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
		13 February 2009

1. MR JUSTICE HOLROYDE: In this action there is a claim by the Claimant, to whom I shall refer as Watersheds, against the Defendants for the sum of £59,119.20 under a guarantee dated 16 November 2004, and a Counterclaim by the Defendants for damages. I heard evidence and submissions over a number of days, the course of the trial being interrupted and delayed by problems arising from the adverse weather conditions. The Defendants represented themselves ably, notwithstanding the obvious stress of the proceedings, and made their submissions clearly and courteously. By agreement among themselves, Mr Gentleman made the closing submissions on behalf of both Defendants and did so in a way which reflected the thoroughness with which they have prepared and presented their case. Professor Watson-Gandy, for Watersheds, assisted the court greatly with his submissions as to the relevant law and I am grateful to them all for the help they have given me.
2. Watersheds have been variously described in the proceedings as corporate finance accountants and corporate finance advisers. The Defendants were at the material times the directors of two companies, Real Creative Solutions Limited ( "RCS"), which was incorporated in 2002 and changed its name on 3 December 2004 to Real Creative Group Limited ("RCG"), and Real Wireless Solutions Limited ("RWS"), which was incorporated in 2004. For the most part these separate companies do not call for any separate consideration and Mr Gentleman made clear that RCG was, as he put it, the real trading entity. Accordingly I shall for convenience generally refer simply to "the company".
3. In 2004 the Defendants wished to raise finance to enable the company to expand its business and in particular to market a particular wireless display system. On a date which has not been identified in the evidence they engaged to assist them in that regard a firm to which I will simply refer as Icon. As I understand it, Icon charged an engagement fee of £5,000, which the company paid. Icon's efforts to obtain funding were however unsuccessful, and the Defendants became dissatisfied. In October 2004 they sought advice from Mr John Davies, a solicitor whose firm, Thring Townsend, acted for the company from time to time. Mr Davies was familiar with Watersheds, having had other clients who had engaged them in what proved to be successful ventures and he suggesting a meeting.
4. That meeting took place on 28 October 2004 at the offices of Thring Townsend. Mr Dacosta attended on behalf of the company. Mrs Susan Green, a director of Watersheds, attended on their behalf. Mr Davies made the introductions, stayed for a time and then left. As will be seen, there is an issue as to what was said between Mrs Green and Mr Dacosta. However, in their evidence both agreed that by the end of that meeting there was a mutual feeling that they could work with each other and that matters should be taken further. Mrs Green asked if she could send a draft letter of engagement and a copy of Watersheds' terms of business and Mr Dacosta agreed that she could. Provisional arrangements were made for a further meeting.
5. On the following day, 29 October 2004, Mrs Green sent an e-mail to Mr Dacosta (volume 3, page 39 of the trial bundle) to which were attached copies of a terms of engagement letter and Watersheds' terms of business. The e-mail itself said in part:

"As discussed, I have pulled off one of our standard engagement letters for you to take a look at. It's drafted by lawyers so, it is a little cumbersome, but I can talk you through this when we meet on Tuesday."

6. The draft terms of engagement, addressed to the Defendants and the company and dated 29 October 2004, contained, amongst other things, the following relevant passages:

"Watersheds work on a success-fee basis. We believe that this nurtures a results-orientated culture, which delivers practical solutions for our clients.

We are writing to confirm our understanding of the work that we, Watersheds Limited ('Watersheds') will carry out on behalf of Real Wireless Solutions Limited and Real Creative Solutions Limited (each 'the Company') and David Dacosta and Paul Gentleman ('the Shareholders') (together 'the Client'), and the terms on which we will undertake that work ('the Engagement'). Those terms are set out in this letter ('the Engagement Letter') and in Watersheds' standard terms of business ('the Standard Terms'), a copy of which is enclosed. The Standard Terms include restrictions on Watersheds' responsibilities and exclusions of liability on Watersheds' part.

Scope of Works

Phase 1

The Company wishes Watersheds to act as financial adviser in connection with the raising of finance by such method as may be available or appropriate in the circumstances. We will seek finance of £2.5 million and will co-ordinate all discussions between funders and the Company."

. [Phase 2 followed completion of the fund-raising. Phase 3 related to subsequent disposal of the company. Continuing to read the relevant passages:]

Duration.

The Client agrees to retain Watersheds for seven years from the date on which the Engagement Letter is signed by the Client ('the Engagement Period').

Fees.

The Client agrees to pay Watersheds' fees as set out below.

Phase 1.

Watersheds' fee will be 3.53% of the funds raised plus VAT, subject to a minimum of £58,824 plus VAT. This fee will be payable by the Company…

Watersheds become entitled to a fee if:

i. a fund-raising arising from an introduction made by us is completed by the Company … at any time, during or after the Engagement Period; and/or

ii. any fund-raising is completed by the Company … during the Engagement Period."

[Provision was also made for a fee to be payable on a disposal of the business in certain circumstances and for a discount of 15 per cent to be allowed if payment was made on specified dates. Reading on:]

Directors' Guarantees

In consideration of Watersheds agreeing to provide its services to the Company on the terms of the Engagement, the company's present directors hereby guarantee to Watersheds the proper performance by the Company of its financial obligations to Watersheds under the terms of the Engagement. This guarantee shall remain in effect until all sums payable by the Company have been paid in full and shall not be affected by any time or other indulgence or concession Watersheds may see fit to grant to the Company or any other person.

Signature

Please confirm the agreement of the Company (and the present directors) to the terms of the Engagement by arranging for each of the directors to sign the enclosed copy of this letter, on behalf of the Company (and on behalf of themselves).

"Please confirm the agreement of the Shareholders to the terms of the Engagement by signing the enclosed copy of this letter."

7. The accompanying copy of the Terms of Business was undated. In clause 1 it stated that:

"The terms of the contract between Watersheds … and the Client are set out in a letter … and in these terms of business."

By clauses 8 and 9 it provided for either party to be entitled to terminate the engagement for any reason on 14 days' written notice but without prejudice to the accrued rights of each party. Clause 11 provided for the engagement to terminate automatically if the client, being a company, became the subject of an administration order. By clause 12:

"In the event of a termination automatically ('a Termination on Insolvency'), Watersheds shall be relieved of the obligation or right to render any further performance and shall become entitled, by virtue of the termination, to payment of the minimum fee set out … in relation to the Phase during which such termination occurred."

8. The final clause which I need to mention at this stage is clause 15:

"The terms of the Engagement constitute the entire agreement between the parties, supercede any previous communication, understanding, correspondence, proposal or presentation, whether written or oral and may not be varied except in writing signed on behalf of Watersheds."

9. Mr Dacosta accepts that he received that e-mail, and both Defendants accept that they had seen the attachments before the next meeting with Mrs Green, which took place on 2 November 2004 at the company's offices. What was said on that occasion is again a matter of dispute. Mrs Green was accompanied to the meeting by her colleague Mr Clive Jones, who sadly died on 28 February 2008 (see volume 5, page 402) and who did not make a witness statement in these proceedings before his death. Present on the company's side were both Defendants, Neil Booth, (effectively the company's finance director), Hannah Seabright, (a consultant who worked with Mr Booth), and possibly one other. It appears to be common ground that not all those persons were present throughout.
10. Following that meeting Mr Booth sent Watersheds a copy of the company's current business plan. Mrs Green told me, and I accept, that consideration of it would start to involve Watersheds in a lot of work and so she checked on whether the letter of engagement had yet been signed. It seems that Mr Jones made a phone call to the Defendants. On 16 November 2004 both Defendants signed the terms of engagement (volume 3, page 65). For a reason which was never explained, Mr Dacosta had already signed another copy on 9 November (volume 3, page 55) but it was not immediately sent to Watersheds and nothing turns on it. It is the letter signed on 16 November which constitutes the agreement between the parties and is the basis of the claim.
11. The figure of £2.5 million appears to have been mentioned at the first meeting of the amount of funding which Icon had sought. Mrs Green said, and again I accept, that she was from the outset doubtful whether that was the appropriate figure to seek and at an early stage the parties agreed that it was too high. For a brief period they took the view that £750,000 of funding would be sufficient, but that figure was then increased by agreement to £1 million. These decisions led to some variation of the agreement of 16 November 2004. On 1 December 2004 Mr Jones e-mailed Mr Dacosta saying:

"Re the engagement letter Sue and I realised that our original letter still talks about us raising £2.5 million. For good order we would be grateful if you and Paul could sign the attached which reflects what we are now planning to do."

