7 Rolls Buildings
London, EC4A 1NL
B e f o r e :
| WELLESLEY PARTNERS LLP
|- and -
Mr Michael Pooles QC & Mr Charles Dougherty QC (instructed by Reynolds Porter Chamberlain LLP) for the Defendant
Hearing dates: 9, 10, 11, 14, 15, 16, 17, 18 and 21 October 2013
Crown Copyright ©
Mr Justice Nugee:
(1) Mr Christian Meissner, then Head of European Investment Banking at Lehman Brothers ("Lehman");
(2) Mr Ludovico del Balzo, then Global Head of Consumer Banking for Lehman;
(3) Mr Simon Roberts, who had a senior role in Bluecrest Capital (a hedge fund);
(4) Mr Harvinder Hungin who had previously been at Lazards, S G Hambros, Société Générale and Chelsfield.
Mr Channing regarded these individuals as being able to play the role of "ambassadors" for WP, and to provide valuable introductions, support and advice for the business.
"Dealing with appropriate amendments to the LLP agreement;
LLP approval and subscription documentation for the new members…"
He also confirmed that Withers would not need to give tax advice.
"I set out below the services which I believe we will be required to provide (based on the information you have given me):
1. reviewing the current LLP agreement;
2. advising on and drafting new provisions for the LLP agreement required by the investors such as pre-emption rights, veto rights and management provisions generally;
3. drafting a summary of the LLP agreement for the benefit of the investors; and
4. drafting deeds of adherence for the admission of new members to the LLP."
"I propose that this matter will be handled by me and Jamie Cuffe…I will act as the partner primarily responsible for the overall supervision of this matter and will be your main point of contact."
"- what capital they are putting in and how that affects capital and profit sharing as if they are coming in at a higher value, then we will have to have capital and profit sharing by reference to an agreed percentage rather than the actual capital that was put in as Rupert and Christian may have put in a very small amount of capital.
We need to give everyone a vote by reference to their percentage interest eg 100 votes per percentage or if we are putting in a table, we can just have a column for votes."
"- Value – they put in capital on current arm's length value of the business. Now they come in at market value need a schedule of percentages
- Business value is £10m"
Mr Simpson accepted in evidence that the first statement was probably made by him, and that it was Mr Channing who indicated the value was £10m. Mr Cuffe's note also includes a reference to:
"express mention of commission levels"
and another note of the same call, made by Peter Finding (a trainee solicitor in the Corporate Department) refers to:
"45% commission payment".
Various other matters were discussed. Mr Channing agreed to send a schedule of the names and intended holdings of the investors, which he did on 23 January. At that stage the proposed interests of the outside members totalled 38%, being 25% for Addax, 10.5% for the four "ambassadors", and 2.5% for Mr Jeremy Harris who was employed in WPHK. With 5% for Mr Brun that left 57% for Mr Channing.
"a short break down of the use of proceeds (GBP 2.5MM)"
Mr Channing replied the same day, saying:
"proceeds….The proceeds generated through this process will assist WP init [sic] growth plans on a number of levels. By definition the cash flow in the business is very lumpy, making it difficult to make investment decisions in people and premises on a seamless basis. The funds will give the business a significant working capital cushion to be able to absorb the hiring on new colleagues and the financial commitments required to accomplish that, as well as establish the new offices in the Middle East and India. You will see from the plan that we will be hiring new consultants and associated support into London, as well as establish the Middle East business with a team of 4-5 people this year, and growing thereafter. Next year we plan to accomplish the same in India. In raising this capital we will be able to accomplish this without putting unnecessary cash flow stress in the business"
The reference to "the plan" is to a draft business plan which Mr Channing had supplied.
"Wellesley Partners is seeking to raise external capital in order to accelerate significantly its growth both in the Gulf Region, as well as India, and other emerging markets…
The investment from Addax will not only provide the financial capital required to generate this accelerated growth, but it may also become a significant partner in helping to generate symbiotic introductions throughout the Gulf Region…
Investment: £ 2.5 million (approx US$ 5 million).
Addax Bank will become a 25% shareholder in the LLP (Group) with an enhanced 40% share of the Middle East business.
Addax bank will receive a guaranteed minimum dividend return of 15% per annum for the first 3.5 years of the Investment in Wellesley Partners.
In November of 2011 (3.5 years anniversary of investment) Addax will have the opportunity to require the management of Wellesley Partners LLP to buy back 50% of their Investment in Wellesley Partners LLP at par value at Addax's discretion…
Investment Returns* to Addax. (Guaranteed minimum)
Initial Investment Date 1 April 2008
4/2008 – 4/2009 – 15% - £375,000
4/2009 – 4/2010 – 15% - £375,000
4/2010 – 4/2011 – 15% - £375,000
4/2011 – 10/2011 – 7.5% - £187,500
Total minimum return £1,312,500
Management Put - £1,250,000
On-going carried interest in WP – 12.5% (Group), 20% Middle East.
This structure is intended to provide significant comfort to Addax about the return profile of the business, and its ability to exit part of the Investment for any reason in a reasonable time frame. The structure guarantees to Addax a minimum return, as well as an opportunity to exit 50% after 3.5 years
Returns and Exit strategy
The Wellesley Partners LLP management team is highly experienced in the growth of executive search businesses, with a significant track record of success. This is intended to be a commercial opportunity for all stakeholders in the business. On the basis of conservative modelling WP believes it will be in a position to generate significant interest in a trade sale of the business within a 3-4 year time frame, or seek an AIM or equivalent listing of the business. Historically the leading large executive search organizations have been highly acquisitive in their own growth strategies, particularly in connection with highly focused high quality boutiques. Clearly the views of all stakeholders will be sought as to the appropriate decision at this time.
In applying conservative industry standard multiples to conservative growth estimates, WP believes that it can generate a 3-4 x exit multiple for Addax over this time period, excluding dividend yields…"
There is in evidence another version of this document in different terms. In particular this version included a statement that:
"The firm has already raised a small amount of capital from a number of highly influential external investors."
This version proposed that Addax's minimum 15% dividend would be for the first 3 years only (rather than 3½). It is also dated 27 March 2007, and it is not possible to date it securely, but I find that it was an earlier version than the Term Sheet and I accept that it was the latter that was sent.
"With regard to Addax's contribution taking the form of a loan, so long as you comply with certain formalities contained in the LLP agreement, legally there is no prohibition to this. In particular, specific written arrangements must be put in place between Addax and the LLP (i.e. the loan must be evidenced in writing) and the approval of a simple majority of the Members must be obtained. Given that you hold more than 50% of the voting rights in the LLP obtaining the simple majority will not be an issue. However, the other Members must be given notice of the proposal and this may cause them to seek to restructure their own contributions."
Mr Channing's reply said:
"…the other members were made aware of the likelihood that addax would seek this structure and were willing to proceed on that basis. I will ask addax to structure a separate document to describe the terms for circulation to all members."
It was suggested to me by Miss Parkin that this exchange was referring to the ability of Addax to call back 50% of its investment. That may have been what Mr Channing was referring to, but I do not think this would have been apparent to Mr Cuffe. There is nothing to show that he was aware of the terms set out in the Term Sheet and he appears to have simply been asked about the possibility of a loan, and there is a difference in principle between a loan and an investment which one has a right to unwind in certain circumstances.
"5. A copy of the business plan and proposed term sheet…
11. Details of Bonus (commission) arrangements for Partners."
Mr Cuffe asked Mr Cartwright to send over a mark up of the LLP agreement, which Mr Cartwright did by e-mail timed at 00.15 on Wednesday 16 April (copied, among others, to Mr Simpson and Mr Channing). His e-mail said that the draft had not been reviewed by Addax and was subject to any comments they might have. It also said:
"As regards the attached draft, we have assumed that the investors other than Addax will be investing alongside Addax on a £ for £ basis and will be expecting a return on a similar basis, although we have not built them into the put option mechanism. You will note that many of our amendments reflect the commercial terms finally agreed between the parties as well as those contained in our letter of last week with our headline comments circulated."
Withers have not disclosed a copy of TW's "letter of last week"; but since Mr Cartwright only introduced himself to Mr Cuffe the previous day, I consider it unlikely that it was addressed to them and I do not find it surprising that they do not have a copy. WP has not produced a copy either and there is no evidence of what it said.
(1) Provisions conferring substantial negative control on the Investors. These took the form of providing for the Investors to have representative(s) on the Executive Committee; introducing the concept of Investor Consent (given either by such Investor Representative(s) or by a majority (by votes) of the Investors); requiring Investor Consent to the draft business plan each year; and requiring virtually any significant decision of the LLP to be approved by the members by Simple Majority with Investor Consent.
(2) A requirement for the Investors to pay the Capital Contributions set out against their name in schedule 1 to the LLP.
(3) Provision for an Investor Priority Share ("IPS") to be paid to each Investor, calculated at 15% of the Capital Contribution made by that Investor with profits to be divided between the members only after payment of the IPS.
(4) Provision (in clause 25) for Addax's option to unwind half its investment. Clause 25.1 provided:
"Subject to clause 25.2 on Addax issuing a notice (an 'Exercise Notice') requiring the LLP to terminate its membership in relation such percentage (up to a maximum of 50 per cent) of the Partnership Interest held by Addax as may be specified in such Exercise Notice (the 'Relevant Interest'), the LLP shall (and the Designated Members shall procure that the LLP shall) terminate Addax's membership in respect of the Relevant Interest and shall pay to Addax the Cancellation Sum."
The Designated Members were (unless changed) Mr Channing and Mr Brun.
(5) Clause 25.2 provided:
"Addax shall only be permitted to issue an Exercise Notice to the LLP on or after the date falling within 42 months following the Commencement Date."
The Commencement Date was defined as the date of the agreement, so the effect of clause 25.2 as drafted was to enable Addax to exercise this option only after 3½ years, which accorded with the Term Sheet.
(6) Clause 25 went on to provide for other matters such as the calculation of the amount to be paid, the date of repayment, and a provision that if the LLP was not able to pay, the Cancellation Sum would remain outstanding as a debt carrying interest.
(7) Schedule 1 now contained a new column against the names of the Investors headed "Capital Contribution" but no amounts were yet shown in this column. There was no similar column for the Initial Members (Mr Channing and Mr Brun).
(8) Schedule 6 contained a number of warranties to be given by Mr Channing and Mr Brun.
(1) "Draft response to TW – COP tomorrow"
This records Mr Simpson saying that they would get a draft response to TW by close of play on 17 April.
(2) "No negative control of the company. Power of veto.
They are only buying 25% and they are not
This reflects Mr Channing's instructions that he did not want Addax to have negative control over WP. The last word is unclear.
(3) "15% coupon ok – other investors fine"
This refers to Mr Channing's instructions that the provision for the 15% IPS for Addax was acceptable, but that the other investors were not expecting a similar return.
(4) "Management put structure fine"
This refers to Mr Channing's instructions that he was happy with the provisions for Addax's option to unwind half its investment. It is of some significance in the light of what later happened.
Although not noted in the attendance note, Mr Channing and Mr Simpson both said in their written evidence that Mr Simpson also raised with Mr Channing the possibility of adding a long-stop beyond which Addax could not exercise its option, and that Mr Channing agreed to think about this.
