England and Wales High Court (Technology and Construction Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
TECHNOLOGY AND CONSTRUCTION COURT
HH Judge Thornton QC

		St Dunstan's House, 133 -137 Fetter Lane, London, EC4A 1HD
		26 September 2005

 


HH Judge Thornton QC:

1. Introduction

1. This judgment is concerned with a dispute between two men, Mr Ian Watson and Mr David Laing, who have been friends and business associates for many years but who have fallen out over their most recent business collaboration. The value of this dispute has yet to be quantified but it could well exceed £2 million.
2. Mr Watson is the controlling shareholder of the claimant, Burkle Holdings Limited ("Burkle") and he owns about 85% of the shares in this company. Burkle is registered in England. For many years before his retirement on 30 April 2000, Mr Watson practised as an accountant but much of his commercial activity was involved in investment business, particularly in property development, which he carried out in his own name or through Burkle. He is also the beneficial owner of European Securities Limited ("ESL"), a company registered in the Isle of Man, which he uses as a vehicle for conducting some of the investment business undertaken by him. That company is run by a nominee administrative director, as is usual with off-shore investment companies undertaking investment business. Following his retirement, Mr Watson sold his house in England, having previously bought a house in Spain where he now lives.
3. Mr Watson met Mr Laing in the early 1970s. Mr Laing is an architect by profession and a member of the Laing family that has been involved for many years in construction and development through various Laing construction and development companies. Mr Laing has himself been involved in property development for many years through various companies he is, or has been, a director of including Laing Properties Plc and Eskmuir Plc. His architectural practices, of which two remain active, were used as an adjunct to his development interests. He has also undertaken investment business in property ventures he has been associated with.
4. Mr Watson and Mr Laing over the years have been involved in a number of successful investment business ventures and their collaboration, in consequence, has enabled both to benefit considerably both personally and through their rESLective investment vehicles. There was evidence of at least 7 ventures in the period between 1975 and 1999. In each of these ventures, Mr Watson provided finance by loaning money to the development vehicle, usually a Special Purpose Vehicle or SPV, and taking a shareholding in that company, usually a 25% or a 50% stake depending on the structure of the venture. This shareholding was usually held by Mr Watson in his own name. Mr Laing's involvement in these ventures was as an investor or architect and, on occasion, as both.
5. It was not surprising, therefore, that Mr Laing approached Mr Watson in 1999 and offered him the opportunity to become involved in a further business venture, being the venture about which this dispute is concerned. It involved the acquisition of a large 22-acre site at Glory Mill, Wooburn Green, High Wycombe, Buckinghamshire. Mr Watson accepted that offer and this action concerns the dispute between the two protagonists as to the basis upon which it was agreed that Mr Watson became involved in the development.
6. One of Mr Laing's architectural practices is Sanders Laing which comprises a partnership of himself and Mr Richard Sanders. Mr Sanders had been presented with an investment opportunity to develop the Glory Mill site. This site was a large one and it was to be developed in two separate parts. The first part of the site, having been acquired from the vendor, would immediately be sold on to a company called Taywood Ltd for residential development. The remainder of the site would be developed commercially, a development that would involve both the building of new buildings and the refurbishment of an existing property. The acquisition of the site and the commercial development would be funded by the money paid by Taywood Ltd for the part of the site to be residentially developed, by a loan from a bank, Leopold Joseph, and by loans from private investors led by Mr Laing and Mr Sanders.
7. The development would be carried out by an SPV formed for this purpose, New Federal Inc ("NFI"), which was registered in the BVI and managed in Cyprus. The necessary contracts for work and services for the development would be entered into by NFI's wholly-owned English subsidiary, Brightstar Properties Limited ("Brightstar"). The investors would be repaid their loans out of the proceeds of sale of the project and would also receive the particular proportion of the net profit that was realised by the completed development that that investor had negotiated. This profit would be earned through dividends paid on the shares in NFI issued beneficially to that investor. The number of shares issued to each investor would reflect the agreed proportion of the profit that that investor was to receive.
8. Mr Watson contends that he procured Burkle to lend Mr Laing £500,000 which Mr Laing then lent on to NFI. In return, Mr Watson contends that he was issued, in Burkle's name, a beneficial 12½% shareholding in NFI and that Burkle was to receive a further 12½% of the net profit of the development by way of a payment by Mr Laing. This sum has been called a profit share by the parties throughout this dispute. The loan, interest and the profit share payment were to be secured by way of a charge on Mr Laing's shareholding in NFI and on other shares he owned and that charge would remain until he had paid Burkle all monies he owed that company. This arrangement was given effect to by the issue of NFI shares to Burkle and by a separate loan agreement covering the loan and its repayment and the payment of the profit share payment. The net effect of this arrangement would be that, broadly, Mr Watson, himself and through his investment company, would receive in total an interest of approximately 25% in the development project which he would receive partly as dividends through Burkle's beneficial shareholding in NFI and partly by the profit share payment to be made by Mr Laing.
9. Mr Laing contends differently. His contention is that the overall effect of the arrangement with Mr Watson was that Mr Watson would receive an interest of approximately 12½% in the development through the profit share payment. He contends that he never agreed that Mr Watson's nominee would, additionally, be given a 12½% shareholding in NFI. The only interest in the shares of NFI that Mr Watson or his nominee would receive would be a security interest which would only be held as security for the period whilst there remained unpaid any part of the loan, any payable interest and the profit share payment.
10. The arrangement involving Mr Watson's investment in the Glory Mill development went through a number of stages. Firstly, Mr Watson and Mr Laing reached an oral agreement whereby Mr Watson would procure Burkle to lend money directly to NFI and would receive a shareholding in NFI in return. This agreement was reached in October 1999 and it is this agreement, which is not evidenced in writing, which is the origin of the current dispute. Mr Watson is unequivocal in his recollection. He contends that he made it clear that he would only advance £500,000 if he obtained a 25% interest in the development by way of the issue to him or his nominee company of a 12½% interest in NFI and a separate 12½% issue to Burkle, resulting in a 25% interest overall. Mr Laing is equally unequivocal that it was clearly agreed that Mr Watson or his nominee company would be left with only a 12½% interest overall. Security for the loan would be provided by way of a guarantee to be provided by Mr Laing which would bind his estate in the event of his death before the indebtedness to Burkle had been cleared.
11. This initial arrangement was soon varied and instead of Burkle advancing money directly to NFI, it was agreed that Burkle would loan the same sum to Mr Laing who would then loan it on to NFI. In return for this loan, NFI would not issue shares in favour of Burkle. Instead, Mr Laing would agree to pay Burkle 12½% of the net profit on a defined date as an adjunct to the loan to him. These outstanding monies would be secured on shares in the two developments and on Mr Laing's shareholding in NFI. This arrangement was enshrined in a loan agreement dated 23 December 1999 between Burkle and Mr Laing. This first loan agreement contained detailed provisions relating to the loan, to the method of calculating the size of the profit share payment and as to the security to be provided as an adjunct to payments to be made by Mr Laing. The first loan agreement contained an arbitration clause providing for the valuation of the payment if agreement could not be reached about this matter. Mr Watson contends that the additional agreement, whereby his nominee would receive a 12½% shareholding in NFI as a reward for procuring the loan to the development, survived intact.
12. Before the loan agreement was executed, Mr Laing gave instructions to Ms Krywald, NFI's solicitor and Brightstar's company secretary, that NFI should issue shares to Burkle. The number of shares to be issued was 6,250, representing 12½% of the 50,000 issued shares in NFI. These instructions were not linked to the loan agreement and, indeed, Ms Krywald thought that she was being instructed to issue these shares to Burkle as beneficial owner. That was a view shared by Mr Watson who contends that this instruction was issued so as to enable Mr Laing to fulfil the first part of his agreement with Mr Watson whereby a 12½% holding would be issued to him personally in addition to the 12½% profit share payment that was linked to Burkle's loan. Mr Laing contends that it was intended by him, and was accepted by Mr Watson at the time, that this issue was by way of a charge on the shares as a security for the loan and of the profit share payment.
13. In 2000, Mr Watson asked Mr Laing to arrange for the NFI shareholding being held in Burkle's name to be re-registered in ESL's name. Nothing was said at the time that these shares were held as security and the re-registration was agreed to and took effect in December 2000.
14. In about October 2001, the dispute between Mr Watson and Mr Laing surfaced. The cause of the issue surfacing was the imminent repayment date of the loan, being 3 December 2001. The development had been delayed and the money to be realised from it to repay the loan was not yet available. Mr Laing wanted to negotiate deferred repayment terms and Mr Watson wanted to clarify the basis of the calculation of the profit share payment and the date on which this sum would be paid by Mr Laing. These discussions brought out the issue of whether the shares held by ESL were held beneficially or only by way of security. A further catalyst for the dispute surfacing may well have been a significant fall in property values that occurred in the period after December 1999.
15. The parties had somewhat desultory negotiations about the loan repayment and the nature of the NFI shareholding during which, according to Mr Laing, an oral agreement was reached between the two protagonists in March or April 2002. The effect of this agreement was that both parties, and not just Mr Watson, would treat ESL's NFI shareholding as being a beneficial one in return for Mr Laing's profit share payment obligation being abrogated. Revised terms for the repayment of the loan were also agreed. These agreements were given effect to by a second loan agreement dated 18 September 2002 entered into between Burkle and Mr Laing which only dealt with the loan. This agreement also contains an arbitration clause. Mr Laing contends that that second loan agreement omitted reference to the profit share payment so as to give effect to the two mens' earlier oral agreement. In other words, so Mr Laing contends, the second loan agreement abrogated, superseded or discharged the first loan agreement.
16. Mr Watson has a very different view of the background to the second loan agreement. He denies that there was any agreement reached in March or April 2002, indeed he contends that there was no discussion at all at that time. He contends that the loan was renegotiated and the new loan arrangements were given effect to in the second loan agreement. This did not refer to the profit share payment because it was clear that the parties remained at loggerheads about that payment and the related question of the basis of the NFI shareholding. These contentious issues remained unresolved and the second loan agreement took effect as a variation to the loan provisions of the first loan agreement. The profit share payment provisions of the first loan agreement remained unamended and in full force. Similarly, the basis of ESL's shareholding remained unchanged. It had been a beneficial shareholding since the shares were first issued to Burkle in March 2000 and remained a beneficial shareholding when they were reissued to ESL in December 2000 and that basis of shareholding remained through 2002 and after the execution of the second loan agreement.
17. The claim that I must decide in order to give effect to the dispute arises in a somewhat curious form. The proceedings started by Burkle issuing an application under section 18 of the Arbitration Act 1996 applying for an order for the appointment of an arbitrator under the first loan agreement's arbitration clause for the purpose of valuing the profit share payment provided for by that agreement. Mr Laing responded by counterclaim by contending that that arbitration agreement was no longer extant since it, and the rest of the first loan agreement, had been superseded by the second loan agreement. Mr Laing also claimed two declarations to the effect that only the second loan agreement was extant and that ESL currently holds its shareholding in NFI beneficially but as a result of that holding having replaced the profit share payment to which Burkle had previously been entitled. As an alternative to these declarations, Mr Laing seeks rectification of the second loan agreement so as to make it clear that that agreement supersedes the first loan agreement in its entirety or a declaration that Burkle is now estopped from contending otherwise.
18. The trial was concerned solely with Mr Laing's counterclaims. The application to appoint an arbitrator, pending the resolution of these counterclaims, remains unresolved. The counterclaims were tried following the service of statements of case by both parties which, in Mr Laing's case, was extensively amended during the course of the trial. At the trial, Mr Laing, Mr Watson and NFI's solicitor, Ms Sandra Krywald, all gave oral evidence in addition to their witness statements. Burkle's solicitor, Mr Michael Kelly, also gave written evidence. Brief written and oral evidence was also given by Mr Watson's son, Mr Stuart Watson.
19. It follows that this dispute involves my having to decide six separate questions. These are, in summary:

(1) What did Mr Laing and Mr Watson agree in October 1999?

(2) How did Mr Laing give effect to his obligation to provide security under the loan agreement he entered into with Burkle dated 23 December 1999?

(3) What was the basis on which NFI shares were issued to Burkle on 14 March 2000 and on what basis did Burkle and its nominee subsequently act at shareholder meetings and as the registered owner of these shares?

(4) On what basis were the shares held in Burkle's name re-issued in ESL's name in December 2000?

(5) What, if any agreement was reached in March or April 2002 by Mr Watson and Mr Laing in relation to a restructuring of the loan, the profit share payment and the NFI shareholding in ESL's name?

(6) Did the second loan agreement dated 18 September 2002 supersede the first loan agreement or, instead, merely amend the loan provisions of the first loan agreement whilst leaving the profit share payment provisions intact?

20. I should finally record that Burkle regards the counterclaims as giving rise to a short question of construction. That question is:

"On the true construction of the 1999 and 2002 loan agreements, does the profit share provision in clause 4 of the 1999 loan agreement still exist?"

21. Burkle contends that this gives rise to a short question of construction and that the answer is clearly "yes". No other question would then arise. However, I need to make findings on all the issues I have summarised for two reasons. Firstly, the loan agreements do not state expressly that the first loan agreement has been superseded by the second loan agreement. In consequence, the construction of the two agreements requires recourse to be had to the common factual matrix known to both parties at the time that the second loan agreement was executed. This factual matrix can only be ascertained once I have provided answers to the issues I have summarised. Secondly, Mr Laing has raised claims for declarations and an estoppel issue which can only be resolved if all the issues have first been resolved.
22. The dispute gave rise to an extensive series of procedural disputes within the overall dispute concerned with the admissibility of certain documents emanating from Mr Kelly. These satellite evidential disputes have already been resolved in two judgments. The first judgment, handed down before the trial by Judge Toulmin following an earlier trial, concerned the question of who Mr Kelly was acting for. Judge Toulmin held that Mr Kelly was acting exclusively for Burkle. The second judgment, handed down by me during the course of the trial, concerned the question of whether certain documents, which emanated from Mr Kelly in his capacity as Burkle's solicitor, could now be referred to in the trial since they were in the hands of Mr Laing and had been added to the trial bundle. I ruled that these documents could be referred to since privilege had been lost and, in the circumstances of this case, could not be revived.