The attached (volume 3, page 204) was a letter which read in part:

"Following our recent discussions Watersheds and the Company have agreed that Watersheds will seek to raise funds for the Company of up to £750,000 by such method as may be available or appropriate in the circumstances.

"For the avoidance of doubt we would be grateful if you could sign on the next page to indicate your agreement to this amendment and to confirm that all other provisions of the Terms of Engagement remain unchanged including the level of fees due to Watersheds for Phase 1 at 3.53% of the funds raised plus VAT, subject to a minimum of £58,824 plus VAT."

12. The Defendants signed that letter on 8 December 2004 (volume 3, page 209). Almost immediately, however, there was the further reconsideration of the amount to be sought, and on 13 December Watersheds sent another letter, which was signed and returned by the Defendants on the same day. This letter (volume 3, page 254) began in similar terms to the letter of 1 December, save that the figure of £1 million was substituted for the previous figure of £750,000. It then continued:

"For the avoidance of doubt we would be grateful if you could sign on the next page to indicate your agreement to this amendment and to confirm that all other provisions of the Terms of Engagement remain unchanged including the level of fees due to Watersheds for Phase 1 at 3.53% of the funds raised plus VAT, subject to a minimum of £58,824 plus VAT (before discount).

"Terms of payment of minimum fee (VAT must be added to these amounts)."

There then followed a table of relevant events and amounts after and before discount, the first being a payment of £10,000, (£11,765 before discount), on signature of £250,000 Small Firms Loan Guarantee Scheme Agreement, and the total of the payments being £50,000 (£58,824 before discount).

13. In broad terms three different types of funding were within the contemplation of the parties; borrowing from a bank, an invoice discounting facility and equity finance. In the letter of 13 December 2004 equity finance was shown as providing, in two tranches, a total of £500,000. All three possible sources were pursued, and a series of business plans were prepared for provision to potential investors. I do not think it necessary to go into any detail about the work which Watersheds did, but Watersheds' case about it is conveniently summarised in Mrs Green's letter of 28 April 2006 (at volume 4, page 381). The third option was the least favoured by Mrs Green, because in her experience clients in similar situations at that time preferred to retain as much as possible of the share capital of their business in order to maximise their return when the business was sold. The Defendants, however, told me that their focus was on equity finance rather than any other form of funding. They also told me that Watersheds did not in fact do as much work as they claimed to have done.
14. In February 2005 the company was granted a loan of £250,000 by HSBC. On 25 February (volume 4, page 51) Watersheds invoiced the company for £10,000 in accordance with the agreement of 16 November as varied on 13 December 2004. That invoice was promptly paid by the company and Watersheds have given credit for the payment in their claim; £58,824 plus VAT equals £69,118.20, minus £10,000 equals £59,118.20.
15. That bank loan was made on the security provided by the Small Firms Loan Guarantee Scheme, a government scheme established in order to assist small businesses which faced difficulties in putting up security for a loan. In relation to such a loan the DTI required, amongst other things, a statement of means from the Defendants so that a check could be made to ensure that government assistance was not being provided to persons whose assets were such that they could and should provide their own security.
16. At a later date the Defendants needed to increase the company's agreed overdraft at the bank. In this regard they were called upon to provide personal guarantees. They told me, and I accept, that they were troubled about the fact that they were being asked to do so at a time shortly after they had in effect declared for the purposes of the Small Firms Loan Guarantee Scheme that they did not have assets sufficient to provide security. I deal further with this topic below, but to keep matters in some chronological order it is relevant to note here that on 16 February 2005 the Defendants gave guarantees in the sum of £30,000 each. On 26 September 2005 they gave guarantees for £62,500 each and between those two dates there was an e-mail from Mr Jones to Mr Dacosta on 22 July 2005 (volume 4, page 150) in which he said that he had checked with a friend who had:

"Confirmed that in these circumstances you can not give security over personal assets which have already been stated to be unavailable to support investment in the company. You can give an 'unsupported' personal guarantee."

17. With the exception of the bank loan of £250,000, to which I have referred, no funding was in fact obtained from any investor. The Defendants are critical of Watersheds, just as they have been critical of Icon's lack of success, and plainly feel that Watersheds made no or no sufficient effort. It seemed to me when listening to their evidence that they did not appear to have contemplated the possibility that their business may not have been as attractive to investors as they expected it to be. They put no evidence before me to suggest, let alone to prove, that there was ample funding available which a reasonably competent adviser could have assisted to bring to fruition. Mrs Green told me that the problem the company faced was that there was not a sufficiently well established history of trading to attract investors and that frequent revisions of the business plan were needed because the company repeatedly failed to achieve the sales forecast in earlier versions. I accept her evidence on this point, which can be summarised by the following extract from my notes:

"Very few funders will lend to a company with no track record so we needed to demonstrate some kind of track record. We never managed because the sales were consistently below what was forecast…. They had anticipated contracts being achieved and they were not." [Quotation unchecked.]

I also accept her evidence that Watersheds nonetheless persisted in their attempts to find investors, albeit without success. In my judgment, there is no convincing evidence to support the Defendants' assertion that Watersheds had failed to use appropriate diligence in going about their work.

18. To complete the narrative of relevant events, the company went into administration on 19 December 2005. On the same day (see volume 4, page 401) the assets and business of the company were sold to Screen FX Plc, for whom, as I understand it, both Defendants then worked for a time. Watersheds learned of the administration and on 7 February 2006 Mrs Green wrote to the Defendants (volume 4, page 366) referring to paragraph 11 of the terms of business and to their personal liability under the directors' guarantees. She enclosed an invoice for £58,824 plus VAT. There was no immediate reply from the Defendants, and Mr Jones sent a chasing letter on 8 March (volume 4, page 369). This too went unanswered. On 4 April Mrs Green wrote (volume 4, page 370) making clear, for the avoidance of any doubt, that Watersheds had exercised its option to declare a termination on insolvency. On 11 April she wrote to each of the Defendants calling upon them to honour their guarantees.
19. On 24 April 2006 the Defendants replied by e-mail to Mr Jones (volume 4, page 380) referring to "your recent correspondence". They requested details of a number of points "in order to assist us in considering your correspondence". Mrs Green replied on 28 April (volume 4, page 381) answering the inquiries whilst pointing out, in my view correctly, that they were somewhat irrelevant in view of the contractual provisions on which Watersheds relied and accepting that the payment of £10,000 received on 15 March 2005 could be treated as a payment on account of the minimum fee. Thereafter solicitors became involved on both sides and on 29 April 2006 these proceedings were commenced.
20. I do not think it necessary to go into a detailed history of the course of the proceedings. It is sufficient to mention only that there was a successful application by Watersheds for summary judgment on the claim and an appeal by the Defendants which was successful in part. The pleadings underwent amendment and some parts of the Defence were in effect struck out by orders of the court. No application was made to me by either party at trial for permission to make any further amendment.
21. In the result the following issues now have to be determined by me. (1) Whether the Defendants were induced to enter into the agreement by a misrepresentation concerning the minimum fee. (2) Whether the Defendants were induced to enter into the agreement by a misrepresentation or material nondisclosure concerning their personal liability under the guarantees. (3) Whether the agreement is unenforceable by reason of section 26 of the Financial Services and Markets Act 2000 (which I will refer to as FSMA 2000). (4) Whether the Defendants are entitled on their Counterclaim to damages for negligent advice.
22. On the first of those issues the Defendants' case is that they made the agreement in reliance on written representations by Watersheds and oral representations by Mrs Green that Watersheds were acting on a "no deal, no fee" basis which, as Mr Dacosta told me in evidence, they understood to mean that Watersheds would not be entitled to any fee unless and until they succeeded in assisting the company to obtain the whole amount of the funding mentioned in the terms of engagement, that is £2.5 million at the outset but ultimately £1 million. I accept Mr Watson-Gandy's submission that the burden is on the Defendants to prove on the balance of probabilities that such a representation was made, that it was false because in fact there was a minimum fee payable in certain circumstances, and that the false representation induced them to enter into the agreement.
23. The Defendants rely on the opening words of the terms of engagement, which I have quoted in paragraph 6 above, and similar words to be found on the Watersheds website. There is no clear evidence as to the entire content of that website at the material time because the only hard copies were taken at later dates. But it is accepted by Watersheds that their home page did say (volume 5, page 223):

"Watersheds Corporate Finance Accountants.