(5) "I have not thought of getting a call. I will think about it."
This refers to the question whether Addax's put option should be matched by a similar call option under which Mr Channing could require them to unwind half their investment. As appears from the note, he had not previously considered this, and it seems likely it was Mr Simpson's suggestion; Mr Channing again agreed to think about it.
(6) "15% coupon only for 3.5 years.
Ensure no double-dip – greater of 15% or 25%."
This refers to two other aspects of the IPS provisions as drafted by TW. First, TW had drafted the IPS as an indefinite entitlement, whereas it was only to last for the first 3½ years. Second, under TW's drafting Addax would be entitled first to a 15% return by way of IPS and then to 25% of profits by way of profit share. Mr Channing's instructions were that it should have a minimum return of 15% by way of IPS or 25% of profits if greater, but not both.
(7) "BXS – worth you going through clause 16"
Clause 16 was the governance clause. As drafted by TW it listed the matters which required Investor Consent. This records Mr Simpson's advice that it would be worth Mr Channing going through the particular matters listed in clause 16.
(8) "call tomorrow evening 5.30.pm"
This is self-explanatory. The intention was that Withers would do a re-draft incorporating Mr Channing's instructions which would be discussed at 5.30pm the next day (Thursday 17 April) with a view to getting it to TW that evening.
"With regard to clause 25, the Addax option, could you confirm whether there should be a long stop on Addax's ability to force the LLP to buy half its interest? We have inserted a 3 and a half year window for exercise. Further, I believe that you were going to consider whether you wished to be able to force Addax to sell 50% of it Partnership Interest to the LLP. Have you come to a conclusion in this regard ?"
As the e-mail indicated, Mr Cuffe's draft had amended clause 25.2 to provide for a long stop for Addax's exercise of its option as follows:
"Addax shall only be permitted to issue an Exercise Notice to the LLP on or after the date falling 42 months following the Commencement Date and before the date falling 84 months following the Commencement Date."
"No probs…lets talk at 530….I will call you"
"Addax shall only be permitted to issue an Exercise Notice to the LLP
on or after the date falling within 42from the Commencement Date until 41 months following the Commencement Date. (the 'Lapse Date'). If the Exercise Notice is not issued before or on the Lapse Date the rights set out in this clause 25 shall lapse in their entirety."
The changes to clause 25.2 appear to have been the only changes made from the previous draft timed at 16.15 on the same day: neither party has identified any others, nor have I. This is supported by the document comparison statistics on the two drafts, which show the 19.56 version as containing one more insertion and two more deletions than the 16.15 version, all of which are accounted for by the changes to clause 25.2.
"I will need to send you a couple of emails on Wellesley. Firstly please respond to TW in your name. Secondly, make sure you respond to all the points he makes in his email dated 16 April.
-in paragraph 1 of your email refer to the vetoes first before giving them the news about removal of investor consent and make clear that our client feels rather than we feel
-in relation to clause 7, you are using a lot of words to say not very much other than we didn't like their drafting
-are you also saying as regards clause 25 that they didn't reflect the deal in their drafting
Can you try rewriting your email in the light of the above ?"
It is apparent from this that Mr Cuffe had drafted, and Mr Simpson had seen, an e-mail to go to TW with the redrafted agreement. No copy of such a draft e-mail has been produced, but on this I accept Mr Cuffe's explanation which is that it is probable that he would have drafted an e-mail, printed it off in draft and given a hard copy to Mr Simpson (or left it for him), and then amended the draft in the light of his comments before sending the e-mail to TW. Again I heard no technical evidence but I infer that in these circumstances no copy of the original draft would have been preserved on Withers' system.
"Our client has not had an opportunity to sign off on the current draft so this version is subject to any final comments our client may have."
"Apologies that the LLP agreement did not go out last night, but Ben wanted to review it once more overnight. His further amendments have been incorporated in the current draft. There is nothing particularly different from the draft I sent you yesterday, but if you would like a blackline showing his changes please let me know."
Mr Cuffe's evidence was that he was sure that what he intended to convey by the 10.34 e-mail was that Mr Simpson's overnight amendments were not of significance. This would seem to be true: the 18 April draft does contain a number of further changes, but none of them would appear to be very significant. So far as clause 25 is concerned, the only change that has been identified is that the grammar of clause 25.1 was corrected by adding the word "to" so that it read:
"Subject to clause 25.2 on Addax issuing a notice (an 'Exercise Notice') requiring the LLP to terminate its membership in relation to such percentage (up to a maximum of 50 per cent) of the Partnership Interest held by Addax as may be specified in such Exercise Notice (the 'Relevant Interest'), the LLP shall (and the Designated Members shall procure that the LLP shall) terminate Addax's membership in respect of the Relevant Interest and shall pay to Addax the Cancellation Sum."
Clause 25.2 in the 18 April draft is identical to that drafted by Mr Cuffe the night before in the 19.56 draft of 17 April. This is indeed a change of some significance from the 16.15 draft of 17 April, but it is not one of the "further amendments" made by Mr Simpson.
"We have agreed to hold back £250k of working capital to seed business"
"?Almost there on terms.
?Rupert needs to get clear on these points."
and in an e-mail that afternoon to Mr Cuffe Mr Cartwright referred to their having made a lot of progress on the draft LLP agreement over the last few days.
"The Investor Representative is not yet known, and neither are the bank details of Addax, however other than this I hope that there should be no changes to the meat of the Agreement. I will continue to chase Tom [ie Mr Cartwright] for confirmation."
"That's great ….when you do speak to him, pls can you confirm that he plans to wire the US$ 5 MILLION today as he indicated to me on the phone yesterday, to Wither's client account, so that we may complete as soon as possible."
"Capital Contributions made by Addax x Relevant Interest"
Partnership interest of Addax as
at the date of the Exercise Notice
Mr Simpson had however queried in the course of his review of the draft agreement on 2 May whether this worked satisfactorily. Mr Cuffe and Mr Cartwright must have agreed that it did not as the draft sent on 7 May replaced this with the simpler calculation of the Cancellation Sum as being:
"Capital Contributions made by Addax x Relevant Interest"
"Can you please confirm you have all of the other investors's funds and are ready to complete ?"
Mr Cuffe must have asked Mr Channing for this confirmation as Mr Channing e-mailed him later that morning saying:
"I can confirm to you that we now have all the funds from the other investors, and that we are only waiting on Addax."
Mr Cuffe then replied to Mr Cartwright:
"Yes, I can confirm that we have all the funds and are ready to complete."
"The dollar exchange rate on the FT website today (see attached scan) is 1.94740. By my calculations, £2,567,525.93 should be sent."
Mr Cartwright replied "Fine" and that he would transfer the funds to be held to TW's order pending one outstanding signature (that of RBC).
"25.1 Subject to clause 25.2 on Addax issuing a notice (an 'Exercise Notice') requiring the LLP to terminate its membership in relation to such percentage (up to a maximum of 50 per cent) of the Partnership Interest held by Addax as may be specified in such Exercise Notice (the 'Relevant Interest'), the LLP shall (and the Designated Members shall procure that the LLP shall) terminate Addax's membership in respect of the Relevant Interest and shall pay to Addax the Cancellation Sum.
25.2 Addax shall only be permitted to issue an Exercise Notice to the LLP from the Commencement Date until 41 months following the Commencement Date (the 'Lapse Date'). If the Exercise Notice is not issued before or on the Lapse Date the rights set out in this clause 25 shall lapse in their entirety.
25.3 For the purposes of this clause 25 the 'Cancellation Sum' shall be calculated as follows:
Capital Contributions made by Addax X Relevant Interest
25.4 Completion of the repayment of the Cancellation Sum shall take place on the twentieth Business Day after service of the Exercise Notice (the 'Cancellation Date') at the registered office of the LLP when:
(a) the Designated Members shall procure that the LLP shall terminate the membership of Addax, in relation to the relevant Interest and shall update the register of Members accordingly;
(b) the LLP shall pay the Cancellation Sum by transfer to such account as Addax shall have notified to the LLP at least one Business Day before completion; and
(c) on receipt of the Cancellation Sum, Addax shall acknowledge that it shall not be entitled to receive any share of the Profits of the LLP in respect of the Relevant Interest for the period after the Cancellation Date.
25.5 If, in any circumstances, the LLP shall not be able to pay the Cancellation Sum to Addax in accordance with sub-clause 25.4(b), the Cancellation Sum shall remain outstanding to Addax as a debt of the LLP (the 'Outstanding Addax Debt') and interest shall accrue on the Outstanding Addax Debt at a per annum rate of 1% over the base rate of Barclays Bank plc from time to time.
25.6 Notwithstanding any other provision of this Agreement, the Members shall consent to the cancellation of the Relevant Interest and the payment of the Cancellation Sum pursuant to this clause 25."
$250,000 to be invested on formation of Wellesley Partners Middle East."
"Jamie Cuffe call – Check option
Foutoun says option can be exercised ?
R.C. – not until 11/201
J.C. – Addax incorrect – checking LLP agreement
- R.C call Foutoun
J.C. Check with Simpson re wording"
"Further to our telephone conversation I have checked the documents and unfortunately the Addax put option is exercisable from the date of the LLP agreement for 41 months (ie until October 2011). It can be exercised at any time in this period. Addax may, however, only exercise the put option in respect of a maximum of 50 per. cent of its partnership interest. If the LLP cannot repay Addax its capital contribution, the sum remains outstanding as a debt to Addax with interest accruing at 1 per. cent per annum over the base rate of Barclays Bank plc."
"- Addax correct = option can be exercised any time until 2011.
- He is shocked. Addax drafted changes
- Simpson unavailable
- Email Foutoun
- Email Simpson
- ? Error in agreement – not original terms – JC agrees."
"- JNC explained that the put option clause had been in the LLP agreement since early on in its current form.
- Rupert wanted to discuss his options. JNC explained that the put option would be a debt payable by the LLP but that commercially as Addax would still have 50% of its investment it would make sense to agree a payment plan that did not involve liquidating the LLP.
- JNC stressed that dialogue in order that the put was not exercised was the best option."
"Rupert called asking me to check the put option in favour of Addax. You were copied into my response. He thought that the put was only exercisable after 3 years for one month. It is in fact exercisable from signing for 42 months.
I checked the file and this was changed early on in the drafting. The Taylor Wessing draft had "exercise on or after 42 months following the Commencement Date [the date of signing]". We changed it to before or on 42 months and lapsing thereafter. This was sent to Rupert as a blackline and remained unchanged for the following five revisions.
Rupert seemed to accept that this was the position and asked what it meant for the LLP. I explained that Addax would be an unsecured credit [sic] with a loan at 1% above base rate if the LLP did not have enough money to pay Addax. In addition, I pointed out that only 50% of the investment could be exercised as a put option and so it was in Addax's best interest not to put the LLP in a position that it a difficult position [sic] with regard working capital as it would jeopardise their investment.
[…] stressed that Addax had not taken a decision to exercise the put option and so Rupert should try to communicate with Addax to find out why they were unhappy and try to get help [sic] them become comfortable with the investment so they would not exercise the put."