2. First Loan Agreement

23. 1 Factual Background
24. The Glory Mill project was not an unduly complex one to set up. It involved the development of a site of about 22 acres which would be acquired for about £8 million by an SPV that had been set up for that purpose. This was a favourable price that Mr Sanders had obtained because he was a favoured purchaser. Mr Sanders had already obtained outline planning permission for a residential development on an 11-acre part of the site and Mr Laing had obtained a forward buyer of this residential development, Taywood Ltd, at a price which would fund more than half the overall cost of the whole site. Thus, the SPV would immediately sell on the part of the site over which the residential development outline planning permission had been obtained. Meanwhile, as soon as the contract for the whole site had been exchanged, the sub-sale contract for the residential development would immediately be exchanged.
25. The balance of the site was already partly occupied with a commercial use and Mr Sanders was confident of obtaining planning permission for a new office development for 240,000 square feet of offices on that part. The existing block that was also on that part of the site would be refurbished and let out.
26. Before the exchange of either contract, Mr Laing would arrange for the necessary funds to enable the first phase of a two-phase project to be undertaken on the part of the site left for commercial development. Phase 1 would involve the refurbishment work on the building that was to be retained and other initial work funded out of the funds to be obtained by Mr Laing. This phase would take about two years to complete and the necessary funding would be provided by loans arranged for that period. At that point, the developers would decide whether to sell the whole incomplete development to a commercial buyer and that onward sale would realise the development profit that was to be earned. A further alternative to such a sale was also being contemplated. This would involve the refinancing of the project with the SPV itself undertaking Phase 2. This second phase would involve all the development work that remained outstanding at that time including the construction of the new office development.
27. Mr Laing was, therefore, very attracted to this proposed development project since it appeared to be a very attractive one for him. This can be seen from what Mr Watson stated Mr Laing told him when first inviting him to subscribe funds for the proposed development. This was that rents in the area were still rising and that the final gross development value could reach as much as £80 million. Mr Laing explained in evidence, however, that there would be a very slow net outlay from the project since Phase 1 of the development alone was likely to take at least two years to complete. Overall, Mr Laing considered that the site had every chance of realising significant profit. As Mr Laing put it, it was fair to describe the development as one that: "had a value".^[1]

2.2. Funding

28. There was no direct evidence of what Mr Laing had estimated the overall cost of the project to be when looking for additional funding. It is clear that he was looking for more funding than was needed to acquire the site since he ultimately obtained funds that exceeded the site acquisition cost by about £1.5 million. The clear inference is that Mr Laing considered that he needed to have in place, before he could complete the contract for the acquisition of the site, sufficient funding both to enable the site to be acquired and to enable the subsequent Phase 1 development costs to be provided for and that that funding included about £1.5 million that was additional to the cost of acquiring the site
29. By July 1999, Mr Laing had instructed Ms Krywald to set up the off shore SPV to acquire the development site and its English subsidiary to carry out the development work. Ms Krywald was the sole principal of McBride Wilson. She set up NFI and Brightstar soon afterwards, NFI being incorporated in the BVI on 16 July 1999. NFI issued 50% of its issued shares on 30 July 1999 to an investment trust called Jedburgh Trust and 50% to another investment trust called Hanover Property Trust. Both trusts were registered in Liechtenstein. Jedburgh Trust had been set up by Mr Laing to hold half the Glory Mill Company. Mr Laing represented that trust at NFI's shareholders meetings and he accepted that he had the ultimate control over these shares since he could direct what happened to them. He referred to the trust as a nominee trust and its holding in NFI as "my shareholding".^[2] It is clear, therefore, that these shares were being beneficially owned by Mr Laing. Hanover Property Trust appears to have been a similar trust set up by or on behalf of Mr Sanders but Mr Laing was unwilling to reveal further details about this trust for what he described as reasons of confidentiality. Mr Laing and Mr Sanders' intention from the start was that all the NFI shares that were to be issued to other investors would be taken, on a 50/50 basis, from these two holdings.
30. Ms Krywald was appointed NFI's solicitor and she handled the conveyancing transaction of the site. The vendor selling the site to NFI was a Dutch company called Felix Schoeller Ltd. Contracts for both the sale and the subsequent partial sub-sale to Taywood Ltd were exchanged on 12 November 1999 with completion stipulated for 3 December 1999.
31. The original intention was that all the required private finance, amounting to £2 million, would be provided by a private investor called Hilti Trust. That funding, coupled with the bank loans arranged with the Leopold Joseph Bank, would have sufficed and Hilti Trust had agreed to take a 40% stake in the SPV in return for its proposed funding. Contracts were originally due to be exchanged in September or early October 1999 without Hilti Trust being legally committed to this arrangement.
32. Unfortunately, it became clear at a late stage that part of the residential development site required extensive remediation work. Sorting out this problem delayed the exchange of both the sale and sub-sale contracts and also appears to have provided the lever for Hilti Trust to seek to renegotiate even more favourable terms for its participation in the development. The proposed new terms were unacceptable to Mr Laing and Mr Sanders and Hilti Trust fell by the wayside. Thus, by early October 1999, only a few days before exchange of contracts was to take place, Mr Laing and Mr Sanders had to find £2 million from other private investors at very short notice.
33. They first attempted to persuade a potential investor called Wail Khoury to come in with the whole £2 million without success. They then decided that between them they could find a further £500,000 in addition to the non returnable £200,000 deposit that was already being funded by Mr Laing. They found two brothers called McGee who were willing to provide £1 million in two tranches, half before and half at some stage after completion. Another investor called Mattar also agreed to provide £250,000. That left £500,000 that had still to be found with time fast running out.
34. It was at that point, on or about 18 October 1999, that Mr Laing first contacted Mr Watson and asked him whether he would be interested in providing finance of up to £500,000 towards the development. This approach was made on the basis that the funds would be required within a matter of a few weeks because exchange of contracts was being pressed by the vendor with completion due on 3 December 1999 and, since exchange had already been delayed, neither it nor completion could be delayed further. As it happened, following exchange on 11 November 1999 with completion stipulated for 3 December 1999, both the sale and sub-sale took place on 23 December 1999 because the vendor delayed completion so as to be obtain, at the last minute, the opinion of a Dutch lawyer.

2.3. Mr Watson Becomes Involved – October 1999 Oral Agreement

35. The initial contact between the two friends was by way of a telephone call on or about 18 October 1999 from Mr Laing to Mr Watson at his intended retirement home in Marbella, Spain. At that time, Mr Watson had not retired but he was planning to do so in the near future and he was staying there on holiday. Mr Laing explained to Mr Watson that he was putting together a good development opportunity in relation to a site in High Wycombe. Following a pragmatic explanation of the project and its potential, Mr Watson's interest was aroused. The two friends were enormously experienced in investing in development projects and both had a shrewd grasp of property values and investment opportunities. The subsequent discussions between them about the proposed development were spread over a number of conversations, most if not all of which took place over the telephone.
36. These few conversations in October 1999 are the most important and significant of the exchanges between the two protagonists that I must consider since they are the origin of their fundamental disagreement about the Burkle, and the subsequent ESL, shareholding in NFI. I must, therefore, consider the background to these conversations with some care.
37. Mr Laing, although he would not accept this in evidence, had contacted Mr Watson in some dESLeration. He had almost put together what appeared to him to be a particularly attractive development opportunity which had considerable money-making potential but he was about £500,000 short of what he required and he only had a few days left to find that sum or else lose the chance of acquiring on attractive terms an 11-acre commercial development site. Mr Laing and his partner had already invested considerable professional time in obtaining outline planning permission on part of this site and in investigating its development potential but the prospect of obtaining the last £500,000 that was needed on acceptable terms at short notice must have appeared daunting.
38. Mr Laing was pressed with the suggestion that he was dESLerate to raise the last £500,000 tranche of the £2 million funding that had to be obtained from private investors. He disputed that this was correct, pointing out that the McGee brothers had provided half of their £1 million funding contribution after completion and could readily have provided it before completion if asked. However, this exchange highlights Mr Laing's position at that time:

Q. In this case here is one quarter of the available money coming in and the way it is arranged between yourself and Mr Watson is half of that, 12½%, comes in as a shareholding and the other half comes in as a profit share, that is what you arranged, was it?