Watersheds is solely concerned with helping clients to buy and sell businesses and raise finance.

Watersheds works on a success only basis (no deal, no fee). This leads to:-

a partnership approach with clients

a results oriented culture

careful thought before accepting new clients.

Watersheds focuses on transactions of between £0 and £15 million.

Watersheds does not:-

prepare accounts

carry out audits

give tax advice

perform due diligence for third parties."

24. In addition the Defendants rely on what they, and in particular Mr Dacosta, say was said by Mrs Green. I therefore turn to consider, in more detail than I have done in outlining the sequence of events above, the evidence given before me.
25. I heard oral evidence from Mrs Green, from both Defendants and from Mr Davies. I also had evidence in the form of written statements from a number of witnesses including Mr Booth and Miss Seabright. There is a feature of the Defendants' evidence which I should mention immediately. On 18 March 2007 Mr Gentleman made (volume 2, page 66) what was in effect a statement of the evidence of both of them, even in relation to matters of which he had no personal knowledge, and Mr Dacosta, who had played a part in the preparation of the joint statement, made a short statement confirming that Mr Gentleman was correct. They each made later supplementary statements but these dealt only with some specific points. Thus it comes about that their principal written evidence is contained only in Mr Gentleman's statement. They told me, and I accept, that matters were dealt with that way on the advice of their then solicitors. Given that they were unrepresented before me, I was very anxious to ensure that they did not suffer any unfair disadvantage and I endeavoured, so far as I could, to ensure that neither was deprived of the opportunity to give any evidence he thought relevant to the issues in the case whether or not it was in the main witness statement. The Defendants were good enough in their closing submissions to acknowledge what they referred to as my patience in that regard. I have also endeavoured to ensure that I do not hold against the Defendants anything which might reasonably be explained by a simple misunderstanding of their instructions by legal representatives who are no longer acting for them.
26. Both Defendants told me, and I accept, that after their experience with Icon, which had cost them what was at the time a significant sum of money, they were keen to engage advisers who would work on a success-fee basis. Mrs Green accepted that she may have been told by Mr Davies in advance of the meeting that the Defendants were interested in working with someone who operated on success-fees. The evidence from Mr Davies supports the Defendants' case on this point, and I find that Mrs Green was told something to that effect. I accept Mr Davies' recollection that whilst he was present at the meeting Mrs Green "explained that Watersheds were able to provide their service on a contingent fee or success only basis", though he acknowledged that he could recollect only the gist of what was said and was not purporting to give the precise words.
27. Mrs Green and Mr Dacosta agree that at that first meeting on 28 October 2004 their discussion was on a broad-brush basis. They also agree, and I find as a fact, that Mrs Green did not commit herself to any specific figure for fees, but did say that Watersheds charged on a percentage basis and gave a likely range of percentages. They further agree, and I further find, that there was no discussion of Watersheds providing the services referred to in the terms of engagement as phases 2 and 3.
28. Mrs Green says that she told Mr Dacosta that Watersheds worked on a success-fee basis but did not discuss what that meant and did not state or imply that there were no circumstances of non-success in which a fee would be payable. She denies that she referred Mr Dacosta to the website. Her recollection is that she gave him a copy of what was variously described as a brochure or a folder, which comprised a card cover in which were inserted a number of summaries of recent work done for other clients. The cover is copied at volume 5, page 188. It describes Watersheds as corporate finance specialists and quotes some satisfied clients. The inside front cover bears very few words, including these: "Watersheds' fees are normally contingent on success."
29. Mr Dacosta says that Mrs Green told him that Watersheds were not the same as Icon. If they did not deliver, they would not get anything. He accepts that Mrs Green told him nothing about Watersheds' standard terms and conditions before sending the draft letter of engagement. He does not remember ever being given any brochure or folder, either at that meeting or at any later date, but says he was referred to the website, which both he and Mr Gentleman subsequently visited. Mr Gentleman also gave evidence to the effect that he never saw a brochure or folder.
30. Mr Dacosta went on to tell me that when he received the draft terms of engagement the following day he was unhappy about the inclusion of references to phases 2 and 3, which had not been mentioned at the meeting and which he regarded as premature. His evidence is that he rang Mrs Green to talk about this and was told by her that he would be able to cancel the agreement after phase 1 if he wanted to. He says he then rang again a day or two later and indicated that he was unhappy about the references to a minimum fee. He says Mrs Green acknowledged that this had not been mentioned at their meeting and told him:

"It is not what it appears. If we do not succeed we do not get paid. It is success-fee only." Both these conversations, he says, took place before the second meeting. Mrs Green says neither conversation took place.