"Option exercise. RC confirmed was extremely disappointed to discover Addax had deliberately changed terms of original deal without ever discussing or advising WP of such change. Very difficult meeting. No comment from FHA on deal change. Said that Board had instructed to exercise because of market conditions affecting bank. No comment on change of deal. RC said couldn't believe that Withers so crap as to let change into docs. Typical. RC Livid. FHA embarrassed and evasive."
Mr Channing also indicated that he wished to buy Addax out completely as his trust in them was broken, and was putting together an offer to buy them out over a two year period. Ms Hajjar-Alami indicated Addax would look favourably on such a proposal, and Mr Channing agreed to put together a proposal for her to put to the Board.
"RC explained that option exercise would massively damage LLP chances with Nomura growth plan."
As explained in more detail below, Nomura, a Japanese bank, had taken over Lehman's business in UK and Europe, but had not acquired its business in the US and was therefore looking to build a business there which involved a large-scale recruitment exercise. Mr Channing was hoping that WP would be appointed to assist in that process.
"When it was originally done I thought that the option was for after 3 years"
The upshot of the meeting was that Withers would draft a holding response and Mr Channing would push to have a conversation with Addax.
"he thought option was for 1 mth after 41 mths – BXS and JC sd that changed in one of the drafts. Slight nervousness."
It was accepted in correspondence that this was Mr Moruzzi's handwriting. But Mr Moruzzi did not give evidence, and no questions about the note were asked of Mr Cuffe or Mr Simpson, who did, so I have no direct evidence about this note. I am willing to infer however that it records what Mr Simpson and Mr Cuffe told Mr Moruzzi at around this time, and that "he" refers to Mr Channing.
"Rupert is refusing to pay for any of my and Jamie's time from what I can see. I think we need to resolve this before we finalise the settlement arrangements as he is otherwise simply going to turn round and refuse to pay…
I think he would be fair to criticise the drafting of the LLP agreement for not having a carve out for Addax approval for settling litigation which Addax can veto when Addax is suing the LLP. Otherwise however we were simply trying to document the deal."
The latter paragraph is a reference to the fact that under clause 16.1(i) one of the matters for which Investor Consent was required was the settlement of proceedings, so Addax's consent was in effect required to settle proceedings brought by Addax itself. As Mr Simpson accepted this seems a bit nonsensical; but it does not (and did not) cause any practical problems. If Addax wanted to reach a settlement with WP, it would obviously consent to WP settling the litigation.
"I know from some of our previous meetings and conversations that you have expressed some unhappiness about the way the LLP Agreement was drafted eg the lack of a carve out from the requirement for obtaining Addax's consent in the situation where the litigation was between Addax and the LLP."
It is noticeable that there is nothing to suggest that Mr Channing had by that stage also complained to Withers about the drafting of clause 25.
"We would expect that Addax will require the re-allocation to be pro rata. Please can we discuss."
This was discussed with Mr Channing, as a result of which the next draft (sent to him on 11 December) provided that Addax's 12.5% was allocated pro rata to the other investors (but not Addax itself), with nothing for Mr Brun and the balance for Mr Channing, 5% of Mr Channing's interest then being allocated to a new member. Mr Channing had no comment on this and it was in this form that the draft amended LLP agreement was sent to TW. Even before taking instructions TW's immediate comment on 5 January 2010 was:
"One initial drafting observation on the LLP agreement is that as 50% of Addax's interest had been cancelled as opposed to transferred, the increase in each member's ongoing partnership interest should be pro-rata including Addax's, as opposed to applying to all members other than Addax. Please confirm that this is agreed."
Allegations of negligence (i) drafting of clause 25.2
"I'm certainly not in a position to say that I know he instructed the change; but, for me, it seems the only logical explanation of the change and the fact that he then didn't object at any subsequent point."
"The absence of any written record or letter supporting the defendant's account of the meeting is clearly cogent evidence in support of the plaintiff's case."
Miss Parkin submitted that this was authority that where a solicitor had failed to make an attendance note that by itself was something that I was entitled to place some weight on. I do not accept that as a general principle. It is of course good practice to make attendance notes, precisely because the absence of them makes it more difficult to establish what instructions and advice were given, but I do not accept that the absence of an attendance note in some way counts against the solicitor in forming a view as to where the truth lies. In Middleton v Steeds Hudson the solicitor had made an attendance note of his meeting with the plaintiff, but this only recorded the instructions he had been given and did not contain any record of the advice that he said that he had given, namely that the plaintiff was being over generous in reaching a financial settlement with his wife. In this context, it is readily understandable why Johnson J should regard the fact there was no record of this advice, either in the attendance note or in any follow up letter, as cogent evidence that such advice was not given, although it is noticeable that in the event he found that the solicitor did give such advice. But his statement is self-evidently not intended to be laying down any general principle; it is simply a comment on the facts of that particular case. In the present case I have no doubt, for reasons given below, that some instructions were given in relation to clause 25.2; the lack of an attendance note does not to my mind help resolve what those instructions were, and I do not see it as evidence supporting one side's case or the other. It simply makes it more difficult to resolve the question.
"Are you also saying as regards clause 25 that they didn't reflect the deal in their drafting ?"
I read this as indicating that Mr Cuffe's draft had made some comment explaining the change to clause 25 in terms that Mr Simpson did not find clear. (Miss Parkin submitted that it could alternatively be read as indicating that Mr Cuffe's draft had said nothing about clause 25 but that Mr Simpson thought he should add an explanation along these lines; but this does not seem to me right. "Are you also saying" is a reference to what Mr Cuffe is saying in his current draft. This is what Mr Cuffe thought ("I clearly wrote something which suggested that what the drafting of clause 25 didn't reflect the deal or that it was ambiguous …I think it is all comments on something that I prepared to go out is how I read it.") and I agree with him). In the event the e-mail as sent by Mr Cuffe to TW said nothing about clause 25. I infer from this that Mr Cuffe did not understand his changes to clause 25 to reflect the commercial deal as negotiated between Mr Channing and Addax (either the original deal or as renegotiated), as otherwise he would have said so. The reason he said nothing about clause 25 is that he appreciated that the change to clause 25 was not something that Addax had agreed but was a change being proposed on WP's behalf in the hope that TW would accept it.
"I mean, of course it's a [possibility], but it seems like a very different drafting outcome from the one that is in there. It bears no resemblance to shortening the window."
I agree. I find that if Mr Cuffe was trying to draft something which shortened the window to one month, he would not have redrafted clause 25.2 as he did. Although it was put to him (again) that it was possible that he made a mistake in drafting to which he said "Of course", I did not understand him to be accepting any more than that this was a possibility, not that he thought it at all likely. It can in my view be ruled out.
Alleged negligence (2): Capital contribution expressed in US$
"the Defendant further failed to heed or draw to the attention of Mr Channing or the LLP, or to advise Mr Channing or the LLP that the recording of the Investors' Capital Contributions in USD in the 'Capital Contribution' column of Schedule 1 to the LLP Agreement and the introduction of clause 6.1(b) to the LLP Agreement (which were proposed by Taylor Wessing in the draft LLP Agreements circulated under cover of their emails to the Defendant dated 16 April and 1 May 2008) would have the result that Addax would be entitled to insist on being repaid its Capital Contribution or any part thereof in USD, or at least risked doing so."
I have set this out because I bear in mind that although various other matters were raised in the course of the hearing I am only concerned with the particular allegation that is pleaded.
(1) Mr Channing's initial discussions with Addax were based on Addax's contribution being £2.5m. This was the sum mentioned by Mr Channing to Mr Al Essa in January 2008; and was understood by Addax to be the sum required as confirmed by Ms Valdez's e-mail of 30 January 2008 seeking a "breakdown of the use of the proceeds (GBP 2.5MM)".
(2) It was also the sum specified in the Term Sheet where Mr Channing specified the investment as "£2.5 million (approx US$ 5 million)". Consistently with this the Term Sheet also showed (i) the 15% guaranteed investment returns as £375,000 a year and (ii) Addax's option (described as "Management Put") as worth £1,250,000.
(3) The drafts of the LLP Agreement prepared by Withers in January and February 2008 did not contain any provision specifying the contributions to be made by the members. They simply provided that each Member should have a Capital Account and that his Capital Contributions should be credited to his Capital Account.
(4) The TW draft of 16 April introduced a new clause 6.1(b) in these terms:
"the Investors shall pay the amounts set out opposite their name in column 4 of Schedule 1 by way of Capital Contribution to the LLP."
At that stage column 4 of schedule 1 was blank and there was nothing to indicate that the contribution would be in US$. Indeed Mr Cartwright's covering e-mail said that they had assumed that the other investors would be investing alongside Addax "on a £ for £ basis". I infer from this that TW had by then had no instructions from Addax that the contribution should be in US$. TW also introduced clause 25 providing for Addax's option to require up to 50% of its membership interest to be cancelled, the cancellation sum being calculated by reference to its Capital Contribution (although the formula was later redrafted, this remained the case throughout).
(5) This draft was discussed by Mr Simpson and Mr Cuffe with Mr Channing in a telephone call on the afternoon of 16 April. There is no record in Mr Cuffe's note of the call of any discussion of clause 6.1(b) but there was no particular reason why there should have been. In itself it was unexceptional. There was a discussion as to clause 25 which Mr Channing described as fine; it seems to me that he must have understood that on exercise of the option Addax would get back (up to) half of its contribution. There was nothing at that stage to indicate that the contribution would be in US$; and indeed the note records under the Middle East JV that:
"WP invest £250k of investment funds"
which indicates that Mr Channing was then still thinking of Addax's investment as being made in sterling.
(6) Withers' draft of 18 April sent back to TW contained no material change. On 21 April Mr Cartwright e-mailed Mr Channing to say that he would be running through the draft contract with Addax. When Mr Channing forwarded this to Mr Cuffe he again referred to "£250k of working capital" being held back to seed the Middle East business.
(7) Mr Cartwright and Mr Cuffe ran through the draft on the telephone on 22 April. Mr Cuffe's note of the call includes under "Addax JV":
This is the first indication in the papers that Addax's contribution was to be in US$. I infer that Mr Cartwright had, as he had indicated he would, run through the draft contract with his clients before this call, and that this was one of the matters Addax had instructed him to change.
(8) The next draft of the LLP Agreement was the 1 May draft sent by TW (and copied to Mr Channing). It specified Addax's Capital Contribution in sch 1 as being $4,750,000 with $250,000 to be invested on formation of Wellesley Partners Middle East. It did not specify the capital contributions for the other investors. Since it was a blacklined version, it was easy to pick up the change from the previous draft (the 18 April draft). It is not ambiguous – there is no doubt that it provides that Addax's Capital Contribution will be a US$ sum.
(9) Withers' telephone records show that Mr Cuffe spoke to Mr Channing on the telephone at 11.25 on 2 May for 21 minutes. Although there is no attendance note of the call, it is clear that the purpose of the call was to run through TW's drafts and obtain Mr Channing's sign-off on the changes they had proposed: Mr Channing had himself suggested on 1 May that Mr Cuffe and he meet or speak "to run through everything"; and Mr Cuffe's billing records describe the call as:
"telephone call – to Rupert Channing, going through all the documents".