A. No, I do not think [so]. Half a million has come in as a lump and for that he was getting 12 and a half per cent interest in the company. The McGees introduce a million, they are getting 22 and a half per cent which is less than Mr Watson in fact pro rata.

Q. That, I suggest, is because Mr Watson was the last piece in the jigsaw and you were keen to get him involved.

A. You know he was one of the last that we could have approached. The McGees would have come in with some additional money, they would have probably charged something for it as well. He was not a lender of our last resort or recourse."^[3]

39. It was on that basis that Mr Laing turned to his old friend and previous investment partner. Mr Watson was about to retire. He had no particular incentive to become involved and was in the frame of mind whereby he could take the deal or leave it. In other words, he would need a particular inducement if he was to be persuaded to become involved. Mr Watson stated in his witness statement:

"… [Mr Laing] was keen to get me involved. He was quite frank in explaining that, through me, he hoped to raise the 'final' £500,000, and thereby embark on a project that was potentially extremely profitable. He explained that completion had already been delayed due to a problem with the Taylor Woodrow sale … Completion was required before Christmas. Time was running out and [Mr Laing] said he stood to lose the deposit of £200,000 that he had paid if the deal fell through."^[4]

40. I am satisfied that Mr Laing was, in commercial terms, dESLerate to persuade Mr Watson to provide an immediate loan to the development of £500,000 so as to rescue the Glory Mill project. Mr Laing did not have any further liquid resources of his own since all his immediately available funds were already committed to this project. Indeed, as he informed Mr Watson, he was about to use the last of his available funds, a sum of £200,000, to fund the deposit on the site which he would stand to lose if the project collapsed after exchange of contracts. Mr Laing could not, as a prudent business man, proceed with the project or with an exchange of contracts until all the necessary funding was in place and time was running out. He suggested in evidence that he had the option of arranging for the McGees to provide all their proposed funding totalling £1 million before completion rather than half before and half after. However, this would not have resolved the difficulty since there would still have been £500,000 to find for post-completion expenditure and, in any case, the McGees would have charged over the odds for providing that additional sum earlier than planned which, presumably, would have thrown the overall tight budget out of balance.
41. Thus, although Mr Watson was not regarded by Mr Laing as a lender of last resort, he was, as Mr Laing put it: "one of the last that we could have approached". Mr Watson was, as I find, in a position to drive a hard bargain since he would have seemed to Mr Laing as being his last realistic remaining hope of rescuing this very attractive commercial project, of allowing it to proceed and of avoiding the waste of a large amount of unpaid professional time that he had already expended in putting the project together. At the time when he first approached Mr Watson, both exchange of contracts and completion were imminent and Mr Laing had only arranged for £1.5 million, or 75%, of the private funding needed to enable him to proceed with the project.
42. By the end of the series of telephone conversations between Mr Laing and Mr Watson, I am satisfied that Mr Watson genuinely believed that the two men had reached an agreement as to the terms on which Mr Watson would arrange for an immediate loan of £500,000 to NFI. The agreement was obviously non-binding and subject to contract at that stage. Moreover, Mr Laing had objectively conveyed the impression to Mr Watson that he had agreed to the proposed arrangement. The agreed deal was as follows:

(1) Mr Watson's company, Burkle, would lend NFI as the SPV set up for the development the sum of £500,000 at a rate of 12½% interest per annum for a period of two years. In return, Burkle would be allocated 12½% of the shares to be issued by that SPV. Mr Laing would personally guarantee the loan.

(2) Mr Laing would arrange for the transfer to Mr Watson a further 12½% shareholding in NFI's shares. These shares would be part of Mr Laing's shares that he had already been issued with by NFI. This was a personal allocation of shares to Mr Watson which was not linked to the loan but was, instead, his reward for procuring Burkle's loan to the development.

43. Mr Watson gave clear and consistent evidence about the agreement he reached with Mr Laing. He was adamant that he had only been prepared to procure the loan requested by Mr Laing if he was provided with an additional personal shareholding of 12½% of the SPV's issued shares in addition to Burkle receiving a similar 12½% shareholding. He regarded this additional shareholding as the price that had to be paid if he was to be persuaded to procure loan finance for the development at short notice so as to prevent an apparently lucrative project falling through. Mr Watson was a longstanding business collaborator of Mr Laing's and he regarded his receiving a 25% interest in the development profit as being reasonable in the circumstances, particularly as he was providing 25% of the loan finance that was to come from private investors. The agreement makes sense since Mr Laing was dESLerate to obtain this last tranche of the private loan finance and agreed to the proposed terms so as to ensure that the project could proceed. Mr Watson was in the position of being able to dictate the terms on which he was to provide the final piece of the funding jigsaw so that he drove a hard, albeit transparent, bargain.
44. Mr Laing's evidence was both unclear and confused. Its gist was to the effect that, overall, only 12½% of NFI's shares would be allotted to Mr Watson and his companies or nominees and no additional shares were to be transferred to Mr Watson out of his own shareholding in NFI.
45. Mr Laing's understanding of the agreement was set out by him in a letter dated 18 October 1999 that he wrote to Mr Watson's appointed solicitor, being Mr Kelly of Taylor Walton. Mr Kelly was a property partner in that firm and Mr Laing had instructed the firm on about twenty occasions over the previous ten years. These earlier instructions had included both personal and professional matters. Mr Kelly was often the partner who handled the particular instructions the firm had received. Since Burkle was to lend money to NFI, a loan agreement was needed and Mr Laing had suggested that Mr Kelly, who Mr Watson had met on previous occasions, should be instructed to draft that agreement. Mr Watson accepted that suggestion and Mr Kelly was instructed. The instructions were received from, and Mr Kelly was acting for, Burkle as Judge Toulmin has decided in Burkle Holdings Limited v David Laing (No 1)^[5].
46. Mr Laing's letter about the proposed loan read as follows:

"Dear Michael [Kelly]

Ian Watson has agreed to introduce £500,000 by way of loan into a property purchase of a site near High Wycombe. He will be making the loan through his company, Burkle, to the company carrying out the transaction through me and with a guarantee given by me.

The terms of the loan are:

Amount £500,000

Period 2 years

Interest rate 12.5% quarterly in arrears from 6 months.

Guarantee by David Laing which will be supported if necessary by my building plot part proceeds from Wheathampstead Land, a share certificate for 100,000 shares in Eskmuir Properties plc and 34 shares in Wheathampstead Land. The guarantee is to be written to be binding on my estate.

Ian Watson or Burkle will benefit from a 12.5% profit share in the project.

Draw Down funds will be available to wire transfer to solicitors … on 1^st December 1999.

The investment funds and any accrued interest of Burkle and parties other than Richard Sanders and David Laing will rank in priority for repayment directly after bankers. …

The project is to be refinanced prior to the development phase (Phase 2) being implemented.

