was expressly and/or impliedly extended during and for the whole of November 29. Thus the same analysis applies in relation to Chaffe Street's failure to give the advice during the meetings on November 29.
- Chaffe Street's case is that the Claimant did not exercise the Option because Ebby Jebreel no longer considered the transaction an attractive one on the agreed terms and in view of difficulties that were unconnected with the acceleration of the M&S payments. The Jebreels had already decided not to go ahead with the deal on any footing. This is strongly supported by the fact Ebby Jebreel's statement makes no mention at all of any surprise that Mr McInnes was reporting the deal as lost. Ebby Jebreel does not suggest that he remonstrated with Mr Einollahi or said that it was unfair that he was being penalised for his uncle's activities.
- Ebby Jebreel's decision was based on his overall assessment that the deal as negotiated was no longer favourable, and in particular he was influenced by difficulties which had arisen with the deal, namely the Lathams' draft due diligence report; his pessimistic view of the prospects of further business with M&S; concerns as to the viability of the individual units; closure and redundancy costs; absence of support from the management of the operating units; and lack of central management for CVC.
- In his telephone call with Mr Street on November 28, Ebby Jebreel informed Mr Street that he wished to renegotiate the terms of the deal because the financial position of CVC was not what he was planning on when he entered into the Agreement and he did not mention the M&S accelerated payments. Similarly, during his telephone call with Mr Street on November 28, Mr McInnes did not say that the M&S accelerated payments was the reason that financial assistance could not take place. He referred to the problems with the hiving down of the operating units, and it was in that context that Mr McInnes said he was looking to negotiate a deal with Mr Einollahi which did not require financial assistance.
- If it were the case that the critical problem was the impact of the M&S accelerated payments on cash flow, it made no sense that the deal was sought to be fundamentally renegotiated at the overnight meeting of November 28/29.
- Chaffe Street say that difficulties with the AIB funding must have affected Ebby Jebreel's decision whether or not to serve the Option Notice. If, as the Claimant contends, the acquisition of CVC would have unlocked a capital profit of at least £77 million, and the Jebreels had a number of alternative financing options to overcome the cash flow problems occasioned by the M&S accelerated payments, a failure by the Jebreels to explore those options strongly suggests that the decision had been taken not to proceed with the deal on any footing.
- There was a fundamental contradiction between TMG's structure (which required all cash coming in to CVC and derived from M&S to be used to fund working capital demands) and the requirement of AIB that all receivables be paid direct and applied in reduction of the loan.
- Mr Heggie's evidence was that this remained a critical condition of funding, and Ebby Jebreel had never approached Mr Heggie on that point. In the witness box Ebby Jebreel appeared to recall an agreement with AIB to the effect that incoming cash from M&S could be used to satisfy short term cash flow requirements for a few weeks, but this evidence should be rejected because no such document has been located and the evidence was contradicted by Mr Heggie. There may have been an oral indication by Mr Whatnall that AIB would allow a percentage of M&S payments to be released so that the Claimant could comply with clause 5(9) of the Agreement (dealing with mode of repayment of the Excluded Debt).
- As AIB wanted the level of M&S debt to be no less than the £15 million loan, they required a Debt Certificate, but Lathams were not prepared to give the Certificate. AIB required the level of M&S debt to equal £15 million, and the quid pro quo of Mr Whatnall's indication that AIB would permit a percentage of M&S payments to be released to pay for the Excluded Debt was that the amount of M&S debt had to be equal to £15 million plus the Excluded Debt. For a facility of £15 million there needed to be an M&S debt at drawdown in the region of £19 million, and Lathams' draft report referred to a current M&S debt of £16.6 million.
- Mr Heggie confirmed that the requirement for AIB to be provided with a signed off due diligence report prior to drawdown was vital, and Lathams' draft report was never provided to AIB.
- Chaffe Street say that Ebby Jebreel must have known that by November 28 the AIB funding was very unlikely to be obtained, and that this was a factor which led him to wish to renegotiate the deal on November 28/29. He did not progress matters with AIB beyond a preliminary stage, and the attempted renegotiation of the deal over November 28/29 took the property element out of the transaction and essentially reduced the consideration to a nominal sum. That is consistent with Ebby Jebreel having formed the view that he did not have AIB financing available. On May 31, 2001 Eversheds wrote to Halliwells to say that the reason that the Claimant did not exercise the Option was because it never had, nor was it able to raise, the funds needed to complete.
- The Jebreels took no steps to pursue other avenues to deal with the short term cash flow deficit. The Claimant's case is that a profit of £77 million was lost due to the unavailability of £2 million for a two week period.
- The indications of the involvement of Sir David Alliance are unclear, but there is a basis for inferring that he withdrew his promise of funding following Lathams' due diligence report and that he was acting in such a way as to cause CVP to refuse to deal with the Jebreels.
- Even if the CVP Claims had merit – in the sense that CVP's conduct could be said to be contrary to the true construction of the Agreement – there were fundamental legal reasons why the service of a Rescission Notice prior to exercise of the Option would leave the Claimant with remedies of no real merit. In fact, even if they had taken additional instructions or given further thought to the matter, neither Mr Street nor Mr Brandwood would have advised the Claimant (whether by the Jebreels or TMG) to pursue or threaten the CVP claims or to serve a Rescission Notice or accept a common law repudiation.
- The Claimant appears to accept that at no time prior to November 28 had CVP actually committed a breach of contract. Even on its case as to the correct interpretation of clause 5(5), an actual breach would only occur when CVP had failed to repatriate cash to make up the acceleration of M&S payments as at Completion. Accordingly, the Claimant is driven to rely on the doctrine of anticipatory breach of contract. The merits of the Claimant's argument that CVP had renounced the contract would have been very weak where: (1) CVP was not refusing absolutely to perform its side of the bargain; rather, and only by Mr Einollahi's apparent statement in the pub on November 29, it was disputing a single element of the overall deal. (2)Any breach could be sanctioned in damages.
- Where a guilty party has repudiated a bilateral contract, the innocent party is relieved from proving that it was ready and willing to perform the contract in accordance with its terms: Chitty on Contracts, para 24-023. Even on the footing that there was a bilateral contract on foot between the Claimant and CVP, this presumption would not (or be very unlikely to) assist the Claimant where: (1) The principle is subject to an exception where, by something that is predestined to happen at the time of the guilty party's breach, the innocent party could not perform its obligations. The difficulties with the transaction from the Claimant's perspective would very likely fall into that category. (2) Even where the principle operates, the innocent party must prove its loss.
- There never was a bilateral contract between the Claimant and CVP. Until an Option Notice was served, what existed was a sui generis relationship between grantor and grantee. Thus the correct legal analysis is that, to take advantage of the bilateral terms of the Agreement, the Claimant needed to exercise the Option. Unless and until it did that, it would only have a remedy if CVP destroyed the subject matter of the Option (which CVP did not).
- No more extensive proposition can be derived from Barnsley on Land Options and the decision of the Singapore High Court in Lian v Kai than that, in a land option, the grantor shall not destroy the subject matter of the option in the period between grant and prior to exercise of the option. Rules in relation to land cannot as easily be applied to commercial transactions.
- It is disputed that the Claimant's remedy would have extended to loss of bargain damages. In particular:
- Accordingly, a decision by the Claimant not to exercise the Option, but to serve a Rescission Notice and purport to accept a common law repudiation by CVP, would have left it with a damages claim of no real merit.
- Exercising the Option would have kept the Claimant's options open by keeping the contract alive, but on the Claimant's case this could not and would not have been done unless it was in all other respects ready, willing and able to complete the transaction.
- The Claimant must show that Chaffe Street should have advised it prior to the expiry of the Option period (otherwise it ends up in the same position as happened in fact).
- Based on the documentary evidence before the Court, the deadline for service of the Option Notice expired at 6am on November 29, pursuant to the short written extension signed by Ms Kantor. While Mr McInnes told the Court that he recalled a telephone conversation between Mr Einollahi and Sir Harry Djanogly, during which Sir Harry Djanogly agreed a further extension of time, Mr McInnes could not recall when that further extension expired. At no time prior to 6am on November 29 would any competent solicitor have advised that CVP was acting in breach of contract. There were apparently ongoing negotiations between Mr Einollahi and Mr McInnes as to repatriation of cash in CVC and it was not until the pub meeting in the evening of November 29 that Mr Einollahi, for the first time, signalled an unwillingness to put cash back in.
- It is disputed that advice from Chaffe Street would have led the Claimant to act differently. Mr McInnes was apparently proceeding on the footing that CVP was in breach of duty. So, when asked how he would have been assisted by advice from Chaffe Street to that effect he said, Mr McInnes response was that it would have "reinforced the strength with which I was saying to Mr Einollahi, 'You must undo this because it should not have been done'"
- Ebby Jebreel withdrew from the transaction because he was not prepared to proceed on the currently agreed terms. That stance would have been unaffected by legal advice from Chaffe Street.
- It is disputed that there was a real prospect that CVP would have acted any differently in that: (1) CVP had (correctly) taken the view that its conduct was permitted by the Agreement and would not have been shaken from that view; (2) CVP's response to any threats of litigation or the service of a Rescission Notice would have been: "sue us then"; and (3) Mr McInnes' own assessment of the situation was that, by November 29, a threat would not have helped Mr Einollahi alter CVP's stance.
- Chaffe Street dispute the Claimant's case that it decided not to exercise the Option because, due to the M&S accelerated payments and the effect on cash flow, Mr McInnes said that he could not and would not sign off the whitewash declaration.
- The essence of the second claim is that if the Claimant is wrong on its construction of clause 5(5), then Chaffe Street were negligent in failing to advise the inclusion of a term to the effect that CVC was either not to dispose of or was to replace the proceeds of assets (save the specified exceptions of stock in the ordinary course of trading and, with monies to be put back, plant not in current use). If Chaffe Street had so advised then the Claimant would have insisted upon it, and there is a real and substantial chance that CVP would have accepted such terms.
- The clear instructions from the Claimant were to prevent asset-stripping and dealings other than in the ordinary course of business. At the November 7/8 meeting it was agreed that there would be no transactions other than in the ordinary course of business and that if there was a more than £8.8 million unwind then cash would be left in. This was separate from the NWC warranty. Mr Street and Mr Brandwood for some reason misinterpreted what was going on and in a way which Ebby Jebreel, Mr McInnes and Mr Hill did not understand or appreciate.
- For CVP to have been permitted to alter the usual course of trading and business and to take out the M&S accelerated payments as it did could not have been contemplated by anyone; both generally and because of its obvious effect on cash-flow and AIB security. Mr Street (and Mr Brandwood) did not explain in any way to Ebby Jebreel/Jacob Jebreel or TMG that the Agreement either was confined to preventing asset-stripping of fixed assets only or did not include cash reimbursement if the unwind exceeded £8.8 million.
- The Claimant would have tried to achieve its intentions at least of obtaining unrestricted clauses preventing asset-stripping or dealings (other than in the previous form of ordinary course of business) of any asset (including M&S debt and including so as to prevent accelerated payments and taking resultant cash out), and that CVP would have been highly unlikely to refuse, particularly bearing in mind its statements at the November 7/8 meeting (see above) and that it would seem commercially very odd for it to say that it could do what it liked. There is a high real and substantial chance for the Court to assess.
- The overwhelming likelihood is that this would all have resulted in the M&S accelerated payments problem never arising (or being successfully challenged and resolved at early stages, or the arguments against them being further improved) and there being ample time to satisfy AIB and/or obtain alternative finance prior to service of an Option Notice. In any event there would have been a high real and substantial chance of it obtaining whatever it desired to be able to serve an Option Notice or being able to succeed under a Rescission Notice.
- Accordingly if the Agreement as executed does not prevent what occurred then Chaffe Street were negligent in its drafting/advising; if Chaffe Street had drafted/advised correctly then there is a high real and substantial chance that the Agreement would have included terms preventing what occurred; and if the Agreement had included such a term then the Option Notice would have been served (and, insofar as such depended on obtaining finance first, there would have been a real and substantial chance of the Claimant having obtained such in advance).
- Chaffe Street dispute that Mr McInnes told Mr Brandwood that there should be no "asset-stripping." Mr Street's evidence was that he remembered a call from Jacob Jebreel or Ebby Jebreel who said something like, "Mr McInnes has said we want to stop stripping out assets". Mr Street was cross-examined on the basis that he had introduced the provision:
- As I have said above, Chaffe Street suggest (in my judgment, correctly) that Mr Street was led into error when he accepted that he had drafted this clause. On October 25 he was asked by Jacob Jebreel to firm up the wording of the offer letter to avoid any reduction in assets or incurring of liabilities by CVC compared to the then position. The "ordinary course of business" provision was already in place, and the amendment made by Mr Street was to the next paragraph. Accordingly, the questioning of Mr Street as to what he meant by use of the word "asset" in that provision may have proceeded on a mistaken footing. In any event, Mr Street's view that the purpose of the provision was to prevent stripping of fixed assets, rather than, say, conversion of one liquid asset to another (debt to cash), cannot be seen as culpably flawed.
- Mr Brandwood took up the terms of the offer letters and drafted the first versions of the Agreement. He could not recall why he altered the wording from that appearing in the offer letter to Warranty 10 of the draft Agreement. Whatever Mr Brandwood's reasons, it was not suggested to him that his drafting betrayed an awareness of the criticality of the level of receivables at completion to the viability of the deal.
- As had been the case throughout, during November 7/9 the financial terms of the revised deal were dictated to Chaffe Street without their having been involved in the formulation or negotiation process. This was the case at the plenary meeting in the early morning of November 8. It was also true when Ebby Jebreel sent his advisers home and embarked on negotiations with CVP at the late-night meeting of November 8/9. At a number of key points during November 7/9 the Jebreels and TMG (Mr McInnes and Mr Hill) were either present when the revised terms of the deal were being outlined or fully involved in the process by which those terms were being reduced to a legal form. There is very little room for there to have been a misunderstanding between the Jebreels/TMG and Chaffe Street as to (i) the commercial terms (ii) whether those terms had been correctly reduced into a legal document.
- Commencing with the plenary session on November 8, Mr Einollahi and Mr McInnes jointly outlined a deal that was radically different from that proposed in the offer letters. The commercial terms of the new deal were fundamentally inconsistent with the warranty-based approach where the asset-worth and asset-composition of CVC would be guaranteed at completion. The revised deal, as described by Mr Einollahi and Mr McInnes on November 8, had at its core a clear, rational commercial basis. The only guarantee that CVP was prepared to give was that NWC would not fall below £39 million. The interplay between NWC and the amount of the Excluded Debt represented a readily understandable commercial deal on a "you pay less if you get less" basis.