(10) Mr Cuffe sent his redraft of 2 May back at 16.55. This left Addax's capital contribution unchanged (and indeed added capital contributions for the other investors in US$).
(11) By 6 May Mr Channing was anxious to complete. He sent an e-mail to Mr Cuffe asking him to confirm with Mr Cartwright that the latter planned to wire US$5 million that day "as he indicated to me on the phone yesterday."
(12) On 13 May Mr Cartwright e-mailed Mr Cuffe saying he expected to be in a position to transfer funds that day and asking him to reconfirm bank details. Mr Cuffe's response referred to the exchange rate on the FT website (£1 = $1.9474) and calculated the sum due at £2,567,525.93. This response was copied to Mr Channing, who replied to Mr Cuffe with WP's account details. Mr Cartwright did not dispute the calculation and later that day transferred the funds to Withers' account to be held to TW's order.
(13) Mr Channing knew that Withers had received approximately £2.56m on 13 May as he had a discussion with Mr Hudson that day to discuss how to deal with the money in which he referred to "approx £2.56m".
(14) Mr Cartwright confirmed to Mr Cuffe at 13.50 on 14 May that the funds could be released, and at 14.10 Mr Cuffe confirmed to Mr Channing that the funds had left Withers' account for WP's. The amount transferred to WP's account was the same as that calculated by Mr Cuffe, namely £2,567,525.93.
"15 per cent of the Capital Contribution less the profit allocation to it pursuant to Schedule 3 in respect of that Financial Year."
As Addax's Capital Contribution is expressed in US$, 15% of that sum is also a US$ figure, whereas Addax's entitlement to profits is calculated by reference to the profits as shown in the audited accounts for the year, which unsurprisingly for a UK entity are drawn up in sterling. So if WP had made any profits, calculation of the IPS would have involved subtracting a sterling figure from a dollar figure, which does not seem a very sensible arrangement and could easily give rise to questions as to which exchange rate to use.
Alleged negligence (3): Redistribution of Addax's interest
"in drafting and advising on the drafting of clause 25 of the LLP Agreement, the Defendant further failed to make, or advise Mr Channing or the LLP as to the wisdom of making, express provision for how the votes attributable to Addax's Relevant Interest should be varied and redistributed upon the exercise of the Addax Option, so as to avoid the possibility of Addax continuing to represent an Investor Majority (and so controlling the giving or withholding of Investor Consent) notwithstanding the repayment of 50% of the Capital Contribution."
(1) Withers' first draft of the LLP Agreement (the 18 January draft) did not contain any reference to Addax's option nor any provision for Investor Consent or Investor Majority; nor did any of the other early drafts they produced.
(2) It was the TW draft of 16 April which first introduced both clause 25 dealing with Addax's option and the concepts of Investor Consent, Investor Representative and Investor Majority. Clause 25.1 as drafted required WP to "terminate Addax's membership" in respect of the Relevant Interest. The provisions in relation to Investor Consent and Investor Majority in effect gave the majority of Investors (the Members other than Mr Channing and Mr Brun) substantial negative control, the majority being calculated by number of votes.
(3) So far as clause 25.1 was concerned, Mr Channing expressed himself happy with Addax's option ("management put structure fine") in the telephone call which he had with Mr Simpson and Mr Cuffe on the afternoon of 16 April, and save for Mr Simpson's insertion overnight on 17/18 April of the word "to", the draft of clause 25.1 which Withers sent back to TW on 18 April was in the same form. It remained unchanged thereafter and the final form of clause 25.1 therefore required WP to "terminate" Addax's membership in respect of the Relevant Interest.
(4) So far as Investor Consent was concerned, Mr Channing said in the telephone call of 16 April that he did not want Addax to have negative control. Withers' 18 April draft therefore took out the reference to Investor Consent. But TW's 1 May draft reinstated it.
(5) As set out above, Mr Cuffe ran through this draft with Mr Channing on the telephone on 2 May. Withers' 2 May draft accepted the reintroduction of Investor Consent. In the light of this, I think it probable that this was one of the matters discussed between Mr Cuffe and Mr Channing and I find that Mr Channing was willing to accept this.
(6) As executed therefore the LLP Agreement provided that a significant number of matters (most of them listed in clause 16.1) required Investor Consent. By clause 15.3 Investor Consent could only be given by the Investor Representative or by an Investor Majority; and by clause 15.1 the Investor Representative was to be appointed by the Investors acting by an Investor Majority. Investor Majority was determined by the number of votes. The total number of votes for Investors was 35.5, of which Addax held 25.
(1) Clause 25.1 provided that on exercise of Addax's option Addax's membership should be "cancelled" in respect of the Relevant Interest. I do not think there is any real difficulty over what this means. It is easiest to see in relation to votes. Addax's membership entitled it to 25 out of 100 votes. If 12.5 votes are cancelled, it is left with 12.5 votes, but no-one else gets the 12.5 that are cancelled: they simply cease to exist. This means that there are only 87.5 votes in total so Addax's share of the total votes is now 12.5 / 87.5 or about 14.3%. It is not 12.5%.
(2) The same is true of Addax's entitlement to 25% of the profits. In exactly the same way this can be thought of as an interest entitling it to 25 out of 100 shares in the profits, with the other members being entitled to 75 such shares. If 12.5 of these shares in profit are cancelled, they do not go to anyone else, so Addax is now entitled to 12.5, with the other members still entitled to 75. That means that Addax's share in profits is now 12.5 / 87.5 or again 14.3%.
(3) This means that although there is no express provision for Addax's votes or interest in profits to be re-allocated, the practical effect of cancelling half their interest is to increase all the remaining interests (including their own) pro-rata.
(4) It also follows that Addax remains entitled after exercise of the option to more than 50% of the total votes attributable to Investors. The initial total of Investors' votes was 35.5, with Addax having 25 and the other Investors 10.5; after cancellation of half of Addax's votes, the total is 23, with Addax having 12.5 and the other Investors still having 10.5.
Alleged negligence (4): failure to advise on 3 February 2009
(1) The first call at 9.26 was a brief one, lasting only 2½ minutes. As appears from both Mr Channing's note of the call and Mr Cuffe's e-mail to Mr Simpson of 12.01, Mr Channing called Mr Cuffe to ask him to check what the LLP Agreement said about when the Addax option could be exercised. This was because Ms Hajjar-Alami had indicated to Mr Channing that Addax were thinking of exercising their option and he thought it could not be exercised until November 2011. Although Mr Channing could not recall this, I find that he also said he thought it could it be exercised for one month. Mr Cuffe agreed to check the wording of the Agreement. He did not give any advice at that stage. Mr Channing's evidence, supported by his note, was that Mr Cuffe told him that his recollection was the same as his, namely that Addax were wrong. Mr Cuffe, who had no actual recollection of the conversation, said in evidence that he thought it unlikely that he would have expressed a view on this as he was going to check the agreement. I think it likely that Mr Cuffe did say something along the lines that he did not think Addax were right but he would check the agreement, but I do not see this as significant. Mr Cuffe had evidently forgotten the detail of the drafting of clause 25.2, something which I do not find at all surprising, and I do not think he would have expressed any more than an off the cuff view.
(2) Mr Cuffe then checked the LLP Agreement, and e-mailed at 9.47 to say that Addax were in fact right. Mr Cuffe thought that he would have done no more at that stage than call up the agreement, find the relevant section and draft a response to the client. There is nothing in his e-mail to suggest that he had done more than this, and I accept that it is unlikely that he had then undertaken any review of the file.
(3) The second call of 10.01 was too brief to have been anything other than an agreement to speak later.
(4) Between then and the third call of 10.54 Mr Cuffe evidently did look at the earlier versions of the agreement, as his note shows that he told Mr Channing that the clause had been in this form since early on. He accepted in evidence that he would have said words to the effect that since the clause was in the signed agreement, Mr Channing must have signed up to it. As his note and his e-mail of 12.01 to Mr Simpson show, Mr Channing then asked what it meant for the LLP and what his options were, and the discussion moved on to the practicalities of seeking to persuade Addax that it was not in their interests to exercise the option.
(5) Mr Channing's note records Mr Cuffe as saying two other things. The first is that he was shocked and that Addax drafted the changes. Mr Cuffe had no actual recollection of the call, but said (a) that he simply would not have said that he was shocked as it would have been out of keeping with everything that he had been told about how to talk to clients; and (b) he would not have said that Addax drafted the changes as he had checked the file and Addax didn't draft it. Certainly by the time he sent his e-mail to Mr Simpson at 12.01 he had identified that it was Withers who had changed the clause from the TW draft, and it is very difficult to see why he would have told Mr Channing that Addax was responsible for the change if he had already identified this. On the other hand, there is no explanation for Mr Channing's note (which I accept is contemporaneous) unless something was said; and there is no doubt that Mr Channing believed Addax to have been responsible for introducing the change as his note of the meeting with Addax in early March makes clear. This refers to Mr Channing's disappointment with Addax for deliberately changing the terms of the deal, and with Withers for letting the change into the documents.
(6) I find the most probable explanation is this. Mr Cuffe identified from his review of the file that the final form of clause 25.2 had been in the draft since early on in the process of negotiating the draft with TW. (Since TW's first draft only arrived on 16 April and clause 25 had been changed by 18 April, this was correct.) He did not at that stage focus on who was responsible for the change, or precisely how it had come about. What he was interested in was the fact that it had been in the draft for some time and in versions which had gone to Mr Channing. When he told Mr Channing that it had been in the drafts since early on, Mr Cuffe expressed some surprise; this was because, as the first call indicated, this was not what he had expected to find. He also said something to the effect that Addax presumably must have made the change. This was not formal advice that Addax had been responsible for the change (something which he had not been looking for and had not checked), but was just a natural response to Mr Channing saying that he had thought the option was exercisable until 2011. It was no more than a passing comment as otherwise he would have recorded it in his note.
(7) The other comment noted by Mr Channing was "? Error in agreement – not original terms – J.C. agrees". Again Mr Cuffe said he thought it unlikely that he had said this as it was not recorded in his note and would probably be the kind of thing he would have recorded. I find it probable that something was said, but again more in the nature of a passing comment than considered advice. Mr Channing may have said that this was not in the original agreement and might have got in by mistake, to which Mr Cuffe might have assented. Mr Channing did not request him to follow this up or track down precisely how the error, if it was an error, occurred; or advise whether he had any remedies if it were an error.
(8) Between this call and his e-mail of 12.01 to Mr Simpson Mr Cuffe must have gone back to the file, no doubt for the purpose of drafting the e-mail, and discovered that the change was in fact introduced by Withers (that is by he himself) in the draft of 18 April. He evidently had no recollection of having made the change, and assumed that it was made on Mr Channing's instructions.
Summary on liability
(1) Clause 25 in its original form was drafted by TW and included in the TW draft of 16 April.
(2) Mr Channing went through this draft with Mr Simpson and Mr Cuffe on the afternoon of 16 April. He expressed himself happy with clause 25 as drafted ("management put structure fine").
