England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		28 October 2008

Mr Justice Arnold :

Introduction

1. The Claimant in this claim ("BexBes") is a limited liability partnership which trades under the name The Business Exchange. It provides services to sellers and buyers of businesses. The First Defendant ("Mr Beer") and his wife the Second Defendant ("Mrs Beer") were formerly the owners of the shares in Mike Beer Transport Ltd ("MBT"). Mr and Mrs Beer engaged BexBes to help them sell the shares of MBT, together with both property owned by MBT and property owned by Mr and Mrs Beer's pension fund, the Mike Beer Transport (1998) Directors' Retirement Benefit Scheme ("the Pension Fund"), under a letter of engagement dated 12 August 2005 ("the Engagement Letter"). Subsequently the shares and property were acquired by two companies in the Online Group of companies ("Online"), Pass J Holdings Ltd ("Pass") and APOL Silva & Orchards Ltd ("APOL") pursuant to a share sale agreement and two contracts for the sale of land (collectively "the Disposal"). Mr and Mrs Beer have paid BexBes £45,000 for its services. BexBes claims that it is entitled under the Engagement Letter to a considerably larger sum, but Mr and Mrs Beer dispute this claim.
2. It is convenient to make three observations at the outset. First, both sides have changed their positions over the course of this dispute. Each side seeks to make forensic capital out of the other side's changes of position, while extenuating its own. I do not consider that either side's changes of position are of assistance in resolving this dispute, and I propose to focus exclusively on each side's final position as presented at trial. Similarly, BexBes has complained that Mr and Mrs Beer have been slow in complying with their obligations of disclosure both under terms of the Engagement Letter and under CPR Part 31. Whether this is so or not, it appears that all relevant documents have now been disclosed. I shall therefore focus on what those documents show.
3. Secondly, I heard factual evidence from the following witnesses. For BexBes, Douglas Llambias, who at the material time was a partner in BexBes and the person who was in charge of the assignment in question; and Andrew Breeze, who at the material time was BexBes' corporate finance director and did much of the day-to-day work. For Mr and Mrs Beer, Mr Beer; Christopher Ashby, a partner in the firm of solicitors who acted for Mr and Mrs Beer in connection with the transaction; Alan O'Leary, who was and remains the Chairman, and owner together with his wife and children, of Online; and Peter Farmer, the owner of Peter Farmer Associates Ltd ("PFA"), another merger and acquisitions advisor engaged by Mr and Mrs Beer. I also received unchallenged written evidence from Michael Whittaker, a partner in the firm of McCabe Ford Williams which acted as MBT's accountant and auditor until 2005. Each of the witnesses who gave oral evidence impressed me as a straightforward witness. I consider that much of the witness evidence is of little assistance in resolving the dispute, however, since it either adds nothing to what the documents show or consists of argument or opinion or is otherwise inadmissible (particularly evidence relating to the subjective intentions of the parties when entering into the Engagement Letter).
4. Thirdly, neither side adduced any expert evidence. As will appear, on Mr and Mrs Beer's case such evidence would be inadmissible or at least of no assistance; but on BexBes' case I might have been assisted by such evidence. It is understandable, however, that neither side should have sought to adduce such evidence for reasons of cost and proportionality. I therefore do not take BexBes' failure to adduce such evidence as any reflection on the merits of its case.

The background to the Disposal

5. The background to the Disposal was as follows. Mr Beer started his haulage business in 1972. MBT was incorporated in 1985. MBT was a successful company in its field. In 2000 Mr and Mrs Beer almost sold the company. They instructed BexBes on that occasion and paid its fees in full. In 2002 Mr and Mrs Beer instructed PFA discreetly to market the business without, if possible, disclosing to third parties that it was for sale. In 2004 MBT moved to larger premises at Dover Port Zone, Whitfield, Dover. Most of the land was owned by MBT, but part of it was owned by the Pension Fund. In the same year Mr and Mrs Beer decided to sell MBT before Mr Beer reached the age of 55 in February 2007. Towards the end of that year, Mr and Mrs Beer instructed PFA openly to market the company. PFA prepared a brochure and approached potential purchasers. By July 2005 nine parties including Online had shown some interest, but none expressed serious interest let alone made an offer. Accordingly, in July 2005 Mr Beer instructed BexBes to act in conjunction with PFA. Shortly after the Engagement Letter was signed, Mr O'Leary on behalf of Online sent a letter dated 17 August 2005 to PFA making an offer to purchase MBT and the property ("the Offer Letter"). There were then negotiations between the parties in which both BexBes and PFA were involved. Key terms were agreed at a meeting on 5 December 2005. Heads of Agreement were signed on 7 January 2006. On 11 May 2006 Mr and Mrs Beer entered into a share sale agreement with Pass ("the Sale and Purchase Agreement"), and on the same date MBT and Mr and Mrs Beer in their capacity as trustees of the Pension Fund entered into agreements to sell their respective properties to APOL ("the Conveyances").

The Engagement Letter

6. The key provisions of the Engagement Letter are as follows.

"1. Definitions

The following expressions shall have the following meaning.