- It was plain to all those sitting around the table during the plenary session, and to Ebby Jebreel and Jacob Jebreel at all times thereafter, that CVP was not prepared to limit the extent to which the M&S debt and finished goods would be converted into cash (save as that conversion might impact on NWC if the cash were then used to reduce debts of various types). It was expressly stated that Warranties 6 and 7 were to be deleted and there was no other commercial term on the table that could reverse the effect of that deletion by requiring a cash injection on a £ for £ basis (save by the NWC adjustment mechanism).
- Mr Street and Mr Brandwood took care to involve Mr Hill on November 8 and again on November 9. Mr Hill confirmed that the NWC-mechanism involved a shifting pool of assets over which the Claimant would have no control prior to completion. Mr Hill read through the draft Agreement. Chaffe Street were entitled to draw comfort from the absence of any suggestion from Mr Hill (or Mr McInnes, to whom the draft had been sent by e-mail on November 8) that the draft legal document had incorrectly embodied the agreed commercial terms.
- Chaffe Street took the Jebreels through the draft document twice. Ebby Jebreel read through the document twice (in its entirety). Comprehensive advice was given as to its terms. In particular, Mr Street advised (a) as to the NWC-adjustment mechanism; (b) that clause 5(5) was directed to the protection of fixed assets, plant, equipment or property prior to completion; (c) that the specification of November 26 for the date of calculation of NWC carried with it the risk of a change in the "gap period" that would fall outside the adjustment mechanism. As Ebby Jebreel accepted, if he had been unhappy with any commercial points stemming from the document, he would have said so.
- As in their answer to the first claim, Chaffe Street do not dispute that, by November 7/8 Mr Street and Mr Brandwood were aware of the following aspects of the Claimant's intended acquisition of CVC: (1) there was inter-company non-trading debt between CVP and CVC, which was to be assigned to the Claimant at completion; (2) upon acquisition, CVC would be free of Bank Debt; (3) as CVC's largest customer, it was to be expected that M&S would owe significant debt to CVC, which would be coming in (in the form of cash) at some time in the future; (4) the M&S debt was important because it could potentially be used as security for bank financing; (5) the deal depended on whitewashing, which in turn depended on the making of the statutory declaration by CVC's board (supported by the auditors) as to CVC's ongoing solvency over a 12-month period. In this general sense, CVC needed sufficient cash flow to remain solvent over that period.
- However, at that time neither Mr Street nor Mr Brandwood knew: (1) the trading terms between M&S and CVC, and, therefore, they did not know exactly or approximately when and at what rate debt and finished goods would convert to cash; (2) CVC's cash flow requirements following completion; and (3) the critical level of M&S debt in relation to bank financing.
- In the light of this lack of knowledge and as Chaffe Street were never given express instructions to the contrary, there was no compelling reason why the solicitors should have sought to challenge the description of the revised deal over the period November 7/9 and to seek to insert terms having the effect described above.
- On the footing that Chaffe Street did act in breach of duty, had they not done so, the first step they should have taken would have been to seek instructions from TMG and the Jebreels as to whether different terms should be put forward to CVP in negotiation. This would occur no earlier than the November 8/9 overnight meeting, because, until that time, the draft Agreement reflected the asset warranties written into the offer letters (and as to which the Claimant has no complaint).
- It is denied that Ebby Jebreel would have instructed Chaffe Street to suggest different terms. It is denied that there was a real prospect that TMG would have advised Ebby Jebreel to raise these points. Ebby Jebreel and TMG (by Mr McInnes and Mr Hill) had been fully involved in the process by which the Agreement was negotiated; they were fully aware of the commercial terms of that Agreement; and they were fully aware that CVP had rejected a deal that sought to secure any particular asset-worth or asset-composition of CVC at completion.
- The Jebreels and TMG were content with the deal as it then stood and would not have sought to renegotiate it.
- The prospect that CVP would have agreed to any of the terms it is now said should have been put forward is speculative. Mr Einollahi had relayed his client's instructions that asset-worth and asset-composition would not be warranted. Warranty 6 and Warranty 7 had been struck through by agreement at the November 8/9 meeting. A commercially logical and sensible NWC adjustment mechanism (coupled with a fixed asset protection covenant) had been put forward. There is not a scrap of evidence from which to conclude that CVP might have reverted to a position already expressly rejected.
- The claim is that there was an offer made by Mr Einollahi (for CVP) that in return for the Claimant transferring the retainers of its professional advisers, and providing that the Shotton purchase took place: (1) CVP would pay all of the Claimant's professional fees of the abortive transaction, and (2) CVP would give the Claimant the right to cherry-pick all of the CV Group's surplus properties (being properties which were or became surplus) at forced sale values. The Claimant (by Ebby Jebreel) decided to and believed that it had accepted that offer and so as to give rise to an enforceable arrangement. However, the offer (and the Claimant's acceptance) did not give rise to any enforceable arrangement and in particular any enforceable obligations on the part of the CVP or rights on the part of the Claimant, because there was never any written contract which satisfied section 2 of the Law of Property (Miscellaneous Provisions) Act 1989. Accordingly, the Claimant had no remedy when CVP repudiated the arrangement on December 5, 2000 and following.
- Chaffe Street knew that the offer had been made, and also that the Claimant thought that it was accepting the offer and resultant arrangement (and, if that is wrong, at least that the Claimant was interested in it and wished to (at least) be able to take it forward).
- As a result the Claimant had no enforceable rights in relation to the offer/arrangement. While Chaffe Street and TMG's fees were paid, the Claimant has no right (and cannot enforce the Shotton contract) to have CVP pay its other professional fees of the abortive transaction or with regard to surplus properties.
- If Chaffe Street had given the correct advice then the Claimant would have required there to be an acceptable written contract as a condition of transferring the retainers of Chaffe Street and TMG (and anyone else). There is a real and substantial chance that such a contract would have been entered into and which would have provided that (1) CVP would pay all of the Claimant's professional fees of the abortive transaction, and (2) CVP would give the Claimant an option to purchase any of the CV Group's surplus (being properties not being used by the CV Group for its own trading business) properties (being properties which were then or became surplus within a reasonable medium-term time (say three years)) at forced sale values.
- It is common ground that Chaffe Street did not advise Ebby Jebreel, Jacob Jebreel or Mr McInnes that a written agreement was required under section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 for an enforceable agreement at any point.
- It seems to be accepted that Mr McInnes believed that a binding agreement extending to costs and properties had been made and he was not cross-examined on this. He told Mr Travis and Mr Hill this and they were not cross-examined on it. Mr Street and Mr Brandwood seem to accept that Mr McInnes was neither informed that there was no such agreement nor that Ebby Jebreel had allegedly said that there was not to be.
- With regard to professionals' costs, Chaffe Street say that only TMG and Chaffe Street's costs were to be covered. This is wrong. Mr Einollahi made clear that it was all professionals' costs, and which is why the relevant clause eventually appeared in the Shotton Agreement.
- As regards the property aspect, the alleged conversation in which Ebby Jebreel supposedly expressed disinterest in the properties option but a possible desire to speak to Mr Einollahi about properties in the next week, seems inconsistent and bizarre. Mr Street's and Mr Brandwood's witness statements substantially repeat (and have infected) each other. In cross-examination (as opposed to in witness statements) Mr Street and Mr Brandwood are inconsistent on the issue of whether Ebby Jebreel expressed complete disinterest in this first (long-table with eight people present) conversation.
- Second, the alleged conversation (denied by Ebby Jebreel) following the signing of the transfers of the retainers as Ebby Jebreel was walking out when he is supposed to have been asked if he wanted Chaffe Street to do anything about the properties option and replied "No", does not appear in the July 2001 meeting when one would have expected it to have been recalled. It is very odd that it would have taken place after the signing of the retainer transfers, and in any event it would have been too late as the retainers had already been transferred. Mr McInnes would have been there (he wrote out the TMG retainer transfer second) and does not recall it at all (and was not cross-examined as to such). It is very odd that it would not have been reported to Mr McInnes who had negotiated the Compromise Proposal.
- The suggestion that Ebby Jebreel would have been giving up the properties element is very unlikely:
- The most likely reality of what happened is that the second conversation did not take place and the first was at most a matter of impression and Ebby Jebreel said little if anything. Chaffe Street, contrary to what Mr Street now says, did not appreciate the need for writing as appeared from their making the statement at the July 2001 meeting as to an agreement being binding without writing, clearly made in the context of the properties option. Chaffe Street were clearly negligent in not giving the advice.
- However, if conversations did take place, then they went no further than a tired and dispirited client indicating a determination to go home on the basis that he believed that everything had been sorted out on the basis of a compromise agreement and that he could implement the deal in the next week and did not need to do anything further that night. In those circumstances, Chaffe Street were still negligent in not pointing out to Ebby Jebreel that without a signed agreement the contract was void under section 2 and he would have nothing to enforce against CVP, and with the result that Ebby Jebreel left under a false impression. Chaffe Street were also negligent in not informing and clarifying the matter with Mr McInnes. Chaffe Street were obtaining a substantial potential benefit in relation to its own fees (and was keen to continue negotiating such) and failed to properly advise its client (the Claimant, by Ebby Jebreel) as to the consequences of not then obtaining the writing necessary to safeguard its interests. The additional advice would have been extremely simple and quick to give, but was not communicated and the client (by Ebby Jebreel) did not realise it. It is likely (see above) that Chaffe Street did not appreciate the need for writing.
- The subsequent events support the Claimant's case (on either version of what happened) and do not go against it. Ebby Jebreel went to see Mr Einollahi and Mr Mehrabani on December 5 and his evidence that he was told that the board of CVP was not prepared to sell properties to the Claimant (but that Mr Einollahi said that he would propose unrealistic prices) is correct. Jacob Jebreel (and to an extent Ebby Jebreel) went to Mr Fairlie on the same day and thereafter during December (although privilege is not waived). Ebby Jebreel tried half-heartedly to take Mr Einollahi's proposals forward by the correspondence of December 8 and December 11. The letter dated December 6 regarding Ebby Jebreel not having sought to sabotage the Shotton deal was sent.
- Ebby Jebreel and Jacob Jebreel's evidence should be accepted to the effect that they believed that there was an agreement; but that they were first concerned about fees; they were wholly psychologically knocked back by Mr Einollahi's (and Mr Mehrabani's) unequivocal statements as to the attitude of the board of CVP; they were concerned to try and put matters right on the record and to mend fences regarding the Trade Union point by the letter of December 6; they could not instruct Chaffe Street (who were acting for Mr Shotton); they were instructing Mr Fairlie and then Halliwells; and they were concerned to obtain full legal advice on the basis of a full instruction of lawyers as to the entirety of relevant material before committing themselves to legal claims on paper (which is an entirely sensible and natural course for experienced businessmen to adopt, and no inferences should be drawn from a decision not to waive privilege). Once they had instructed Halliwells in early January 2001 appropriate letters were written to CVP on February 28, 2001 and May 25, 2001 and thereafter.
- If the advice had been given as to the need for writing then Ebby Jebreel would have required that such should take place. The Claimant was gaining little (simply avoiding a liability for 60% of Chaffe Street's fees, which it would probably have challenged in any event in the light of the failure of the transaction) from the compromise, and CVP was gaining a lot.
- If a written agreement had been sought then there is a real and substantial chance that CVP would have agreed, especially as: (a) Mr Einollahi had made the offer; (b) Mr Einollahi had (and could obtain) the authority of Sir Harry Djanogly; (c) CVP were desperate to sell to Mr Shotton immediately (and as otherwise they would have been forced into their own redundancy/closure programme) and for which they needed the retainers; (d) CVP were (presumably) embarrassed as to what had happened and had just "taken" £14 million; (e) CVP were in a disposal situation and any realisations of surplus properties (even on a forced sale basis) would have been welcome. The terms would have involved surplus properties then and for some years in accordance with Mr Einollahi's offer.
- Accordingly (1) Chaffe Street were negligent in failing to advise as to the need for a signed written contract for a binding agreement; (2) if Chaffe Street had so advised then Ebby Jebreel for the Claimant would have sought such; (3) if such had been sought then there was a high real and substantial chance that it would have been obtained. The Court should decide on the most likely terms (forced sale value, and meaning of "surplus" as not being used for CVP's core business, and time periods) and the percentage chance.
- In Chaffe Street's earshot, at least, CVP did not offer or indicate to pay the Claimant's costs beyond Chaffe Street's and TMG's costs to date. Even then, no final agreement was reached that night on Chaffe Street's fees, as Ebby Jebreel knew. Mr Street did seek, after the Jebreels' departure, to persuade Ms Kantor to pay Lathams' fees, but she would not.
- Ebby Jebreel first told Mr Street that he found the properties unattractive and he could always take the matter up the following week if he were interested in buying them, and later that he did not want to bother with them.
- At no time did Ebby Jebreel (or Jacob Jebreel) believe that on November 29/30 the Claimant had secured a binding compromise agreement concerning either the other professional fees or CVP's 'surplus' properties.
- It is denied that Chaffe Street conducted themselves negligently as to the other fees in that:
- It is denied that Chaffe Street were negligent in relation to the properties in that:
- If Chaffe Street should have taken additional steps in relation to CVP's offer of compromise, the first such step would be to seek instructions from the client and, if instructed, to seek clarification as to the terms of the offer.
- The Claimant's instructions, via Ebby Jebreel, would have been exactly the same as they were in fact. Ebby Jebreel knew the terms of the offer on the table: he knew that CVP's costs offer was limited to Chaffe Street's and TMG's fees; he knew of the indication as to an offer concerning properties.
- Even if Ebby Jebreel had instructed Mr Street or Mr Brandwood to press for an agreement as to all the Claimant's costs and for an immediately binding option over the entirety of CVP's property book, there is only a speculative chance that CVP would have agreed.
- CVP had never offered to pay the other costs. Mr Street expressly raised the question of Lathams' costs with Ms Kantor, who refused to pay them.
- It is fanciful to suppose that CVP would on November 29/30 have entered into a binding option in relation to its entire property portfolio (worth £250 million). Mr Einollahi's indication of a favourable deal on any surplus properties from CVP's portfolio could never have been meant to go so far.