31. So far as the second meeting on 2 November 2004 is concerned, it appeared in the end to be common ground that there had been no discussion of the terms of engagement at a time when everyone was present. It was also common ground that there was no such discussion at a time when Mr Gentleman was present. Mr Dacosta's evidence, however, is that after the main meeting and after Mrs Green had been shown round the offices he had a separate meeting with her at which she again told him that the agreement could be cancelled after phase 1. His evidence was that she kept responding to his concerns by saying that the terms of engagement were their standard terms and that everyone else signed them. He also said that Mrs Green went on to ask him what his problem was with the minimum fee and again told him that if Watersheds did not succeed they did not get paid. His evidence was that the effect of what Mrs Green said at this separate meeting was: "We would only pay for successful work; no deal, no fee." Again, Mrs Green denies any such conversation and says that at this meeting there was no discussion of the terms of the agreement. Her evidence was that she regarded her e-mail of 29 October as an invitation to talk through the terms of engagement if the Defendants wished to do so, but that nobody on behalf of the company did want to do so.
32. It will be apparent from the above that there is a conflict of evidence between Mrs Green and Mr Dacosta and that the most relevant conversations or alleged conversations were private to them. Mr Gentleman can only confirm what Mr Dacosta said to him about his conversations with Mrs Green and does not say he heard any relevant statements himself. Indeed, the first part of the meeting on 2 November 2004 was the only time he met or spoke directly to Mrs Green. Mr Davies, who struck me as a most impressive witness, stayed for only part of the first meeting on 28 October 2004, taking the view that his role was "to introduce them and to let them get to know each other". Thus the extent to which he was able to help the court was limited to his confirming that there was mention of a success-fee or contingent-fee basis and he accepted that there can be more than one type of such fees and "the devil is in the detail". I therefore have to assess the evidence of the two key witnesses, Mrs Green and Mr Dacosta.
33. Although Mr Watson-Gandy has been understandably critical of aspects of Mr Dacosta's evidence, and although I agree that at times Mr Dacosta was doing his best to avoid difficult questions, I do not think that either of those key witnesses was trying deliberately to mislead me. Mrs Green, though generally firm, clear and precise in her evidence, at times tended to phrase her answers in terms which struck me as being somewhat contrived; and she was shown in cross-examination rather to have overstated the work of Watersheds, and understated the work of Mr Booth and other employees of the company, in relation to the preparation of business plans. As to Mr Dacosta, I felt at times that he tended to get carried away in his account of relevant matters by his belief in the justice of his cause. For example, his allegation that Watersheds deliberately did very little work because they wanted to claim their minimum fee is one which, in my view, makes no commercial sense and is wholly unsupported by any evidence. I concluded that he had a capacity to convince himself - and had convinced himself - that things had been said and done which had not in fact happened. Having said that, I found them both to be doing their best to give honest accounts of what they remembered. In reaching my conclusion as to why they differ so markedly, and in preferring the evidence of Mrs Green on most of the important matters, there are a number of important points.
34. The first is that phrases such as "success-fee basis" in my view carry an ambiguity. They plainly convey that fees will be payable in the event of success and it is easy to see why they may initially be understood to mean that fees will be payable only in the event of success. But a moment's thought makes it obvious that such an understanding is likely to be mistaken, or at least might be mistaken. What is to happen, for example, in the event of near success, (say funding of £2.2 million), or if the only bar to success is the conduct of the Defendants themselves? In my judgment, the Defendants were happy to hear the reference to "success-fee" and did not think about or inquire further into the exact meaning of those words. Mr Dacosta said in evidence that he had been "very specific" in asking about the minimum fee and was mollified by the answers he received. On his account, however, being very specific would have entailed his denying that a minimum fee could ever be paid, and Mrs Green quite falsely telling him that their agreement did not provide for a minimum fee. On the view I take of the evidence as a whole, I am quite satisfied that Mrs Green did not tell any such falsehood. I do not think Mrs Green said anything specifically to make clear that Watersheds did charge in some circumstances of non-success. But I find that she said nothing which positively asserted that there could be and would be no charge unless complete success was achieved, and nothing which contradicted the clear written terms as to the payment of a minimum fee.
35. The second important point, which has particularly influenced my decision, is that I find it impossible to reconcile important parts of Mr Dacosta's account of what was said by Mrs Green with the fact that he and Mr Gentleman signed not one but three contractual documents which plainly stated that a minimum fee was payable in certain circumstances. Mr Dacosta accepted that the documents e-mailed to him on 29 October 2004 would have legal effect if they were signed. That was obviously the case, and I cannot accept Mr Gentleman's evidence that when he first saw the draft letter of engagement he did not really consider it to be a legal document, merely a letter which set out what Watersheds would do. I accept that Mr Dacosta did at some stage challenge Mrs Green about the inclusion in the terms of engagement of phases 2 and 3 and that she explained to him that the agreement could be cancelled after phase 1. I think Mrs Green's recollection is wrong in this regard because it seems to me incredible that there was no mention whatsoever of a substantial feature of the written agreement. Moreover, I accept Mr Dacosta's evidence that an explanation was given of the possibility of cancelling after phase 1 and that accordingly he was not troubled by the fact that he was signing a written agreement which referred to phases of work to which the Defendants did not agree. However, I reject his claims that Mrs Green said anything to contradict the written provisions as to minimum fee. I cannot think why it would be in her or her employer's interests to tell a client that the written agreement did not mean what it said, and that Watersheds would not seek payment of a minimum fee in the circumstances for which the agreement provides. For a corporate finance adviser the possibility that the corporation concerned might cease to exist, and the consequent need to provide for remuneration in such circumstances, must surely be a very important consideration.
36. Nor can I think Mr Dacosta and Mr Gentleman would have signed the agreement of 16 November 2004 without qualification if they had been given the assurances which Mrs Green is said to have given.
37. Having seen them over several days, it is clear that each of them is an articulate man who is well able to state his point of view. They had Mr Davies available at the end of the telephone if they wanted any advice, and he would have been the obvious person to turn to since it was he who had first told them that Watersheds worked on a success-fee basis. In addition, the Defendants had recently had their unhappy experience with Icon. Although I was not shown any documents relating to that agreement, the clear inference from the evidence is that they had felt they should not have had to pay the £5,000 but had been contractually obliged to do so. As a matter of common sense one would expect anyone in that position to adopt the adage "once bitten, twice shy" and to ensure thereafter that any contractual documents precisely reflected their understanding. Yet on their evidence the inclusion in this agreement of any reference to a minimum fee was wholly wrong, at best superfluous and with an obvious potential for causing trouble in the future. Any businessman in their position would surely want the written agreement to reflect the oral assurances he had been given and would ask for the references to a minimum fee to be deleted or at the very least qualified by a note referring to what had been said. Having seen the Defendants give evidence, I am satisfied that that is what they would have done if Mrs Green really had given the assurances they allege. As Mrs Green said in answer to one of Mr Dacosta's questions in cross-examination: "If you did not like the letter, you need not have signed it." Although given every opportunity, Mr Dacosta in his evidence was in my view unable to provide any sensible explanation of why, if he had been told unequivocally that there would be no minimum fee and the company would pay only for success, he had signed an agreement plainly referring to the payment in certain circumstances of a minimum fee.
38. The third important point by which I am also influenced is the inconsistency between the evidence which the Defendants gave before me and the earlier statements of their case. They accept that they read the documents sent on 29 October 2004 and Mr Dacosta accepts that he appreciated that if signed they would be of legal effect. In evidence they both told me that they had discussed what they say were the differences between what the document said and what Mrs Green had told Mr Dacosta. But that is not at all the picture painted in their pleaded case. In my view, the clear tenor of paragraphs 3.9 to 3.11 of the amended Defence is that the Defendants only received the written terms and conditions on 16 November 2004, and that the documents had not been read in any detail because the Defendants had no reason to think they would differ from the oral representations of Mrs Green. This is not merely a pleading point, and it does not arise because of the obvious error in the pleading as to the dates of the meetings. The Defendants now say in effect that they were raising objections to the terms of engagement from 29 October onwards and were repeatedly assured that those terms did not really mean what they said. But that is not how the case was pleaded and it was, as Mr Dacosta accepted, pleaded on the basis of their instructions at the time. Indeed the pleading does not even refer to the phone conversations which Mr Dacosta says he had with Mrs Green between 29 October and 16 November and which the Defendants rely upon as important.
39. Similarly, none of the Defendants' witness statements, all of which were prepared at times when they were represented by solicitors, makes any reference to the telephone conversations which Mr Dacosta says he had on 29 October 2004, on a later date before 2 November and at a yet later date when the amount of funding being sought was varied. Nor does any witness statement refer to the discussion of terms and conditions at the separate meeting which Mr Dacosta says he had after the main meeting on 2 November 2004. In my judgment, it is impossible to explain the absence of these matters on a basis of a misunderstanding of instructions or a failure to appreciate relevance. On the evidence which the Defendants gave me it is obviously a vital feature of their case that Mrs Green repeatedly told Mr Dacosta that the written terms and conditions did not mean what they said. I cannot understand how such a vital feature could have been omitted from the witness statements, and Mr Dacosta was unable to provide any convincing explanation. The conclusion to which I am driven is that the Defendants had probably put forward a different account to their solicitors.
40. I am fortified in my views on those three points by the evidence as to what was said when the terms of engagement were subsequently altered by reducing the amount of funding sought. As an obvious matter of simple arithmetic the stated minimum fee, which remained the same throughout, was less than 3.53 per cent of £2.5 million but more than 3.53 per cent of £750,000 or £1 million. I accept Mr Dacosta's evidence that he did say something about that fact in a telephone conversation with Mrs Green, because his evidence as to her explanation, (namely, that the amount of work which Watersheds would have to do would be much the same however much funding was sought), accords with the explanation she gave in her evidence on a different point. But, whatever was said, he and Mr Gentleman twice more signed to show their acceptance of the revised terms of engagement, in which of course there was no change to the provisions as to payment of the minimum fee if the company went into administration. One again, I cannot accept they would have done so if they had really been told that there were no circumstances in which a minimum fee could or would be payable.
41. Whilst dealing with those agreed variations I should say that I reject the Defendants' submission that the letter of 13 December 2004 had the effect of ending the provision for a single minimum fee and introducing provision for four activities, each with its specific value. In my judgment, it is clear that the variation was in this respect limited to introducing stage payments in certain circumstances of the unchanged minimum fee.
42. In those circumstances I find that Mr Dacosta was not misled by Mrs Green about the written provisions as to a minimum fee. I accept her evidence, and I find as a fact, that she did not tell him that the written terms and conditions did not mean what they said or anything else to that effect. I find that the reason why the Defendants' witness statements do not refer to the key conversations now alleged is that conversations in those terms did not take place. Although Mrs Green did refer to a success-fee, I find that the use of that label did not so misstate the nature of the agreement as to override the written terms and I find that she gave the Defendants ample opportunity to read and consider for themselves Watersheds' standard terms and conditions. On an objective view it was, in my judgment, obvious to anyone who read the documents sent on 29 October 2004 that the references to a success-fee were not the sole provisions as to payment and that the agreement into which the Defendants were being invited to enter did provide for a minimum fee to be payable in certain circumstances.
43. I think it probable that they chose to focus on the references to a success-fee because they did not think through the circumstances in which a minimum fee would be payable, probably because of their general optimism about the likely success of their business. That is, in my view, apparent from the way in which throughout these proceedings they have repeatedly emphasised the opening words of the letter of engagement whilst ignoring all that follows therein about minimum fees. But be that as it may, they willingly entered into an agreement in which the provisions as to a minimum fee were clear if they had chosen to heed them and, in my judgment, they were not induced to do so by the alleged misrepresentation.
44. In the light of those findings of fact I do not think I need refer to all or even most of the authorities cited to me by Mr Watson-Gandy. I should however mention Peekay Intermark Limited v Australia and New Zealand Banking Group Limited [2006] EWCA Civ 386. That case supports the proposition that even if a false statement has been made it can be nullified if it is effectively corrected so that the representee is aware of the true position before he enters into the agreement. Moore-Bick LJ, giving the judgment of the Court of Appeal Civil Division, said at paragraph 43:

"…the true position appeared clearly from the terms of the very contract which the Claimant says it was induced to enter into by the misrepresentation. Moreover, it was not buried in a mass of small print but appeared on the face of the documents as part of the description of the investment product to which the contract related. It was accepted that a person who signs a document knowing that it is intended to have legal effect is generally bound by its terms, whether he has actually read them or not."

Although the facts of that case were of course different from the present, not least because that was a case in which the terms and conditions had not been read, I accept Mr Watson-Gandy's submission that it is in some ways analogous to the present case and that the written terms of engagement and draft engagement letter provided these Defendants with their first opportunity to satisfy themselves that the terms were consistent with the broad description "success-fee basis" and were satisfactory to them.

45. Turning to the second issue, a similar conclusion must in my judgment be reached about the Defendants' evidence that they did not know they were signing personal guarantees on 16 November 2004. In evidence Mr Dacosta initially said that he understood he was guaranteeing the performance of the company under the terms of the engagement: "If the company had to pay a bill and did not do so, we would pay it." Later, however, he gave a different account, to the effect that he understood that he was only guaranteeing that he and Mr Gentleman would conduct themselves properly as directors. Mr Gentleman's evidence was that he understood he was guaranteeing that the company would act properly in relation to any proposed funding and would do nothing to obstruct a potential provision of funding. On those rather divergent accounts it seems to me that they would at the very least have wanted to clarify exactly what the provision meant, particularly in view of the emphasis they both placed on wanting to avoid any personal liability. But there is no suggestion that they asked for any clarification at all. I agree with them to the extent that this paragraph in the terms of engagement could helpfully have included the words "personal guarantee". But I reject the allegation that this was a deliberate use of misleading language by Watersheds, because the written terms imposing personal liability are, in my judgment, clear enough to be able to be understood by anyone in the position of a company director seeking assistance in raising £1 million or more of business funding. I suspect, although Mr Gentleman denied the suggestion to this effect, that the Defendants in reality gave little thought to the implications of this provision, believing that their company would be successful. Be that as it may, I do not accept their evidence that they read the provision and misunderstood it.
46. On this issue also I am influenced by the absence of anything contemporaneous in writing to support the Defendants' case. Each said in evidence that he was stunned to receive the demand for payment under the guarantee (volume 4, page 366) and wondered what guarantee Watersheds meant, but they did not immediately write communicating that astonishment to Watersheds, as one would expect them to have done if the circumstances were as they now say.
47. Moreover, it is to be noted that the Defendants' case on this second issue has undergone a significant change. Their pleaded case is to the effect that they did not believe the letter of engagement contained a personal guarantee, apparently because they did not check, and could not have been expected to check, to see whether it contained any unwelcome surprises. Their complaint was that no one drew to their attention the fact that they were taking on a personal liability. Their Defence was therefore based on non-disclosure rather than misrepresentation. In evidence, however, they accepted that they had read the documents which Mrs Green sent, and they now put their case on the basis that they thought the guarantee related to their obligations as directors rather than any personal financial liability.
48. I should mention for completeness that there had at one stage in the proceedings been an apparent issue as to whether the relevant paragraph does in law amount to a personal guarantee, but no such point has been pursued before me, the Defendants no doubt accepting, rightly, that it does.
49. The legal basis of their Defence is far from clear. The amended Defence asserts that the Defendants would not have signed the agreement if they had appreciated that it imposed a personal liability on them. In paragraph 3.16 it asserts:

"Having 'pitched' their services to the Defendants as being on the basis of 'no deal, no fee', and having, prior to the date on which the Engagement Letter was signed, already started to act as a financial adviser to the Companies in whom the Defendants (as representatives of the Companies) could and did place trust and confidence, the Claimant was duty bound to draw to the attention of and/or explain to each of the Defendants in the clearest possible terms the existence and effect of the provisions in the Claimant's contract terms which had the potential effect pleaded in paragraph 3.15 above. In proffering the contract terms for signature in the circumstances pleaded above without doing so, the Claimant acted unconscionably and did not act fairly and/or consistently with the general duty owed by any creditor to any surety to disclose unusual features affecting the transaction and/or to correct any mistake or misapprehension on the part of the surety of which the creditor has knowledge before the contract is made."

50. No authority for that sweeping assertion has been put before me. No contractual relationship existed between the parties until the terms of engagement were signed on 16 November 2004 and, although Watersheds had before that date impressed the Defendants with their approach, there has been no evidence to suggest that the Defendants were in some way already especially trusting of or reliant upon Watersheds. On the evidence there is no suggestion that Mrs Green or anyone else had any knowledge of any relevant misapprehension on the part of the Defendants. It seems to me that Watersheds were no more duty bound to draw the implications of the contractual terms to the attention of the Defendants than any business person would be when simply putting forward proposed terms of engagement for consideration by a prospective client. Mrs Green was, in my view, entirely justified in adopting the approach she did, which she put in these terms:

"I deal with businessmen, not uneducated people. I assume they will read the documents I send them and, if they do not understand the documents, will seek advice."

The Defendants were free to take advice if they wished. They were free to reject the terms if they did not like them. They in fact did neither and, in my judgment, they cannot now complain that Watersheds should have gone through the contractual documents, highlighting and warning about provisions which would in certain circumstances have unwelcome consequences. I accept the submissions of Mr Watson-Gandy, relying on Chitty, 30th edition, paragraph 6-014 and the cases there cited, that in general non-disclosure does not amount to misrepresentation, and that there is nothing here to put the case into a special category such as to give rise to a special duty of disclosure.