…

'Client' – the ultimate shareholders of Mike Beer Transport Ltd, a company incorporated in England and Wales registration number 1981266, in relation to the sale of shares of Mike Beer Transport Ltd; and the ultimate shareholders and Mike Beer Transport Ltd in relation to a sale of assets or trade of Mike Beer Transport Ltd, or the shares, assets or trade of any subsidiary or associated companies of Mike Beer Transport Ltd or the issue of any new shares or debentures in Mike Beer Transport Ltd or any subsidiary or associated company of Mike Beer Transport Ltd.

'Transaction' – the sale of part or all of the shares in or assets of the Client, the investment in or issuing of additional share capital or debentures by the Client and/or any other arrangements entered into to achieve these or similar objectives.

…

'Consideration' - the Consideration in relation to the Sale Contract comprises the aggregate of all amounts of whatsoever nature that may be actually received (including any cash, loan notes, shares, profit sharing and earn out arrangements (including any cash, loan notes, shares and profit sharing arrangements comprised in such earn out) and, additionally, any pre completion gross dividend strip from Mike Beer Transport Ltd, and/or the market value of any assets less any outstanding liabilities of the Client which are retained in the ownership of the Client, his associates, or companies associated with the Client) and subscriptions for share capital and/or loans or debentures.

…

Also, if any amounts receivable by the Client are reduced because the Buyer or Investor assumes responsibility for any other liability of the Client then the fees to be paid will be calculated on an amount comprising the aggregate of the reduced Consideration and the liability assumed.

'Sale Contract' – the Contract or Contracts and any side letters between the Client and the Ultimate Buyer or Ultimate Investor in relation to the Transaction.

…

3. The Client's Responsibilities

The Client will:

(a) immediately provide to BEX in writing full particulars of the Transaction including details of the amount and timing of the Consideration hoped to be achieved from the Transaction and all necessary financial and other material information to support the Transaction;

(b) promptly on request provide to BEX in writing such further information and explanations relating to the Transaction as BEX shall reasonably request.

…

4. Fees and Expenses

4.1 Fees payable by the Client to BEX are:

…

(v) In the event that the Transaction is entered into by the Client with any of the following (each hereafter referred to as 'Existing Potential Buyer or Investor')

1. Online Group

…

prior to circulation of the particulars of the Transaction then the above fees in Clauses 4.1(ii), (iii) and (iv) shall not apply and the following fees will be payable:

1. a fee of £10,000 payable on production of the information pack by The Business Exchange or four weeks from the date of this agreement, whichever is the earlier.

2. a deal fee of £35,000 plus 10% of the increase in Consideration between the first offer from the Existing Potential Buyer or Investor and the final Consideration up to £3.5m and 18% of that part of the Consideration over £3.5m…

…

(vi)^[1] The Client will irrevocably instruct solicitors or other lawyers acting for the Client in relation to the Transaction to retain from the Consideration (if received by them) such amount as is required to pay the fees referred to in clause 4.1. (iv) as appropriate to BEX; and promptly pay such fees to BEX.

…

4.3 In the event that the Transaction does not take place but an offer is obtained from any Buyer or Investor in relation to the Transaction with a Consideration of £3.0m or more and this offer is unreasonably refused by the Client, then the fees in clause 4.l (iv) above shall apply to the Consideration offered and such fees shall be payable to BEX.

For the avoidance of doubt in considering what constitutes an offer, it is agreed that an offer is not only an unconditional Sale Contract available for signature by the Client but also a serious written offer containing a clear indication of the Consideration (or range of Consideration) that will be payable if the conditions, subject to which the payment of the Consideration will be made, are fulfilled.

The above offer level of £3.0m is agreed on the basis of the Key Issues section of the accompanying letter dated 7 July 2005, which forms part of this Letter of Engagement."

The Offer Letter

7. The Offer Letter begins by setting out the synergies which Online hoped would be yielded by integrating MBT with two of its divisions, Online Europe and Online GmbH. The Offer Letter concludes with the following passage, which is headed "Our Offer":

"1. Business Goodwill £1.25m

a) £350K cash up-front payment

b) £225K per annum based on maintaining 2005 levels of turnover and profit

c) 4 year contract Mike Beer and family

Salary – Mike Beer £65,000 per annum, plus performance sharing to a total of £100,000K per annum.

Bonus structure: 60% Mike Beer

20% Online Euro

20% Online GmbH

2. Assets

At valuation, to a maximum £1.5m. Method of acquisition financing to be decided by Pass J Holdings Ltd.

3. Fixed Assets

Property acquisition by APOL Silva & Orchards Ltd – at valuation.

4. Timing

1^st January 2006"

8. It is common ground that: (i) paragraph 1(b) envisages four annual payments of £225,000 making a total of £900,000 and hence a total goodwill payment of £1.25 million when added to the sum of £350,000 payable under paragraph 1(a); (ii) "£100,000K" in paragraph 1(c) contains a typographical error and should read "£100,000"; (iii) paragraph 2 should be interpreted as an offer to purchase MBT's fixed and current assets other than goodwill and property at their book value (i.e. cost less depreciation) which in the event was agreed by Pass's accountants THP Ltd and Mr Whittaker to be £1,467,023 (comprising £981,880 fixed assets and £485,143 current assets); and (iv) "Fixed Assets" in paragraph 3 referred to the property owned by MBT and by the Pension Fund. It is also common ground that in assessing the Consideration attributable to the property owned by MBT, one must take a net figure after deducting outstanding mortgages and loans.