- Further, even if Mr Einollahi had that intention, it is clear that Ms Kantor did not. No binding authority could have been obtained from the CVP Board that night. It is denied that Mr Einollahi had actual authority (of any type) or that the Claimant could safely have relied on Mr Einollahi's ostensible authority. It is disputed that Sir Harry Djanogly, the CVP Chairman, could or would have executed such an option without Board approval. He owed duties to his shareholders and would not unilaterally have irrevocably bound CVP to sell to the Claimant its entire "surplus" property portfolio at an undervalue.
- The essence of Chaffe Street's defence to the Claimant's claim is that they did what they were asked to do on the basis of express instructions from the Claimant and TMG and in the light of information that it was reasonable for them to obtain. If that is wrong and it was Chaffe Street's duty to give unsought advice and/or proactively to obtain additional information, the Claimant contributed to its own loss by the inadequacy of its instructions/information given to its solicitors.
- The Claimant's reply is that under section 1 of the Law Reform (Contributory Negligence) Act 1945, Chaffe Street must show fault and that such was causative and that it is just and equitable for some percentage reduction in damages to be applied. The Claimant denies fault and argues that it is very difficult for a solicitor who has failed to give advice to do this: Feakins v Burstow, supra, at para 110. Any failures (which are disputed) by TMG are irrelevant in this context. No items of fault were put to Ebby Jebreel.
- Chaffe Street says that if CVP, by Mr Einollahi, did make a contractual offer to pay the other costs, the Claimant has failed to act in reasonable mitigation of its loss in that it has taken no steps at all to enforce the oral agreement allegedly said to have arisen. The Claimant has also failed to act in reasonable mitigation of its loss by failing to take any steps: (1) to request that Mr Shotton enforce clause 11 of the Shotton Agreement; and (2) to take an assignment of Lathams'/Chestertons' own rights to enforce clause 11 of the Shotton Agreement under section 1 of the Contracts (Rights of Third Parties) Act 1999 or to enforce CVP's obligation itself by virtue of the Act of 1999.
- The Claimant replies an assignment is not possible in view of the non-assignment clause and where the Contract (Rights of Third Parties) Act 1999 cannot apply as the Claimant is not identified as a third party beneficiary(section 1(3)). No matters were put to Ebby Jebreel at to what he should have done, and it cannot be reasonable to force the Claimant to engage in such speculative litigation.
- Chaffe Street rely on the limitation of liability clause in the retainer letter of £20 million. This is subject to the Unfair Contract Terms Act 1977 ("UCTA"), section 2. It seems that they accept that the £20 million figure is exclusive of costs and interest.
- The Claimant relies on the facts that: (1) Chaffe Street's insurance was not revealed to Ebby Jebreel and was in fact at a higher figure (without need for any additional premium); (2) there is no evidence as to availability of higher cover; (3) Mr Street was wrong to say in the letter that this was a standard term; (4) Mr Street misled Ebby Jebreel when he assented to Ebby Jebreel's statement that presumably his loss could not exceed £20 million when it clearly could in law bearing in mind the apparent profit of £79 million (although a client might well think and this client did think that it would have to be limited to the £12 million price); (5) Chaffe Street owed fiduciary duties as solicitors and they should not be able to rely on their letter as against their own client without having fully advised the client as to the scale of potential damages remedies and/or suggested independent legal advice. There is no evidence as to how common were (or are) such clauses. Chaffe Street have not discharged and will not discharge the relevant burden.
- Chaffe Street's factual case is that there was a discussion about the limitation clause, but no objection to it by Ebby Jebreel.
- The limitation of liability clause should be considered in the light of the following additional factual matters:
- Chaffe Street accept that the statutory test of reasonableness in UCTA applies to the limitation of liability clause; and that they bear the burden of proving that the clause is reasonable pursuant to section 11(5). But the term, they say, was reasonable.
- There were 7 volumes of documents before the court, and the trial took more than 3 weeks. The pleadings cover some 200 pages. There were almost 300 pages of final written submissions. But in my judgment the whole case is an artificial lawyers' construct designed to shift the blame onto Chaffe Street for what was an essentially commercial failure by the Jebreels and TMG, and the claims are capable of being dealt with simply on the basis that Chaffe Street had no duty in the circumstances to give the advice which it is so elaborately pleaded they should have given.
- This was a fast-moving transaction, with many meetings over a short period, from mid-October to early December 2000, some five and a half years before trial. In those circumstances, where meetings and telephone calls were not documented or noted (as most were not), it would be surprising if the participants had any reliable recollection of the detail of what was said. Although some of the Claimant's witnesses were asked by their advisers to recollect the relevant events within a few months of their happening, and as a result of a meeting in July 2001, Mr Street and Mr Brandwood had to recollect what had happened, many of the witnesses had very little memory of the detail of the meetings and of what was said, and I consider that, to a greater or lesser extent, the evidence of some of the witnesses, especially Ebby Jebreel, Mr McInnes and Mr Street, was reconstruction and/or self-serving.
- There are a number of general points to be made. First, the chemistry between the Jebreels and their professional advisers was not conducive to clear understanding between them, or the giving of clear instructions. The Jebreels were not able to use Ernst & Young for corporate finance advice, and TMG were recommended to them by Deloittes. They had never previously worked with Mr McInnes. Chaffe Street were recommended to them by Eversheds, and Mr McInnes had not at that time worked on a transaction on the same side as Chaffe Street. Ebby Jebreel is a very sophisticated and intelligent businessman, and having seen them all in the witness box I do not think that the Jebreels, Mr McInnes and Mr Street and Mr Brandwood were well matched.
- The Jebreels were also the kind of clients who instructed their advisers on a "need to know" basis, controlling the amount of information being supplied. Mr Rearden said:
- Second, for the purposes of this case, Ebby Jebreel presented himself as a rather passive client, not taking action unless advised to do so. This is how he explains his failure to insist on Chaffe Street attending the meeting of November 28/29, and his failure to ask for advice on whether CVP was justified in arranging the M&S accelerated payments, and his failure to protest when, on his case, Mr Einollahi repudiated the property aspect of the compromise agreement. I think this is a false impression. When it was in their interests, the Jebreels were perfectly capable of voicing their concerns to their professionals and demanding what they saw to be their rights. Thus in early November they listed what they saw to be the shortcomings in TMG's service. One of their complaints was the lack of personal involvement by Mr McInnes. Mr McInnes made it clear in the witness box that Ebby Jebreel had used some very strong language to which Mr McInnes objected. Having seen him in the witness box, I am satisfied that Ebby Jebreel is a hard-headed and sophisticated businessman who knows what he wants and knows how to get it.
- Third, Ebby Jebreel and Mr McInnes never put in place a proper structure to manage the transaction.
- In theory, TMG was the project-manager of the transaction. Following their meeting on October 11 Mr McInnes wrote to Ebby Jebreel to say that the TMG team's role would "centre around the structuring and negotiation of a transaction and its project management through to completion, in liaison with you and your other advisors." Mr McInnes' evidence was that the project-management role extended to: (a) negotiating with CVP; (b) understanding "at the level of strategic importance" sufficient about CVC to say what was its ordinary course of business and to advise in relation to cash flow and viability; (c) understanding the mechanism of the arrangements and the structure of the deal that was agreed. Mr McInnes said in the witness box that it was TMG which was co-ordinating the input from all the advisers and from the clients, and managing the project in terms of saying who was responsible for what. He accepted that he was well used to dealing with a professional team consisting of a number of individuals and well familiar with and able to ask questions of the lawyers, if he felt it appropriate.
- But there were aspects of the transaction that were expressly excluded from TMG's project-management remit by the Jebreels, namely: (a) banking matters; (b) tax advice; (c) co-ordination of the due-diligence process and liaison with the due-diligence accountants, Lathams. In particular, the Jebreels did not allow TMG to be involved with the raising of finance from AIB (or Sir David Alliance).
- In the middle of November 2000, after the Jebreels and TMG had had a serious disagreement, TMG made it a condition of its ongoing involvement that it "be allowed to project manage the transaction through to completion".
- Both Ebby Jebreel and Mr McInnes saw Chaffe Street's role as dealing with "legal" matters. In one sense that is obvious, but Ebby Jebreel and Mr McInnes, at least for the purposes of this case, have a very wide notion of what was meant by "legal" matters, which seem to encompass a wide range of pro-active duties.
- It is true that there are dynamic corporate lawyers who take on themselves a role very close to the client, and identify strongly with the client's interests, particularly if the client is an important and regular client of the firm and the solicitor has worked closely with the client and knows the client's thinking and requirements. Such lawyers are much in demand. But, at least on the evidence of their relationship with Ebby Jebreel and on the basis of my impression of them in the witness box, Mr Street and Mr Brandwood are not dynamic solicitors. I consider that they are competent lawyers (if somewhat pedestrian), specialising in medium size corporate transactions, with sufficient experience to produce adequate documentation, and to give competent advice on the problems which normally arise in corporate transactions.
- If it was the task of anyone to co-ordinate strategy, it was the task of Mr McInnes, but there is no evidence that anything was done by him to bring the whole of the Claimant's team together to discuss how to deal with the changing situation, and the Claimant was reduced to claiming that it was Mr Street who had assumed such a role by convening the meeting of November 24, when in fact that meeting was only necessary because of the Claimant's failure to put a proper system in place.
- Chaffe Street's conduct in relation to the CVC transaction falls to be judged in accordance with the standard of reasonably competent solicitors specialising in corporate law. There have been many more recent cases (most of which were cited in argument) but what Oliver J said in Midland Bank Trust Co Ltd and another v Hett Stubbs & Kemp [1979] 1 Ch 384 at 402-3, remains a classic statement:
- The scope of that duty of care is variable. It will depend, first and foremost, upon the content of the instructions given to the solicitor by the client. It will depend also on the particular circumstances of the case: Pickersgill v Riley [2004] UKPC 14, [2004] 1 Lloyd's Rep 795, para 7; Credit Lyonnais SA v Russell Jones & Walker [2002] EWHC 1310, [2003] PNLR 2, at paras 21, 28; The Football League Limited v edge ellison [2006] EWHC 1462 (Ch), para 249.
- The scope of the duty depends on the characteristics of the client. A client, unversed in business affairs, might need explanation and advice from the solicitor before entering into a commercial transaction which it would be pointless, or even sometimes an impertinence, for the solicitor to offer to an obviously experienced businessman: Pickersgill v Riley at para 7.
- A solicitor may as a result of circumstances which occur during the course of carrying out his instructions have an obligation to proffer unsolicited advice or to seek further instructions. In doing that the solicitor is neither going beyond the scope of instructions nor is doing extra work for which the solicitor is not to be paid. The solicitor is simply reporting back to the client on issues of concern which he or she learns of as a result of, and in the course of, carrying out express instructions: Boyce v Rendells (1983) 268 EG 269 at 272; Credit Lyonnais SA v Russell Jones & Walker at para 28; The Football League Limited v edge ellison [2006] EWHC 1462 (Ch), at para 263.
- But where a client in full command of his faculties and apparently aware of what he is doing seeks the assistance of a solicitor in the carrying out of a particular transaction, that solicitor is under no duty whether before or after accepting instructions to go beyond those instructions by proffering unsought advice on the wisdom of the transaction. To hold otherwise could impose intolerable burdens on solicitors: Clark Boyce v Mouat [1994] 1 AC 428, at 437; Clarke v Iliffes Booth Bennett para 138.
- Nevertheless, where the client negotiates a transaction, and the solicitor is instructed to implement the transaction, the terms of which had been agreed, the solicitor's non-participation in the negotiation of the terms of the deal does not relieve him of the duty of pointing out to the client any legal obscurities of which the client might have been unaware, or of drawing the attention of the client to any hidden pitfalls: Pickersgill v Riley [2004] 1 Lloyd's Rep 795 at para 11.
- The solicitor owes a duty to advise the client as to the contents of relevant documents. Consequently, a solicitor has a duty to understand the effect of the document which is being negotiated, and may (depending on the circumstances) have a duty to be equipped to correct the client's misunderstanding of an important part of the transaction. So also a solicitor cannot be heard to say that he or she is not under a duty to understand the terms of the agreement, and advise as may be necessary in the circumstances, simply because the client is sophisticated and has negotiated the agreement: Clarke v Iliffes Booth Bennett, ante, at paras 140, 144. But the solicitor is not under a duty to review the whole range of commercial considerations that underlie a particular deal and to work out to which the client may not have give sufficient thought and to remind the client about them: The Football League Limited v edge ellison [2006] EWHC 1462 (Ch), at para 270.
- Whether a solicitor has a duty to attend any particular meeting depends on the circumstances. Normally a corporate lawyer would expect to be asked at short notice to go to lengthy meetings (and sometimes meetings stretching late into the night), and it must be an implied term that a firm of corporate lawyers will have adequate resources to deal with the client's reasonable requirements. But whether there will be a duty to attend any particular meeting, or arrange for someone to be there, will depend on the client's instructions and requirements.
- There is nothing in the retainer letter of November 6 which is directly relevant to the issues. It does not define the scope except (a) by reference to what work is anticipated and (b) by excluding (inter alia) advice on the fairness or reasonableness of the transaction.
- Prior to the exchange of the Agreement on November 10, Chaffe Street's initial instructions were to assess the legal viability of the transaction as structured by Mr McInnes, which Mr Lumsden did in his letter of October 19; to comment on the offer letters which emerged on October 25 and November 1, and to answer specific questions from Jacob Jebreel on them, and to draft and assist in the negotiation of the Agreement. Chaffe Street were not asked to be involved in the formulation of the offer letters or the negotiations, which was the responsibility of TMG. Not surprisingly, Chaffe Street were never instructed to assess the cash flow requirements of CVC in the post-completion period or to consider the asset-worth or asset-composition that CVC needed to have to enable whitewashing to occur or to support bank financing. Chaffe Street were never asked whether the Jebreels were proposing to enter into a prudent transaction or whether the financial terms could be improved in any way. Those matters were entirely the responsibility of TMG, and Mr McInnes in particular.
- After the exchange of the Agreement, their instructions were to progress the legal side of the transaction through to completion to include matters reflected in the retainer letter: (1) dealing with the banking matters in the sense of ensuring the documentation reflected the agreed terms and negotiating any points on the documentation in accordance with client instructions; (2) dealing with property matters; (3) seeking to agree the terms of the hive-down agreements; (4) advising the client on the disclosure provided by CVP and undertaking legal due diligence.