Yours sincerely

David Laing

47. This letter makes no mention of a second 12½%, the 'personal' 12½%, shareholding that Mr Watson contended that he was to receive in addition to the 12½% shareholding linked to Burkle's loan to NFI. Mr Laing stated that that was because no such additional shareholding was mentioned or referred to in his discussions with Mr Watson. In other words, Mr Laing contended that this letter set out the entirety of the terms of, or associated with, the agreement concerning Mr Watson's involvement in the Glory Mill development.
48. Mr Watson's case was that there was such an additional element to the agreement but since it was separate from the loan and personal to him, there was no need for Mr Laing to refer to it in his letter to Mr Kelly since that letter was merely confirming the instructions being given to Mr Kelly in relation to the drafting of the necessary loan agreement. For the same reason, Mr Watson explained that he had not mentioned this personal share issue to Mr Kelly.
49. Mr Watson's case is clearly explained in this passage of his evidence, based upon a letter written by Mr Kelly to Ms Krywald on 22 October 1999 which, effectively, confirmed the terms of the proposed loan agreement that Mr Laing had communicated to him on 18 October 1999:

"Q You knew, did you not, that Taylor Walton were writing to McBride Wilson on 22 October setting out the terms? …

A. Yes, I knew, because it says at the bottom it was copied to me.

Q. That was the full extent of the terms as far as you were concerned?

A. No. As I say, there was a separate equity stake.

Q. So why did you not …

A. Because it was a verbal agreement and we did not … Well, I certainly did not want to not put that in writing because it was an offshore vehicle and I wanted to be … I did not want any reference to Burkle as to the equity stake because it was never going to Burkle. It was going to be "or my nominee".

Q. I suggest to you that this carried the full terms and referred to the equity being the 12.5% profit share, which was to be payable by way of shareholdings.

A. No, that is not correct."^[6]

50. Which version of the agreement was reached in October can only be determined after a consideration of the parties' actions in rESLonse to the agreement. The agreement itself did not have contractual effect, it amounted to no more than an informal understanding which was, at best, an agreement that was "subject to contract". However, it shaped the background to the two relevant transactions that did have legally binding effect that were subsequently entered into. These transactions were the first loan agreement dated 23 December 1999 and NFI's issue to Burkle of 6,250 shares by means of a share certificate dated 14 March 2000.

2.4. First Loan Agreement

51. Mr Kelly's letter to Ms Krywald dated 22 October 1999 asked whether she had received instructions from NFI to act in the negotiations that would lead to a finalised loan agreement to be entered into between NFI and Burkle. This loan agreement would give effect to Mr Kelly's instructions that he had received from Mr Watson. Mr Kelly got no immediate answer to that letter. Meanwhile, Mr Watson, no doubt in conversation with Mr Laing, learnt that the SPV was registered in the BVI and that it would hold no tangible assets save for the heavily encumbered development site. Mr Watson then took advice from Mr Kelly on 24 November 1999 and, following that advice, Mr Watson proposed to Mr Laing an alternative arrangement. This was that the loan would be made by Burkle to Mr Laing who would then sub-lend that sum to NFI on terms which Mr Laing and NFI would arrange between themselves. In return for that loan, Mr Laing would become personally liable to repay the loan and the payable interest prior to its repayment and would also make a one-off payment to Burkle at the time when the loan matured 24 months later. This payment would be in a sum that represented 12½% of the profit realised on the sale or of the value of the site at the time that the development was refinanced. This payment would replace the proposed issue to Burkle of shares in NFI as an adjunct to the loan. Finally, instead of a personal guarantee being provided by Mr Laing, he would instead provide security against all sums due under the loan agreement by way of a charge in favour of Burkle over certain of his shareholdings including his shares, or some of his shares, held in NFI.
52. Mr Watson contended that this restructuring of the loan left intact the agreement whereby he or his nominee would be issued with a second personal 12½% holding in NFI and Mr Laing contended that there never had been, and was no longer, such an arrangement so no such additional issue of shares would result from this change to the originally intended arrangement.
53. Both Mr Watson and Mr Laing explained this change as being a technical reconstruction of the proposed loan agreement. The reason why the loan was restructured in this way was because of concerns that Mr Watson had, having learnt that the SPV was an off-shore company and having taken advice from Mr Kelly, that the loan would be made to an off-shore company with no realisable assets and that the loan would, in consequence, be entirely underpinned by Mr Laing's personal guarantee. Clearly both protagonists did not regard this restructuring as being significant.
54. Mr Watson explained his understanding of the amended agreement following the agreed restructuring of the loan he was arranging and the associated profit share and further equity holding he was to receive as follows:

"… But I had put in 25% of the value and initially I wanted to get 25% of the equity, but the deal we ended up with was that I would get 12.5% of the equity and a profit share at a fixed date, which may or may not be worth anything."^[7]

The profit share was in addition to the equity share. Mr Watson was emphatic about that:

"Q. Because it was structured in that way, Mr Laing would expect and did get, the 12.5% of the shares that you would have had, or Burkle would have had, had Burkle lent directly to the company, as originally envisaged?

A. David [Laing] did not get the 12.5%. I got the 12.5%. I certainly would not have agreed to make the loan to David if I had thought I was losing my equity stake."^[8]

The profit share payment was to be secured against part of Mr Laing's shareholding in NFI, being a different shareholding than the shareholding that would be issued by NFI to Mr Watson. As Mr Watson explained:

"Q. Then the security is set out at page 18 [of the loan agreement] … . You have got … shares in [NFI] representing 12.5% of its issued capital.

A. Yes …

Q. The 12.5% figure was chosen because that was the figure that the investment to be made by David Laing of the £500,000 would secure.

A. No, it is not. It is 12.5% of his 29 …

Q. Why?

A. Because there is a difference between my original equity stake of 12.5% and the 12.5% of the 29% which are the Jedburgh Trust security shares that he is charging under this. It is purely a coincidence. …

Q. The only shares, therefore, on your evidence that Mr Laing was ever going to be entitled to was the 29.5% Jedburgh Trust shares that he already had.

A. Yes.

Q. A moment ago you said it was a pure coincidence …

A. The coincidence was that it was 12.5%.

Q. But that is too much of a coincidence, is it not?

A. I do not think it is. The profit share is only 12.5, so he is only charging 12.5 of his 29; he is not charging 29.5 to secure 12.5.

Q. And could you explain why you say it is pure coincidence.

A. Because it is the same as the equity share, but it is … He would not be charging more than 12.5% of his shareholding in support of the profit share … ."^[9]

55. The details of the arrangement and the way it differed from the October agreement should be summarised. Firstly, Mr Laing was for the first time to be personally liable to repay the loan within 24 months, to pay the interest accruing on the loan and to make a substantial payment that represented the profit share being taken by Burkle. Previously, it was to be NFI that would be the rESLonsible party for all these payments. Moreover, these payments would become payable by Mr Laing whether or not he received equivalent payments from NFI. Secondly, Mr Laing was no longer providing a guarantee to Burkle but was, instead, agreeing to charge a very valuable group of shareholdings, including part of his own NFI shareholding, with the onerous financial commitment he was taking on. Thirdly, the profit share that was to be paid to Burkle was to be calculated on a different and potentially more favourable basis than the equivalent percentage profit share would be calculated in the form of a dividend to be paid to Burkle as a shareholder of NFI. Furthermore, this payment would be, or might become, payable on a defined date which was earlier than the date on which any division by NFI of profits to shareholders as a dividend payment might take place. Fourthly, Mr Laing was making a sub-loan to NFI and needed to agree and record the precise terms on which he was making that sub-loan so as to ensure that the loan to, and any repayment from, NFI was back to back with the loan payment that he was receiving from Burkle. Moreover, the loan to NFI needed to be clearly recorded and its repayment to him enforceable by either himself or his estate as necessary.
56. Mr Laing gave the impression in the witness box that he had not appreciated the significance of the changes that this agreement had created. In particular, he appeared to be oblivious of the fact that he had undertaken a personal liability to repay Burkle and to pay it a profit share payment, both payments to be secured against his own shareholding in NFI. Mr Laing's apparent failure to appreciate the onerous and potentially precarious position he had placed himself in until after the loan agreement had been signed also forms part of the background to his actions following that loan agreement that I will need to consider, particularly as I formed the impression that he was not nearly as vague about these arrangements as he wanted me to think that he was.
57. The loan agreement was then drafted and its terms negotiated and finalised. The loan agreement was executed by both Burkle and Mr Laing and was dated and took effect on 23 December 1999.
58. 5. The Material Terms and Structure of the Loan Agreement
59. The Agreement provided that Burkle was advancing £500,000 to Mr Laing for a fixed period with a redemption date of 3 December 2001. This date had been fixed by reference to the intended 2-year period of all the other loans made by the other investors and was the intended period of Phase 1 of the development after which the development would be refinanced or sold and Phase 2 would then be undertaken. Interest would be paid on this loan at 12½% a year. In further consideration for the loan, Mr Laing agreed to pay a lump sum defined as a profit share on the date of completion of the onward sale or of the refinancing of the property. This profit share was to be calculated using the formula provided for in clause 1.5 of the agreement and was to be 12½% of the net profit realised on the proceeds of sale of the property or its value on the appropriate date if the development was refinanced. This profit was a profit net of 8 defined deductions including site acquisition costs, bank loans and:

"1.5.7 all sums paid or due to [Burkle] by way of interest on the Advance and all interest payments made or due to other contributors towards the purchase and development of the Property"

The loan agreement also provided for security to be provided by Mr Laing to cover the loan, interest and the profit share.

60. It can be seen from this summary that Burkle's loan of £500,000 was not expressed to be repayable out of the proceeds of sale of the Glory Mill development but was instead expressed to be a personal loan to, and to be repaid by, Mr Laing. Furthermore, in calculating the net profit or profit share to be paid by Mr Laing personally under the loan agreement, there was no express requirement that account was to be taken of, or any initial deduction made for, the investors' loans.
61. Mr Laing was to loan that sum to NFI once he had received it from Burkle. This onward loan, according to Mr Laing, was not subject to any agreement. Instead, the loan by him to NFI was a bare loan which was unsecured. However, the loan would carry interest. Mr Laing made it clear that the other investors were loaning and not giving their rESLective contributions to NFI. It would appear that there were no loan agreements in place for these loans, certainly none were put in evidence. However, these loans were also stated by Mr Laing to have carried interest and, it would appear, would be repayable by NFI after 24 months at the conclusion of Phase 1 and those repayments would be deducted from the proceeds of resale before any profit distribution was made by way of dividend payments to the shareholders.
62. In summary, therefore, Mr Watson, through Burkle, and the other investors were in a similar but not identical position in relation to their rESLective contributions to the development. Each was making a loan, albeit Burkle's loan was to Mr Laing who then loaned that sum onto NFI, whereas the other investors were making their loans direct to NFI. These loans would carry interest paid by NFI, in Burkle's case by Mr Laing who would be reimbursed by NFI. All the loans were repayable after 24 months by NFI on the redemption date and any profit calculation would be made on the net profit realised by the development after all these loan repayments had been deducted from the proceeds of resale of the development. The only differences between Burkle's position and the other investors' position were that Burkle would be entitled to recover its loan from Mr Laing even if NFI was insolvent and unable to fund the repayment whereas the other investors would only be repaid by NFI to the extent that NFI was ready and willing to repay them on the due date; Burkle's loan was secured whereas the other loans were not; and, possibly, the profit share payment would be calculated without reference to the loan repayments whereas the net profit to be distributed to shareholders would take those repayments into account.
63. It also follows that none of the investors were providing any consideration for the equity shares that would be issued to them. The only consideration was the actual provision of their rESLective loans. Each investor became an equity shareholder in NFI in return for that loan. Burkle was in a similar position, if Mr Watson's version the October 1999 agreement is correct, since his nominee was being issued with a 12½% equity shareholding in NFI in return for Burkle's loan to Mr Laing. In his case, however, he would earn a far greater return on his loan to Mr Laing than the other investors would earn from NFI since he would earn interest, as they would, but he would also earn a lump sum profit share on his loan at the redemption date, as they would not. Depending on what value was placed on the profit using the loan agreement valuation formula, the profit share payment might also be more favourably calculated under that agreement as part of a dividend distribution to NFI's shareholders.
64. 6. The Security Provisions of the Loan Agreement
65. The first draft of the loan agreement was drafted by Mr Kelly and was sent by him to Mr Watson and Mr Laing on 24 November 1999. This draft provided for the revised loan arrangements whereby Burkle was providing a loan to Mr Laing. The first draft stated that security would be provided as follows:

" 6. Security

As security for his obligations under this agreement [Mr Laing] with full title guarantee hereby charges the Security to [Burkle] such charge to remain in full force and effect until all [Mr Laing's] actual or contingent liability to [Burkle] under the Agreement has been paid or discharged in full."

The Schedule

The Security

a. [Mr Laing's] interest in the proceeds of sale of a plot or plots of land at Codicote … retained by Wheathampstead Land Company Limited at the time of a sale to … on 3 August 1998;

b. 100,000 shares in Eskmuir Properties plc;

c. 34 shares in Wheathampstead Land Company Limited; and

d. shares in [New co] representing 12½% of its issued capital

BRIGHTSTAR PROPERTIES LIMITED "

The words in italic were set out in manuscript on the copy of the draft adduced in evidence and had been written in by Mr Watson on his copy of the draft.

66. Mr Laing suggested two amendments to these security provisions to take account of the fact that his holding in NFI was held through Jedburgh Trust over which he had overall control.
67. Mr Laing approved the amendments and the draft was then in its agreed and final form later on 24 November 1999. The revised security provisions read as follows:

"6 Security

As security for his obligations under this agreement [Mr Laing] with full title guarantee hereby charges (and to the extent that any of the assets listed in the Schedule hereto are not in the name of [Mr Laing] hereby undertakes to procure the charging of) the Security to [Burkle] such charge to remain in full force and effect until all [Mr Laing's] actual or contingent liability to [Burkle] under this Agreement has been paid or discharged in full.

The Schedule

The Security

1. [As before]

2. [As before]

3. 17 [as before]

4. [Mr Laing's] shareholding in (Brightstar Properties Limited) representing 12½% of New Federal Inc

the issued share capital thereof."

68. The brackets around Brightstar Properties Limited and the words "New Federal Inc" were inserted in manuscript and both Mr Laing and Mr Watson initialled these additions and also signed the agreement on behalf, rESLectively, of himself and Burkle.
69. It is clear that the amended provision was intended by the parties to read:

"Part of [Mr Laing's] shareholding in New Federal Inc representing 12½% of the issued share capital thereof."

The parties have certainly always accepted that this is how this provision should be read and, in context, that is the correct reading of it.

70. Mr Laing signed the completed loan documentation on 10 December 1999. He sent a covering note in his handwriting to Mr Kelly when returning the signed loan agreement which read in part:

"I enclose the completed loan documentation together with share certificates from

Eskmuir 100,000 no

Wheathampstead Land 17 no

Regarding Wheathampstead Land I have spoken to Ian Watson who has agreed the reduction from 34 to 17.

Sandra Krywald of McBride Wilson will either have sent the share certificate of New Federal Inc, the development company holding the assets of the Glory Mill site, or will warrant to you that they are held for the benefit of Burkle."