The Sale and Purchase Agreement

9. The Sale and Purchase Agreement is a lengthy document, but for present purposes it is only necessary to refer to a few parts of it. Clause 3.1 provides that the Vendors shall sell the Shares to the Purchaser and clause 3.4 provides that the Purchase Price shall be the Consideration. Clause 1 contains a series of definitions, including the following. "Consideration" is defined as "the Initial Consideration, the Deferred Consideration and the Further Deferred Consideration". "Initial Consideration" is defined as "the initial consideration calculated and payable in accordance with Clause 3 and Schedule V Part 1 (Initial Consideration)". In Schedule V Part 1, however, the provisions for calculating the Initial Consideration have been crossed through and the figure of £3,050,540 inserted in manuscript. "Deferred Consideration" is defined as "£500,000 payable in accordance with clause 3". Clause 3.6 provides that this sum is payable in eight equal quarterly instalments beginning on 15 June 2006. "Further Deferred Consideration" is defined as "the further deferred consideration (if any) payable in accordance with Schedule V Part II". The "Effective Date" of the agreement is 31 January 2006, which was the end of MBT's financial year.
10. Schedule V Part 2 contains provisions for calculating the Further Deferred Consideration which it is unnecessary to set out in full. The key terms are as follows. Further Deferred Consideration is defined as "14% of the 2007 Net Profits Before Tax up to £360,000 plus 25% of the 2007 Net Profits Before Tax in excess of £360,000 and 14% of the 2008 Net Profits Before Tax up to £360,000 plus 25% of the 2008 Net Profits Before Tax in excess of £360,000". "2007 or 2008 Net Profits Before Tax" are defined as the net profit as shown in the audited accounts for the financial year ending on 31 January 2007 or 31 January 2008 as the case may be, subject to certain adjustments. Clause 2.13 of Schedule V Part 2 provides that maximum amount of Further Deferred Consideration payable in respect of each of these years is £150,000 i.e. a total of £300,000.

The Conveyances

11. The only provisions of the Conveyances which it is necessary to record are that the Conveyance in respect of the property owned by MBT provides for a purchase price of £2,500,000 while the Conveyance in respect of the property owned by the Pension Fund provides for a purchase price of £500,000.

The Service Agreement

12. Immediately after the Disposal Mr Beer entered into a service agreement with MBT dated 11 May 2006 ("the Service Agreement") which provided for him to be employed until at least 31 January 2008 (i.e. two years from the Effective Date of the Sale and Purchase Agreement) subject to earlier termination in certain limited circumstances.

Subsequent events

13. One of Mr Beer's objectives when he instructed BexBes was only to continue work for MBT after the sale for a period of 12-18 months. As can be seen, Online's Offer Letter proposed contingent goodwill payments (an "earn out") spread over four years and an employment contract of the same duration, whereas the final transaction included a two year earn out and employment contract. In the event Mr Beer did not last even two years. By January 2007 he was unhappy with the way in which MBT was being run. The upshot was a negotiated departure effected by means of two agreements. First, a compromise agreement dated 14 February 2007 between Mr Beer and MBT which terminated his employment with immediate effect and settled any and all claims he might have against MBT in that connection. Secondly, a deed of amendment of the same date between Mr and Mrs Beer, Pass and MBT which amended the Sale and Purchase Agreement to provide that the Further Deferred Consideration should only be paid in respect of the period to that date. On 5 October 2007 THP Ltd, who were by then MBT's auditors, certified the Further Deferred Consideration payable for the year ended 31 January 2007 as being £40,650. On 9 November 2007 there was a further agreement between Mr and Mrs Beer and Pass the details of which it is not necessary to go into, but it is common ground that in the end the amount of Further Deferred Consideration received by Mr and Mrs Beer was £48,664.

BexBes' claim

14. BexBes' claim as presented at trial is calculated in the following way.

The consideration under the first offer is calculated as follows:

	£
Goodwill	350,000
Adjusted asset value	1,467,023
Property equity (including pension property)	812,517
TOTAL CONSIDERATION	£2,629,540

The consideration actually paid is calculated as follows:

	£
Consideration	3,117,040
Pension Property	500,000
Deferred Consideration	500,000
Add back of PFA's fees, re-invoiced on completion	12,000
Further Deferred Consideration actually paid Payments to or for the benefit of 4 key managers of £30,000 each	48,664 120,000 ________
TOTAL CONSIDERATION	£4,297,704

Accordingly, BexBes' fee is calculated as follows:

	£
Final Consideration	4,297,704
First offer Consideration	(2,629,540)
DIFFERENCE	£1,668,164
Fee for production of Information Pack	10,000
Deal fee	35,000
2,629,540 to 3,500,000 @ 10%	87,046
3,500,000 to 4,297,704 @ 18%	143,587
TOTAL FEE	£265,633