51. Finally in relation to the first and second issues in the case, I refer again to clause 15 of the terms of business, which I have set out at paragraph 8 above. Mr Watson-Gandy submits that the terms of that clause make it impossible in law for the Defendants to succeed in their allegations of misrepresentation. Whether or not he is correct in the full extent of his submissions, I accept that it is possible to exclude by a contractual term any claim for misrepresentation (see Toomey v The Eagle Star Insurance Company (No 2) [1995] 2 Lloyd's Rep 88). In the circumstances of this case clause 15 of the terms of business, in my judgment, does have that effect.
52. It follows that on the evidence I have heard the Defendants have failed to persuade me on the balance of probabilities that the agreement was obtained either by the misrepresentation or by the nondisclosure alleged. There was, in my judgment, no misrepresentation either about the minimum fee or about the guarantees, the relevant contractual provisions being clearly stated in the written terms, and the Defendants were not induced by any such misrepresentation or nondisclosure to sign the agreement. In my judgment, subject to the issue of unenforceability, to which I must now turn, the Defendants are bound by the agreement into which they freely entered.
53. Section 19 of FSMA 2000 imposes what is referred to as "the general prohibition". No person may carry on a regulated activity in the UK or purport to do so unless he is an authorised person, which it is common ground Watersheds were not, or an exempt person. Contravention of the general prohibition is a criminal offence under section 23. Most significantly for present purposes, section 26(1) provides:

"An agreement made by a person in the course of carrying on a regulated activity in contravention of the general prohibition is unenforceable against the other party."

54. However, even if an agreement is unenforceable by reason of section 26, section 28 gives the court a discretionary power in, so far as material to the present case, the following terms:

"(3) If the court is satisfied that it is just and equitable in the circumstances of the case, it may allow --

(a) the agreement to be enforced ...

"(4) In considering whether to allow the agreement to be enforced ... the court must --

(a) ... have regard to the issue mentioned in subsection (5).

"(5) The issue is whether the person carrying on the regulated activity concerned reasonably believed that he was not contravening the general prohibition by making the agreement."

55. Although the agreement between the parties related both to the company and to the Defendants as individuals, it is, in my judgment, to be treated as a single and indivisible agreement for the purposes of sections 26 and 28.
56. The first question I have to decide is whether under the agreement between the parties Watersheds were carrying on a regulated activity. Section 22 of FSMA 2000 defines a regulated activity as one which is an activity of a specified kind, is carried on by way of business and relates to a specified investment. The second of those three criteria is plainly satisfied in this case. In relation to the other two criteria, "specified" means specified in an order made by the Treasury, and for present purposes it is necessary to consider some of the provisions of the Financial Services and Markets Act (Regulated Activities) Order 2001, to which I shall refer as RAO. Article 4 of RAO provides in part:

"The following provisions of this Part specify kinds of activity for the purposes of section 22 of the Act (and accordingly any activity of one of those kinds, which is carried on by way of business, and relates to an investment of a kind specified by any provision of Part III and applicable to that activity, is a regulated activity for the purposes of the Act)…

"(3) …each provision specifying a kind of activity is subject to the exclusions applicable to that provision (and accordingly any reference in this Order to an activity of the kind specified by a particular provision is to be read subject to any such exclusions)."

57. The provision which is said by the Defendants to apply to the services which Watersheds provided is article 25, which is titled "Arranging Deals in Investments" and the material parts of which provide:

"(1) Making arrangements for another person (whether as principal or agent) to buy, sell, subscribe for or underwrite a particular investment which is

(a) a security ...

is a specified kind of activity.

"(2) Making arrangements with a view to a person who participates in the arrangements buying, selling, subscribing for or underwriting investments falling within paragraph (1)(a) … is also a specified kind of activity."

58. Article 25 is followed by a number of exclusions, including the following:

"Arrangements not causing a deal

26. There are excluded from article 25(1) arrangements which do not or would not bring about the transaction to which the arrangements relate.

"Enabling parties to communicate

27. A person does not carry on an activity of the kind specified by article 25(2) merely by providing means by which one party to a transaction (or potential transaction) is able to communicate with other such parties."

59. "A security" is defined by article 3 and article 76 in terms which include shares or stock in the share capital of any body corporate. As I have said, one of the forms of funding which was contemplated by the parties was equity funding which, whatever its precise form, would involve the sale of shares in the company. However, there is an issue as to whether Watersheds were in fact making arrangements which fall within article 25 and, even if they were, there are the exceptions to article 25 which would then need to be considered.
60. The first issue is this: did Watersheds "make arrangements" for the company to sell shares? Although many of the words and phrases used in the RAO are defined, "making arrangements" is not. The phrase has however been the subject of judicial analysis by Mr Jonathon Crow QC, sitting as a deputy judge of the High Court, in the case of Re Inertia Partnership LLP [2007] 1 BCLC 739. I respectfully agree with what he said at paragraph 39 of his judgment:

"39.1. The word 'arrangements' is, depending on the context, capable of having an extremely wide meaning, embracing matters which do not give rise to legally enforceable rights.

39.2. In articles 25 and 26, the word 'arrangements' is used in contradistinction to the word 'transaction'.

39.3. In article 26, the word 'transaction' is plainly a reference to the purchase, sale, etc. of shares contemplated by article 25.

39.4. As such, a person may make 'arrangements' within article 25 even if his actions do not involve or facilitate the execution of each step necessary for entering into and completing the transaction (i.e. the purchase, sale, etc of the shares.

39.5. The availability of the exception in article 26 is essentially a question of fact. As a matter of causation, did the arrangements bring about the transaction (i.e. the purchase, sale, etc of the shares)?"

61. On the evidence in that case the learned deputy judge found that in one respect the Inertia Partnership (referred to as TIP) had done no more than make an introduction of one company, Vivadi, to another, Porterland. In his paragraph 40 he said:

"That introduction is in my judgment too nebulous and too remote an act to fall within the concept of 'making arrangements' within RAO article 25. Such an introduction in these circumstances is not an 'arrangement' in any meaningful sense, for two reasons: first, because it does not necessarily result in anything further happening as between Vivadi and Porterland, let alone between any consumers and Vivadi or Porterland; and secondly, because any further steps that might be taken following the introduction were not within TIP's power to effect or direct. As such, the introduction did not involve TIP in any violation of the general prohibition under [section 19 of the 2000 Act]."

62. Mr Watson-Gandy submits that the same reasoning can be applied to the present case. At most, Watersheds identified potential investors and assisted the company to prepare and present the business plan and financial information in such a way as would be most likely to attract interest. But Watersheds were powerless to bring about actual interest, powerless to achieve a particular outcome to any meeting that might take place between the company and the investors and powerless to control the terms of any transaction that might result. However good the business plan may have been, there was nothing Watersheds could do to make a potential investor be attracted by it.
63. The contrary submission of the Defendants, in a nutshell, is that Watersheds were engaged to act as financial advisers, would not only effect introductions but would also co-ordinate discussions and would inevitably be actively involved up to the moment when an investment was made because that was the point at which their fee would become payable.
64. I have reflected carefully on the Defendants' arguments, which were presented with clarity, but in the end I accept Mr Watson-Gandy's submission. As I indicated in argument, I regard the facts of this case as clearly distinguishable from the facts in Re Inertia Partnership, because here there is more than a bare introduction to a third party. Watersheds were required to use their experience and expertise to assist the company to ensure that all necessary material was provided to investors in the most attractive form so as to assist or promote a successful outcome to any meeting. Nevertheless, in my judgment, what was contemplated by the terms of engagement involved Watersheds at most trying to effect introductions and to assist the company in meeting potential investors in order that the company could try to reach agreement with those potential investors as to a transaction. I accept the submission that Watersheds were not able in any real sense to influence whether or not an investment was made in the company. I conclude that Watersheds were not undertaking activity which was of a kind specified by article 25(1).
65. I am fortified in that conclusion by the guidance given in the Financial Services Authority's Perimeter Guidance Manual, paragraph PERG 2.7.7B of which states in this regard:

"The activity of arranging (bringing about) deals in investments is aimed at arrangements that would have the direct effect that a particular transaction is concluded (that is, arrangements that bring it about)."