- Chaffe Street were entitled to take the view that the Jebreels were intelligent, sophisticated and experienced businessmen who were perfectly able to seek advice from their solicitors if they desired it. They were also entitled to work on the basis that TMG was responsible for the financial structuring of the transaction and overall project-management.
- As I have said, the essence of the first claim is that Chaffe Street knew of the facts constituting (a) the M&S accelerated payments issue and (b) the letters of credit issue, and of their prejudicial and destructive effects, and that CVP was seeking to legitimise what it was doing by the draft Amendment Agreement. Chaffe Street had enough knowledge that they should have advised that CVP was acting in (at least highly arguable) breach of the Agreement (in particular of clause 5(5)) in relation to the M&S accelerated payments, and that CVP was not entitled to act as it was proposing to do in relation to the letters of credit, and thus was threatening to act in breach of the Agreement.
- The essence of the second claim is that if the Claimant is wrong on its construction of clause 5(5), then Chaffe Street were negligent in failing to advise the inclusion of a term to the effect that CVC was either not to dispose of or was to replace the proceeds of assets (save the specified exceptions of stock in the ordinary course of trading and, with monies to be put back, plant not in current use).
- As regards the first claim, the allegation is that Chaffe Street should at all times on and following November 21 and in particular on November 24, 28 and 29 have advised that CVP was acting and had acted and was proposing to act in (at least highly arguable) breach and as to the resultant available rights and remedies both by negotiation and by the service of a Rescission Notice and by service of an Option Notice.
- It is said that the following matters placed Chaffe Street on notice that CVP were or might be in breach: (1) their receipt on November 21 of the CVC-M&S letter from Lathams, which made clear that M&S payments were being accelerated from post-Completion to pre- Completion and it was obvious that they would be taken out by CVP. Consideration and advice should have been given to and regarding the "non-disposal" clause 5(5); (2) their receipt on November 23 of the first draft Amendment Agreement, when Mr Brandwood linked clause 2.1.7 of the draft Amendment Agreement to the M&S accelerated payments, and should have concluded that there were clear (and certainly highly arguable) actual/threatened breaches and potential for service of the Rescission Notice, and given the Claimant full advice; (3) Mr Brandwood's receipt on November 26 and 28 of the Eversheds letters on the M&S accelerated payments and the letters of credit, and the revised draft Amendment Agreement with regard to the latter.
- I accept that from mid-October 2000 Chaffe Street had been informed of the approximate level of M&S debt; and they knew in general terms that M&S placed orders and that they called off finished goods in accordance with their requirements. They also knew that CVC was, after taking account of inter-group debt, balance sheet insolvent; and that if there was to be financial assistance there would be a need for a whitewash. Chaffe Street do not dispute that, by the time the Agreement was entered into, Mr Street and Mr Brandwood were aware of the following aspects of the Claimant's intended acquisition of CVC: (a) there was inter-company non-trading debt between CVP and CVC, which was to be assigned to the Claimant at completion; (b) upon acquisition, CVC would be free of Bank Debt; (c) as CVC's largest customer, it was to be expected that M&S would owe significant debt to CVC, which would be coming in (in the form of cash) at some time in the future; (d) the M&S debt was important because it could potentially be used as security for bank financing; (e) the deal depended on whitewashing, which in turn depended on the making of the statutory declaration by CVC's board (supported by the auditors) as to CVC's ongoing solvency over a 12-month period; (f) in that general sense, CVC needed sufficient cash flow to remain solvent over that period.
- But I do not consider that Chaffe Street were informed of the critical importance of cash flow for whitewash purposes. Neither Mr Street nor Mr Brandwood knew: (a) the trading terms between M&S and CVC, and therefore they did not know exactly or approximately when and at what rate debt and finished goods would convert to cash; (b) CVC's cash flow requirements following completion; (c) the critical level of M&S debt in relation to bank financing.
- I do not consider that at any time were they, or should they have been, aware that CVP was in material breach, or anticipatory breach, of the Agreement with respect either to the M&S accelerated payments or the letters of credit. I am satisfied that even if it were arguable, with hindsight, that CVP were in breach of Agreement, that would not have imposed a pro-active duty on Chaffe Street to advise when they thought, correctly, that the matter was being dealt with in negotiation, with TMG taking responsibility. Nor do I accept that it was Chaffe Street's task to ensure that the Agreement was drafted so as to ensure that CVC's asset-composition and asset-worth was preserved at a particular level until completion.
- The first question is whether it should have been clear to Chaffe Street that the acceleration of the M&S payments and their application to inter-company debt would have been in breach of the Agreement. This depends on two questions. The first is their reasonable understanding of the commercial purpose of the Agreement, and the second is their reasonable understanding of the effect of the Agreement. I accept Chaffe Street's contention that prior to the Agreement there had been no express contractual limitation on the unwind. In particular, the documents show that CVP did not agree to a warranty that net assets would be no less than £94 million or to a warranty that sold finished goods and trade debtors less trade creditors would be reduced by no more than £8.8 million, but if reduced by less, then the purchaser would add to the difference to the deferred consideration, provided the operating assets exceeded £94 million by an equivalent amount.
- I am satisfied that at the meetings on November 7/8 and 8/9 it was agreed that the proposed restriction on the unwind was replaced by the NWC/Excluded Debt mechanism, and that Mr McInnes' recollection in re-examination that the unwind mechanism remained in place is reconstruction or wishful thinking. Mr Hill said in his witness statement that it was agreed that any unwind over £8.8 million would be put back, but he accepted that he had only a vague recollection of the discussion, and I consider that he mixed up this discussion with earlier discussions. He approved a version of the draft without any provision for reversal of unwind.
- As I have said, I think it probable that the Sixth Schedule document was on the table and the subject of some discussion, but that Chaffe Street were not concerned in any discussion about the figures, and that it was not referred or shown to Mr Street or Mr Brandwood at this stage. I accept Mr Street's and Mr Brandwood's evidence that they were not provided with a copy of the Sixth Schedule document until the afternoon of November 9; and that their understanding of the essential function of the document was that it set out the September 2000 management accounts, as referred to in certain clauses of the Agreement, and essentially fixed the "bases, policies and practices" by which CVC's assets and liabilities were stated. They were also told that it set out the anticipated completion position, but I am satisfied that they were never informed that it was a crucial document designed to show the outcome of the deal.
- I have already expressed the view that the Jebreels were taken through the draft agreement on November 8. But it is likely that they read only those parts to which their attention was specifically drawn. I also accept that Mr Street would have told the Jebreels that the thrust of clause 5(5) was to protect against disposal of fixed assets etc. in circumstances where CVP had refused to give a net asset warranty. I accept Chaffe Street's evidence that clause 5(5) was discussed primarily in the context of fixed assets. Its wording derived from the deleted Warranty 10, and not the deleted Warranty 6, although commercially it gave some protection in place of the net asset warranty.
- It is accepted by Chaffe Street that they did not advise on any potential breach by CVP; or attend the meeting of November 28/29; or give detailed advice on the draft Amendment Agreement, and particularly on its implications for the letters of credit problem and the M&S accelerated payments. Subject to Mr McInnes' claim that he asked "Surely they cannot do this?" it is common ground that they were never instructed to consider whether CVP were or might arguably be acting contrary to the Agreement.
- TMG and the Jebreels had negotiated the Agreement, and were familiar with its terms, and would have been able to detect whether CVP was acting or was threatening to act in a way that was contrary to commercial expectation and such as to imperil the transaction and then instruct Chaffe Street to consider the legal consequences of CVP's conduct, and provide them with the necessary commercial information to enable legal advice to be given.
- Ebby Jebreel's evidence was that he did not know at the time that the acceleration of the M&S payments was against the contract, and he assumed that it was as per contract. In re-examination he said that he would have thought that if there was anything done which was outside the ordinary course of business in relation to the disposal of assets, Chaffe Street would have brought it to his attention.
- But this position is undermined by Mr McInnes' evidence. At all times Mr McInnes had overall responsibility for dealing with the implications of the M&S accelerated payments, and for dealing with the negotiations. TMG made it clear that it was dealing with the issue of the M&S accelerated payments. Mr Daly of Lathams told Mr Brandwood this during a phone call following receipt of the fax of November 21. Mr McInnes said the same at the November 24 meeting, at which the Jebreels were present.
- Mr McInnes claimed that he communicated the view that CVP was in breach of the Agreement to Chaffe Street and asked for their advice by saying on November 29 something along the lines of "surely they cannot do this?" to which the reply (from Mr Brandwood, he thinks) was something like "you can walk away from the deal." In the witness box Mr McInnes said that he had to admit that it was not a particularly strong recollection and it was not a long discussion. It was a comment that he recollected making and a response which he recollected. Mr Hill's evidence was that he would have raised with Chaffe Street the question whether what CVP had done in respect of the speed payments amounted to a breach of agreement, but in the witness box he said that he could not specifically say that he had that conversation with anybody. I do not accept the evidence of Mr McInnes and Mr Hill and believe it is reconstruction in the light of the claim in these proceedings.
- In cross-examination Mr McInnes said that when the question of the M&S accelerated payments came up in negotiations, his position was that this was outside the scope of what had been agreed at the end of October. He did not have a specific recollection of saying to Chaffe Street that it was outside the scope of the agreement until the very end, when it was clear that it was not going to be put back at all. But he had a recollection of saying it repeatedly to Mr Einollahi in meetings at which Chaffe Street were present. He said words to the effect that it was outside the scope of the agreement and the money had to be put back. Mr McInnes said that he told that to Ebby Jebreel, and Ebby Jebreel understood that Mr McInnes thought it was outside the scope of, and therefore contrary, to the Agreement. It was then put to him that he would have wanted to take legal advice on that, but he said that he would not wish to do so until Mr Einollahi said he was not going to put it right. He said:
- In my judgment that is a perfectly sensible and normal commercial approach, but it largely undermines the Claimant's case, which is as far removed from commercial reality as it is possible to be.
- In the course of his evidence he became aware that his answers were not helpful to the Claimant's case, because he realised that if he thought that CVP were in breach, then that would undermine the Claimant's case that Chaffe Street had a pro-active duty to advise a legally ignorant client. So in re-examination he tried to draw a distinction between breaking an agreement in the sense of not doing what one had agreed to do or something that one had agreed not to do, and a breach of contract in terms of an event which was specifically provided for in a document. But he said that he knew what had been done was not in the ordinary course of business and was tantamount to the removal of assets, and he knew that those provisions were in the Agreement. He concluded that what they had done was not in accordance with the Agreement, and he said to Mr Einollahi that the cash would have to be put back, and what he was saying to Mr Einollahi was "This should not have been done; this must be undone." He was very firm with him, and said something like "This is completely against what we agreed".
- My judgment is that Mr McInnes probably thought that CVP were acting contrary to the spirit of the Agreement, and suspected that they might be acting contrary to its letter (with which he was not familiar), but he did not seek legal advice because he intended and hoped to solve the problem by commercial means in negotiation. He was in a position to ask Chaffe Street to advise, but for perfectly understandable commercial reasons he did not do so.
- I also accept Chaffe Street's evidence that what was conveyed to them was that the M&S accelerated payments were among several issues confronting the Jebreels and TMG. Concentration on that issue and the letters of credit issue is simply the use of hindsight to construct the claim against Chaffe Street.
- Thus I accept Mr Street's evidence that Ebby Jebreel called him on November 28 to say that he intended to renegotiate the terms of the deal because the financial position of CVC was not what he was planning on when he entered into the Agreement; and that he did not mention (or at any rate give any emphasis to) the acceleration of the M&S payments during the call or any impact it might have on the whitewash. I am satisfied that Mr Street's note accurately records that Mr McInnes was on November 28 relaying the fact that there were a number of problems with the transaction, and that a solution was being sought.
- Nor did Mr McInnes inform Mr Street in their telephone conversation on November 28 of a link between the acceleration of the M&S payments and an inability to whitewash. The financial assistance problems were said to stem from the lack of readiness to hive down the operating units (a concern discussed at the November 24 meeting). Mr McInnes told Mr Street that, whatever the position with the acceleration of the M&S payments and the M&S debt ("No M&S debt"), CVP was intending to inject cash into CVC.
- Nor is there anything in the Claimant's criticism of the way in which Mr Brandwood dealt with the draft Amendment Agreement. I accept Chaffe Street's contention that the critical prior question was the commercial implication of the terms. It was right for Mr Brandwood to provide the document to the Jebreels and TMG in the expectation that, if need be, there would be a meeting on which instructions could be sought and any advice given. As to clause 2.1.1 Eversheds' covering letter had stated that the proposed clause had been discussed with TMG and "The precise mechanics (timing) for the adjustment may change". Mr Brandwood did not know precisely what discussions TMG had had.
- There is no basis for the allegation in relation to Chaffe Street's non-attendance at the November 28/29 meeting. Mr Street and Mr Brandwood gave evidence that if a client was insistent on their attendance at a meeting in a large transaction, they would either attend or send someone in their stead. There was the following exchange in the cross-examination of Ebby Jebreel:
- Ebby Jebreel knew how to insist on attendance if he thought it was necessary. He did not insist on attendance, and that is the end of the point.
- It is not necessary on this analysis to decide whether there actually was a breach of the Agreement. The Claimant's argument on construction is very sophisticated, and I am wholly satisfied that there was not such a clear breach as could have imposed on Chaffe Street a duty pro-actively to advise on remedies. Commercially, clause 5(5) was plainly not intended to deal with collection of debts from customers and the normal use of the payments to satisfy inter-company debt. If it were necessary to decide whether there was a breach in relation to the M&S accelerated payments I would have found that the natural meaning of clause 5(5) would not encompass the collection of debts from customers and the payment of existing debt, and that the NWC/Excluded Debt mechanism was the control mechanism for current asset movements between exchange and completion.
- Nor do I see any basis for the implication of the terms alleged by the Claimant. In particular, the terms are not necessary to give business efficacy to the Agreement nor do they arise as an obvious inference.
- There is nothing in the letters of credit point. Mr Brandwood understood the basic proposal set out in Eversheds' fax of November 28. It was being dealt with by TMG. There was nothing that put Mr Brandwood on notice that there was a concern about the letters of credit issue. It was simply a proposal to deal with a commercial problem, namely that neither the asset (the incoming stock) nor the liability (CVC's obligation to pay for it) was in CVC's books. Clause 5(16) of the Agreement provided a method of dealing with the letters of credit. It would have required the Claimant (1) to use all its reasonable endeavours as soon as reasonably practicable following completion to release CVP from its liability to its bank; and (2) pending such release to indemnify CVP from any liability to its bank. That might have led to a better cash flow for CVC than compliance with the NWC adjustment mechanism. But these were purely commercial matters for which TMG had sole responsibility and Mr Brandwood cannot be faulted for simply forwarding the drafts for instructions.