BexBes' claim is calculated as follows:

	£
Fee due	265,633
Fee paid	(45,000)
CLAIM	£220,633

The issues

15. Under clause 4.1(v) of the Engagement Letter BexBes' fee depends on whether there was an "increase in Consideration between the first offer from the Existing Potential Buyer or Investor and the final Consideration", and if so the extent of that increase. BexBes' position is that there was an increase in Consideration between Online's first offer and the Disposal. Mr and Mrs Beer's position is that, although the Disposal was more favourable to them than Online's first offer in certain respects, there was no actual increase in the Consideration. There are disputes between the parties both as to the Consideration payable under the First Offer and as to the Consideration paid under the Disposal. In relation to the first offer, there are three issues: (1) should the contingent element payable in respect of the goodwill be included in the Consideration in whole or in part; (2) should the "performance sharing" element be included in the Consideration; and (3) what was the Consideration payable in respect of the property? In relation to the Disposal, there are four further issues: (4) should the Further Deferred Consideration be assessed as the maximum amount potentially payable or as the amount which in the event was actually paid; (5) should a sum of £21,000 paid as a result of the delay in finalising the Disposal be included in the Consideration; (6) should PFA's fees and a mortgage redemption swap fee of £3,500 be included in the Consideration; and (7) should pension payments made for the benefit of four key managers be included in the Consideration?
16. One matter which is now common ground is that the property belonging to the Pension Fund should be included when assessing both the Consideration payable under Online's first offer and the Consideration in relation to the Disposal.

Applicable principles of interpretation

17. It is common ground that the Engagement Letter should be interpreted in accordance with the principles of contractual interpretation stated by Lord Hoffmann in Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896.
18. Counsel for Mr and Mrs Beer submitted that the Offer Letter should be interpreted in the same way, and in particular that it should be interpreted objectively as of its date. Counsel for BexBes submitted that, since it was a unilateral offer, there was more room for taking into account both the subjective intentions of the author of the Offer Letter and subsequent events than would be the case with a contract such as the Engagement Letter. In my judgment counsel for Mr and Mrs Beer is correct.

Interpretation of the Engagement Letter

19. A number of the issues depend in whole or in part on the interpretation of the Engagement Letter. I will deal with the specific points below, but it is convenient to deal with some general matters first. Clause 4.1(v) requires a comparison to be made between Consideration under the first offer and the final Consideration. It is common ground that the evident purpose of this provision was to provide BexBes with an incentive to try to negotiate (or assist in the negotiation of) better terms for Mr and Mrs Beer than those initially offered by an Existing Potential Buyer and to reward BexBes by reference to any increase if it did so.
20. Counsel for Mr and Mrs Beer emphasised that the purpose of clause 4.1(v) was to provide for the calculation of BexBes' fee and submitted that assessment of the Consideration was only required to the extent necessary to achieve that purpose, rather than to make the best possible valuation of it. Furthermore, he submitted that clause 4.1(vi) and commercial common sense showed it must have been the intention of the parties that BexBes' fee should be susceptible of being calculated in a straightforward way and promptly after conclusion of the Sale Contract. By contrast, counsel for BexBes submitted that BexBes might have to wait a number of years before it was in a position to calculate its fee. Moreover, it was implicit in some of his arguments that the calculation might be less than straightforward. I agree with counsel for Mr and Mrs Beer. I do not think the parties can have intended that BexBes should have to wait several years to calculate, and therefore collect, its fee. Nor do I think that the parties can have intended that any sophisticated analysis of Consideration would be required.
21. Counsel for BexBes submitted that, both as a matter of the wording of clause 4.1(v) given that the word Consideration is used twice and as a matter of commercial common sense, it was necessary to take a consistent approach to assessing the Consideration payable under the first offer and under the Sale Contract. By contrast, as will appear, Mr and Mrs Beer's primary case involves assessing the Consideration under the first offer on a different basis to the Consideration under the Sale Contract. I will deal more specifically with that case below, but in general I agree with counsel for BexBes. For the reasons he gave, I consider that a consistent approach should be taken to assessing the Consideration under the first offer and under the Sale Contract and that like should be compared with like.
22. Counsel for Mr and Mrs Beer submitted that the Consideration payable under the first offer should be assessed as at the effective date of the Sale Contract and that it was not permissible to take into account after-acquired knowledge, although as will appear he took a different approach to the assessment of Consideration under the Sale Contract. By contrast, counsel for BexBes submitted that the Consideration payable under both the first offer and under the Sale Contract should be assessed in the light of what was known now. Moreover, he accepted that in some circumstances assessment could only take place years later. These questions are tied in with the first issue considered below, and I will deal with them more fully there. In general, however, it seems to me that the approach called for by the Engagement Letter is to compare the Consideration under the first offer and under the Sale Contract as of their respective effective dates without taking into account later knowledge. In the present case the effective date of Online's first offer as set out in the Offer Letter was 1 January 2006 while the effective date of the Disposal was 31 January 2006. Fortunately, it is common ground that this difference is immaterial for present purposes since there is no evidence of any relevant change in value between 1 January and 31 January 2006. I therefore do not need to decide what the position would be if there had been such a change; but I incline to the view that in the event of a difference one should attempt to assess the value of the first offer as at the effective date of the Sale Contract.

