England and Wales High Court (Queen's Bench Division) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION

		Royal Courts of Justice Strand. London. WC2A 2LL
		3rd December 2008

Stephen Phillips QC :

Introduction

1. The Gatwick Worth Hotel ("the Hotel") is situated about 6 miles south east of Gatwick Airport on a large freehold site. It has 118 bedrooms, car parking for over 400 vehicles and seven conference rooms of varying sizes. Between 2002 and 15 February 2006 the Hotel was a member of the Best Western Hotels consortium and accordingly traded as the Best Western Gatwick Worth Hotel.
2. The Hotel's land and buildings are owned by Partflat Limited ("Partflat"), a company which, until 24 November 2005, was wholly owned by the first and second claimants, Mr Devji Gorecia and Mrs Mukta Gorecia ("the Gorecias"), and their three children. Until that date Mr Gorecia also owned the entire shareholding of Gatwick Worth Hotel Limited ("GWHL"), the company which then owned and operated the business of the Hotel. GWHL is the fifth defendant in these proceedings.
3. On 24 November 2005 the Gorecias (and their children) sold their shareholdings in Partflat and GWHL (and thereby sold the Hotel and its business, the only assets of those two companies) to the third defendant, Pearl Hotels Holdings Limited ("Pearl Holdings"), a company owned by the first and second defendants, Mr Zahir Somani and his brother, Dr Hanif Somani (together, "the Somanis").
4. The share sale agreement ("the Sale Agreement") provided that the total consideration of the purchase of the two companies was £3 million, with Pearl Holdings also paying £5.1 million to discharge debts secured on the Hotel's property. Completion of the sale took place on execution of the Sale Agreement, Pearl Holdings paying the total agreed price of £8.1 million less an agreed retention of £350,000.
5. As would be expected, the Sale Agreement contained a number of standard warranties given by the Gorecias (referred to as "the Vendors") to Pearl Holdings (referred to as "the Purchaser") concerning the Hotel and its business. These warranties, set out in Schedule 3, included the following:

"7.5 ....so far as the Vendors are aware there is no fact or matter not disclosed in writing to the Purchaser or any of its advisers which renders any [information which has been disclosed in writing] untrue or misleading because of any omission or ambiguity or for any other reason.

7.6 So far as the Vendors are aware there is no fact or circumstance relating to the affairs of [Partflat or GWHL] which has not been disclosed to the Purchaser or any of its advisers and which if disclosed might reasonably have been expected to influence the decision of a purchaser of the Shares to purchase the Shares on the terms contained in this Agreement.

11.4 Neither [Partflat nor GWHL] nor any Vendor, is aware of any breach of or any invalidity, or any grounds for determination, rescission, avoidance or repudiation of, any contract to which [Partflat or GWHL] is a party or of any allegation of such a thing.

15.2 No substantial supplier to [Partflat or GWHL] has, during the twelve months preceding the date of this Agreement, ceased or indicated an intention to cease trading with or supplying to [Partflat or GWHL] or is likely to reduce substantially its supplies..."

6. It is common ground that, in the course of negotiating the sale and purchase of the Hotel, Mr Gorecia and Mr Somani made a separate oral agreement that, conditional on and following the completion of the sale, the Gorecias would act as consultants to the Hotel's business for a fee of £50,000 (plus VAT) ("the Consultancy Agreement"). During the course of the trial it emerged as further common ground that Mr Gorecia made the Consultancy Agreement on behalf of the third claimant, AG Property Investments Limited ("AGPI"), a company owned by the Gorecias and of which their son Ashis was the sole director, whilst Mr Somani contracted on behalf of Pearl Holdings. Otherwise, as will appear below, the terms of the Consultancy Agreement are very much in dispute.

The claims in these proceedings

7. In the Particulars of Claim, the Gorecias and AGPI asserted that the Gorecias had provided the required services under the Consultancy Agreement so that the consultancy fee had been earned, and accordingly claimed £58,750. They joined, as defendants to that claim, all those who might possibly be said to be counterparties to the Consultancy Agreement (that is to say, the Somanis, Pearl Holdings, Pearl Hotels (Gatwick) Limited, the company managing the Hotel since its acquisition by Pearl Holdings, and GWHL). As I have said, the parties have now agreed that the appropriate parties to a claim under the Consultancy Agreement are solely AGPI as claimant and Pearl Holdings as defendant.
8. Pearl Holdings denies that the consultancy fee has been earned. In the alternative, Pearl Holdings counterclaims (by way of set-off against the agreed fee) damages for the alleged failure of the Gorecias to provide services which Pearl Holdings asserts were agreed would be provided pursuant to the Consultancy Agreement. GWHL was also expressed to be party to the counterclaim in the pleadings but, again, GWHL's counterclaim falls away by virtue of the agreement as to the identity of the parties to the Consultancy Agreement.
9. Pearl Holdings also brings a counterclaim against the Gorecias for damages for breach of the warranties set out above. It is alleged that the Gorecias failed to disclose, prior to the sale, the undisputed fact that the Hotel's membership of the Best Western consortium was under serious threat of termination by Best Western because, for over 18 months, the Hotel had failed to meet Best Western's quality requirements. Best Western operated a "dual test" policy, involving inspections by its own inspectors and by the AA. Although the Hotel had passed Best Western's inspections, it had failed to obtain the rating Best Western required its member hotels to obtain separately from the AA. This was apparent from correspondence between Best Western and the Hotel as follows:

9.1. On 26 May 2004 Keith Pope, the Director of Membership Services at Best Western, wrote to Mr Alex Neil, the Operations Manager of the Hotel, advising him that, following an inspection of the Hotel on 12 May 2004, the AA had given the Hotel a rating of 3* 63%, whereas Best Western's minimum standard for membership was 66%. Mr Pope further advised that the Membership Sub-Committee of the Board of Best Western would consider the matter on 17 June and advise as to corrective action required to retain membership.

9.2. On 21 June 2004 Mr Pope wrote again to Mr Neil following the Sub-Committee meeting, informing him that it had been decided that the Hotel should have a further AA inspection in January 2005, at which time the carpets and breakfast service issues should be resolved. He further warned that if the Hotel did not achieve the required level of 3* 66% then the Board would have to review the membership of the Hotel at its meeting to be scheduled in March 2005.

9.3. As appears from a further letter from Mr Pope to Mr Neil dated 12 April 2005, the Hotel was re-inspected on 23 February 2005, receiving a rating of 3* 64 %. The matter was to be referred to the Board on 4 May 2005.

9.4. It is not clear whether the matter was discussed by the Board in May 2005, but on 7 July 2005 Mr Pope wrote to Mrs Gorecia at the Hotel stating that following a meeting earlier that week, the Board had asked for a further AA inspection of the hotel prior to the September Board meeting. Mr Pope again warned that if the Hotel failed to achieve the current minimum standards required of 66%, then the Board would have no option but to discuss the continuation of membership of the Hotel.

9.5. On 25 August 2005 (by which time the Somani brothers had agreed with Mr Gorecia, in principle and subject to contract, to purchase the Hotel) Mr Neil wrote to Mr Pope at Best Western, stating that the Hotel had engaged an independent consultant to help with staff training. Mr Neil also referred to an agreement with the Regional Director of Best Western, Richard Begley, that the further AA inspection would be completed prior to the November Board meeting.

9.6. On 9 September 2005 Mr Pope wrote to Mr Neil, referring to the further AA inspection scheduled for October and confirming that if 3* 66% was achieved them there would be no requirement for further action. In the event, the further inspection took place on 17 November 2005.

9.7. On 30 November 2005 Mr Pope wrote to Mrs Gorecia at the Hotel, expressing surprise at having received a telephone call from her to say that Mr and Mrs Gorecia had sold the Hotel. Mr Pope recorded that Mr Gorecia had said that the new owners wished to continue membership of Best Western, but pointed out that "Unfortunately, as you are aware, the hotel is currently in final correction period with regard to its membership ... The Board is currently awaiting the results of the most recent inspection, which could lead to the termination of membership".

10. By 30 November 2005, of course, Pearl had acquired the Hotel and its business. Mr Pope's letter was opened and read by Mr Somani, whose evidence is that this was the first he (or Dr Somani) knew of any threat to the Hotel's membership of Best Western. Mr Somani replied to Mr Pope on 6 December, expressing surprise at "the severity of the situation regarding the AA inspection report". On 21 December 2005 Mr Pope wrote to Mr Somani referring to the fact that, following the AA inspection on 17 November 2005, the Hotel had again failed to achieve the required level with a score of 64% against a requirement which, it appears, had increased to 67%. Despite further letters from Mr Somani and Mr Neil, on 1 February 2006 Mr Pope wrote to advise that, at the Best Western Board meeting in Barcelona on 28 January 2006, the Board had decided to terminate the Hotel's membership of Best Western from 15 February 2006.
11. The Gorecias accept that a failure to disclose the problems with Best Western would have constituted a breach of the warranties set out above. They also accept that they did not disclose those problems themselves, formally or otherwise. Their defence is based on contentions that (a) Mr Neil informally disclosed the problems with Best Western in the course of a discussion with the Somani brothers in July or August 2005 and (b) that it is to be inferred that the Somani brothers, in the course of inspecting documents at the Hotel prior to the Sale Agreement, would have come across and read the correspondence with Best Western.
12. Before considering the Consultancy Agreement issues and the breach of warranty claim, I should mention that there are further related disputes between the parties or their companies relating to the Hotel which, perhaps unfortunately, have not been included in these proceedings but which are closely related to issues I have to decide. Mr Gorecia claims that there was a further collateral agreement with Mr Somani pursuant to which he and Mrs Gorecia were to be paid £100,000 for improvements to the Hotel which he had funded personally. AGPI claims that it is entitled to £43,528.28 in respect of works performed for Partflat before the sale. Finally, there is a dispute as to the completion accounts under the Sale Agreement and as to the meaning and effect of a determination by an independent accountant (presumably under the procedure set out in schedule 7 to the Sale Agreement) that Pearl Holdings is entitled to retain the whole of the £350,000 deferred consideration and that some £22,000 is in fact repayable to Pearl Holdings in respect of the sale and purchase of the Hotel.