- Nor do I consider that there is anything in the alternative claim that Chaffe Street's drafting of the Agreement was negligent.
- As in their answer to the first claim, Chaffe Street do not dispute that, by November 7/8 Mr Street and Mr Brandwood were aware of various aspects of the commercial relationship between CVP and CVC and between CVC and M&S, but they did not know the trading terms between M&S and CVC, CVC's cash flow requirements following completion, or the critical level of M&S debt in relation to bank financing.
- During November 7/9 the financial terms of the revised deal were dictated to Chaffe Street without their having been involved in the formulation or negotiation process. At a number of key points during November 7/9 the Jebreels and TMG (Mr McInnes and Mr Hill) were either present when the revised terms of the deal were being outlined or fully involved in the process by which those terms were being reduced to a legal form.
- Commencing with the plenary session on November 8, Mr Einollahi and Mr McInnes jointly outlined a deal that was radically different from that proposed in the offer letters. The commercial terms of the new deal were fundamentally inconsistent with the warranty-based approach where the asset-worth and asset-composition of CVC would be guaranteed at completion. The only guarantee that CVP was prepared to give was that NWC would not fall below £39 million.
- I am satisfied that it was plain to all those involved that CVP was not prepared to limit the extent to which the M&S debt and finished goods would be converted into cash (save as that conversion might impact on NWC if the cash were then used to reduce debts of various types). It was expressly stated that Warranties 6 and 7 were to be deleted and there was no other commercial term on the table that could reverse the effect of that deletion by requiring a cash injection on a £ for £ basis (save by the NWC adjustment mechanism).
- Mr Hill read through the draft Agreement. Chaffe Street were entitled to draw comfort from the absence of any suggestion from Mr Hill (or Mr McInnes, to whom the draft had been sent by e-mail on November 8) that the draft legal document had incorrectly embodied the agreed commercial terms. Chaffe Street took the Jebreels through the draft document twice. Ebby Jebreel accepted that if he had been unhappy with any commercial points stemming from the document, he would have said so.
- I therefore accept that there was no reason why Chaffe Street should have sought to include an express provision limiting the unwind.
- I have come to a very clear view that Chaffe Street were not in breach of duty on either way of putting the claim, and I will therefore not address the complex causation issues in the detail in which they were presented to me. That is particularly because to some extent they depend on a variety of alternative dates in the course of the negotiations as to when (if the Claimant had succeeded on the issue of duty) the advice should have been given, and it would have been necessary to make various alternative findings on a hypothetical basis. I also take the view that it was unfortunate that the issue whether the Claimant would actually have been able to complete was carved out of this trial, and reserved as a second trial issue. A wholly artificial distinction had to be drawn between the questions whether the Jebreels thought they would have been able to complete, and therefore would have exercised the Option (first trial issue) and whether they would actually have been able to complete (second trial issue). There are plainly very serious question marks about the Jebreels' ability to complete, and it might have turned out on the evidence that they had no realistic prospect of completing.
- It is the Claimant's primary case that, if it had been given proper advice by Chaffe Street, it would have used that advice to seek to have CVP reverse its stance (intending to serve the Option Notice if CVP did) and if CVP had reversed its stance (and agreed to put back the M&S accelerated payments) then the Claimant would have served the Option Notice (and all the more so if Chaffe Street had only given the correct advice on November 28 or at an attendance at the meeting on November 28/29). Thereafter (although this is a second trial issue) the Claimant would have obtained finance from Mr Heggie and/or Sir David Alliance and/or the Jebreel family. If CVP had not reversed the M&S accelerated payments, the Claimant would have served the Rescission Notice and sued with a very high chance of success.
- If Chaffe Street had advised the Jebreels and Mr McInnes that CVP were in breach or threatened breach, then the issue arises as to what would have happened.
- The first point is that the M&S accelerated payments issue was only one of the issues in the negotiations. I accept Chaffe Street's case that overall the Claimant did not exercise the Option because Ebby Jebreel no longer considered the transaction an attractive one on the agreed terms and in view of difficulties that were unconnected with the acceleration of the M&S payments, which are put at the forefront purely because of the present claim. In particular he was influenced by difficulties which had arisen with the deal, namely the Lathams' draft due diligence report; his pessimistic view of the prospects of further business with M&S; concerns as to the viability of the individual units; closure and redundancy costs; absence of support from the management of the operating units; and lack of central management for CVC.
- In his telephone call with Mr Street on November 28, Ebby Jebreel informed Mr Street that he wished to renegotiate the terms of the deal because the financial position of CVC was not what he was planning on when he entered into the Agreement and he did not mention the M&S accelerated payments. Similarly, during his telephone call with Mr Street on November 28, Mr McInnes did not say that the M&S accelerated payments was the reason that financial assistance could not take place. He referred to the problems with the hiving down of the operating units, and it was in that context that Mr McInnes said he was looking to negotiate a deal with Mr Einollahi which did not require financial assistance.
- Consequently, all that would have happened with regard to Chaffe Street's hypothetical advice would be that at most it would have been slipped in by Mr McInnes in the negotiations, but only as one part of them, by Mr McInnes saying that the M&S payments should be reversed because, as they had been advised, acceleration was contrary to the letter and spirit of the Agreement.
- In answer to a question from the court, as to what difference it would have made if, on November 28, he had been authorised to threaten legal proceedings or rescission (or Chaffe Street had been) Mr McInnes replied that on November 28 he thought it would have improved the chances of getting Mr Einollahi to persuade his client to put back at least enough to make the deal viable, but by the time he was having the discussions on November 29, he suspected that the threat might not have helped Mr Einollahi to change his client's mind.
- I consider that there is no realistic chance that this would have had any effect whatsoever in the light of the weakness of the point and the fact that this was a purely commercial negotiation.
- The question whether, if the payments had been reversed, the Claimant thought it was able to complete, would not arise. If it were necessary to decide it, I am satisfied that Ebby Jebreel would not have exercised the Option for the reasons given above, and also because there was much to be sorted out with regard to AIB's funding, and Sir David Alliance was no longer supporting the deal.
- In those circumstances I consider that it is wholly unrealistic to suppose that the Claimant would have served a Rescission Notice in order to preserve a very speculative damages claim.
- As regards the alternative claim, the only causation issue which arises is whether, if Chaffe Street had advised the inclusion of an express provision limiting unwind in the draft Agreement, there is a real chance that it would have been accepted by CVP. On my findings that Chaffe Street had no reason to believe that there had been an agreement to that effect, and that it had not in fact been agreed previously, it follows that there would have been no such realistic chance.
- The issues on these claims are as follows. First, what were the terms of the compromise agreement, and in particular was there an option agreement, and did the agreement on fees extend beyond those of TMG and Chaffe Street? Second, did Chaffe Street know of the terms, and were they negligent in not advising that the terms be reduced to writing? Third, would it have made a difference if they had so advised?
- The claim is that there was an offer made by Mr Einollahi for CVP that in return for the Claimant transferring the retainers of its professional advisers, and providing that the Shotton purchase took place: (1) CVP would pay all of the Claimant's professional fees of the abortive transaction, and (2) CVP would give the Claimant the right to cherry-pick all of the CV Group's surplus properties (being properties which were or became surplus) at forced sale values. The Claimant decided to and believed that it had accepted that offer and so as to give rise to an enforceable arrangement. However, the offer (and the Claimant's acceptance) did not give rise to any enforceable arrangement and in particular any enforceable obligations on the part of the CVP or rights on the part of the Claimant, because there was never any written contract which satisfied section 2 of the Law of Property (Miscellaneous Provisions) Act 1989. Accordingly, the Claimant had no remedy when CVP repudiated the arrangement on December 5, 2000 and following.
- It is common ground that Chaffe Street did not advise Ebby Jebreel, Jacob Jebreel or Mr McInnes that a written agreement was required under section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 for an enforceable agreement with regard to the property option.
- The compromise emerged in discussions between Mr McInnes and Mr Einollahi. There was an element of conflict of interest, because an important term so far as TMG was concerned was that under the proposal its fees would be paid, whereas if the Claimant's Option lapsed it was to be paid nothing.
- It is plain that Mr Einollahi held out the possibility of offering surplus properties to the Jebreels at favourable prices, but I do not consider that Chaffe Street were ever given to understand that there was an offer on behalf of CVP to grant an option to the Claimant which was capable of acceptance. Nor (if it is relevant) do I consider on the evidence that there actually was such an offer.
- I accept Chaffe Street's argument that it is fanciful to suppose that CVP would on November 29/30 have entered into a binding option in relation to its entire property portfolio (worth £250 million). Mr Einollahi's indication of a favourable deal on any surplus properties from CVP's portfolio could never have been meant to go so far.
- That is supported by Mr McInnes' evidence that the property aspect of the compromise was not discussed in the presence of Ms Kantor. He got the impression that the property aspect of the consolation prize was something that Mr Einollahi intended to deliver quietly using his apparent delegated authority from, and possibly, with the consent of the chairman of CVP, without other members of the CVP board being actively involved. But it is fanciful to suppose that Sir Harry Djanogly, the CVP Chairman, could or would have executed such an option without Board approval. He owed duties to his shareholders and could not unilaterally have irrevocably bound CVP to sell to the Claimant its entire "surplus" property portfolio at an undervalue. I am also satisfied for those reasons that if a written agreement had been sought then there is no real and substantial chance that CVP would have agreed.
- The conclusion that what was being held out was a simply a commercial possibility rather than a firm option explains Ebby Jebreel's apparent lack of interest on the day and his conduct thereafter. I accept Mr Street's evidence about Ebby Jebreel's dismissive attitude in the two conversations. Mr Street twice asked Ebby Jebreel what he wanted to do about the properties. Ebby Jebreel's first answer was that he found the properties unattractive and he could always take the matter up the following week if he were interested in buying them. Ebby Jebreel's second answer was that he did not want to bother with them and that he was going home.
- I also accept Chaffe Street's contention that what Ebby Jebreel did at and after the meeting with Mr Einollahi on December 5 was entirely inconsistent with the notion that he believed himself to have a property option in that (a) at the meeting itself he did not "thump the table" and tell Mr Einollahi that he was in breach of the agreement; (b) he wrote to CVP about the allegations concerning his visit to the unions, without any mention of CVP having repudiated an agreement relating to the properties; and (c) he corresponded with Deloittes and Chestertons about the properties without any suggestion that CVP had been in breach.
- Chaffe Street were not negligent. Mr Street twice sought Ebby Jebreel's instructions as to what he wanted to do, and Ebby Jebreel's response was that he did not want to pursue the matter further. I accept the contention that he was not obliged to second guess or challenge Ebby Jebreel's instructions, and to tell a sophisticated commercial client (whether or not he was "tired and dispirited") that if he did not agree an offer on a particular night, it might not be available in the future.
- If I were wrong in my conclusion that there was no property option offer and in my conclusion that Ebby Jebreel expressed disinterest, then I would have accepted that, notwithstanding Ebby Jebreel's experience in property transactions, Mr Street would have been under a duty to satisfy himself that Ebby Jebreel knew that the agreement should be in writing. It does not follow that he should have given that advice as a matter of urgency on November 30. I do not consider that in the circumstances Mr Street should have foreseen that relations between the Jebreels and CVP would deteriorate so fast as a result of CVP's unfavourable perceptions of the activities of Ebby Jebreel and Sir David Alliance.
- So far professional fees were concerned, the only urgent matter which needed to be dealt with was the transfer of the retainer of TMG and Chaffe Street. In my judgment the probability is that nothing was said expressly about other professionals' fees, and there was no reason for Mr Street to have concluded that Mr Einollahi's proposal as accepted by Ms Kantor extended beyond the fees of TMG and Chaffe Street. Mr Street sought to persuade Ms Kantor to include Lathams' fees. I accept his evidence that that was without success, but the refusal was not so categorical as to prevent CVP's agreement in the Shotton Agreement to pay a further £60,000.
- If there was no firm agreement in relation to the properties, but an agreement in relation to fees, Ebby Jebreel and Mr McInnes did not need advising that the commercial terms should be agreed clearly, and that it is sometimes helpful to have such an agreement in writing. Relations with CVP had not deteriorated.
- The other issues do not arise on my findings.
- If this issue had arisen I would have accepted the Claimant's argument that Chaffe Street had not shown any fault on the part of the Claimant.
- There is nothing in the point on the Contract (Rights of Third Parties) Act 1999, and there would have been much force in the Claimant's point on speculative litigation.
- Ebby Jebreel said in his witness statement that there had been a discussion with Chaffe Street during which Ebby Jebreel asked – "I assume that this is enough as my maximum loss is going to be £12 million?" – and the answer was – "Yes, you are well covered". Ebby Jebreel's statement was to the effect that he signed the retainer letter in the belief that, in view of Chaffe Street's advice, the £20 million limit was adequate to cover the maximum claim he might have against them in the future.
- Ebby Jebreel said in re-examination:
- Mr Street's recollection of the discussions was that Ebby Jebreel made an enquiry about the amount of the limitation and Mr Street responded that he fixed the amount at what he considered to be reasonable taking into account the circumstances of the transaction and Chaffe Street's insurance cover. Ebby Jebreel did not ask or suggest that £20 million was more than he could lose on the transaction and Mr Street did not confirm that to be the case. Mr Street did not make any reference to the amount of Chaffe Street's insurance cover. Ebby Jebreel did say to Mr Street that the limit was reasonable.
- This is a typical case where recollections of what was said more than five years ago can be unreliable and self-serving. In my judgment Mr Street's account is much more likely to accord with the commercial reality, but I do not think that anything turns on the difference.
- I accept that the term is reasonable in the light of the factors in the Unfair Contract Terms Act 1997 ("UCTA"). The overall test of reasonableness is that the term: "shall have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made" (section 11(1))
- By Schedule 2 the following guidelines (among others) are set out: (1) the strength of the bargaining position of the parties relative to each other, to taking into account (among other things) alternative means by which the customer's requirements could have been met; (2) whether the customer received an inducement to agree to the term, or in accepting it had an opportunity of entering into a similar contract with other persons, but without having to accept a similar term; (3) whether the customer knew or ought reasonably to have known of the existence and extent of the term.