The first offer

23. Subject to one point which gives rise to issue (3), it is common ground that Online's first offer is contained in the Offer Letter.

(1) Should the contingent element payable in respect of the goodwill be included in the Consideration payable?

24. It is common ground that the Offer Letter contains an offer of £1.25million in respect of the goodwill of MBT which consists of two elements, namely (i) a cash up-front payment of £350,000 and (ii) contingent payments of £225,000 per annum for four years "based on maintaining 2005 levels of turnover and profit". Mr and Mrs Beer contend that, when assessing the Consideration payable under Online's first offer, the second of these elements should be given its full value while BexBes contends that it should be valued at nil, alternatively at a reduced sum.
25. Counsel for Mr and Mrs Beer pointed out that, even though clause 4.1(v) uses the term Consideration in relation to the first offer, Consideration is defined in clause 1 of the Engagement Letter as "the Consideration in relation to the Sale Contract". He therefore argued that this did not apply to the first offer. He reinforced this argument by pointing out that the definition goes on to refer to "all amounts … that may be actually received", whereas it is common ground that no amounts were actually received under Online's first offer. He sought to resolve this conundrum by reference to clause 4.3, arguing that this showed what constituted Consideration in the context of an offer. In particular, he submitted that in the context of an offer Consideration was what "will be payable if the conditions, subject to which the payment of the Consideration will be made". Although clause 4.3 concerns offers which are unreasonably refused, he submitted that the Consideration could not change if the offer was reasonably refused. On this basis he argued that the Consideration payable in respect of the first offer included the contingent element at full value, whereas (as discussed below) the value of Further Deferred Consideration under the Sale and Purchase Agreement was the sum actually received. In the alternative, he relied on the fact that the definition of Consideration expressly includes "profit sharing and earn out arrangements", which are usually contingent.
26. Counsel for BexBes submitted that definition of Consideration did apply to the first offer. He argued that, in the context of the first offer, it was the Consideration that would have been received had the first offer been accepted and hence matured into a Sale Contract. He put the same point another way by saying that in that context one should read in the word "hypothetical" before the words "Sale Contract". He went on to submit that the definition of Consideration was restricted to amounts "actually received" and that this definition excluded contingent sums since they might never be received. He argued that the reference to profit sharing and earn out arrangements merely meant that they were included in the types of consideration that fell within the definition, it did not mean that they were to be included at full value. He argued that clause 4.3 did not assist since it only applied to the specific situation of an unreasonably refused offer, in which case there would be no Sale Contract. In the alternative counsel submitted that, in the light of what was now known, it could be seen that the contingent element of the offer was worthless or at least worth considerably less than £900,000. In support of this submission he relied on the fact that Mr Beer had left MBT's employment little more than a year after the Effective Date of the Sale and Purchase Agreement. He also argued that MBT's profit in its first financial year after the Effective Date was less than that in the year ending 31 January 2006 once certain adjustments had been made. In the further alternative, counsel submitted that, even if later knowledge was to be excluded, some reduction should be applied to reflect the fact that the payments were contingent.
27. In my judgment the Consideration payable under the first offer includes the contingent element at full value. My reasons are as follows. First, I agree with counsel for BexBes that the definition of Consideration applies to the first offer and in that context means the Consideration receivable if the first offer had been accepted and matured into a Sale Contract.
28. Secondly, as stated above, I think that the Engagement Letter contemplates a simple and prompt calculation. This points to taking the first offer (and the Sale Contract) at face value. In my view the most that might have been contemplated is a discounted cash flow ("DCF") analysis of the value of the first offer (and of the Sale Contract), but a DCF analysis only deals with evaluating the present worth of future payments not evaluating contingencies. Although one of counsel for BexBes' alternative suggestions was that a DCF analysis could be applied, I do not consider that this is called for by the Engagement Letter. In any event the evidence does not permit a proper DCF analysis to be undertaken, certainly not on a consistent basis with regard to both the first offer and the Disposal.
29. Thirdly, as I have also said, I consider that the approach called for by the Engagement Letter is to compare the first offer and the Sale Contract as at their effective dates and not to take into account after-acquired knowledge. This points to ascribing full value to contingent payments.
30. Fourthly, the logic of BexBes' case is that one should wait until the expiry of four years after 1 January 2006 and then ascertain what the first offer was worth in the light of subsequent events and compare that to the value of the Disposal in the light of subsequent events. This would mean that its claim was substantially premature, which is an unlikely result.
31. Fifthly, clause 4.1(v) presupposes that the first offer is not accepted and therefore one is considering a hypothetical scenario. This points against confining attention to what would definitely be received.
32. Sixthly, although a contingent payment may not be received, it may be. BexBes' case involves the proposition that, if it had only secured a large increase in contingent Consideration, it would get no fee beyond the basic £45,000 even though the contingency might be quite likely to be satisfied and this increase might be highly beneficial to Mr and Mrs Beer. This is unlikely to have been intended.
33. Seventhly, the words "actually received" are preceded by the word "may be", not "are". While one can read the clause by emphasising either the words "may be" or the words "actually received", in context and having regard to the purpose of the clause I consider it makes more sense to emphasise the words "may be".
34. Eighthly, this reading is supported by the word "receivable" in the last paragraph of the definition of Consideration and by the words "hoped to be achieved" in clause 3(a).
35. Ninthly, the definition of Consideration expressly includes profit sharing and earn out arrangements and thus contingent payments, but it does not suggest any special approach to valuing them. If such arrangements were to be valued at anything other than face value, one would expect to see some provision in the Engagement Letter as to how they are to be valued; but there is no such provision.
36. Tenthly, clause 4.3 confirms that conditional payments are to be included. While it is dealing with the particular situation of an offer which is unreasonably refused, it would make no sense to include contingent sums in such a case and not in the case of an offer which is reasonably refused or an offer which is accepted.
37. I would add that in any event I do not consider that either of the two main subsequent events relied on by counsel for BexBes provide a sound basis for reducing the value of the contingent payments anyway. First, on the face of the Offer Letter the payments are not dependent on Mr Beer continuing to be employed for four years, but on "maintaining 2005 levels of turnover and profit". Secondly, I think that "profits" should be interpreted as meaning audited profits, and these were more than maintained in the following financial year: they increased from £464,012 to £644,416.