The Consultancy Agreement issues

13. The Consultancy Agreement was made by Mr Gorecia (on behalf of AGPI) and Mr Somani (on behalf of Pearl Holdings) in the course of a meeting at the Hilton Hotel in Watford. I accept Mr Somani's recollection that it took place on 5 October 2005, Mr Gorecia believing that it had taken place "in or about September" that year.
14. It is common ground that in the course of the meeting it was agreed that, for 3 months after the sale, the Gorecias would attend at the Hotel as and when required in order to assist with the hand-over of the business, and that the agreed fee payable under the Consultancy Agreement was £50,000 plus VAT.
15. Mr Somani, however, contended that it was also agreed that, in exchange for the consultancy fee, the Gorecias would, after the sale, (a) provide a full reconciliation of the Hotel's bank records; (b) provide a comprehensive inventory of the Hotel's mechanical and electrical equipment and procure manuals for that equipment and (c) take responsibility for completing certain essential building and maintenance works at the Hotel, in particular (i) repairs to a leaking roof over the Hotel's Sussex Suite (ii) repairs to the defective electric sign outside the Hotel and (iii) repairs to the control unit for the Hotel's boiler and heating system.
16. Pearl Holdings raises three defences to AGPI's claim for the consultancy fee as follows:

16.1. that the Gorecias did not in fact attend the Hotel regularly after the sale, but only on about 5 occasions, and so did not provide the services that the Gorecias agree they were required to provide;

16.2. that the Gorecias did not perform any of the additional work alleged to have been required under the Consultancy Agreement, entailing that the Gorecias did not earn their fee or that, alternatively, Pearl Holdings is entitled to set-off the costs of having the works performed by others, estimated to have cost more than £30,000;

16.3. that the Consultancy Agreement was subject to an implied term of "trust and confidence" as between the Gorecias and the Hotel owner, a term the Gorecias breached by failing to disclose the problems with Best Western.

(1) Attendance at the Hotel to assist with the hand-over

17. Mrs Gorecia gave evidence that she continued to attend the Hotel on an almost daily basis after the sale, making the long journey from the family home in Hertfordshire. This continued, she said, until an incident occurred in January 2006 in which she had routinely destroyed copies she had taken of bank statements in order to undertake reconciliation work and on which she had made notes. Mrs Gorecia said that Mr Somani had found out about this and publicly and loudly accused Mrs Gorecia of destroying Hotel property and told Mr Gorecia that Mrs Gorecia should cease coming to the Hotel.
18. Mr Gorecia's evidence was that he had also regularly attended at the Hotel and had, indeed, frequently stayed overnight in a room there which was occupied by his son, Ashis, who had continued working at the Hotel after the sale.
19. The Sales and Marketing Manager at the Hotel at the relevant time, Minodora Fledderus-Diaconu, who remained employed at the Hotel until March 2007, confirmed in her evidence that both the Gorecias attended regularly at the Hotel until at least late January 2006. I found Ms Fledderus-Diaconu to be an honest, reliable and independent witness and, indeed, her evidence was not challenged on this point by Mr Ferris, Counsel for the defendants.
20. The Somanis both gave evidence that they only saw the Gorecias on a few occasions after the sale, Mr Somani correcting his witness statement to accept that they had attended on at least five occasions. Mr Somani's evidence was that shortly after the sale Mr Gorecia had travelled to the Ukraine for a period of weeks and thereafter he only attended on limited occasions specifically for the purpose of meeting the Somanis. He also stated that that he had a vague memory of an incident with Mrs Gorecia concerning her having taken documents away from the Hotel, but it was not a significant matter. He did not recollect saying that Mrs Gorecia should cease to attend the Hotel.
21. If the Somanis were right in their recollection, it would have been apparent to them from shortly after the Sale Agreement that the Gorecias were seriously in default in their obligations under the Consultancy Agreement. But on 21 December 2005 Mr Somani signed a letter, a draft of which was provided to him by Mr Gorecia but which he accepts he himself revised before signing. It was addressed to the Gorecias c/o AGPI and stated:

"We confirm that we have agreed a fee of £50,000 plus VAT for consultant services provided for the management of [the Hotel], and successful handover of all company matters to Pearl Hotels (Gatwick) Ltd., Mr Z. Somani and Mr H. Somani relating to [Partflat] and [GWHL]. The payment will be paid on invoice from the above company ([AGPI]). "

22. Further, at no other time during the consultancy period did the Somanis write to the Gorecias requiring their attendance at the Hotel or complaining of a failure to attend, and when Mr Somani subsequently corresponded with Mr Gorecia as to various matters in dispute, at no time did he allege a failure to attend at the Hotel to assist in the handover of the business. Neither do the Somanis suggest that they at any time requested the Gorecias' attendance orally, nor that they at any time complained orally about a failure to attend.
23. In my judgment the evidence of the Gorecias and Ms Fledderus-Diaconu is plainly to be preferred to that of the Somanis on this issue. I find that the Gorecias did attend the Hotel on a regular basis to assist with the hand-over. But further, even if and to the extent that they did not do so, there is no evidence to suggest that they were required by the Somanis to attend on any occasion or for any period but failed to do so.