71. Mr Laing insisted in evidence that the reference to NFI shares in this note was intended to be a reference to the shares issued by NFI in favour of Burkle in March 2000 and that those shares were therefore security shares only. However, the reference in this note was to the charging of Mr Laing's shareholding in NFI and the share certificate being referred to was the share certificate relating to his shares in his nominee's name which he would be charging as security as provided for in the loan agreement. It was that certificate, and not a certificate issued in Burkle's name, that the note was stating would be deposited as security with Mr Kelly. This note cannot therefore be taken to provide, or to be read as, any indication by Mr Laing that there was no agreement or understanding by him to issue shares beneficially to Burkle in addition to his providing his NFI shares as security.

2.7. Issue of Shares to Mr Watson

72. Unrelated, or at least not expressly linked to, the steps that were being taken to implement the loan agreement, Mr Laing wrote to Ms Krywald on 1 December 1999 as follows:

"Dear Sandra

RE: NEW FEDERAL INC.

Can you kindly arrange for a share certificate representing a 12½% interest in the project to be prepared in the name of:

MR I.W. WATSON

97 Brookmans Avenue

Brookmans Park

Herts

ALG 7QG

And forward it to me to be lodged with his solicitor;

Mr. M. Kelly

[address]

Yours sincerely

David Laing"

73. On 7 December 1999, Mr Sanders faxed Ms Krywald a document on Hanbury Securities notepaper with himself described as Company Secretary with a cover sheet which read:

"Share allocation attached"

and which attached a document which read:

	%	No of Shares (10,000)
David Laing	29.5000	2950
Richard Sanders	29.5000	2950
Tim Mattar	6.0000	600
Ian Watson	12.5000	1250
Brian McGee	16.7500	1575
John McGee	5.7500	675
	100.0000	10000

In fact, since the number of issued shares was 50,000, this instruction was, and was taken by Ms Krywald to be, an instruction to issue the number of shares listed in the third column of this schedule multiplied by 5 since the issued shares referred to in that column, totalled 10,000 and not 50,000.

74. On 10 December 1999, Mr Kelly wrote to Mr Watson and informed him that Ms Krywald had contacted him and asked him whether the share certificate for 12½% of the purchaser company was to be issued in Mr Watson's name or in the name of Burkle. Mr Kelly also stated that he had informed Ms Krywald that the certificate should be issued in the name of Burkle. Mr Watson did not reply, at least in writing, and it is to be assumed that he accepted and approved that proposed course of action.
75. On 4 January 2000, Mr Kelly wrote to Mr Watson stating that there was no sign of the share certificate relating to Mr Laing's holding in the new company and asking whether Ms Krywald had sent it to him yet. He followed this up with a letter to Ms Krywald dated 7 January 2000 stating that he, Mr Kelly, was still awaiting the share certificate relating to Mr Laing's 12½% shareholding in NFI and asking that it be forwarded as soon as possible. In context, these references were to the Laing security shareholding in NFI and not to any shares issued by NFI to Burkle.
76. Ms Krywald explained the instructions she had received to issue shares to Burkle and not to Mr Watson in this way:

"Q. Then you have a conversation with the same man, Mr Laing, and he says, "No, issue the 12.5% shareholding to Burkle?"

A. Well, based on the fact that the money was coming from Burkle.

a. He said that or that was just your inference?

A. No, I had said, "well, hold on, I have a letter… words to the effect of, "I have a letter from you saying 'issue the shares to Mr Watson'. However, the money is being provided by Burkle Holdings. Taylor Walton are acting on Burkle and providing the money, the £500,000. Therefore, surely it is Burkle who were going to get the interest in the company, not Mr Watson." He confirmed that if Burkle was providing the money, then obviously the share certificate should be in the name of Burkle. I then spoke to Mr Kelly and he confirmed that was the case. I think there is a letter where he actually records that conversation."

Q. Did Mr Laing not tell you that he had entered into a loan agreement with Mr Watson's company?

A. No.

Q. Even when you went back to him in January, did he not tell you that he had a loan agreement?

A. No."^[10]

77. Ms Krywald was instructed by Mr Sanders to issue the shares to be issued to Mattar, Watson and the McGees by taking an appropriate number from the holdings of the two trusts, Jedburgh and Hanover Property Trusts, and reallocating them in such a way that the two trusts were left with a 50/50 split of the residue of shares and each investor was allocated, to himself or to the nominee nominated by that investor, the number of shares linked to is investment. To give effect to this instruction, she issued the 6,250 shares she had been instructed to issue to Burkle out of Jedburgh Trust's NFI holding but she could equally have issued them out of the Hanover Property Trust holding. This issue was effected by Mr Laing authorising Jedburgh Trustee to instruct NFI in writing to transfer 6,250 of its NFI holding to Burkle by a share transfer instruction dated 9 February 2000. This instruction was implemented by the company secretary of NFI, Mr Simon Caldridge, being instructed by Ms Krywald on 2 March 2000 to issue the appropriate share certificate and that certificate was issued on 14 March 2000. By administrative error, the registered owner of the shares was stated to be "Burkle Holdings Investments" rather than "Burkle Holdings Limited" but everyone proceeded on the basis that the issuee was in fact Burkle.
78. Mr Laing now contends that he made a mistake in instructing Ms
    Krywald that she should arrange for NFI to issue 6,250 of its shares to Mr Watson by his letter dated 1 December 1999. The mistake was, according to him, to issue instructions which appeared to be instructing NFI to issue beneficially to Mr Watson a shareholding. What he intended to do, and what was in fact done, was to instruct that shares be issued that were charged in favour of Burkle as security for his indebtedness to Burkle and in fulfilment of his loan agreement obligation to charge his NFI holding. He also contended that the subsequent corrESLondence involving himself, Ms Krywald and Mr Kelly, in relating to an issue of 12½% of NFI's shares, was referring to these so-called security shares that were charged as security for his indebtedness to Burkle.
79. In other words, Mr Laing contended that the share certificate dated 14 March 2000 was the fulfilment of the contractual obligation imposed by the loan agreement for him to secure part of his personal holding in NFI by way of a charge or as security against all debts provided for by the loan agreement.

2.8. Evidence as to Share Issue

80. Mr Laing. Mr Laing was pressed as to why, on his case, he had mistakenly issued instructions for the outright issue of shares beneficially to Mr Watson only a few days after he had personally drafted the relevant provisions of the loan agreement providing for a charge over those shares. Mr Laing's answers were not easy to follow. The salient passages from his witness statement and from his cross-examination were as follows:

"A … Both Mr Watson and I met with Mr Kelly on 25^th November 1999. During that meeting I advised both Mr Kelly and Mr Watson that the purchasing company of the Glory Mill Project was a British Virgin Island Company. In rESLonse Mr Watson said he would want in addition to the other security, a charge on my shareholding representing the £500,000 investment in the British Virgin Island Company. … On 1^st December 1999 I wrote to Sandra Krywald … and asked her to "arrange for a share certificate representing a 12.5% interest in the (Glory Mill) project to be prepared in the name of Mr W Watson" this was the 12.5% investment of £500k referred to [above]."^[11]

a. [Mr Laing's letter to Ms Krywald] is a simple letter: you are asking for her to arrange for a share certificate representing a 12.5 percent interest in the project to be prepared in the name of Mr Watson?