(2) Should the "performance sharing" element be included in the Consideration payable?

38. It is common ground that paragraph 1(c) of the Offer Letter provides for a "performance sharing" payment of up to £35,000 per annum for four years i.e. a total of £140,000. Mr and Mrs Beer contend that this constitutes part of the Consideration in relation to the first offer. In support of this contention, counsel for Mr and Mrs Beer pointed out that the definition of Consideration embraces "all amounts of whatsoever nature … including … profit sharing and earn out arrangements" and argued that the "performance sharing" payment was a profit sharing or earn out arrangement. Against this, BexBes contends that the "performance sharing" payment constitutes part of Mr Beer's salary under a four year employment contract and does not constitute part of the Consideration for the sale of MBT.
39. In my judgment BexBes is correct. It is clear as a matter of arithmetic that the business goodwill payment of £1.25 million consists of the two payments listed in paragraphs 1(a) and (b) of the Offer Letter. In my view clause 1(c) represents a separate, although linked, proposal to employ Mr Beer for a period of four years as part of the overall deal. The "salary" offered to Mr Beer consists of two elements. The first is a fixed sum of £65,000 per annum. The second is a performance-related payment of up to £35,000 per annum to make a total of up to £100,000 per annum. Counsel for Mr and Mrs Beer rightly did not suggest that the fixed element comprised part of the Consideration for the sale of MBT: it is plainly remuneration to Mr Beer for his employment. I consider that the performance-related element stands in the same position. The fact that it is performance-related does not make it part of the Consideration for the sale of MBT. This conclusion is supported by the fact that the "bonus structure" quoted envisages that 40% of Mr Beer's "performance sharing" payments will be related to the performance of the two existing Online divisions with which MBT is to be integrated.
40. During the course of the subsequent negotiations, Mr and Mrs Beer's representatives negotiated a change in the proposed overall deal whereby Mr Beer gave up the profit-related element of his salary and instead Mr and Mrs Beer received the Further Deferred Consideration, which it is common ground is a profit-related payment for the goodwill of MBT. This was more beneficial to Mr and Mrs Beer, particularly from a tax perspective since it would be subject to capital gains tax rather than income tax. Both counsel argued that this supported their respective cases. On balance I think this is more consistent with BexBes' case than Mr and Mrs Beer's, but I do not rely on it in reaching my conclusion on this issue.

(3) The consideration payable in respect of the property

41. Paragraph 3 of the Offer Letter states that the property will be acquired by APOL "at valuation". BexBes contends that (i) this was not the first offer for the property, but rather indicated that the "first offer" was yet to come; and (ii) Online's first offer in relation to property was an offer of £2.5million made on 17 November 2005. Mr and Mrs Beer dispute both parts of this contention.
42. In my judgment the Offer Letter included Online's first offer in respect of the property. I interpret "At valuation" as meaning "at a valuation to be agreed". The fact that the valuation was to be agreed does not mean that this was not an offer. As counsel for Mr and Mrs Beer argued, BexBes' contention confuses the first offer with subsequent negotiations over that offer.
43. The basis for the second part of the contention is a note by Mr Breeze of a conversation with Mr Beer on 18 November 2005 which contains the statements "Geoff Lane spoke to Lisa last night – their valuer has put property @ £2.5m". "Lisa" is Lisa Lehegerat, Mr and Mrs Beer's daughter and the then company secretary of MBT. Neither Mr Lane nor Mrs Lehegerat gave evidence. The evidence of the witnesses who did give evidence shed little further light on what was said by Mr Lane or its significance beyond what is recorded in the note. Counsel for Mr and Mrs Beer submitted that Mr Lane had not made an offer with regard to the property on behalf of Online, but rather had a made a negotiating statement about its value. I am inclined to agree with this, but in my view the more significant point is that Online had already made an offer in respect of the property which I have interpreted in the manner set out above.
44. In the end the valuation which was agreed for the property was £3 million. In my judgment this represents the Consideration for the property in Online's first offer. The property thus stands in the much same position as the other assets, in respect of which BexBes' first offer was to purchase them "at valuation", which was later agreed to be £1,467,023. I would add that it is clear from the evidence that the figure of £3 million was one which both sides had in mind as being the likely value of the property from before the date of the Offer Letter.