(2) The performance of further works

24. There is no suggestion in the letter of 21 December 2005 confirming the Consultancy Agreement that further works, above and beyond management consultancy, were included in that agreement. Neither was that suggested by Mr Somani in subsequent correspondence.
25. In a letter to Mr Gorecia dated 24 February 2006 Mr Somani referred to certain matters "outstanding with regards to completion", which included completing lighting to the signs outside the Hotel and reconciliation matters, and on 29 March 2006 Mr Somani wrote again referring to the lack of bank reconciliation and to the "outstanding works" in the three respects referred to above. But the bank reconciliation was plainly being referred to in the context of finalising accounts and the reference to outstanding works was in response to Mr Gorecia asking for payment of AGPI's outstanding invoices to Partflat, as to which Mr Somani said "As we discussed previously, I have no issue in paying the outstanding invoices - although there is outstanding work to be finished".
26. In my judgment it is clear that the Consultancy Agreement was limited to the management consultancy and hand-over services referred to in the letter of 21 December 2005, revised and signed by Mr Somani. It would not have made sense for the parties to describe an agreement as relating to "consultancy", but to have included within it an obligation to perform building works of significant value for no additional payment. Issues of bank reconciliations and the provision of manuals were matters for the vendors of the Hotel, not for AGPI (the party to the Consultancy Agreement) and, in any event, I find it incredible that they would have been separately agreed in early October 2005, nearly two months before the Sale Agreement was executed.
27. I have considered whether Pearl Holdings might nonetheless claim to set-off, against AGPIs consultancy fee, the sums it claims in respect of repairs to the leaking roof of the Sussex Suite on the basis that AGPI had performed (or at least invoiced sums for performing) the original repair works. However, it is clear works to the Hotel's premises had been invoiced to Partflat, the company which owned those premises, and this was not contested by Mr Somani in correspondence. It therefore seems clear that any claim for outstanding works would be that of Partflat (which is not party to these proceedings) and would form part of the dispute concerning AGPI's unpaid invoices addressed to that company. Mr Ferris, on behalf of the defendants, did not contend otherwise.

(3) The implied term of trust and confidence

28. It is by no means clear to me that a term imposing obligations of trust and confidence, undoubtedly implied as a matter of law into employment contracts, is to be implied into a contract with a limited company for the provision of the services of consultants for a limited period of time. If it was necessary to do so, I would hold that there was insufficient evidence in this case of grounds which would give rise to the existence of such a term. All that the Gorecias agreed and were required to do was to be available for the new management of the Hotel to consult with them so as to assist in a hand-over. They were not themselves to manage the business, its monies or property, but merely to be available to those who were doing so.
29. But in my judgment the implied term contended for, even if established, would not assist Pearl Holdings in resisting the claim for the consultancy fee. If the Gorecias did not disclose the problems with Best Western (an issue I shall examine in detail in considering the warranty claim below), the Somanis were necessarily aware of that fact by the time they received Mr Pope's letter of 30 November 2005, which set out that Mrs Gorecia knew that the Hotel was in a period of "final correction".
30. Despite knowing of the non-disclosure (and learning more details on 6 December 2005 when meeting Mr Pope), Mr Somani confirmed and affirmed the Consultancy Agreement on 21 December 2005 and at no stage did or said anything would could amount to a purported acceptance of a repudiation of that agreement. There is simply no basis on which the defendants can claim to have ended the ongoing obligations of the parties under the Consultancy Agreement, including the accrual of the fee.
31. As the Consultancy Agreement was not terminated but was affirmed, Pearl Holdings would in any event be limited to a claim for damages for breach of the alleged term, but it is difficult to see what damages could result. The Consultancy Agreement only became operative on completion of the Sale Agreement, at which point any damage from the alleged non disclosure had already been suffered and is claimed and recoverable by Pearl Holdings by way of the warranty claim against the Gorecias in these proceedings. There are no other damages to claim against AGPI under the Consultancy Agreement.