66. Even if I am wrong about that, Mr Watson-Gandy submits that no arrangements were in fact made, no funding was ever provided, (which is indeed the Defendants' complaint), and accordingly any arrangements which Watersheds might be found to have made did not bring about the transaction to which they related so that the article 26 exclusion of article 25(1) applies. I did initially wonder whether that was the correct interpretation, but I have been persuaded that it is. In my judgment, even if there were arrangements capable of falling within the scope of article 25(1), they did not cause a deal and so were excluded by article 26.
67. I then have to consider whether Watersheds' work fell within article 25(2). This article received comparatively little mention in the judgment in Re Inertia Partnership, though it is to be inferred that the learned deputy judge regarded the bare introduction in that case as falling outside its provisions. As I have said, the facts here are different from the facts in that case and the inclusion of the words "with a view" makes the scope of the article wider than the scope of article 25(1).
68. In relation to article 25(2), PERG 27.7.7B, which I have quoted in part above, continues in these terms:

"The activity of making arrangements with a view to transactions in investments is aimed at cases where it may be said that the transaction is 'brought about' directly by the parties. This is where this happens in a context set up by a third party specifically with a view to the conclusion by others of transactions through the use of that third party's facilities. This will catch the activities of persons such as exchanges, clearing houses and service companies (for example, persons who provide communication facilities for the routing of orders or the negotiation of transactions. A person may be carrying on this regulated activity even if he is only providing part of the facilities necessary before a transaction is brought about."

69. Had it not been for that guidance, with its emphasis on the provision of facilities for others as opposed to assisting one party, I would have been inclined to think that article 25(2) did apply to Watersheds' activity in seeking to assist the company to raise equity finance. As it is, I am persuaded that it does not.
70. Even if I am wrong about that, I accept Mr Watson-Gandy's submission that article 25(2) would in any event be excluded by article 27. By agreeing to co-ordinate discussions Watersheds were in my view merely providing the means by which the company and a potential investor would be able to communicate.
71. In view of my conclusions on other points I do not find it necessary to deal specifically with the submissions made to me about articles 67 and 70.
72. For those reasons Watersheds, in my judgment, were not engaging in specified activities and for that reason were not in breach of the general prohibition.
73. In case I am wrong about that, I go on to consider whether, if they were engaging in specified activities, Watersheds were an exempt person under FSMA 2000, section 19. Section 326 of the Act gives the Treasury the power to designate professional bodies for the purposes of part 20 of the Act. One such body is the Institute of Chartered Accountants in England and Wales (ICAEW), which regulated Watersheds at all material times. Section 327 then exempts a person (P) from the general prohibition if the conditions set out in the section are satisfied. Those conditions are as follows:

"(2) P must be --

(a) a member of a profession; or

(b) controlled or managed by one or more such members.

"(3) P must not receive from a person other than his client any pecuniary reward or other advantage, for which he does not account to his client, arising out of his carrying on any of the activities.

"(4) The manner of the provision by P of any service in the course of carrying on the activities must be incidental to the provision by him of professional services.

"(5) P must not carry on, or hold himself out as carrying on, a regulated activity other than --

(a) one which rules made as a result of section 332(3) allow him to carry on; or

(b) one in relation to which he is an exempt person.

"(6) The activities must not be of a description, or relate to an investment of a description, specified in an order made by the Treasury for the purposes of this subsection.

"(7) The activities must be the only regulated activities carried on by P (other than regulated activities in relation to which he is an exempt person).

"(8) 'Professional services' mean services --

(a) which do not constitute carrying on a regulated activity, and

(b) the provision of which is supervised and regulated by a designated professional body."

74. It is, in my judgment, clear on the evidence that Watersheds do supply professional services as defined in that article. For example, assisting clients to seek non-specified finance (in this case two of the three types of funding which were sought), which will of itself involve checking, revising and presenting financial statements provided by the client. On the other hand, their advertising material makes clear that they do not provide many of the core services of a conventional firm of chartered accountants. Indeed the tenor of the advertising is that they are significantly different from such a conventional firm. Mrs Green in her evidence emphasised that she and the other partners are qualified chartered accountants and identified the sort of accountancy work which Watersheds do and did in this case, but she agreed that they only do such work as part of their corporate finance work. They would, I infer, turn away a client who came to them seeking only conventional accountancy services.
75. Subject to certain exceptions which are not material to this case, a designated professional body (DPB) licence exempts a firm from the general prohibition and so dispenses with the need for authorisation by the Financial Services Authority provided the licensed firm complies with the requirements of the licence. A licence is available to any firm which has one or more chartered accountants as its principals, and the uncontradicted evidence here is that Watersheds did.
76. The ICAEW handbook provides, in schedule 3, relevant guidance on the meaning of "in an incidental manner". Whether or not Watersheds complied with that guidance is plainly relevant to issues which I have to consider. Paragraphs 2 and 3 of the guidance are in the following terms:

"2. The focus is on how the regulated activity relates to the professional service from the standpoint of the firm. It is the sum of the individual transactions comprising the service which falls to be assessed, in relation to the professional activity of the firm.

3. In order for a firm to satisfy the Institute as to its provision of regulated activities in an incidental manner it should be able to show that:

(a) it is mainly concerned with providing professional services other than regulated activities; and

(b) the provision of the regulated activities is not isolated from the firm's other activities such that there is in effect a separate business (this would however not exclude a licensed firm from operating specialist departments within it)."

77. Guidance is also provided by the Financial Services Authority in its publication "Professional Firms: The Need for Authorisation under the FSMA 2000", a copy of which was helpfully added to the trial bundle by the Defendants. This guidance makes clear that for the purposes of section 327(4) professional services are services which do not constitute carrying on a regulated activity, and the provision of which is supervised and regulated by a DPB. Paragraph 1.10.1 is in these terms:

"The FSA considers that to satisfy the condition in section 327(4) of the Act regulated activities cannot be a major part of the practice of the firm. The FSA also considers the following further factors to be among those that are relevant: (i) the scale of regulated activity in proportion to other professional services provided; (ii) whether and to what extent services that are regulated activities are held out as separate services; and (iii) the impression given of how the firm provides regulated activities, for example, through its advertising or other promotions of its services."

78. It is relevant to note also the guidance given in the same publication on non-realtime financial promotions, eg written communications and websites, by professional firms. Article 55(A) of the Financial Promotion Order has the effect of permitting a DPB to publish such material provided it contains a specified statement and is limited in its content to the matters referred to in paragraph 1.26.11(g) of the guidance, which is in the following terms:

"A financial promotion made under article 55(A) must contain a statement in the following terms: 'the company is not authorised under the FSMA 2000 but we are able in certain circumstances to offer a limited range of investment services to clients because we are members of [the ICAEW]. We can provide these investment services if they are an incidental part of the professional services we have been engaged to provide'. The financial promotion may also set out the part XX activities which the person is able to offer to his clients, provided it is clear that these are the incidental services to which the statement relates."