The Disposal

45. It is common ground that in relation to the Disposal the Sale Contract for the purposes of the Engagement Letter comprises the Sale and Purchase Agreement together with the Conveyances. It is also common ground that the Consideration in respect of the Disposal for the purposes of clause 4.1(v) of the Engagement Letter included the £500,000 of Deferred Consideration paid under the Sale and Purchase Agreement and the £500,000 paid for the property owned by the Pension Fund. As noted above, the Initial Consideration paid under the Sale and Purchase Agreement was £3,050,540. Mr and Mrs Beer's case is that this sum was calculated as follows: £750,000 for goodwill, £812,517 for the net equity in the property owned by MBT, £1,467,023 for assets and the figure of £21,000 discussed below. BexBes disputes the correctness of this calculation. As noted above, there is also a dispute as to the correct figure to be attributed to the Further Deferred Consideration.

(4) Should the Further Deferred Consideration be assessed as the maximum amount potentially payable or as the amount which in the event was actually paid?

46. Mr and Mrs Beer's primary case is that for the purposes of assessing the Consideration in respect of the Disposal the Further Deferred Consideration under the Sale and Purchase Agreement should be taken to be the sum which in the event was actually paid, namely £48,664, rather than the maximum sum which was potentially payable, namely £300,000. This, of course, involves adopting a different approach to the assessment of the Consideration under the Disposal to that contended for by Mr and Mrs Beer with regard to the assessment of the Consideration under the first offer. Counsel for Mr and Mrs Beer sought to justify this by arguing that clause 4.3 provides that contingent sums were to be included in the Consideration with regard to offers, but clause 4.1(v) provides that the Consideration in respect of the Sale Contract is confined to sums actually received. He also relied on evidence that the two figures of £150,000 in Schedule V Part 2 had been inserted purely for the purposes of enabling the stamp duty payable by Pass to be calculated rather than as a genuine estimate of the likely sums payable by Pass by way of Further Deferred Consideration. Mr and Mrs Beer's secondary case is that, if a consistent approach is to be adopted, contingent sums should be included at both stages. By contrast, it is BexBes' primary case that contingent sums should be excluded at both stages.
47. In my judgment the Further Deferred Consideration payable under the Disposal for present purposes should be taken to be £300,000 for the same reasons as I have already given in relation to issue (1) above. As to the evidence about the two figures of £150,000 being inserted for stamp duty reasons, in my view this is immaterial. The net effect of Schedule V Part 2 was that the total sum potentially payable by Pass by way of Further Deferred Consideration was £300,000 even if this was not very likely. As I have said in relation to issue (1), I think this should be taken at face value.

(5) Should a sum of £21,000 paid as a result of the delay in finalising the Disposal be included in the Consideration?

48. It is common ground that the Initial Consideration of £3,050,540 paid under the Sale and Purchase Agreement included a sum of £21,000 to reflect the delay in finalising the Disposal after 31 January 2006. Mr and Mrs Beer contend that this sum should be excluded from the Consideration for the purposes of clause 4.1(v) of the Engagement Letter on the ground that it was effectively an interest payment. BexBes contends that it should be included on the ground that it reflected the fact that MBT earned additional profits after 31 January 2006 which increased MBT's net asset value from the value as at that date.
49. In my judgment this sum should be included. On Mr and Mrs Beer's own case the Initial Consideration under the Sale and Purchase Agreement includes this sum. Once again, I think the Sale and Purchase Agreement should be taken at face value. Furthermore, the fact that the purpose of the sum was to reflect the delay in finalising the transaction does not make it an interest payment: it is part of the Consideration paid.