- By section 11(4), where liability is restricted to a specified sum, regard is to be had in addition to: (a ) the resources the person seeking to restrict liability could expect to be available to him for the purpose of meeting the liability should it arise; and (b) how far it was open to him to restrict liability to cover himself by insurance.
- I am satisfied that the limitation was reasonable. First, the Claimant, in effect the Jebreels, was a sophisticated and wealthy consumer. The bargaining positions of the parties were equal. The Jebreels were used to contracting with professionals on the basis of limitation of liability. For example, they accepted Lathams' limitation (7 times their fee) without demur. Second, the Claimant was aware of (and on its own case discussed) the limitation, and it was not imposed on it as a non-negotiable term (albeit, as I accept, it would not have been easy for the Claimant to switch solicitors by mid-November 2000). Indeed, in Appendix 2 of the draft engagement letter Chaffe Street said: "Should you want to vary these limitations we shall be pleased to discuss it with you but we reserve the right to vary our fees accordingly." Third, Chaffe Street determined the £20 million limit on reasonable commercial principles, taking into account insurance cover and its expense and the circumstances of the transaction.
- Accordingly I dismiss the claims.
Mr Justice Lawrence Collins:
I Introduction
II The Agreement
(1) " 'the Debt' means all indebtedness owing by the Company and any of the Subsidiaries and any of the Overseas Entities to the Seller or any of its subsidiaries (other than the Company, the Subsidiaries, and the Overseas Entities) other than the Excluded Debt and other than current trading indebtedness (which will be settled in accordance with current terms of business);"
(2) " 'the Excluded Debt' means the sum of £4,600,000 (subject to adjustment as hereinafter mentioned) of the indebtedness of the Company to the Seller (not being current trading indebtedness). The said sum of £4,600,000 shall be increased by an amount equivalent to any excess of the consolidated Net Working Capital of the Company and the Subsidiaries and the Overseas Entities (calculated and consolidated using bases, policies and practices consistent with those used to prepare the 30th September 2000 Management Accounts forming the Sixth Schedule) over £44,000,000 at 26th November 2000 up to a maximum increase of £8,800,000 and shall be reduced by an amount equivalent to any shortfall in such consolidated Net Working Capital below £44,000,000 at 26th November 2000 up to a maximum reduction of £4,600,000. The parties shall use all reasonable endeavours to agree the amount of the Excluded Debt and the Net Working Capital as soon as reasonably practicable following Completion;"
(3) " 'Net Working Capital means stocks of raw materials, work in progress and finished goods plus debtors (but excluding intra-group debts other than intra-group trading debts) and cash less creditors (but excluding intra group creditors other than intra-group trading creditors);"
"Each of the Schedules shall have effect as if set out herein."
"(1) Subject to the terms of this Agreement in consideration of the payment of the sum of £1 by the Buyer to the Seller (receipt of which the Seller hereby acknowledges) the Seller hereby grants to the Buyer the right exercisable on one occasion only following a notice of intention under Clause 2(4) (which may only be given once) by notice in writing from the Buyer to the Seller given at any time on or after 17th November 2000 but on or before 28th November 2000 to require the Seller to sell the Sale Shares and to sell or procure the sale of the Overseas Entities Shares and the Debt to the Buyer under the terms of this Agreement.
…
(3) In the event of the Buyer not giving notice to require the Seller to sell to it (or procure the Sale as the case may be) the Sale Shares and the Overseas Entities Shares and the Debt in accordance with Clause 2(1) above on or before 28th November 2000 this Agreement shall lapse and neither party shall have any further liability to the other hereunder.
(4) The Buyer shall notify the Seller of its intention to exercise its right under Clause 2(1) not less than three Business Days prior to such exercise. Such notice shall not in any way bind the Buyer to serve a notice of exercise of such right at any time thereafter. The latest date for the service of this notice of intention is 24th November 2000."
"(1) The consideration payable by the Buyer for the Sale Shares shall be the sum of £1 payable in full in cash on Completion …
(2) The consideration by the Buyer for the Debt shall be the sum of £12,000,000 …"
"(H) It is the Buyer's intention that its directors (and the Continuing Directors if they so agree) will sign any statutory declarations to whitewash financial assistance under the Companies Act 1985 in connection with this Agreement."
"(3) On or prior to Completion the Seller shall procure that the Company shall capitalise into redeemable preference shares of £1 each sufficient indebtedness owning to the Seller so as to result in the Company having positive shareholders funds of not less than £1,000,000 and not more than £1,500,000.
(4) In the event that the September Management Accounts of the Businesses as annexed hereto in the Sixth Schedule have not been prepared on a consistent basis and using the same bases and policies as those applied in management accounts prepared for the Businesses through the period of 12 months prior to 30th September 2000 and as a result:-
(a) liabilities which give rise to an obligation to make cash payments to third parties are therein understated the Seller shall forthwith on demand pay to the Buyer the amount by which such liabilities are understated …
…
(5) During the period from 30th September 2000 to Completion neither the Seller nor any of its subsidiaries (including the Company and the Subsidiaries) nor any of the Overseas Entities has disposed of or without the Buyer's prior written consent shall dispose of any asset of the Businesses other than disposals of stock in the ordinary course of trading and other than disposals of plant and equipment not then in current use on an arm's length basis. To the extent that plant and equipment not in current use has been or is so disposed of during such period the Seller shall pay to the Buyer forthwith on demand an amount equivalent to the full proceeds of sale thereof by way of reduction in the consideration payable by the Buyer for the Debt. In the event that during such period any liability arises to or is incurred by the Company or any of the Subsidiaries or any of the Overseas Entities (as a result of a voluntary act or voluntary omission of the Seller) other than in the ordinary course of business the Seller shall pay to the Buyer forthwith on demand an amount equivalent to the full amount of such liabilities by way of reduction in the consideration payable by the Buyer for the Debt. Save that there shall be no breach of the above provisions arising as a result of:
(a) operation of sub-clause (14) of this Clause 5;
(b) any matter to ensure that the Warranties or Clauses 5(1), 5(3) 5(9) and 5(15) are not breached; or
(c) any matter relating to tax.
…
(9) The Seller agrees with the Buyer that on Completion it will enter into an agreement with the Company for the repayment (without set off or counterclaim) of the Excluded Debt on terms that require the Company to pay to it on a weekly basis towards satisfaction of the Excluded Debt 20% of all receipts (net of VAT) received by the Company and/or the Subsidiaries and/or the Overseas Entities from time to time prior to 31st December 2000 (and 10% of net receipts thereafter) in respect of debts due to it from Marks & Spencer plc or any of its subsidiaries and require repayment in full of the Excluded Debt in any event within 90 days of Completion and provided that these terms are met the Seller shall not take any action to enforce earlier payment of the Excluded Debt.
(10) In the event of the Consolidated Net Working Capital of the Company and the Subsidiaries and the Overseas Entities at 26th November 2000 (calculated and consolidated using bases, practices and policies consistent with those used to prepare the 30th September Management Accounts forming the Sixth Schedule) being less than £39,000,000 the Seller shall forthwith on demand make good such shortfall by way of a cash contribution to the Company of an amount equivalent to the shortfall in such consolidated Net Working Capital below £39,000,000.
….
(16) The Buyer undertakes to use all its reasonable endeavours as soon as reasonably practicable following Completion to procure the release of the Seller or any of its subsidiaries (other than the Company, the Subsidiaries and the Overseas Entities) from any guarantee or indemnity given by such company in respect of the obligations of the Company, any of the Subsidiaries or any Overseas Entity and pending such release to indemni[f]y the Seller and its subsidiaries from any liability in relation thereto."
"(A) Subject to the matters fairly disclosed in the Disclosure Letter the Seller represents and warrants to the Buyer that as at the Completion the Warranties will be true and accurate
…
(D) Right of Rescission
In the event of it becoming apparent to the Buyer on or before Completion that the Seller will be in material breach of any of the Warranties or any other term of this Agreement the Buyer may rescind this Agreement by notice in writing to the Seller.
(E) Limitations
The liability of the Seller under the Warranties shall be limited in accordance with the provisions of the Fifth Schedule."
"(C) Rights of Rescission
Any rights of rescission conferred upon the Buyer hereby shall be in addition to and without prejudice to all other rights and remedies available to it and no exercise or failure to exercise such a right of rescission shall constitute a waiver by the Buyer of any such other right or remedy. Completion shall not constitute a waiver by the Buyer of any breach of any provision of this Agreement (save for rescission which may not take place after Completion) whether or not known to the Buyer at the date of Completion.
…
(G) Buyer's reliance solely on the Warranties
The Buyer acknowledges that:-
(i) this Agreement sets forth the entire agreement between the parties with respect to the subject matter covered by it and supersedes and replaces all prior communications, drafts, representations, warranties, stipulations, undertakings and agreements of whatsoever nature, whether oral or written, between the parties relating thereto;
(ii) it does not enter into this Agreement in reliance on any warranty, representation, undertaking, stipulation or agreement other than those contained in this Agreement;
(iii) save as expressly provided herein its only remedies are for breach of contract;
(iv) save as expressly provided herein it has no right to rescind this Agreement either for breach of contract or for negligent or innocent misrepresentation;
(v) without prejudice to the generality of the foregoing, the Buyer waives any right or remedy it may have against the Seller, in respect of any statement (whether oral or written) of fact or opinion whatsoever, including any untrue or misleading statement, warranty or misrepresentation, expressed or implied, made to the Buyer or its agents, officers or employees during the negotiation of or otherwise in connection with this Agreement save for any warranty, misrepresentation or undertaking expressly contained in this Agreement or which is made fraudulently. …"
"(1) None of the assets undertaking or uncalled capital of the Company or any of the Subsidiaries or any of the Overseas Entities (but excluding for these purposes the Properties) is subject to any Encumbrance or any agreement or commitment to give or create any Encumbrance save for retention of title claims relating to stock, set off claims relating to debtors and plant and equipment which is subject to hire purchase and/or leasing liabilities totalling not more than £12,000,000.
…
(4) The Company and the Subsidiaries and the Overseas Entities have no bank debt or third party loans (other than the hire purchase and lease liabilities referred to in paragraph 1 of this Schedule).
…
(7) All debts due to the Company, the Subsidiaries and the Overseas Entities from Marks & Spencer PLC or any of its subsidiaries are freely assignable without the consent of the debtor."
III The facts
A Initial approaches
B Finance and instruction of advisers
"Were the Bank's Solicitors to take a different view, then the 'white wash' could not currently be effected because on the basis of the 1998 accounts Target is 'balance sheet' insolvent and even after the writing off of part of the indebtedness to Parent to render Target 'balance sheet' solvent the directors are unlikely to be able to give the statutory declaration statement (or the auditors to support it) either that the company will be able to pay its debts as they fall due over the twelve months following the creation of the Debenture or it will go into solvent liquidation and all debts will be paid during the 12 months thereafter.
…
In relation to the 'orders' whilst [it] is certainly possible to create fixed security over the debts arising from those orders and any 'call off' made pursuant to them, that is likely to be relatively complicated and its achievement will depend on the precise terms of the orders and the call off arrangement contracts which give rise to them."
C October 19 meeting
D Finance and the drafting of offer letters
"Neither CV nor the corporate vehicle to be acquired will dispose of any assets, nor incur any liabilities, within the division, other than in the ordinary course of business, pending completion, other than the transfers in and out as envisaged under the terms hereof"
"Over the last 48 hours, the position as presented to us has altered as set out on page 2 of the analysis, resulting in an erosion of acquired net assets at book value of some £20 million. The majority of that erosion falls within the category of readily realizable 'hard' current assets and of real liabilities, particularly the apparent and inexplicable shortfall of leased fixed assets as compared to the liabilities outstanding thereon.
Our Client understands that there is a desire to hold to the cash value of the outline offer of last week and proposes to hold to that position, on the basis that the variances now advised to the net book value of the assets are dealt with as follows:-
…
• The sale of the Irish businesses and the increased reduction in 'sold' finished goods and debtors amount to some £4 million of erosion of net assets, of which over £3 million is in the form of readily realizable 'hard' assets. Whilst our Client's outline offer was not sensitive to minor variations in net asset values, these variations are beyond such tolerances. To compensate for this erosion, without amendment to the quantum of the cash offer, we suggest that the 'unwind' of sold stock and debtors is restricted to the £8.8 million originally advised and that the freehold retail sites used by RHL are included in the assets transferred, with appropriate commercial leases granted to RHL for their ongoing use.
Accordingly, we offer, on behalf of our client, for P to acquire the whole of the equity and loan account interest of CV in the Clothing Division, as reflected in the column headed 'Division as now presented' on page 2 of the enclosed analysis, for the sum of £1 for the equity interests and £15 million for the loan account interests on the terms set out below and subject to the conditions set out hereafter.
…
• The book value of 'sold' finished goods and collectable debtors (including CV group debtors) will be no less than £60.2 million.
…
Our Client will commission limited due diligence investigations to verify that the total operating assets transferred on the transaction (as categorized, adjusted and defined above) are not less than £94 million and the offer is conditional on that verification. Further due diligence verifications may be required by our Client's bankers and the DTI.
Neither CV nor the corporate vehicle to be acquired will dispose of any assets, nor incur any liabilities, within the division, other than in the ordinary course of business, pending completion, other than the transfers in and out as envisaged under the terms hereof.
We confirm that our client is prepared to accept limited warranties. In particular, CV will warrant that the corporate vehicle to be acquired has no actual or contingent liabilities that are not disclosed in the statements of operating assets upon which the enclosed analysis has been based, that all assets and the shares in the corporate vehicle are owned by CV and free of encumbrance, save as anticipated, and that there are no facts or circumstances, to the best of the knowledge and belief of CV, having made due and careful enquiry, which might adversely affect the business profitability or prospects of all or any of the businesses. CV will verify the description and nature of the operating assets and warrant that all information provided by [and] on behalf of CV in the course of these negotiations, was when given and at completion, is true and accurate and not misleading. CV will enter into an appropriate deed of tax indemnity and provision of appropriate environmental warranties."
51. On October 27 Mr Travis faxed to Mr Street the final October 25 offer letter, but without the financial schedules.
"8. Our client's offer in connection with the payment of the £3m deferred consideration will not be amended, as this represents a fundamental variation from the negotiation position from which our client's offer was based.