(4) Conclusion on the Consultancy Agreement Issues

32. I conclude that AGPI is entitled to judgment in the sum of £58,750 against Pearl Holdings.

The breach of warranty claim

(1) Informal disclosure by Mr Neil

33. The Gorecias' case as to actual disclosure of the problems with Best Western, albeit of the most informal nature, is that those problems were disclosed by Mr Neil in a discussion with the Somanis in July or August 2005. Mr Ferris, for the defendants, accepted that such informal disclosure, if it had been given, would have sufficed to satisfy the warranties.
34. Mr Neil gave evidence that, during July or August, he was asked to join Mr Gorecia and the Somanis for a drink whilst the Somanis were visiting the Hotel. Mr Neil stated that the Somanis were introduced as "hoteliers". He was not told that they were potential purchasers, but he guessed that they might be, and so was concerned to be helpful so as to increase his prospects of keeping his job if there was a sale. After 10 minutes Mr Gorecia left the meeting, saying that Mr Neil would answer any questions the Somanis might have about the Hotel. In the ensuing discussion, Mr Neil stated, he had been asked about Best Western and had explained the dual test and that the Hotel "had not passed the AA test yet as we were awaiting a re-test which would involve a re-visit. I made it very clear to them that unless you passed the AA test Best Western could refuse membership"
35. Mr Gorecia referred to the same meeting, stating that he recalls that when he rejoined the meeting Mr Neil and the Somanis were discussing "the membership criteria".
36. The Somanis accepted that they met Mr Neil at the Hotel, but stated that it had taken place on 20 October 2005. They denied that there was any mention of the matters Mr Neil claims to have discussed.
37. On this issue I find that the Somani's version of events is to be preferred. I found Mr Neil to be an unimpressive and unreliable witness. His evidence was at times inconsistent and bordered on belligerent. Substantively, Mr Neil had no good answer as to why he would have disclosed such highly confidential and damaging information to strangers, particularly if he believed they might be potential purchasers who would be assessing his suitability to remain in charge of the operations of the Hotel. His justification that Mr Gorecia had said, on leaving, that he should tell the Somanis whatever they wanted to know, was lacking in credibility. Even if Mr Gorecia had said such a thing, it could not reasonably have been regarded as sanctioning such damaging disclosure, and it would not have prevented the Somanis concluding that Mr Neil was not to be trusted, exactly the opposite of the sort of impression Mr Neil wanted to give to prospective employers.
38. It emerged during the course of cross-examination that Mr Neil had first provided a draft statement in support of the claimants in October 2006. Mr Neil had left the Hotel in March 2006 and had been working as a courier. In October 2006 he was in the process of acquiring a pub restaurant with financial assistance from none other than Mr Gorecia, who in fact purchased the property in question and leased it to Mr Neil. Mr Neil eventually further admitted, after a period of considerable evasion, that Mr Gorecia "might have lent me £1500, not as much as £50,000". Mr Neil was not sure how much was outstanding but thought it was about 5% of the loan.
39. Mr Neil could therefore not be regarded as an impartial witness and the manner and content of his evidence confirmed that to be the case. I reject his version of the meeting, whenever it may have taken place, preferring the recollection of the Somanis.
40. Mr Ferris, on behalf of the defendants, did not challenge Mr Gorecia's evidence about returning to hear discussion about "the membership criteria", but in my judgment it was unnecessary for him to do so. Even if Mr Gorecia did hear some discussion of the membership criteria of Best Western (or other hotel groupings), it does not entail that Mr Neil had disclosed the problems with Best Western in that context. I am satisfied that he did not.

(2) Inference of knowledge of the problems with Best Western

41. Counsel for the claimants, Mr Morpuss QC, contends that the Somanis' conduct, both before and after the sale, gives rise the inference that they knew about the problems with Best Western (such as by finding and reading the correspondence file whilst carrying out due diligence at the Hotel) but were uninterested in that issue.
42. Contrary to the Somanis' strong protestations to the contrary, I consider that it is indeed clear that the Hotel's membership of Best Western was not a major factor in their considerations relating to the purchase of the Hotel. The Somanis made no enquiries as to the income the Hotel received from Best Western nor the costs of membership, and Dr Somani made no more than superficial internet inquiries about the Best Western organisation generally. Further, they did not mention the membership in their written presentation to their bankers, delivered on 19 September 2005, save for one negative reference. Mr Somani's own calculations of the value of the Hotel were based on his assessment of the likely EBITDA (earnings before interest, taxes, depreciation and amortisation) and, as he accepted, he did not place any specific value on the Best Western membership.
43. It is also correct to say that the Somanis could possibly have reacted more vigorously to the news that the membership was under threat. Mr Somani did not ask Best Western for copies of its correspondence with the Hotel on the issue until 13 February 2005. Further, neither of the Somanis attended the Best Western sub-committee meeting on 17 January 2006 nor the Board meeting in Barcelona on 28 January 2006, despite Dr Somani accepting that they had been encouraged to do so. Their explanation, which I entirely accept, was that they were too busy running the newly-acquired Hotel and turning around its fortunes.
44. Such conduct and attitude is consistent with the Somanis placing a relatively low value on the Best Western membership, perhaps being relatively unconcerned whether it continued long term or not, and possibly planning to apply for membership of another consortium in due course. But it is certainly not the case that the Somanis were totally uninterested in the Best Western membership or were unconcerned about retaining the benefit of that membership after the sale, as appears from the following:

44.1. In the course of carrying out due diligence, the Somanis had noticed that the Hotel's membership agreement with Best Western was in the name of Plusresult Limited, a company through which the Gorecias had run the Hotel's business until the liquidation of that company in 2004. On 6 October 2005 the Somanis' solicitors requested confirmation that membership would be transferred to GWHL prior to completion of the sale and purchase, a request that Mr Somani repeated directly to Mr Gorecia in an e-mail dated 19 October 2005. That transfer duly took place on 17 November 2005. The effect of that transfer was to render GWHL, one of the companies Pearl Holdings was about to purchase, liable for Best Western's membership fees of about £15,000 per year.