(6) PFA's fees and the swap fee

50. Although PFA was engaged to sell the business, its contract was a contract with MBT dated 26 March 2002. PFA rendered an initial invoice to MBT for its services in the sum of £12,000 plus VAT on 16 January 2006. On 31 March 2006 Mr Whittaker sent Mr Farmer an email asking him to replace this with an invoice with "more specific wording". On 3 April 2006 Mr Farmer complied with this request and sent Mr Whittaker an invoice in the same sum with the same date for "initial fees relating to property sale". On the same date PFA rendered a further invoice to MBT for "fees relating to property sale" in the total sum of £75,000 plus VAT, that is to say, £63,000 plus VAT in addition to the initial £12,000 plus VAT. In addition, it appears that PFA charged Mr Beer personally some £7-8,000 plus VAT.
51. The initial fee of £12,000 plus VAT was paid by MBT before 31 January 2006. Accordingly, this payment was taken into account when MBT's assets were valued as at that date. BexBes contends that this sum should be added to the amounts actually paid by Online when assessing the Consideration in relation to the Disposal. Mr and Mrs Beer dispute this.
52. It appears that the further fee of £63,000 plus VAT was paid by MBT at around the date of the Sale and Purchase Agreement. Mr Ashby explained in evidence that, although Mr and Mrs Beer tried to persuade Online to pay this fee, Online was not prepared to agree to this. Accordingly, the fee was deducted from the equity in MBT's property. It appears that Mr Farmer was asked to issue invoices with the "more specific wording" partly to facilitate this treatment of the fee and partly to enable MBT to reclaim the VAT. (It was agreed between Mr and Mrs Beer and Online that if MBT was not successful in reclaiming the VAT Mr and Beer would reimburse MBT, but in the event MBT was successful.) Similarly, it was agreed between MBT and Online that a sum of £3,500 representing half of a swap fee payable by MBT for redeeming the mortgage on the property would be deducted from the equity in MBT's property. Thus the net equity in MBT's property was calculated as follows: £2.5m less £1,620,983 (mortgage and loans) less £63,000 (PFA's outstanding fee) less £3,500 (swap fee) equals £812,517. BexBes contend that the sums of £63,000 and £3,500 represent part of the Consideration in relation to the Disposal, that the true figure for net property equity is £879,017 and that the true Initial Consideration paid by Online was £3,117,040. Again Mr and Mrs Beer dispute this.
53. The basis for BexBes' contention that the sums of £12,000, £63,000 and £3,500 form part of the Consideration is that BexBes assumed responsibility for them such that they fall within the last paragraph of the definition of Consideration in the Engagement Letter. In my judgment this is incorrect. Online did not assume responsibility for these sums. On the contrary, it positively declined to assume responsibility for them. It is true that agreement was reached between Mr and Mrs Beer and Online as to how the payments of £63,000 and £3,500 would be dealt with, because MBT had incurred liability for the payments before 31 January 2006 but they were actually made after that date. In effect, what was agreed was that MBT would bear the payments as if they pre-dated 31 January 2006. In this way the payments were treated as further charges against the equity in the company's property. In other words, Mr and Mr Beer assumed responsibility for them.
54. Counsel for BexBes submitted that in reality PFA's fees were incurred for the benefit of Mr and Mrs Beer rather than MBT and that the wording employed on PFA's invoices did not accurately reflect the reality of the position since PFA's services primarily related to the sale of the company. I have some sympathy with these submissions, but they do not change the facts that the pre-existing contractual liability for PFA's fees lay with MBT and that Online declined to assume responsibility for them.

(7) The key managers' pension payments

55. One of Mr and Mrs Beer's objectives in selling MBT was to ensure that four key managers of MBT, including Mrs Leheragat and Mr and Mrs Beer's son Ross, received some payment. This was partly to reward them for their past contribution to the business, and partly to make them favourably disposed to continuing to work for MBT under its new ownership. At one stage Mr and Mrs Beer contemplated making such payments themselves out of their consideration from the sale, but in a letter dated 7 December 2005 Mr Llambias suggested that it would be more tax efficient and hence less costly if MBT made payments to the managers' pension schemes. Mr and Mrs Beer adopted this suggestion, and MBT made payments of £30,000 to each of the managers' pension schemes. These payments were accounted for in MBT's accounts for the year ended 31 January 2006 on the basis that MBT had agreed to pay these sums before that date, although they were not actually paid until later. It appears that half of the payments were made before completion of the Disposal and half after.
56. Again BexBes contends that Online assumed responsibility for these payments and thus they form part of the Consideration under the Disposal. In my judgment it is even clearer in the case of the pension payments than in the case of PFA's fees and the swap fee that this is incorrect. Online did not assume responsibility for these payments. On the contrary, the payments were made by MBT and accounted for in the accounts for the year ending 31 January 2006 which were used to value MBT's assets. Again, therefore, Mr and Mrs Beer assumed responsibility for the payments.
57. I should add that Mr Llambias stated in his letter that making the payments in this way would not affect the Consideration for the purposes of BexBes' fee. While I understand why Mr Llambias thought that his helpful suggestion should not reduce the Consideration and hence the fee, I do not consider that this correctly reflects the effect of the Engagement Letter.

Conclusion

58. For the reasons given above, I conclude as follows. The Consideration in respect of Online's first offer was £1.25m for goodwill plus £1,467,023 for assets plus £1,312,517 net equity in the two properties, a total of £4,029,540. The Consideration in respect of the Disposal was £3,050,540 Initial Consideration plus £500,000 Deferred Consideration plus £300,000 Further Deferred Consideration plus £500,000 in respect of the Pension Fund's property, a total of £4,350,540. The increase is £321,000. BexBes' fee is £45,000 plus £57,780 (18% of £321,000). Thus BexBes is entitled to £57,780 in addition to the £45,000 already paid. BexBes is also entitled to interest, the calculation of which I hope can be agreed between the parties.