(3) Withers suggested adding a longstop provision and Mr Cuffe included one in clause 25.2 of the 16.15 draft of 17 April. This was sent to Mr Channing as a blackline against the TW draft of 16 April.
(4) Mr Channing spoke to Mr Cuffe at 17.38 on 17 April. I have found above that in that call they discussed clause 25.2 and that Mr Channing instructed Mr Cuffe to make some change to the window in clause 25.2, probably that the window should be reduced to one month.
(5) Mr Cuffe in fact changed clause 25.2 to provide for an option exercisable immediately. This was included in the 18 April draft which was sent to TW, as a blackline against their draft of 16 April, at 10.31. It was copied to Mr Channing. At 10.34 Mr Cuffe sent the e-mail to Mr Channing which referred to Mr Simpson's amendments having been incorporated in the current draft and that:
"there is nothing particularly different from the draft I sent you yesterday."
(6) Mr Channing's evidence was that he opened the 10.34 e-mail first, understood it to mean that there were no significant changes from the 16.15 draft of 17 April and therefore did not check through the draft attached to the 10.31 e-mail. I accept this evidence. If he had read through the draft attached to the 10.31 I find he would have noticed the change to clause 25.2. There were not many changes from the TW draft of 16 April, and they were easy to identify as the draft was a blackline one. Most of them were concerned with the removal of the requirement for Investor Consent, but the change to clause 25.2 would have stood out as the one which most directly affected the commercial terms. If Mr Channing had read it, he would have noticed what it said and objected: it is as I have said clear and entirely unambiguous.
(7) The next draft copied to Mr Channing was the 1 May draft produced by TW. This was a blackline against the 18 April draft and contained no further change to clause 25. Mr Channing went through it on the telephone with Mr Cuffe on 2 May, and although there is no direct evidence of what was discussed, I find it probable that discussion was limited to the changes introduced by TW and shown on the blackline. This is what one would expect.
(8) The next draft copied to Mr Channing was sent at 11.37 on 6 May. This was not a blackline version but a clean version.
(9) The next draft copied to Mr Channing was sent at 10.16 on 8 May. So far as appears from the documentary evidence it was the last version sent to Mr Channing before completion, even though there were a couple of later last-minute amendments introduced at the request of RBC.
(1) First, it claims that Addax's withdrawal of capital meant that it was unable to finance the anticipated expansion of its business both in London and abroad. It therefore claims the revenue that it would have earned had it recruited more consultants in London, and had it opened abroad. In practice, for reasons explained below, the latter refers to the possible opening of an office in New York.
(2) It claims losses flowing from the diversion of Mr Channing's time away from that of generating revenue and expanding the business into dealing with the disputes with Addax.
(3) It claims various legal costs which it has incurred in dealing with Addax.
(1) Mr Channing had prepared a business plan ("the Business Plan") for the purpose of his initial discussions with Addax. He had supplied a copy to Addax by 30 January as is shown by his e-mail of that date to Ms Valdez (paragraph 22 above). On 15 April 2008 he sent a copy to Mr Cartwright (paragraph 27 above).
(2) In the latter half of April Withers and TW were engaged on drafting the JV agreement for the Middle East business. On 29 April Mr Cartwright asked for a business plan for that business (with a view to annexing it to the JV agreement). Mr Channing suggested that since the Middle East plan was incorporated in the "group plan", it would make sense to attach the latter.
(3) Also being drafted was the agreement between WP and WPHK, which began as a trade mark licence under which WP licensed WPHK to use WP's trade mark, but which was later redrafted, after WPHK had objected to this form of agreement, as a non-compete agreement. In its original form it only licensed WPHK to operate in Hong Kong, but when Mr Cuffe asked Mr Channing if it needed to grant WPHK the right to trade anywhere else in Asia, Mr Channing instructed him that it should include all of North and South East Asia; and when Mr Cuffe sent through a list of all countries in Asia, Mr Channing's response (on 28 April) was that he should exclude all the Arab states and Turkey. The result was that the agreement was drawn up with a long list of Asian countries which were reserved to WPHK, including India.
(4) WPHK's redraft of the agreement as a non-compete agreement was received on 6 May. Mr Cuffe spoke to Mr Channing that morning. As a result he amended it to add an explicit reference to WPHK not using the name Wellesley Partners in Europe or the United States.
(5) At a very late stage (at 10.48 on the morning of 13 May) Mr Cuffe e-mailed Mr Channing to say that Mr Cartwright had been looking at the non-compete agreement and noticed that:
"although the business plan talks about growth opportunities in India, this is one of the reserved territories for WP HK"
He asked Mr Channing to confirm that the list of territories for WPHK was correct. There is no record of any e-mail response but Mr Cuffe and Mr Channing spoke on the telephone that morning and I infer that Mr Channing confirmed that the list was acceptable as it was left unchanged.
(6) Also on 13 May Mr Cartwright e-mailed Mr Cuffe the Business Plan asking him to initial it, as he would on behalf of Addax. Mr Cuffe did so and sent it back on 14 May. The plan gave details of WP's projected growth in London, the Middle East and India. There is no indication in the documentary record that Mr Cartwright ever received more than one plan and I find that this document was the plan sent to him on 15 April.
(7) Mr Channing's evidence was that some time before 13 May WPHK had suggested that it made sense for them to be able to market in India as it was closely linked to Hong Kong, and that as a result he agreed with Mr Al Essa that WP would turn its attention to the United States instead of India. He therefore drew up the Revised Business Plan, which dropped India and replaced it with the US. He says that he provided a copy of the Revised Business Plan to both Mr Cartwright and Mr Cuffe on 5 May, and indeed says he cannot understand how in these circumstances Mr Cuffe came to incorporate the earlier plan in the documentation.
(8) There is however no record of Mr Channing e-mailing or sending a hard copy of the Revised Business Plan either to Withers or to TW. I think it unlikely that he did. If Mr Cartwright had had it, he would not have thought there was any conflict between the business plan he had and the list of territories reserved for WPHK in the non-compete agreement, nor would one expect him to have annexed the superseded plan. If Mr Cuffe had had the Revised Business Plan before 13 May, he would not have had to pass Mr Cartwright's query on to Mr Channing; and again one would expect him to have told Mr Cartwright that he was proposing to annex the wrong plan. I find therefore that Mr Channing did not provide either Mr Cartwright or Mr Cuffe with a copy of the Revised Business Plan on 5 May, or indeed at all.
(9) At some stage however the Revised Business Plan was indeed drawn up and a copy is in evidence. This copy is undated, but I accept Mr Channing's evidence that by the end of April 2008 he had decided not to expand into India and was contemplating expanding into the US instead. I infer this from the fact that he excluded the Middle East from the list of territories reserved to WPHK and not India; and from the fact that on 6 May he asked Mr Cuffe to put in the non-compete agreement an express reference to WPHK not competing in the US. I find that the Revised Business Plan was probably drawn up in May 2008 at about the time of the LLP Agreement being completed.
(1) The projections are not detailed: indeed although the profitability summary for WP London contains brief estimates of operating costs, those for WP Middle East and WP North America consist of no more than a summary of revenue (£1,350,000, £1,900,000 and £2,250,000 for each) and net profit (£500,000, £750,000 and £1,000,000, again for each). It is therefore little more than an outline sketch of expected profits for these two offices, and suggests that it was put together quite quickly.
(2) It contains a list of "Assumptions Supporting Revenue and Profitability Summary" but these are in fact taken unchanged from the original Business Plan and so still refer to the proposed expansion into India, and contain no reference to the US. This again tends to suggest that it was put together as a fairly quick exercise.
(3) The profitability summary allows for commission on all revenue at a rate of 45%. The London profitability summary uses the same rate for past years with a note reading:
"Commission has been applied at a standard 45% rate to Historical figures, although actual reported commissions have been much less, due to the partnership entity structure."
This is potentially relevant to one of the issues between the parties on the assessment of quantum.
(4) With this adjustment, the figures for WP London showed a net profit as follows:
It can be seen from this table that although there had been relatively little growth in net profit between 2004/5 and 2007/8, the projections showed a very substantial increase from then to 2010/11.
Nature of executive search business
(1) Mr Brun. Mr Brun gave evidence about working with Mr Channing both at Heidrick & Struggles and then at WP, and in particular about the establishment, and subsequent rapid growth, of WPHK.
(2) Mr Brian Sullivan. Mr Sullivan was between 1999 and 2002 Global Head Financial Services, and subsequently a Vice Chairman and Global Head of Practices at Heidrick & Struggles. He was responsible for rebuilding the firm's financial services practice and recruited Mr Channing to lead the practice and grow the business. His evidence was directed at Mr Channing's success in doing this. His witness statement was accepted without cross-examination and he was not called to give oral evidence. Mr Sullivan is now CEO at an executive search firm called CTPartners ("CT"), and in this capacity he in fact worked closely with Mr Channing in 2009 in trying to secure an appointment from Nomura in the US but his evidence did not deal with this particular matter at all.
(3) Mr Piers Marmion. Mr Marmion was President International and then CEO and Group Chairman of Heidrick & Struggles during 2000 to 2003. Mr Channing was already working there when he arrived. Mr Marmion also gave evidence as to Mr Channing's success in aggressively growing Heidrick & Struggles' financial services practice during his time there.
(4) Mr Anthony Fry. Mr Fry is a corporate finance advisor. In 2004 Mr Channing successfully recruited him to join Lehman as head of UK investment banking. He subsequently used WP to assist him to recruit a number of senior bankers to join Lehman's UK banking business.
(5) Ms Bridget Anderson. Ms Anderson worked for Lehman, becoming Chief Administrative Officer for Lehman's Investment Banking Division Europe; and subsequently, after the collapse of Lehman, continued in a similar role for Nomura which acquired Lehman's business in Europe. One of her tasks was to manage recruitment for the business and she had specific oversight of all executive search activity the business chose to conduct. She gave evidence of her experience of Mr Channing with whom she worked closely.
(6) Mr David Rothnie. Mr Rothnie is a financial journalist. His evidence, albeit heavily redacted by agreement between the parties, gave some general evidence about the executive search business and his knowledge of Mr Channing. His witness statement in its redacted form was accepted and he was not called to give oral evidence.
(1) Ms Louise Kerr. Ms Kerr worked at WP from May 2006, initially in an execution role, although she later originated business herself. She was on maternity leave from July 2008 until January 2009, and left WP in May 2010. Her evidence was accepted without cross-examination.
(2) Ms Annie Jordan. Ms Jordan also worked at WP. She joined as a consultant in 2004, and left in May 2008. She now works in Moscow and her evidence was admitted as a hearsay statement under the Civil Evidence Act.
(1) Executive search businesses invariably work on an exclusively retained basis, that is on being given a "mandate" by the client (in the case of investment banking, a financial institution) to fill a particular post, with a clear instruction to proceed and a contractual commitment to pay on the post being filled. (This is what distinguishes executive search or headhunting from recruitment in general).
(2) In the case of investment banking, recruitment tended to operate in an annual cycle. Bankers did not want to move before the end of the calendar year, when they would receive substantial year-end bonuses. A typical search from mandate to completion (when an offer is made to a candidate) would take around 3 to 4 months, but many candidates would be required to undertake a period of gardening leave so there was then a timelag until the new appointee took up a post. This meant that those looking to recruit would tend to place mandates in the latter half of the year (July to October) with a view to the successful candidate joining in January to March after the bonus period.