44.2. Shortly after completion of the purchase and receipt of the 30 November letter from Mr Pope, the Somanis attended the Best Western Regional meeting on 6 December 2005, and Mr Somani immediately followed up that meeting with a letter of the same date making a presentation to Best Western for the purposes of the meeting on 17 January 2006. Mr Somani and Mr Neil both wrote further letters to Best Western in early January 2006, referring to steps taken to improve the Hotel and its service, and following a letter from Mr Begley asking for information in this regard to help advance the Hotel's case at the meeting on 17 January 2005, Mr Neil (on instructions from Mr Somani) sent evidence that quotations had been obtained for new beds for the Hotel.

44.3. On 5 January Mr Somani also applied for the membership of Best Western to be transferred to the new operator of the Hotel, Pearl Hotel (Gatwick) Limited, thereby rendering that company liable for the annual fees payable to Best Western. It is difficult to see why the Somanis would have taken that step if they were not interested in retaining Best Western membership for at least a period.

44.4. After the Hotel's membership had been lost in February 2006, and after making improvements to the Hotel, the Somanis arranged for a further AA inspection on 4 April 2006. The Hotel was given a rating of 3* 74%, above the 72% by then required by Best Western. On 3 May 2006 the Somanis re-applied for membership of Best Western, but on 15 May 2006 the Hotel failed Best Western's own inspection.

45. In my judgment, whilst membership of Best Western may not have been a major factor in the Somanis' decision to acquire the Hotel and they may have had firmly in mind the possibility of terminating that membership in due course, I am entirely satisfied that they wished to retain that membership (or have the option of retaining it), at least in the short term.
46. I therefore reject the contention that the Somanis knew about the problems with Best Western before the Sale Agreement, but did nothing about those problems because they were uninterested. I am entirely satisfied that, had Mr Somani learned of those problems prior to completion, he would have raised them directly with Mr Gorecia and used them as a ground for seeking a reduction in the purchase price.
47. The contrary conclusion would entail that the Somanis deliberately did not raise the problems with Best Western prior to the Sale Agreement, subsequently lying about when they discovered those problems in order to mount the present breach of warranty claim in bad faith. I do not see any grounds for such a conclusion. Indeed, if it had been necessary to decide which of the parties acted in bad faith in this regard, I would hold that it was Mr and Mrs Gorecia who deliberately withheld disclosure of the problems with Best Western, no doubt hoping (and even expecting) that the Hotel would achieve the necessary rating from the AA inspection shortly before the sale. It is extraordinary that, in the several months of negotiations, the Gorecias never saw fit to mention the Best Western problems to the Somanis, either formally or informally, no matter what they understood to be the Somanis' interest in that membership. Further, and as recorded in Mr Somani's letter to Mr Gorecia of 29 March 2006, Mr Gorecia's first response when taxed with the non-disclosure of the problems with Best Western was that he was not aware of them, a response which was undoubtedly untrue. However, as the claim is purely in contract, it is unnecessary for me to make such a finding, it being sufficient that I am entirely satisfied that the Somanis did not know of the Best Western problems at the date of the Sale Agreement.

(3) Conclusion as to liability for breach of warranty

48. I therefore conclude that Mr and Mrs Gorecia are liable to Pearl Holdings for breach of warranty.

(4) Damages for breach of warranty

49. By the conclusion of the trial it was common ground that the proper measure of Pearl Holding's damages for breach of warranty was the difference in the value of the Hotel on 24 November 2005 as warranted by the Gorecias (that is to say, with no threat to its membership of Best Western) and the actual value of the Hotel on that date (that is to say, with the actual threat to that membership, assessed as at that date).
50. It was further common ground that a determination of the difference between such warranted value and actual value is most appropriately reached by assessing the value of the Hotel's membership of Best Western and then discounting that value by the degree of threat to its continuation which a reasonable objective observer would have appreciated as at 24 November 2005.
51. I heard evidence from two expert valuers, Mr Nick Boyd of Edward Symmons for the defendants and Ms Kay Linnell of BDO Stoy Hayward for the claimants. The parties and their expert valuers were in agreement that, perhaps surprisingly, there is no intrinsic added value to a hotel in membership of a consortium such as Best Western. They agreed that as such a consortium is one of a number of marketing and sales tools which a hotel can employ, the use of one consortium adding no greater value than the use of another or, indeed, trading independently of any consortium.
52. It was further common ground that value of the membership (or, perhaps more accurately, the decrease in value of the Hotel due to its loss) is represented by the effect which the disruption of losing the membership (and adopting a new marketing and sales strategy) would have on the sustainable earnings potential of the Hotel, taking into account any capital expenditure required to implement such a new strategy. It was yet further common ground that that such disruption would be assumed to last for no more than 3 months, during which time the lost income from business from Best Western would gradually be replaced, whether or not the Hotel joined another consortium.
53. The defendants' case, based on the evidence of Mr Boyd, is that the value to the Hotel of the membership was £300,000. Mr Boyd candidly and properly stated that valuing the "threat" to such membership was an artificial exercise in which he could profess no expertise, but expressed the view that any purchaser (or at least their financier) was likely to take a cautious approach in assessing the threat. Doing the best he could, he expressed the opinion that the threat to membership of Best Western on 24 November 2005 reduced the value of the Hotel by £150,000 to £200,000.
54. As for the valuation of membership of Best Western in the sum of £300,000, Mr Boyd reached that figure on the following basis:

54.1. He assessed the discounted cash flow valuation of the Hotel, with membership of Best Western, as £8.164m, which he rounded up to £8.2m. This was slightly lower than the £8.4m valuation which Savills prepared for the Somanis and their bankers in September 2005, Mr Boyd believing that Savills had made an error in the costs and profits they had assumed for sales of food at the Hotel.

54.2. He assessed the discounted cash flow valuation of the Hotel, without membership of Best Western, as £7.881m, which he rounded up to £7.9m.

54.3. The difference of £300,000 between the two valuations was attributable to two factors. First, Mr Boyd assumed that the loss of Best Western would reduce room occupancy at the Hotel from 65% to 55% for the whole of the first year of his cash flow, equating to the loss of the Hotel's entire annual revenue of £250,000 from Best Western and a consequential loss of net profit of about £170,000. Second, Mr Boyd assumed additional capital expenditure in the first year of his cash flow of £160,000.

55. Mr Boyd, whom I found to be a careful and independent expert, stressed that the above calculations were only one part of his final valuation, the other being his expert assessment of the likely impact of relevant matters on the market's view of the value of the Hotel at the relevant time. His view was that a purchaser (and in particular the party financing the purchaser) would reduce an offer for the Hotel by about £300,000 if the Hotel was about to lose its membership of Best Western.
56. Ms Linnell did not address the above analysis, her evidence being that as the Hotel in fact made increased profits after the sale, there was no loss. That line of argument was not in the event pursued by Mr Morpuss for the claimants, in my judgment rightly, as the actual performance of the Hotel under the Somanis' control was not (at least directly) relevant to assessing the value at the date of sale. Further, Mr Morpuss did not pursue any arguments based on mitigation of loss or failure to mitigate.
57. Mr Morpuss did, however, attack Mr Boyd's analysis as follows:

57.1. In relation to loss of revenue, Mr Boyd's discounted cash flow assumed a loss of revenue for a full 12 months, whereas it was agreed that revenues would have fully recovered within 3 months. Mr Morpuss demonstrated, and Mr Boyd accepted, that if, at most, only a quarter of the annual Best Western income would be lost (£62,500), this would increase his discounted cash flow valuation of the Hotel to at least £8m. Mr Boyd's response was that, whilst he accepted that the only known loss of income would be one-quarter of the annual Best Western income, an objective observer would assume that there might be other unidentifiable losses of income associated with the problems with the Hotel which gave rise to the loss of membership and because of the disruption caused by that loss. He broadly assessed such losses as being equivalent to one year of the income from Best Western.

57.2. In relation to capital expenditure, Mr Morpuss argued (and Mr Boyd accepted) that as income would be restored within 3 months of loss of Best Western membership, regardless of whether another membership was obtained, it was unnecessary to expend £160,000 or any sum to put the Hotel back in the position needed to earn the same revenues as before as so restore its value. Mr Morpuss demonstrated that further removing the assumed capital expenditure from the discounted cash flow (in addition to limiting lost revenue to 3 months) resulted in a valuation of £8.14m, only £24,000 less than the valuation with Best Western membership, a sum less than the amounts by which Mr Boyd had rounded his valuation of the Hotel with the benefit of membership. Mr Boyd's response was that "market sentiment" would require allowance to be made for capital improvements to correct the deficiencies which led to Best Western withdrawing membership.

57.3. As to the quantum of capital expenditure assumed by Mr Boyd, he accepted that his inspection of the Hotel was long after the relevant date and that he had based his assessment on items identified in a report by Choice Hotels in April 2006. He also acknowledged that the Somanis had in fact spent no more than £30,000 on the Hotel in order to achieve a 74% rating from the AA that same month. Mr Boyd's response was that £160,000 was his best assessment of what a purchaser would have expected to spent as at 24 November 2005 on learning that the Hotel had continually failed to meet Best Western's standards such that membership had been terminated.