…
11. Our client accepts that only limited warranties are going to be offered which will primarily include:-
• Title to the shares and assets being sold to our client;
• Minimum operating assets at completion of £94m (before deducting depreciation) and the level of 'sold' finished goods and collectable debtors (including CV Group debtors) less creditors (including CV Group creditors) at completion is reduced by no more than £8.8m from the 30 September 2000 position of £32m. If the net of the 'sold' stock, debtors and creditors, defined above, have not reduced by £8.8m then our client will add the shortfall to the deferred consideration; as long as the operating assets before depreciation, exceed £94m by an equivalent amount; and
• Disclosure of any contingent liabilities not provided for and details of all environmental reports and issues, within the knowledge of the appropriate key executives but without the need of the executives to carry out further enquiries.
…
13. As regards the process up to completion our client acknowledges the speed necessary and is happy to co-ordinate their limited due diligence and other necessary work in line with your client's suggestion.
14. As regards the matter of the minimum net operating assets and 'sold' finished goods and collectable debtors included in our client's offer, their position remains unchanged. Any further reductions in these targets up to completion would represent an unacceptable variation to their proposal, as would any request for an increase in the price being paid."
E Events prior to meetings of November 7/8 and November 8/9
"1. We anticipate that our work will entail:-
(a) Advising upon and assisting in the negotiation of 'Heads of Terms'.
(b) Dealing with the establishment of Newco.
(c) Dealing with legal due diligence.
(d) Negotiating an agreement for the sale of shares in the Target and a tax indemnity.
(e) Dealing with any 'standard' financial assistance implications of the transaction.
(f) Reviewing the bank documents and the security arrangements.
(g) Dealing with various reconstruction issues including hive-up and hive-down arrangements and the establishment of new operating subsidiary companies.
(h) Dealing with property issues.
2. Our scope of work does not include and we will have no responsibility or liability for:
(a) Any tax advice or any work required as a result of any of the parties' tax planning.
(b) Any pension work or pension planning work.
(c) Advising on the fairness or reasonableness of the transaction".
F Meetings on November 7/8 and November 8/9
Meeting on November 7/8
(1) the M&S payments only came up in the context of discussion of payment of the deferred consideration, and the question of the application of a percentage of M&S payments to pay the deferred consideration (which had been re-characterised as excluded debt) was raised by Mr Einollahi, who initially wanted security for the debt but stated he would be content to take a percentage "at fastest rate that doesn't jeopardise the business", and the M&S debt was only mentioned in this context;
(2) Deloittes would sign off financial assistance as auditors but this was conditional upon Mr McInnes being on the board of CVC and giving the required solvency declarations;
(3) Mr Einollahi used the term receivership deal to indicate that he was not prepared to give significant warranty protection, especially Warranty 1;
(4) Mr Einollahi and Mr McInnes made it clear there was to be no warranty regarding net assets or receivables, which is recorded in Mr Brandwood's note and is consistent with the deletion of Warranties 6 and 7;
(5) in replacement of deleted Warranties 1, 6 and 7 a different scheme of protection was proposed, consisting of an adjustment mechanism relating to net working capital ("NWC") and the concept of CVC paying to CVP a portion of the inter-company debt ("the Excluded Debt"): if NWC at November 26, 2000 was £44 million, the Excluded Debt would be £5 million; if it increased the Excluded Debt would increase £1 for £1 with a cap once the Excluded Debt reached £13.8 million (NWC at £52.8 million); but if NWC decreased, the excluded debt would reduce pound for pound until it would be £0 at NWC of £39 million.
(6) clause 5(5) was a mechanism to protect against "asset stripping" of fixed assets. as that term was to be understood in the usual commercial sense, and replaced the £94 million net asset warranty in Warranty 6.
Events following meeting
Meeting on November 8/9
Sixth schedule
G Execution of the agreement
H Bank facility
"The key points which needs [sic] to be addressed by both [Lathams] and our lawyers are as follows:
• The Bank will require a fixed charge over an amount of receivables from M&S in a like amount to the Loan. We will require confirmation that these receivables are correctly due and payable within 90 days of issue and are not subject to any other third party interest. We will require them to be formally assigned and the proceeds directed to the Bank for credit to the Loan.
• The Bank will require first fixed legal charges in respect of the portfolio of properties you have shown us with a minimum aggregate valuation of £17m as verified by our appointed valuers."
I Lathams' due diligence draft report
(1) standard trade terms with M&S were 15 days from the end of the week of invoicing and virtually all of the M&S debt at October 31, 2000 was current month, and in normal circumstances the debt would be collected within 21 days of invoice except where there was a delivery or quality dispute;
(2) a key issue in assessing the viability of each of the component businesses was the ongoing relationship with M&S;
(3) orders had been secured for certain elements of the spring 2001 M&S range and apart from Outerwear Mr Hartley said there was no current dialogue regarding the autumn 2001 range, and that in any event there would undoubtedly be a dip in sales in respect of part of these ranges where it would not be possible to win business that would normally have been retained by CVC;
(4) the trading arrangement with M&S was not defined by any formal overriding legal contract and was operated more by a process of custom, practice and mutual understanding;
(5) there were a number of issues which pointed to fundamental uncertainties regarding the viability and continuation of many of the component divisions of CVC, including (a) the critical reliance on a single dominant customer, M&S, which itself was facing declining sales; (b) the continuing losses in many of the businesses; (c) the low level of morale of much of the workforce; (d) the declining order book which was exacerbated by the absence of a continuing dialogue with M&S for part of the spring 2001 and all of the autumn 2001 range, and in addition around 20% of the finished goods at October 31, 2000 were at least 6 months old and there was a very strong argument for valuing the stock as low as 10% of cost;
(6) according to Mr Shotton, the Underwear Division had been instructed not to communicate with M&S in respect of the autumn 2001 product range and it would become increasingly difficult to secure orders for that season if the current uncertainty surrounding the future of the business was not resolved quickly, and the view was also expressed that it might already be too late to retrieve the situation in respect of Childrenswear;
(7) the Socks and Hosiery Division reported trading losses of £2.6 million in the 10 months to October 31, 2000 in its current form and projections to the end of December appeared to be wildly optimistic, and without fundamental restructuring and perhaps some form of strategic relationship with a similar business, the operation was unlikely to be viable;
(8) management of the Shirts and Ties Division had indicated that M&S were not ordering for Spring 2001 beyond the levels currently committed and that there was no current dialogue in respect of the Autumn 2001 range;
(9) in the Knitwear Division the current M&S order book for the spring 2001 range was £6 million compared to £20 million normally at that time of year, and there was no current dialogue with M&S regarding the autumn 2001 range, and the losses of the division together with the uncertainty raised significant doubt about the viability of the business without substantial restructuring;
(10) in the Stevensons dyeing Division there might be environmental liabilities associated with contaminated land and asbestos at the production site, and it was advisable to commission a specialist investigation; the viability of the Division was critically dependent on orders from other CVC businesses and the losses sustained in the first 10 months looked unlikely to be recovered in the remaining 2 months of the year, and the order book was currently very poor and the business might have no work in 4 weeks time; a climate change levy in April 2001 would result in additional annual cost of £200,000 unless capital expenditure of £700,000 was incurred, and management had disclosed that the likely cost of closing the division was £11.6 million;
(11) the Outerwear Division returned about £500,000 of operating profit and was considered by Mr Hartley to be the most viable of the CVC businesses, and this was the only division with a current M&S dialogue regarding the autumn 2001 range.
J The speed or accelerated M&S payments
K Draft amendment agreement and November 24 meeting
"(d) cash generated by the entities comprising the Businesses being used to reduce indebtedness owed either to the bank or the Seller or member of the Seller's group (other than the Companies, the Subsidiaries or the Overseas Entities)."
"M&S Debt to be tracked by Lathams and cash and finished goods stock
Acceleration of M&S debt payments –£14-£7M. They are planning to leave us with cash"
"7... 14 days M&S debt – trying to leave £5-6M cash. – Asking Lathams to give info to Bank. Bank £12-15M RHS insisted on prof fees on completion – EJ agreed"
Draft Amendment Agreement
L Closure costs and more information on speed payments
"In the course of going through the disclosure process with my clients, my clients have asked me to point out (for the avoidance of doubt) a matter which does not, in my view, form a proper disclosure against any of the Warranties and of which, to the extent that Marplace's financial due diligence has not taken the point into account, Marplace's financial due diligence needs to take the point into account.
Lathams were recently provided with a copy letter from David Holt of CV to Marks and Spencer in relation to this. The point is that there has been a recent acceleration of the payment period for debts due from Marks and Spencer to the Businesses which is not due to continue after Completion. The net effect will be that payment due for deliveries made to 25 November will have been paid to the Seller's group by 27 November, and that no further payment for deliveries made will be due thereafter for a period of around 2 weeks.
I should be grateful if you could pass a copy of this note to Lathams and to TMG."
M Meetings November 28/30
Letters of credit
"Whilst Deloitte and Touche are considering the position (and by copy of this letter, to them could I ask for their input on what is proposed to deal with the point), it has been provisionally proposed that the letters of credit would be satisfied by [CVP] as part of external indebtedness and that the stock which is currently not on the September balance sheet, would be added for the purposes of calculating working capital in accordance with the agreement.
I am writing this fax to you in the interests of speed, in terms of raising the point as one for discussion."
Mr Street/Ebby Jebreel: first telephone call on November 28
Telephone call between Mr Street and Mr McInnes on November 28
"Not ready to MBOs – units
Stevensons – need £1m redun'cies then create business loses £300k p.a.
Not going to do fin'l assistance – trying to spk to M to do a deal with no fin'l assistance. No M&S debt – accelerated last week. Now anor disc't & paid anor: 1 wk – only 1 day's debt. M now undoable. 1m -> 2wk – 1w – 1 day. NWC - £32m. Had def'd – need to leave £8m."
Meeting on November 28/29
Events following meeting
Evening meetings
O Compromise proposal
(1) Ebby Jebreel says that Mr McInnes made clear that the original and revised deals would not work because there would not be enough cash to take CVC through to Christmas.
(2) Ebby Jebreel and Mr McInnes say that the deal on professional fees related to all of the professionals and not just Chaffe Street and TMG.
(3) Jacob Jebreel (who left the meetings early because of a migraine attack) says that Mr Einollahi was offering an option to buy any of CVP's properties which were vacant or surplus to requirements or (perhaps) unused at any time that they would like at any time at forced sale value as a consolation prize and as compensation.
(4) Mr Hill says that Mr McInnes said that that there was a compensation package which the Jebreels would be offered whereby they could take their "pick of the CVC properties" at a significant discount and all the fees they incurred would be paid.
(5) Mr Street says that during the discussions about the costs and the release he asked Ebby Jebreel (and also Jacob Jebreel, although in oral evidence he said he was not sure if he was still there) what he wanted to do about the properties, but he did not seem to be willing to do anything. He was leafing through a binder and making unenthusiastic remarks about the properties. The response to his query was dismissive, and Ebby Jebreel made a comment to the effect that the properties appeared unattractive and that if he decided he was interested in buying any of them he could always talk to CVP the follow week. After the release had been prepared, Mr Street asked again about the properties to make sure he did not wish Chaffe Street to explore the position any further, and he said to Ebby Jebreel something along the lines of "what do you want to do about the properties?", and the reply was that he did not want to bother with the proposal, and that he was going home.
(6) Mr Street says that, after the Jebreels' departure, he sought to persuade Ms Kantor to contribute, at least, to Lathams' fees, but she would not.
P Subsequent events
"Had the 'Financial Assistance' issue been capable of being addressed and the necessary security therefore capable of being granted, I still believe we could have completed the deal, notwithstanding the timescale imposed on you by the vendor.
…
You mentioned that the various properties may form the basis of a deal in the future and I would be happy to discuss the matter at your convenience."
"an option to purchase each and any and all of the various properties which were then or subsequently owned by CVP (or its subsidiaries) whenever any of such should then or from time to time be or become empty or unused or surplus to the requirements of CVP (by itself or the companies which were at the relevant time (ie, when the property(s) became surplus or unused or empty) its subsidiaries) at forced sale values, should the purchase by [Shotton] (or anyone else) of CVC take place"
"As your client is well aware, the reason it did not exercise the option to complete the Agreement was because it never had, nor was it able to raise, the funds needed to complete."
IV The first claim
A The Claimant's arguments
(1) The ordinary terms of the M&S trading and business with CVC was for payment three weeks following call-off.
(2) Following entry into the Agreement, CVP procured CVC to agree with M&S that M&S payments be accelerated, so that two weeks which would ordinarily have fallen payable after December 1, 2000 (post-Completion) were paid prior to November 30, 2000 (pre-Completion).
(3) CVP intended and threatened to (and actually did) apply the M&S accelerated payments to inter-company Debt (and if not then to Bank Debt) and so as to remove them from CVC. This had the effect of reducing the NWC to less than £39 million, and thus of removing the entire amount of the Deferred Consideration and Excluded Debt. It also had the effect of reducing the M&S debt at the date for Completion to less than £6.4 million (according to a cash forecast produced on November 29) (or £9.6 million, according to Deloittes' figures produced on November 27), with consequent effect on cash-flow.
(4) CVP eventually intended and threatened to add the letters of credit at £3.883 million into its NWC calculation, thus reducing the amount payable under clause 5(10), with the effect that on any basis CVC would run out of cash for the few weeks immediately following proposed Completion.
"During the period from 30th September 2000 to Completion neither the Seller [CVP] nor any of the subsidiaries (including the Company and the Subsidiaries [CVC]) nor any of the Overseas Entities has disposed of or without the Buyer's [the Claimant] written consent shall dispose of any asset of the Businesses other than disposals of stock in the ordinary course of trading and other than disposals of plant and equipment not then in current use on an arm's length basis…"
(1) CVP's conduct was such as to destroy the concept of the Excluded Debt, and thus the Deferred Consideration and the idea that the Deferred Consideration was being paid on a deferred basis, i.e. with part of each M&S payment as it came in being used to fund short-term trading. Instead the M&S accelerated payments were being used in their entirety up-front to pay off what should have been the Excluded Debt. It could not have been contemplated that CVP could, and must have been an implied term that CVP would not, manipulate the M&S debt so as to do this.
(2) CVP's conduct was entirely contrary to the concept of clause 5(9) providing for the Excluded Debt to be paid from continuing M&S payments (and Warranty 7 that the M&S debt would be assignable), and thus in breach of an implied term that the M&S debt (and the Excluded Debt) would not be eliminated/manipulated.