(3) Executive search firms in this field were on the whole either the large internationally recognised firms (such as Heidrick & Struggles and Mr Baines' firm, Korn/Ferry) or small specialist boutique firms (such as WP and Miss Mills' firm, The Rose Partnership). While the large integrated firms dominate most other areas of search, in investment banking some clients preferred to use boutiques and they could be very successful.
(4) The most successful boutique firms need to attract and retain some of the best search consultants. The professionals working for such firms divide broadly into consultants, who talk to clients, win mandates and generate revenue; and support professionals who help to execute the mandates and carry out the research necessary for a firm to be able to serve its clients. Top consultants develop deep relationships with their clients; they become close and trusted advisors to the most senior members of the financial institutions and build relationships with them that last many years.
(5) It is not however possible for a firm to have this sort of relationship with more than a handful of clients in the same sector. The experts are agreed that in the world of investment banking, no more than two or three core clients is the norm. Partly, as Mr Baines explained, this is because clients prefer to work with a few firms and appoint them exclusively ("preferred suppliers") but in return will require firms to agree to an "off-limits" provision (ie a provision that they will not seek to recruit the client's own employees to work for anyone else); this means that firms must have a large pool of non-client institutions from which to find potential candidates, and if they have too many clients will lose business. Partly, as Miss Mills explained, this is because investment banking is a very competitive industry and a client would not feel comfortable if its preferred firm also worked for its biggest competitors.
(6) So far as Mr Channing personally is concerned, all the evidence I heard agreed that he was among the most successful consultants in his field. Mr Sullivan, who recruited him to Heidrick & Struggles in 2000, said he then had an excellent reputation for originating and successfully executing assignments; and both he and Mr Marmion testified to his success in building the financial services team at Heidrick & Struggles, and to the fact that he personally was in the top echelon of fee-producers globally in the firm.
(7) One particular client of Mr Channing's was Lehman. Ms Anderson who was then Head of HR for Lehman's Investment Banking Division first met him in about 1999. She said that he had an excellent reputation, and it was not long before Heidrick & Struggles became one of Lehman's preferred suppliers. Mr Channing initially assisted with the London office, but subsequently with placements for Lehman across Europe. After Mr Channing established WP, she continued to work with him and Lehman retained WP as a preferred supplier. After WPHK was established, Lehman also used WPHK to assist with recruitment in Asia. Her overall assessment was that WP was one of the top two executive search firms with whom Lehman's Investment Banking Division worked (in terms of the strength and depth of relationships between Mr Channing and the key decision makers, and the volume of work done); and she regards it as the most successful search firm with which she has worked (in terms of its ability to find the best candidates and persuade the selected candidates to accept the offers made to them).
(8) Mr Fry, who had himself been recruited to join Lehman by Mr Channing in 2004, used WP to assist him in recruiting a number of senior bankers; he confirmed that Mr Channing had built a significant relationship with senior management at Lehman, and that Lehman used WP's services extensively both in Europe and Asia (the latter no doubt through WPHK).
(9) The fees paid to executive search firms are typically based on a proportion of the compensation of the successful candidate, with part of the fee (the retainers) paid during the mandate and the balance paid as a success fee only on successful appointment of a candidate. Since bankers are (notoriously) well paid, this means that the fees can be substantial; even though it became the practice to introduce fee caps, Mr Baines' evidence was that in 2004 to 2008 a fee of £300,000 for a senior appointment was quite possible, and that a top class consultant might generate fees in the order of £2 to £2.5m a year in that period, although his evidence was that this fell significantly after 2008. Miss Mills' evidence was that the most successful headhunters operating in this industry from boutique platforms could generate in the period 2008 to 2011 £1.5m to £2m a year, and that she included Mr Channing in this bracket. Mr Baines said that he fully agreed that Mr Channing was in a top group of some 20 or so consultants.
The US – WP's actual experience
"the fact as mentioned by you in the last update, there is no clarity whatsoever in current market conditions on future revenues"
which indicates that the uncertainty continued for some time later than January. I revert to this point below.
"In depth discussion about Lehman / Nomura growth plans and proposed Europe / US buildout. Significant WP revenue opportunity."
In re-examination he told me that he had had conversations about the opportunity with Mr Meissner, probably, although he could not point to a formal starting point to them, around December 2008 to January 2009.
"Rupert had spoken very highly of you whenever he and I had gotten together in London and it's very clear to me why you had been so successful"
and Mr St John saying:
"Christian, we are very excited about the prospect of representing you here in the US, and building upon Rupert's great work around the globe for Nomura."
Mr Channing's evidence was that he flew to New York with Mr Meissner on 19 April, but the probability is that he flew out with him for this meeting and in order to introduce the team from CT to him.
"In order to make the discussion as productive as possible, I wonder if you could focus on the first two questions and think about how we might approach these issues. Also, to give you an update on my thinking, I had a very good impression of our first discussion and I'm minded to work with you on this if you are interested. However, I am still debating whether it makes sense to hire one or two firms given the scope of the project so I'd be interested in your thoughts on that as well. Finally I will invite my senior colleagues from Nomura NY to the meeting (Mr. Kashiwagi and Ms. Iino) although I don't know yet if they are free."
Mr Sullivan's response was to say that they remained very interested and excited about working with him, and that they were confident that he should use one firm.
The law on loss of profits – loss of a chance
"22 There is a central flaw in the appellants' submissions. Some claims for consequential loss are capable of being established with precision (for example, expenses incurred prior to the date of trial). Other forms of consequential loss are not capable of similarly precise calculation because they involve the attempted measurement of things which would or might have happened (or might not have happened) but for the defendant's wrongful conduct, as distinct from things which have happened. In such a situation the law does not require a claimant to perform the impossible, nor does it apply the balance of probability test to the measurement of the loss.
23 The claimant has first to establish an actionable head of loss. This may in some circumstances consist of the loss of a chance, for example, Chaplin v Hicks  2 KB 786 and Allied Maples Group Ltd v Simmons & Simmons  1 WLR 1602, but we are not concerned with that situation in the present case, because the judge found that, but for Mr Bomford's fraud, on a balance of probability Tangent would have traded profitably at stage 1, and would have traded more profitably with a larger fund at stage 2. The next task is to quantify the loss. Where that involves a hypothetical exercise, the court does not apply the same balance of probability approach as it would to the proof of past facts. Rather, it estimates the loss by making the best attempt it can to evaluate the chances, great or small (unless those chances amount to no more than remote speculation), taking all significant factors into account: see Davies v Taylor  AC 207, 212, per Lord Reid, and Gregg v Scott  2 AC 176, para 17, per Lord Nicholls of Birkenhead, and paras 67–69, per Lord Hoffmann.
24 The appellants' submission, for example, that "the case that a specific amount of profits would have been earned in stage 1 was unproven" is therefore misdirected. It is true that by the nature of things the judge could not find as a fact that the amount of lost profits at stage 1 was more likely than not to have been the specific figure which he awarded, but that is not to the point. The judge had to make a reasonable assessment and different judges might come to different assessments without being unreasonable."
"21. In the classic loss of a chance case the most that the claimant can ever say is that what he (or she) has lost is the opportunity to achieve success (e.g.) in a competition (Chaplin v Hicks  2 KB 786) or in litigation (Kitchen v Royal Air Forces Association  1 WLR 563). The loss is by definition no more than the loss of a chance and, once it is established that the breach has deprived the claimant of that chance, the damage has to be assessed in percentage terms by reference to the chances of success. But there will be other loss of chance cases where the recoverability of the alleged loss depends upon the actions of a third party whose conduct is a critical link in the chain of causation. The decision of this court in Allied Maples Group Ltd v Simmons & Simmons  1 WLR 1602 has established that causal issues of that kind can be determined on the basis that there was a real and substantial chance that the relevant event would have come about."
He then said that the loss of a chance doctrine established by Allied Maples was primarily directed to issues of causation and needed to be distinguished from the evaluation of factors which go to only to quantum (at ); that the claimant's case on causation was straightforward as there was no doubt that the breach had caused the loss subject only to quantification (at ); and that HHJ Levy had found as a fact that the restaurant would have been a success and assessed its lost profits on that basis (at ). He continued:
"24….His analysis of the variable factors I have outlined which formed the agreed components of that calculation involved taking into account the time needed to establish a reputation and other everyday contingencies but did not involve a more general discount of the kind described in Allied Maples to take account of the statistical possibility of failure. That was excluded by his finding that the restaurant would have been a success.
25 Where the quantification of loss depends upon an assessment of events which did not happen the judge is left to assess the chances of the alternative scenario he is presented with. This has nothing to do with loss of chance as such. It is simply the judge making a realistic and reasoned assessment of a variety of circumstances in order to determine what the level of loss has been."
He then referred to what Toulson LJ had said in Parabola at - (which I have set out above) and continued:
"26 In the assessment proceedings in the first claim Judge Levy reached a view about the prospects of success for the restaurant and then proceeded to carry out this sort of exercise in relation to the issues about cover turns and increases in profitability. As Toulson LJ, I think, makes clear, that process is not the kind of exercise contemplated as the second stage in Allied Maples and does not require a discount to be made for the possibility of failure which, on the judge's own findings, was non-existent.
28. The task of the judge is to decide what profit could have been made. Once he does this any further discount is inappropriate. Judge Levy decided that he was assessing the profits of a successful restaurant. The only issue was how successful."
(1) There is a difference between the question whether a loss has been caused by the wrong complained of, and if it has, the quantification of that loss. The fact that there is a distinction is in principle clear; what is not always clear is where the line is to be drawn.
(2) Sometimes what the claimant has lost was only ever an opportunity to obtain something else, for example the chance to take part in a competition or the opportunity to bring litigation. Such an opportunity is a valuable right in itself, and what the claimant proves (on the balance of probabilities) is that he has lost that right; the assessment of the value of the right then depends on the chances of success. As Patten LJ says in Vasiliou at  this is because what has been lost is by definition the loss of a chance. It would obviously be wrong to value the right to take part in a competition at the value of the prize that might be won as the claimant never had a right to the prize, only the right to enter the competition. It would also be wrong to value the right to bring litigation as if it were bound to succeed, if, as is almost inevitably the case, the outcome of the litigation is uncertain. A claim with a prospect of success has a value, but until judgment has been obtained (and indeed it is clear that it can be successfully enforced) that value is not the same as the amount which would be awarded were it to succeed.