58. Mr Morpuss accordingly submitted that the loss of Best Western membership could not account for a loss in value of the Hotel of any more than £24,000 at most, a negligible sum which would be discounted in a transaction of the order of £8m. In effect, he contended, retaining Best Western membership was of absolutely no value to the Hotel. Mr Morpuss argued that this was supported by the fact that the Somanis themselves appeared to place no value on that membership during negotiations and were not sufficiently concerned about retaining it to think it worth travelling to a meeting in London on 17 January 2006. That conclusion is further supported, Mr Morpuss submitted, by the fact that the Hotel's income, far from falling, increased significantly in the months immediately following the termination of the Best Western membership.
59. Mr Morpuss further submitted that any small loss in value which could be shown should in any event be very heavily discounted because the threat to the membership of Best Western would, despite the actual outcome, have been assessed as small. He relied on that fact that both Mr Gorecia and Mr Somani gave evidence that they were confident that membership of Best Western would be retained.
60. In my judgment, in circumstances where a prospective purchaser (and his financiers) discovered that a hotel was about to lose its membership of a consortium such as Best Western because it was failing to meet the standards required by that consortium, there is no doubt that the purchaser would demand and likely obtain a reduction in a sale price which had been agreed on the basis that such membership was continuing. I have no doubt that the Somanis would have made such a demand in the case of the Hotel and that Mr Gorecia would have been in no position to resist. In my judgment it was precisely because of the inevitability of such reduction that the problems with Best Western were not disclosed to the Somanis. I therefore reject the submission that the market value of the Hotel would have been the same whether or not its membership of Best Western was about to be terminated.
61. I further accept Mr Boyd's opinion that, in assessing the impact of the loss of membership of Best Western, a purchaser (and his financiers), advised by a valuer (such as Mr Boyd) would be unlikely to assume that the loss would be strictly limited to the loss of known income directly from Best Western. Whilst that would be a starting point, I accept Mr Boyd's opinion that there would be a concern that the loss of the Hotel's name, branding and quality mark would have an unquantifiable effect on other income streams. In my judgment Mr Boyd's broad assessment for these purposes seems to me to be reasonable and, indeed, no countervailing opinion of the likely view of a valuer advising a purchaser was expressed. The fact that, in the event, the Somanis succeeded in increasing the Hotel's income in the period following the loss of membership is of no assistance. It is common ground that the Somanis were far more experienced and professional hoteliers than the Gorecias and put in place much better management and marketing procedures. Whatever income they achieved for the Hotel after the sale, it could have been greater had the Best Western membership been retained.
62. I also accept Mr Boyd's evidence that a purchaser and his financiers (again, advised by a valuer such as Mr Boyd) would assume that capital expenditure would be required to remedy the problems with the Hotel which had led to loss of membership. Mr Boyd's opinion, trying to put himself back in the position of advising parties in November 2004, was that £160,000 would a reasonable assumption and, again, that opinion appears to me to be entirely reasonable and is not met by any opposing opinion. The fact that the Somanis in the event spent only £30,000 on the Hotel by April 2006 is not relevant to the question of what a purchaser would have conservatively assumed in November 2005. Further, the expenditure of £30,000 was insufficient to enable the Hotel to pass Best Western's inspection in May 2006.
63. Mr Boyd's second approach to his opinion, namely, his expert view that the market would regard the Hotel as being worth about £300,000 less if it lost it Best Western membership, is also in my judgment entirely reasonable. Indeed, the view that the impending loss of a hotel's name, branding and quality mark would reduce its market value by only 3.7% would seem to be relatively conservative. Once more, no contrary expert opinion on that issue was expressed by Ms Linnell.
64. I therefore find that the loss of membership of Best Western would have reduced the value of the Hotel by £300,000 as at 24 November 2005. At that date, however, it was unclear whether or not the membership would be lost. It was possible that the Hotel would receive the required rating following the AA inspection on 17 November 2005 and further possible that Best Western would give the Hotel (and its new owners) a further chance even if it did not.
65. It was suggested by Mr Boyd that the exercise of assessing the degree of threat and the likely effect on value is highly artificial as a purchaser would inevitably delay the purchase until the result of the AA inspection was known and the question of membership resolved. I do not accept that view, as it is perfectly possible that either the vendor, the purchaser or both would insist on proceeding in such circumstances and would agree a variation in price to reflect the risk. It is both possible and necessary to form a view as to what such a variation to the price was most likely to be.
66. In my judgment, as at 24 November 2005, the history of correspondence with Best Western would suggest to an objective observer that, whilst there was a significant risk that membership would be lost, there were at least reasonable prospects of retaining it. I accept that the market would be likely to take a conservative view of those prospects, which I find would have been assessed as roughly even. That assessment is in line with Mr Boyd's view that the threat would have been "valued" at £150,000 to £200,000.
67. Accordingly I assess Pearl Holdings' damages for breach of warranty as being £150,000.

Conclusion

68. As set out above, AGPI is entitled to judgment against Pearl Holdings for £58,750 and Pearl Holdings is entitled to judgment against Mr Gorecia and Mrs Gorecia for £150,000. All other claims and counterclaims will be dismissed.
69. I would ask Counsel to seek to agree the interest that is to be added to those sums, and will hear further argument on that issue if necessary, as well as any arguments as to costs.