(3) CVP's conduct was inconsistent with the Sixth Schedule which provided what was to happen to CVC's assets/liabilities, including as to the anticipated level of "receivables" of £55 million (which the M&S accelerated payments much reduced), that the "unwind of receivables" was only to be £8.8 million (which the taking of the M&S accelerated payments much increased), that Debt was to be capitalised/assigned and Bank Debt was to be repaid by CVP (and cf. also Warranty 4), and thus in breach of express and implied terms that CVC financial position would not be otherwise dealt with/manipulated
(4) CVP's conduct was also inconsistent with the provisions (e.g. clauses 2 and 3) that it was selling the Debt. Instead it was using CVC's money to repay itself and to reduce the amount of the Debt which it was intended should be assigned to the Claimant, and thus in breach of express and implied terms that the Debt would not be dealt with/reduced, and in particular by a manipulation
(5) CVP's conduct was also destructive of the financial assistance which the Agreement contemplated (clause 4(H)) and thus in breach of an implied term that nothing out of the ordinary would be done to disrupt this
(1) the level of "unwind", being reduction in amount of debtors and sold finished goods was of great importance to the Claimant and its plans. This had been referred to in the offer letters of October 25 and November 1, and Chaffe Street were aware of this;
(2) the existence of the Excluded Debt, and the fact that such was only to be repaid on a deferred percentage basis from received M&S debt was important with regard to both cash-flow and AIB security. The provisions regarding the Excluded Debt had been negotiated on the basis that the percentage rate was to be fixed not to jeopardise the business and specifically renegotiated by Ebby Jebreel to a lower rate;
(3) it was crucial to the whitewash for CVC to be able to pay its debts as they fell due for 12 months, and therefore cash-flow (and therefore the M&S payments) was of great importance;
(4) the M&S debt was regarded by AIB as its main security and AIB was concerned to be satisfied as to its level.
(1) Chaffe Street asking Mr McInnes whether such a discussion had taken place.
(2) Chaffe Street seeking to understand clause 2.1.1 (the working capital clause and which was almost unintelligible), and to clarify with Mr McInnes what he thought and intended.
(3) Chaffe Street linking clause 2.1.7 of the draft Amendment Agreement to the M&S accelerated payments (which Mr Brandwood did, as he accepted in evidence) and considering them in the context of clause 5(5) (and the rest of the Agreement) and concluding (in the light of all of the above knowledge) that there were clear (and certainly highly arguable) actual/threatened breaches and potential for service of the Rescission Notice
(4) Chaffe Street giving full advice in any event as to this document which was a legal document received by it from Eversheds and which called out (in particular in the light of the M&S accelerated payments) for proper and full advice to be given regarding it to the Claimant.
(1) He should have appreciated that CVP's proposal was to satisfy the letters of credit itself and to simply add the amount for the purposes of the NWC calculation (thus reducing CVP's liability under clause 5(10) notwithstanding the stock was coming in later).
(2) He should have appreciated that this was a very considerable amount of money – the letter says £5 million.
(3) He should have realised that this would have the effect in practice of advancing CVC's obligation to pay for the stock to the point of Completion notwithstanding that the stock would only be delivered later, and that this must have further prejudicial effects on cash-flow exacerbating the consequences of the M&S accelerated payments
(4) He should have considered this against the wording of the Agreement which also made express provision for liabilities omitted from the September balance sheet (as per the letter) in clause 5(4)(a) and also for guarantee/indemnity (and thus letters of credit) liabilities in clause 5(16), and advised that CVP could not insist on this.
(5) He should have taken express instructions from TMG. Instead he merely faxed it around "for your information" without taking (and never took) instructions. This was clearly insufficient and wrong in the circumstances.
(1) He should have noted that clause 2.1.2 made provision for the letters of credit and in the manner stated in the earlier letter. He should then have considered this against the wording of the Agreement which also made express provision for liabilities omitted from the September balance sheet (as per the letter) in clause 5(4)(a) and also for guarantee/indemnity (and thus letters of credit type) liabilities in clause 5(16), and advised that CVP could not insist on this, and also that CVP had at least doubts as to whether or not it could insist upon this. This was now a proposed legal document being received from Eversheds and which was not itself easy for a lay person to understand.
(2) He should have taken express instructions from TMG (and also the Claimant) both generally because it was of financial effect and because of the front wording about including some wording about monies being left at completion. Instead he merely e-mailed it around "FYI" and without taking (and never took) instructions. This was clearly insufficient and wrong in the circumstances.
(1) known that there were substantial difficulties with the transaction as far as both Ebby Jebreel and Mr McInnes were concerned;
(2) known that the M&S accelerated payments were a matter of very substantial effect and a very considerable problem;
(3) known that Mr Einollahi was taking the stance of refusing to put back the M&S accelerated payments (or at least part of them) as Mr McInnes wanted;
(4) therefore considered what was happening regarding the M&S accelerated payments (and the letters of credit) as against the Agreement and the draft Amendment Agreement and sought instructions and given advice.
(1) Chaffe Street believed that the Option Notice had been served, and thus that there was a binding contract (in fact the position was that there was an express/implied extension of time);
(2) it was known that the M&S accelerated payments were the major issue;
(3) Mr McInnes specifically (i) told Mr Street and Mr Brandwood that the problems were primarily the M&S accelerated payments and the letters of credit and (ii) asked as to how CVP could do what it was doing (to be met with the response that the remedy was for the Claimant to walk away).
B Chaffe Street's arguments
(1) The control mechanism for current asset movements between exchange and completion was provided by the combination of clause 1(A) (the definition of the Excluded Debt and of NWC) and clause 5(10).
(2) Save for the express limits of that control mechanism (a £39 million NWC floor and a maximum Excluded Debt of £13.4 million) there was no express or implied restriction on the conversion of less liquid current assets to cash and the use of that cash to pay debt.
(3) Clause 5(5) principally regulated the disposal of fixed assets (plant, equipment, machinery). The first part of the clause – "dispose of any asset" – related to a true disposal of an asset, e.g., sale of machinery. The second part of the clause – "other than disposals of stock in the ordinary course of trading" – was to make it clear that selling stock on usual trade terms (as opposed to auctioning off stock at an undervalue) was not prohibited.
(4) Clause 5(5) was in no way directed to conversion of one current asset type to another, say, finished goods to debts and debts to cash. It did not catch the use of cash in CVC to pay debt (of any type).
(5) Clause 5(9) obliged CVC to pay over to CVP a fixed percentage of any receipts incoming from M&S in reduction of the Excluded Debt. Nowhere did the clause specify or demand that there would necessarily be receipts or that there would necessarily be a M&S debt from which such receipts would derive, nor the amount of such receipts and debt or the timing of the receipts. Further, the Agreement envisaged a situation where the Excluded Debt would be £nil and so clause 5(9) would not be operative.
(6) Similarly, Warranty 7 required "all debts due" from M&S to be freely assignable. It was wholly silent as to the amount of debt at any time.
(7) The function of the Sixth Schedule document was to incorporate the September 30 management accounts into the Agreement for specifically identified purposes, namely:
(a) Clause 1(A) (definition of Excluded Debt) – to fix the "bases, policies and practices" by which NWC fell to be calculated.
(b) Clause 5(4) – to permit an adjustment of consideration if assets had been overstated or liabilities understated as a result of the September 30 management accounts not having been prepared on a consistent basis to preceding months' management accounts.
(c) clause 5(10) – as for clause 1(A)
(d) Warranty 3 – to provide the basis for a qualified warranty that there were no actual or contingent liabilities.
(8) There was no term in the Agreement which converted the Sixth Schedule document into a series of warranties as to the asset-worth and asset-composition of CVC at completion. Clause 1(D) – "Each of the Schedules shall have effect as if set out herein" – could not elevate the status of the Sixth Schedule document.
(9) Clause 2(1) stated that CVC was buying the Debt (amongst other assets). The Debt was not specified in amount either in that clause or in clause 1(A) (the definition of the Debt) or anywhere else. The Agreement did not therefore seek to preserve the Debt at any set amount or prohibit its reduction by CVC by use of cash between exchange and completion.
(10) Warranty 4 required CVC to be free of bank debt at completion. As with the Debt, there was no term in the Agreement prohibiting CVC from paying off bank debt by use of cash between exchange and completion.
"… broadly speaking, in financial assistance aspects of the banking transaction, I generally relied upon the accountants to provide that input to ensure that the cashflow worked."
V Causation on the first claim
A The Claimant's arguments
B Chaffe Street's arguments
(1) Clause 5(5) was stated to be a "covenant". It was not stated to be a contractual condition; nor is there any reason to construe it as a condition. The modern analysis is that it should be treated as an intermediate term, breach of which entitles the innocent party to treat the contract as repudiated "only if the other party has thereby renounced his obligations under the contract, or rendered them impossible of performance, in some essential respect or if the consequences of the breach are so serious as to deprive the innocent party of substantially the whole benefit which it was intended it should obtain from the contract" : Chitty on Contracts, para 12-034.
(2) That test could never be satisfied by an allegation that CVP procured the acceleration of M&S payments and used them to pay debt. At the very highest, the Claimant would have a damages claim based on the amount of the acceleration. CVP would have strong arguments that, in fact, the mechanism for assessment of that claim was already written into the Agreement by clause 5(10).
(3) The right of rescission granted by the Agreement (see clauses 6(D) and 8(C)) should be construed as a right to rescind ab initio. It should not be construed as a right that converts every contractual term into a condition so that breach entitles the Claimant to terminate and sue for loss of bargain damages.
VI Second claim: drafting of the Agreement
A The Claimant's arguments
B Chaffe Street's arguments
"Neither CV nor the corporate vehicle to be acquired will dispose of any assets, nor incur any liabilities, within the division, other than in the ordinary course of business, pending completion, other than transfers in and out as envisaged under the terms hereof".
VII Compromise Agreement claim
A The Claimant's arguments
(1) Ebby Jebreel was a property businessman, and his initial interest in the acquisition was based on properties.
(2) Ebby Jebreel had asked for a similar (but less valuable) pre-emption right in the letter of October 25, and Mr Street was unable to suggest why Ebby Jebreel would have given up the properties element.
(3) Ebby Jebreel had a Chestertons report of a £4 million difference between actual and distressed sale values just regarding the Agreement properties.
(4) Ebby Jebreel had the White Book of hundreds of CV Group properties.
(5) What was being offered was potentially a very valuable right which would not cost the Claimant anything.
(7) CVP had already acted in relation to the Agreement so as to act in a way very different from how had been contemplated and so as to wreck the transaction.
B Chaffe Street's arguments
(1) This offer was not on the table. There was no doubt about that or, at any rate, nothing to put Mr Street or Mr Brandwood on notice that there might be ambiguity in CVP's offer that would need clarification.
(2) Ebby Jebreel was a sophisticated businessman. He was quite capable of negotiating terms with CVP. He did not demand that his other professional fees be paid. He knew the offer was limited only to TMG and Chaffe Street (or, from Mr Street's and Mr Brandwood's perspective, there was nothing to place them on notice that Ebby Jebreel misunderstood that position).
(3) In these circumstances, the duty of Chaffe Street was to act on their client's instructions, which they did. In fact, Chaffe Street went beyond their remit in trying to persuade Ms Kantor to pay Lathams' fees, and negotiated clause 11 of the Shotton Agreement.
(1) Mr Street twice sought Ebby Jebreel's instructions as to what he wanted to do. Ebby Jebreel's unambiguous response was that he did not want to pursue the matter further.
(2) Chaffe Street were not obliged to second guess or challenge Ebby Jebreel's instructions. He was, after all, a businessman specialising in property transactions.
(3) Chaffe Street were not obliged to tell a sophisticated commercial client that if he did not agree an offer on a particular night, it might not be available in the future.
VIII Contributory Negligence
IX Mitigation
X Limitation of Liability Clause
A The Claimant's arguments
B Chaffe Street's arguments
(1) Chaffe Street's turnover in 2000/2001 was £3.61-£4.23 million, approximately 60% of which derived from corporate transactions.
(2) The amount of the limitation of liability set by Chaffe Street in its retainer letters with various clients did vary from one transaction to another.
(3) Chaffe Street's insurance cover in the policy year 2000/2001 was £25 million.
(4) In setting the limit of £20 million, Mr Street was under the impression that, if the Claimant were to bring a claim against Chaffe Street, interest and costs would be added to the £20 million. Mr Street also took into account the scale of the transaction.
XI Conclusions
A Introduction
" … [Ebby Jebreel] probably falls into the category of a sort of client who does not always explain fully to the solicitor he is dealing with what he is doing because he will do some of the things himself. And I suppose the sort of client who tells a solicitor what he thinks the solicitor needs to know in order to do his bit."
B Duties
"The extent of his duties depends upon the terms and limits of that retainer and any duty of care to be implied must be related to what he is instructed to do. … Now no doubt the duties owed by a solicitor to his client are high, in the sense that he holds himself out as practising a highly skilled and exacting profession, but I think that the court must beware of imposing upon solicitors - or professional men in other spheres - duties which go beyond the scope of what they are requested and undertake to do. It may be that a particularly meticulous and conscientious practitioner would, in his client's general interests take it upon himself to pursue a line of enquiry beyond the strict limits comprehended by his instructions. But that is not the test. The test is what the reasonably competent practitioner would do having regard to the standards normally adopted in his profession, and … the duty is directly related to the confines of the retainer."
C Instructions
D The claims
"It is a question of timing in these things. When something like this happens, and one is negotiating still in good faith with the ultimate objective of getting a deal done, and something happens which should not happen, one goes back to the vendor and says, 'Put it right'. If one goes running off to a lawyer to seek other remedies at that stage, then one is seriously prejudicing getting the deal done. So the first line of attack is to go to the vendor and say, 'What you have done is not what we agreed. Please undo what you have done.' That is what we did."
"Q. He said that unfortunately he could not attend and Mr Brandwood could not attend and you left it at that?
A. I believe so."
E Compromise Agreement claims
F Miscellaneous
Contributory Negligence
Mitigation
Limitation of liability clause
"I asked Mr Street – first of all, I was convinced myself that £12 million at that time was negotiated for the deal. And when I asked Mr Street about the figure of insurance liability and Mr Street mentioned £20 million, I said something along the lines of, 'Well, that is enough, that is more than I can lose', and he said 'yes', because to my mind, I could not have lost – in fact, I felt at the time that the insurance cover was more than enough because of the money that I was putting into the deal."