(3) What Patten LJ makes clear, which had not I think been so clear before, is that this is not quite the same type of case as Allied Maples. In an Allied Maples case the claimant has not lost a valuable right, but he has lost the opportunity of gaining a benefit, albeit one which depends on a third party acting in a particular way. In such a case the claimant is not required to prove that the third party would have acted in that way, only that there was a real and substantial chance that he would. This is still a question of causation, not of quantification (see Vasiliou at , and also First Interstate Bank of California v Cohen Arnold & Co  CLC 174 at 182 per Ward LJ, cited in Vasiliou at ); but if the claimant does establish that there was such a real and substantial chance, then when it come to quantification, his damages will be assessed not at 100% of the value of the benefit he would have obtained, but at the appropriate percentage having regard to the chances of his obtaining it. I only add the obvious point that in some cases, where the chance is found to be say 30%, the requirement that the claimant only need show that he has lost a real and substantial chance is beneficial to him (as if he had to prove how the third party would have acted on the balance of probabilities, he would recover nothing); but in other cases, where the chance is assessed at say 70%, it has the effect of only enabling him to recover 70% of the damages he otherwise would. But as I read the authorities, the claimant does not have a choice whether to adopt the Allied Maples approach; if the case is an Allied Maples type of case, this is the appropriate way to approach the issues of causation and quantification.
(4) However, as Parabola and Vasiliou illustrate, there are other cases where the claimant does not seek to establish as a matter of causation that he has lost the opportunity of acquiring a specific benefit which is dependent on the actions of a third party; rather, he claims he has lost the opportunity to trade generally, and claims the loss of profits that he would have made.
(5) It seems that in such a case the Court must first decide whether the claimant would have traded successfully. It is not entirely clear if this is part of the question of causation and a separate exercise from quantification; or whether it is to be regarded as part of the quantification exercise. Toulson LJ in Parabola at  fairly clearly treats the finding of Flaux J that "on a balance of probability Tangent would have traded profitably…" as part of the question of causation as he deals with it in the context of the claimant having first to establish an actionable head of loss, and coming before the "next task" which is "to quantify the loss". On the other hand Patten LJ in Vasiliou at  seems to have regarded the question as part of the exercise of quantification: see his reference to there being "no doubt at all that the breach had caused the loss subject only to the quantification of that loss", and to Mr Vasiliou's competence and the restaurant's prospects of success not being matters that went to causation at all but being relevant at most to the assessment of how profitable the restaurant would have been.
(6) On either view this is clearly a different type of exercise from that undertaken in an Allied Maples case. It does not require the Court to find that there was a real and substantial chance of a third party acting in a particular way; but to reach a conclusion whether trading would have been profitable or not. However the exercise is characterised, I think it must follow that this is a simple yes/no question (would the trading have been profitable ?), and hence falls to be decided on the balance of probabilities. I accept that this is so, even though as a matter of strict logic it is not entirely obvious why there should be such a sharp difference of approach from the Allied Maples type of case. The profitability of the restaurant in Vasiliou presumably depended on whether it would have attracted sufficient custom, or in other words whether a number of third parties would have chosen to come to Mr Vasiliou's restaurant; and this does not seem very different in kind, only in degree, from the question in Allied Maples which was whether the third party in question would have chosen to accede to Allied Maples' request for a particular contractual term. It may be that the difference is between one particular third party and a pool of potential customers; in the case of an individual third party, the Court must assess the chance of his acting in a particular way, but in the case of a pool of potential customers, the Court is not concerned with how any individual would have behaved but with whether there would have been sufficient custom generally to make the business a success.
(7) Be that as it may, it is clear from Parabola and Vasiliou that if the Court finds that trading would have been profitable, it then makes the best attempt it can to quantify the loss of profits taking into account all the various contingencies which affect this: see Parabola at . This neither requires any particular matter to be proved on the balance of probabilities (see Parabola at ) nor has anything to do with the loss of a chance as such (see Vasiliou at ). The assessment of the loss will itself include an evaluation of all the chances, great or small, involved in the trading (see Parabola at ). Once the judge has assessed the profits in this way, any further discount is therefore inappropriate (see Vasiliou at ).
Those being, as I understand it, the principles which I am bound to apply, it is now necessary to see how they apply to the facts of this case.
Would WP have opened an office in New York ?
(1) There is no evidence that WP took any steps towards opening an office or hiring anyone before February 2009.
(2) Ms Jordan's evidence in her witness statement, when asked whether she was aware that Mr Channing intended to expand into the US, was that she was not, and that she was surprised by the suggestion as it would have been very difficult for WP to compete there: Mr Channing's focus in terms of growth when she was at WP was on emerging markets, including the Middle East, India and Europe. However not only was this untested, but she left WP in May 2008, so I do not regard this as inconsistent with Mr Channing's evidence.
(3) Ms Kerr's evidence was that she was aware that Mr Channing went to New York a number of times to meet Mr Meissner following her return from maternity leave and that he was pitching for business at Nomura with Mr Sullivan, her understanding being that it was to be a joint exercise with CT rather than WP pitching for business on its own. This evidence clearly relates to what actually happened between mid-February and May 2009. It does not support Mr Channing's evidence that he would have opened an office himself; but on the other hand Ms Kerr only returned from maternity leave at the end of January 2009, and she herself says that Mr Channing did not involve her in decisions about business strategy. Her evidence is therefore not inconsistent with Mr Channing having planned until 3 February 2009 to open an office himself.
(4) When WP did start preparing for a pitch it did so jointly with CT, and it had started doing this by 18 February 2009 at the latest. If this was a change of strategy, it was one that took place very rapidly after Addax first intimated its intentions on 3 February.
(5) It was suggested to Mr Channing that even after Addax had threatened to withdraw half its capital, WP would have had ample money left to open an office in New York had it wanted to, so the fact that it did not do so cast doubt on his evidence that it was the lack of money caused by Addax's threat of withdrawal that caused it to make a joint pitch with CT. Mr Pooles invited me to infer that even if the money had not been withdrawn WP would not have gone ahead with a New York office.
Would WP have had a profitable business ?
Would WP have secured the Nomura mandate ?
(1) Mr Baines' view was that WP would need to have a credible presence in New York before securing the mandate and this would require demonstrating a fully functioning office with deep local market knowledge. He doubted that WP could have got to this by May 2009 even if they had started in September 2008. He also considered that WP would have needed to recruit 3 senior partner hires (as part of a team totalling 8 to 10 professionals), and felt that it was particularly hard to hire search consultants in the US. Miss Mills considered that it would have been possible for WP to do it with 2 senior consultants and 2 support professionals. This would mean working extremely hard but it was possible.
(2) The decision was not simply one for Mr Meissner. Mr Vereker was also part of the process, and as appears from Mr Meissner's e-mail, Mr Meissner also felt it appropriate to invite senior Japanese colleagues from Nomura NY to meet the proposed headhunters.
(3) In the event Nomura decided against hiring a boutique firm at all and took the decision to hire two global firms. The reason for this is not known but it may have reflected a concern as to whether a boutique firm was large enough to handle the business, or a desire to play it safe.
(4) Mr Pooles also pointed to the fact that Mr Meissner did not give evidence. Mr Meissner, as set out above, has a long and close relationship with Mr Channing and is himself a member of WP with an interest (albeit small) in this litigation and it might be thought that he would have given evidence in support of WP's case had he been able to confirm that Nomura would in all probability have appointed WP had WP pitched for the business on its own. Mr Pooles referred me to the decision in Wisniewski v Central Manchester Health Authority  PIQR 324 and the principles stated by Brooke LJ at 340, in accordance with which a court may draw adverse inferences if a witness is not called who might be expected to have material evidence to give.
(5) Even if Nomura had given the mandate to WP it does not follow that they would have given it to them exclusively. Mr Baines did not think that a client would give a build of this magnitude to one search firm alone; and thought that if WP had managed to put together a team to work in the way that Miss Mills suggested, that would make it likely that Nomura would have chosen to divide the work among two or three suitable firms. Miss Mills in her second report herself said that banks who embark on large build outs of the sort contemplated in Mr Meissner's e-mail of 27 April "typically retain one or two" firms and that it was "not inconceivable" that Mr Channing might have been the "main provider for the build". Mr Meissner's e-mail itself raised the question of whether it would be better to hire one or two firms given the scope of the project (and that was in the context of a joint bid where CT were rather larger and more established than a new WP office would have been); and in the event two firms were hired, even though each were large global firms.
Remoteness of damage
(1) The test for remoteness in contract is whether the type or kind of loss was "not unlikely" to result from the breach in question: Victoria Laundry (Windsor) ltd v Newman Industries Ltd  2 KB 528, 539-40 (Asquith LJ) ("Victoria Laundry"), The Heron II  1 AC 350, 382-6 (Lord Reid), Transfield Shipping Inc v Mercator Shipping Inc  1 AC 61 ("The Achilleas").
(2) Loss of profits from a new market such as the US, is different in kind and type from profits in existing markets, or in markets where it was known that WP was opening: see for example the distinction drawn in Victoria Laundry at 543 between the loss from certain lucrative dyeing contracts and general loss of profits; and Mayhaven Healthcare Ltd v Bothma  EWHC 2634 (TCC) at  per Ramsey J where he accepted that loss of profits is not to be equated with loss of a particular kind or type so as to make all profits recoverable.
(3) Where there is concurrent liability in contract and tort, the contractual test for remoteness applies: see Obsession Hair and Day Spa Ltd v Hi-Lite Electrical Ltd  EWHC 2193 ("Hi-Lite") at - per HHJ McKenna.
"In any event, it is now established that there will be a parallel liability in tort and the problem can normally be avoided by applying the tortious rules as to remoteness of damage."
No authority is cited, and I was not referred to anything else on this aspect of the case other than Hi-Lite. Given that there can be quite significant practical differences between the application of the test for remoteness in contract and that in tort, it is a little surprising that the question does not appear to have come up otherwise, or been decided.
"It seems to me where there are concurrent duties owed in contract and tort there are strong arguments for concluding that it should be the test for remoteness in contract that applies."
He then referred to a passage in McGregor on Damages (18th edn) at §19-008 which supports that view as follows:
"Now that the tort of negligence has been expanded to allow recovery for pure economic loss so that in cases of professional negligence there is concurrent liability in contract and in tort, the question arises whether, where it would make a difference, the victim of the negligence may rely on the wider tortious test of reasonable foreseeability and ignore the stricter and more limiting contractual test of contemplation of the parties. It is thought that there is much to be said for not allowing him to do so. Where the claim in tort is in the context of a contractual relationship, the parties are not strangers, as most tortfeasors and tort victims are, and they should be bound by what they have brought to their contractual relationship in terms of what risks have been communicated the one to the other. This question has not yet been faced by the courts but one day it will have to be."
This is quite tentative language, and HHJ McKenna's observations in Hi-Lite are clearly neither part of the ratio (as he had decided that there was in fact no claim in tort) nor expressed as a definitive conclusion. I therefore consider that I am not bound to follow his views even as a matter of comity, and should reach my own view on the point.
Quantification of US loss
WP makes no claim for 2008/9 when on any view the US office would not have been contributing to revenue, but based on these figures its claim for the years ended 2009/10 and 2010/11, and the part-year to 6 November 2011, is that the revenue would have been as set out in Mr Pearson's supplemental report as follows:
1.4.11 to 6.11.11 £1,084,800
(The figure for 1.4.11 to 6.11.11 is based on the revenue for 2010/11, reduced by 20% to allow for a market decline, and then apportioned for the relevant period, namely 220 out of 365 days, an apportionment that is not disputed and that I will adopt even though 2012 was a leap year).