79. The Defendants point to the fact that the advertising material published by Watersheds did not include the requisite statement of the limitations on its services. That is a relevant factor, but there is no evidence which could lead me to conclude that the notice was deliberately omitted for the purpose of misleading clients. In any event Mr Watson-Gandy was entitled to make the point that the Defendants have never pleaded any case based on breach of this provision.
80. Even if, contrary to my finding, Watersheds were undertaking regulated activity, such regulated activity was, on the evidence I have heard, limited to their work in respect of assisting the company to raise equity finance. But the uncontradicted evidence of Mrs Green also shows that equity finance was, in this case and in the case of other clients, only one of the forms of fund-raising with which Watersheds were concerned and was the least favoured of the various options. Moreover, Mrs Green was again uncontradicted in her evidence that the amount of time spent by Watersheds identifying potential equity finance investors and introducing them to the company was much less than the time spent on other accountancy work. The natural inference from that evidence, in my view, is that the allegedly regulated activities formed only a minor part of the services provided by Watersheds and I have heard no evidence which could or does lead me to a different conclusion. In addition, I am satisfied that any such regulated activity was in no sense a separate business of Watersheds, or even one carried out by separate staff. It was just part of the overall service.
81. The Defendants' submission is that in reality Watersheds were not engaged by them to do anything other than what they contend was regulated activity, so that there was nothing to which that regulated activity could be incidental. In my view, that submission overlooks two important points: the fact that even for this client Watersheds also sought to assist the company to raise non-specified forms of finance and the need to look at the totality of Watersheds' practice.
82. On the evidence I have heard, my conclusion is that even if Watersheds had been carrying out regulated activity, that activity was incidental to their provision of professional services.
83. Finally, even if I am wrong in all my above conclusions and Watersheds were in breach of the general prohibition, I would regard this as a proper case to exercise my discretion under section 28 of FSMA 2000 to permit Watersheds to enforce the agreement. Firstly, Mrs Green told me that she believed at all material times, and indeed still believes, that Watersheds were exempt. That was the advice she had from her principal, who told her that he had made a number of calls to the ICAEW and had been advised by them that a DPB licence would suffice to cover all Watersheds' activities, and she believed it to be correct. She was entitled to rely upon what she was told and it was, in my view, reasonable for her to do so. Moreover, her evidence before me demonstrated an awareness and broad understanding of the most relevant provisions of the complicated legislation. I do not think she simply took her superior's word and thought no more about it. I accept her evidence on this point, which indeed was not challenged. Since she is the senior person most actively involved in the work with the Defendants, I think it right to regard her as the person whose belief is relevant for the purposes of section 28(5).
84. I then have to consider the other circumstances of the case. The following are, in my view, relevant.

(i) Firstly, if, contrary to my above conclusions, the unenforceability defence is well-founded, the Defendants are of course entitled to rely on it. But when it comes to an exercise of my discretion it is relevant to note that none of their criticisms of Watersheds have anything to do with whether or not Watersheds were acting in breach of the general prohibition. Their real complaints are that Watersheds misled them about the fees which would be charged, failed to alert them to their potential personal liability and then did little or nothing to earn their fees, failing to secure any funding and so causing the failure of the Defendants' business. The unenforceability defence was not raised until the proceedings had been underway for some time.

(ii) Secondly, although the Defendants now complain that Watersheds' advertising material did not include an appropriate warning as to the limits on their work and say that the inclusion of such a warning would have deterred them from entering into any agreement with Watersheds, their evidence on this point did not persuade me. Mr Dacosta told me that he had been impressed by Mrs Green's attitude and Mr Gentleman told me he was similarly impressed. I find it difficult to accept that they would nonetheless have decided not to engage Watersheds if the warning notice had been published.

(iii) Thirdly, no investment was in fact made and so no investor lost money as a result of any breach of the general prohibition. Moreover, the company was never intended to be an investor, it was to be the beneficiary of investment.

85. I therefore conclude that the agreement is not unenforceable, and that Watersheds have proved their entitlement to the sum claimed, together with the appropriate interest, a matter on which I will hear submissions.
86. I turn finally to consider the Counterclaim. Paragraphs 21 to 28 of the amended Defence and Counterclaim allege that in about March 2005 Mr Jones, acting on behalf the Claimant, recommended that the Defendants should sign personal guarantees in favour of HSBC Bank. They did so and thereby incurred a contingent liability of £67,500 each. That at least is what paragraph 24 says, but paragraph 26 says that the loss for which they are entitled to be compensated is:

"Such sum as will fully discharge their liabilities under the personal guarantees which they have given to HSBC Bank, being a minimum of £67,500 each plus such further interest and/or charges as the bank may apply."

The cause of action relied upon in paragraph 25 is as follows:

"In advising the Defendants to sign the guarantees Mr Jones, and therefore the Claimant, was negligent. Having regard to the financial status of the Companies and the lack of success which the Claimant had had in arranging any substantial equity funding since November 2004, Mr Jones ought to have advised the Defendants not to make themselves personally liable for the liabilities of the Companies."

87. The Defendants were initially unable to tell me where the figure of £67,500 came from, though later it was said to be a typing error for £62,500. Nor were they able to produce any documents for HSBC Bank, except the two which appear in the trial bundle at volume 2, pages 104 and 105. These are copies of letters, both dated 15 December 2005, from HSBC to Mr Gentleman, (there were no doubt identical letters to Mr Dacosta), demanding immediate repayment of £30,000 under a guarantee dated 16 February 2005 and £62,500 under a guarantee dated 26 September 2005.
88. As I have said, Mr Jones did not make a statement in this case before his death and so the court has no evidence from him. There is, however, the important e-mail from him to Mr Dacosta, to which I have already referred, and which no one suggests is inaccurate in its contents. Otherwise the evidence relevant to the Counterclaim necessarily comes only from the Defendants.
89. Their evidence was very far from clear and I found it necessary on several occasions to intervene in an attempt to establish what exactly their case was. In the end, and making generous allowances for the fact that their pleadings are far removed from their evidence, I understood their case to be as follows.

(i) In February 2005 they signed the first guarantees. They spoke to Mr Jones at that stage only on the topic of their concern about having recently received the bank loan of £250,000 secured under the Small Firms Loan Guarantee Scheme.

(ii) When called upon to sign the second guarantees they spoke to Mr Jones both about their previous concern and about their anxiety over entering into personal liability for such substantial sums.

(iii) Although Mr Jones' e-mail of 22 July 2005 (volume 4, page 150) appears inconsistent with the above, the explanation is that the bank began pressing for the second guarantees as early as July, notwithstanding that they were not in fact signed until late September. No documentary evidence to support this was put before me.

(iv) When asked whether they should take on this personal liability, Mr Jones encouraged them to do so, saying words to the effect: "Do not give up, we [that is Watersheds] are almost there, we will sort something out."

90. Although that is the way the case appeared to me to be put, Mr Dacosta's initial evidence about what Mr Jones said was that Mr Jones told him he was faced with a stark choice. If he did not sign the personal guarantee the bank would not lend any more money by way of overdraft; and, if the bank did not lend any more money, the company would not be able to continue.
91. Even without any evidence from Mr Jones, it is in my view clear that the Defendants have failed to prove their claim. To succeed, they would have to establish on the balance of probabilities that Mr Jones, in circumstances in which he owed them a duty of care, negligently gave them positive advice to enter into the personal guarantees with the bank. But, in my view, their own evidence shows that he did no such thing. On Mr Dacosta's evidence all he did was to summarise their position, entirely accurately, and indicate that if they wanted to keep the business going they had no practical alternative but to sign the guarantee. Far from being recommended to sign the guarantees, the Defendants were simply being told of the stark choice which must in any event have been obvious to them. Moreover, in his closing submissions Mr Gentleman accepted that Mr Jones did not mislead them about their personal liabilities, but they "believed we were going places and that the equity finance would be raised".
92. In those circumstances my finding is that the Defendants appreciated that they were being called upon to enter into personal guarantees in substantial amounts, did not want to do so if they could avoid it, but preferred to take that course rather than put themselves in a position where they would be unable to continue with the business of the company. It is clear that they had great faith in their products and, whilst no doubt they were encouraged to hear that Watersheds remained optimistic about raising equity finance, I do not believe that was the only reason why the Defendants made the choice they did. They have fallen far short of persuading me that Mr Jones gave them negligent advice, let alone that they acted to their detriment in reliance on such negligent advice.
93. That finding of fact makes it unnecessary for me to consider in detail the other difficulties which the Defendants would face in trying to prove their Counterclaim, such as the absence of any evidence as to what has happened in the three years since the bank wrote on 15 December 2005 calling upon them to honour their guarantees.
94. I am very conscious that the decisions I have made will come as a bitter blow to the Defendants. They are essentially decent men whose hopes for a successful business were disappointed and who now face substantial financial liabilities. I am sympathetic to the human realities of their situation, but for the reasons I have given I am clear in my conclusions against them. There must therefore be judgment for the Claimant on the claim and the Counterclaim must be dismissed. I will hear further submissions as to the exact form of the order.