1.4.11 to 6.11.11 £428,262
There is one complication. Mr Channing accepted that if WP had been awarded the Nomura mandate its overheads would have been higher as he would have had to recruit an additional consultant and researcher at a combined cost of £225,000 per year. His evidence was that this would have been more than offset by the revenue from the Nomura mandate being higher than the revenues in the Revised Business Plan. I accept this and will therefore use the figures put forward by Mr Pearson. I will also assume that had WP been awarded only half the mandate these extra costs would not have been incurred, and the overheads would therefore have simply been those used by Mr Pearson.
Commission payable to Mr Channing
(1) It is normal in the executive search business for the consultant or revenue generator who secures a mandate to be paid by commission, often of the order of 40% to 50% of the search fees received by the firm. This reflects the fact that it is winning the mandate that is the difficult part, and this is very dependent on the personal relationship between the consultant and the client.
(2) Historically however when WP was owned by Mr Channing and Mr Brun equally, they simply split the profits after payment of operating expenses. Financial statements were prepared by WP's (external) accountants, Frank Hirth & Co ("FH"), for the period ended March 2005, and the years ended March 2006 onwards, although they were not formally audited accounts. The profit and loss accounts for the first two periods (ending March 2005 and 2006) each show a figure for WP's profit, calculated after cost of sales and administrative expenses and including interest receivable but "before members' remuneration and profit shares". It is not possible to tell from them how the profits were divided between Mr Channing and Mr Brun, although a note to the 2006 accounts does reveal that the "share of profit" of the member with the largest entitlement (which was no doubt Mr Channing) was £289,074 for the period ending March 2005 (the total profit available for division being £508,148), and £777,119 for the year ended March 2006 (the total available being £1,034,978) which shows that the profit was not simply divided equally.
(3) For 2006/7 and 2007/8 however a statement of the partners' profit share (included in the 2008 financial statements) gives a detailed explanation. In each case the starting point is the net profit after costs of sales (commissions payable to non-partners) and administrative expenses (2007: £883,000; 2008: £944,000 – I have rounded all figures to the nearest £1,000 as the exact amounts do not matter). There is then calculated a commission for Mr Channing at 40% of the total search fees for the year less the commission paid to non-partners, to give a net commission figure due to Mr Channing (2007: £515,000; 2008: £519,000). The balance of net profit after deduction of this figure, called "Net Profit After Partners Commission Adjustment" (2007: £367,000; 2008: £425,000) is then split between Mr Channing and Mr Brun in the proportion 95% to 5%. Mr Channing's 95% (2007: £349,000; 2008: £403,000) is then added to his net commission to give a total figure (2007: £864,000; 2008: £922,000), described as his "Share of Net Profit". Mr Brun's "Share of Net Profit" is simply his 5% of the net profit after deduction of the commission for Mr Channing (2007: £18,000; 2008: £21,000).
(4) Mr Channing's evidence was that after Mr Brun left to run WPHK, "as is reflected in the accounts" he drew a salary and received 40% commission on the revenue he generated, both salary and commission being "treated as expenses of the business". I am not sure that is accurate: no separate salary for Mr Channing is identified in the accounts, and the 40% commission payable to Mr Channing, as I have set out above, is treated as a priority division of profits payable to him as a working partner, rather than as an expense of the business.
(5) When Mr Channing drew up his business plan he projected the profits for the London office by allowing a 45% commission. This was deducted from revenues to find gross profit, from which was deducted operating expenses to find a net profit. He also restated the profits for the London office for previous years by allowing for a 45% commission in the same way although as explained above (paragraph 161(3)) it was noted that this was not how commission had actually been dealt with.
(6) Mr Channing mentioned a figure of 45% commission to Mr Simpson and Mr Cuffe on the telephone on 18 January 2008 (paragraph 18 above).
(7) When Mr Channing sent the business plan to Mr Cartwright on 15 April he also enclosed what he described as "Details of bonus (commission) arrangements for Partners" (paragraph 27 above). This document was not produced in evidence, nor is there any evidence of what it contained.
(8) Mr Channing's evidence was that because he had shown a 45% commission in the business plan sent to Addax he proceeded on the basis that he remained entitled to a salary and commission (now at a rate of 45%); and that when draft accounts for 2008/9 were drawn up in April 2010 they were drawn on this basis.
(9) What the draft accounts in fact include is a page headed "Draft Partners Share of Losses", WP having made a loss for the year of some £321,000 (again all figures are rounded to the nearest £1,000). There is then a "Working Partners Adjustment", which calculates a commission to Mr Channing at 45% of the total search fees for the year, less the commission paid to non-partners. This is only some £13,000. The next line is "Notional Managers "Salary" equivalent" of £180,000. (This is £15,000 per month and Mr Channing's bank statements show that he was receiving repeated payments of £15,000 from WP during the year.) The total "Working Partners Adjustment" was therefore £193,000; this was added to the net loss for the year to make a total of £514,000 and this loss was then divided between the partners in accordance with their respective percentages. The result for Mr Channing was that his share of the loss was £381,000, which after crediting him with the Working Partners Adjustment, left a net share of loss of £188,000.
(10) These draft accounts were sent to TW in April 2010. The response was a letter from TW in May raising a number of queries, one of them being that it appeared Mr Channing had been paying himself substantial sums on account of drawings and that since there were no profits to draw against he should be shown as a debtor to the partnership. TW also sent a letter making the same points direct to FH.
(11) Matters were then overtaken by the summary judgment application but in October 2010 Mr Channing agreed to allow FH to discuss the draft accounts for 2009 with Addax's accountant. This was Mr Andrew Cottle of BDO, the same Mr Cottle who gave expert evidence before me on behalf of Withers.
(12) Revised draft accounts were sent by FH to TW on 1 October and discussed at a meeting between FH and Mr Cottle on 13 October. By this stage the draft accounts showed members' remuneration on the profit and loss account as being "charged as an expense". Mr Channing's total remuneration was some £680,000, made up of some £500,000 commission and £180,000 "salary/guaranteed draw". Following the meeting Mr Cottle sent a list of queries to FH, one of them being to ask for an explanation of the basis for accruing salary and commission to Mr Channing, the LLP Agreement being silent on such matters. FH's response was that they were advised that Addax were aware of the terms of Mr Channing's remuneration agreed at the time of the LLP Agreement.
(13) Mr Cottle's position was that this was not accepted by Addax. On 26 October FH sent Mr Channing a list of matters that were outstanding including:
"Christian Brun to confirm RC entitlement to profits being 45% on total sales (regardless if commission to third parties also payable) and £180k guaranteed profit share."
(This was a repeat of a request FH had previously made in September). There is no record of Mr Brun having given any such confirmation, and when the accounts were signed off on 16 November, FH qualified their auditors' report in a number of respects one of which was:
"We have been unable to obtain sufficient evidence regarding amounts disclosed as remuneration charged as an expense of one of the members."
(14) Mr Brun was asked in evidence what the commission arrangements were in London. He said he could not remember the way in which they paid themselves when they set up WP, but he said there was no explicit commission structure as there was in WPHK. He also said he could not remember having any discussions about commission rates because they were focused on the percentage they owned in the business and that was how funds were distributed.
"A Member may act and be remunerated as a member or employee or as agent or adviser of the LLP and shall not be liable to account for any remuneration, fees or profit received."
Remuneration is a wide word and is plainly wide enough to include commission. I agree with Mr Cottle therefore that the fact that the LLP Agreement does not itself specify whether, and if so what, commission was payable to Mr Channing does not mean he was not entitled to it; and that it is a question of fact whether an agreement existed between Mr Channing and WP under which he was entitled to be paid commission. Mr Cottle was cross-examined at some length about the apparent change in his views, but the mere fact that, when acting for Addax, he quite properly asked for evidence to support the accounting treatment in the 2009 accounts, does not prevent him from now saying that it is a question of fact to be decided on the evidence before the Court, nor preclude Withers from now submitting that on such facts I should find there was such an agreement.
"to get a more precise estimate of operating income, we have to estimate the appropriate compensation for the owner-managers, based on the role they play in the firm and the cost of hiring replacements for them".
Mr Cottle's view therefore was that whatever the actual arrangements with Mr Channing, it would be appropriate to reflect commission payable to him as a cost of the business.
US loss of profits: conclusion on quantum
(1) Sole mandate.
In the light of the above I accept Mr Pearson's calculations of the loss of profits in this scenario as set out in Appendix 6(i) of his Supplemental Report. This can be summarised as follows:
I will therefore award 15% of this figure, which is £489,383.
(2) Shared mandate
I have assumed above that if WP had been awarded a shared mandate (i) it would have received 60% of the revenues projected in the Revised Business Plan and (ii) its overheads would have been those used by Mr Pearson. That leads to the following calculation, taking 60% of the above figures for revenue and commission and the same figures for overheads:
I will therefore award 45% of this figure, which is £567,907.
London office – WP's actual experience
As with the US office, WP's claim for loss of profits is based on these figures for the years to 2009/2010 and 2010/2011, and an apportioned amount for the period to 6 November 2011.
(1) Ms Kerr in fact went on maternity leave from July 2008 to the end of January 2009 so did not contribute significantly to revenue during the year.
(2) She had noticed by the time she went on maternity leave that business had begun to slow down. This accords with Mr Baines' evidence that even before the collapse of Lehman in September 2008, the market, which had been very buoyant in 2004 to 2008, had begun to change when Bear Stearns folded in March 2008.
(3) Mr Channing says that he had begun a search for another revenue generator for the London office and had identified some potential candidates, but he was concentrating on the proposed Middle East business, and WP had not recruited anyone by September 2008 when Lehman collapsed.
London – what would have happened ?
London office – quantification of lost profits
(1) Year to March 2010
(2) Year to March 2011
Full potential £750.000 90% of full potential 90% x £750,000 = £675,000
Full potential £750.000 65% of full potential 65% x £750,000 = £487,500 Total £1,162,500
(3) Period to 6.11.11 (220 days)
Full potential £600,000 Apportioned 220/365 x £600,000 = £361,644
Full potential £600,000 90% of full potential £540,000 Apportioned 220/365 x £540,000 = £325,479 Total £687,123.
Not all of this however would be attributable to the new revenue generators as much of it would be attributable to Mr Channing and Ms Kerr. In the absence of any more detailed evidence I will assume that half of the extra costs would have been attributable to the recruitment of the new consultants, giving increased costs attributable to their employment of £210,000 for 2009/10 and £310,000 for 2010/11. I will assume that from April 2011 the same would apply as for 2010/11.
|Net extra profit||£93,875||£329,375||£191,069||£614,319|
Diversion of Mr Channing's time
"the treatment of capital in 2009; the inability of the LLP to be able to recognise compensation; the failure of Addax to pay any of its bills; and the currency issue."
This is a fair summary of the issues which arose, but of these only the first could be said to have any connection to the clause 25.2 issue, and even then one of the main points was something entirely unconnected with it, namely whether the sums paid by the non-Addax investors should have been paid to WP.
Summary on quantum
|(1)||US loss of profits:||£489,383 + £567,907 =||£1,057,290|
|(2)||London loss of profits||£ 430,023|
|(3)||Diversion of Mr Channing's time||£ 125,000|