A. Yes.

Q. Now, interest in the project means having a share in the project, does it not?

A. Yes.

Q. And it was Mr Watson that you identified as being the recipient of those shares, not Burkle; was it not?

A. Yes, in the letter, yes.

Q. Yes. So that this allocation and this direction was not something to do with Burkle; was it not?

A. Yes, it is.

Q. Why do you say that?

A. Because there is only one set of shares that were being contemplated, there is not a second one, there never has been a reference to it. …

Q. … We reached a point on 25^th November, with a profit share calculated in this detailed way with the sheets annexed, now you are asking Sandra Krywald to allocate shares to Mr Watson. Why?

A. They would be the same shareholding that was originally going to be in the 18^th October letter. I am afraid I did not straighten out the affairs, they should have been held in the security, as is later demonstrated.

Q. What is your evidence as to what you were seeking to achieve by giving this direction to Sandra Krywald?

A. It was, you know, an execution of the original intention of the shareholdings that are covering profit share and security for them. …

Q. Is it not right that on your case, Mr Laing, there is actually no explanation for why you wrote this letter on 1^st December? It makes no sense whatever, does it?

A. As it stands now, instead of, you know, looking back on it in reflection, those are the shares which should have been lodges as security with Mr Kelly. I think that, as I say, the whole of the later corrESLondence confirms this.

Q.. Why do you identify Mr Watson as being the recipient of this shareholding, when you well knew, having been a party to the drafting of the loan agreement, that the lender was Burkle?

A. As far as I was concerned they were one and the same person.

Q. Do you appreciate that there is a distinction between a shareholder of the company and the company itself?

A. I do. But Mr Watson is the main representative of Burkle and I understood it was the same situation.

Q. Were you asked by Mr Watson that the shareholding he was to receive should be in his name?

A. No.

Q. Why was it that you therefore identified Mr Watson by name and address in this letter?

A. You know, looking back on this, I cannot answer it. I am clear that there was only one set of shares that were issued, and they should have been worded as "transferred" rather than "issued" because they were held in my name originally and, you know, that is borne out by the bundle."^[12]

81. Mr Laing, later in his cross-examination, was asked about his letter instructing Ms Krywald to arrange for NFI to issue some of its shares to Mr Watson. The exchange went as follows:

"Q. … you wrote to Sandra Krywald as we saw back on 1^st December 1999 asking for the shares to be issued to Mr Watson?

A. Um um.

Q. Was that an error on your part?

A. Yes.

Q. So that is what you are saying that was an error then and the –

A. It was also, you know the December letter was written before the agreement of the end of December was put in place and that as far as I was concerned tidied everything up."^[13]

82. In summary, Mr Laing was stating that because there never was any agreement that Mr Watson or his company should receive beneficially a second tranche of shares, the instruction issued to Ms Krywald on 1^st December must have been, and can only have been, intended by him to relate to his obligation to provide a charge over the shares as security for the loan. However, he could not explain why he wrote the letter, save that it was a mistaken attempt to give effect to the earlier obligation to issue shares beneficially recorded in his letter of 18^th October 1999 which had been superseded by the loan agreement. Equally, he could not satisfactorily explain why in his letter he identified Mr Watson rather than Burkle as the person who should be the recipient of the shares; nor why he came to instruct Ms Krywald to issue rather than to transfer the shares; nor why Ms Krywald was being instructed to register shares beneficially rather than to charge shares, nor, finally, why these instructions, which contradicted the charging provisions of the loan agreement, came to be given only about one week after he had been involved in drafting the loan agreement providing for the creation of a charge over his shareholding in NFI.
83. Ms Krywald. Ms Krywald stated in evidence that she was unaware that Burkle was making a loan of £500,000 to anyone. She was not involved in the loan agreement at all. She, indeed, understood or assumed that Burkle was buying its way into the company for £500,000 and was being issued as a beneficial owner with the 12½% shareholding she was concerned with in return for the payment of that sum which she understood or assumed had been paid directly to NFI by Burkle. This view is clearly expressed in this passage of her evidence:

"Q. …. There was of course this letter [from Mr Kelly to Ms Krywald dated 1 December 1999 which referred to Burkle's loan to Mr Laing for £500,000] … You told us that you might not have understood that the Burkle was making a loan to Mr Laing who was then lending it on. Even if you did not understand that subtlety, and it is not very subtle, did you not understand that this was a reference to a loan? After all, it says at the end, "To enable us to complete the loan documentation?"

A. No. As I said previously, this was still at the stage where there were no finalities of how things were going to be done, and I was not instructed on that. Therefore, it just did not concern me in that rESLect. When I got to completion, where did the monies come from, are they from legitimate sources and what is the deal at this point, that is when I would address my mind. As I said to you before, I just did not turn my mind to the specifics of that letter.

Q. I understood you to say you did not understand it was a loan to Mr Laing and then a loan to the company. What you are now telling us is that you did not know the money was a loan at all?

A. No, I did not. I believed when I issued the share certificates, that the £500,000 coming from Burkle was entitling them to an equity share in the company. That is why I actioned the share transfer of 6,250 shares."^[14]

84. Ms Krywald expanded on this evidence as to her understanding and instructions about the nature of the shareholding she was arranging for both Mr Watson and for the other investors in these passages of her cross-examination:

1. Ms Krywald's Instructions

"Q. … You were personally concerned, were you, in handling the conveyancing aspects of the purchase of Glory Mill?

A. Yes, I was."

2. From Whom Ms Krywald Took Instructions

Q. Could I ask for you to identify who your clients were. You say "my clients"?

A. I was predominantly taking instructions from Mr Sanders who was the main thrust of the negotiations and the arrangements for the purchase of Glory Mill.

Q. So your client was Mr Sanders?

A. Well, if it was not Mr Sanders, it was New Federal – I was acting for New Federal Inc but he was, if you like, acting on behalf of the company in pulling everything together and negotiating the terms of the contract."

Q. But who did you see Mr Laing as being?

A. Well, again, in some rESLects, he was not quite in as predominant position as Richard Sanders. He was obviously the other main shareholder in the company. Again, in that rESLect, he had ostensible authority to give me instructions vis-à-vis the Glory Mill purchase."

3. Source of Funds, Loans or Share Consideration

"Q. When does [your understanding or your knowledge that the monies being provided by the investors be by way of loans] change?

A. Because I did not ever receive instructions. I received instructions on 7^th December^[15]. This was the shareholding allocation and I received no instructions to do any loan agreements."

"Q. So is it right then that in December, you did not regard it as relevant to know whether or not the money was being loaned to the company or given to the company in return for shares?

A. That is correct. …

Q. Does it follow from that that since you had received no instructions in relation to the drawing up of loan agreements, or the provision of security against the title which you were conveying, you reached the firm conclusion that these monies were not loans?

A. Correct."

5. Nature of Burkle's Interest in NFI

"Q. So by 7^th or thereabouts, you have separately received information from both the founder shareholders of the company that Mr Watson is to receive 12.5% interest in NFI?

A. Yes.

Q. By way of a shortcut, is it not right to say that for about the next two years you worked on the basis that Mr Watson or his nominee held a 12.5% beneficial interest in NFI? …

A. Yes. I believe that the £500,000 that came into the company was a consideration for his 12.5% interest in the company."

"Q. … Did Mr Laing not tell you that he had entered into a loan agreement with Mr Watson's company?

A. No.

Q. Even when you went back to him in January, did he not tell you that he had a loan agreement?

A. No."

6. Burkle's Rights as a Beneficial Shareholder

"Q. … shareholders meetings are organised for NFI and Mr Watson or his representative being his son attend those shareholders meetings, do they not?

A. Yes.

Q. At no point during the year 2000 does anyone, including Mr Laing say, "oh, you, Mr Watson, are not entitled to be present here as a shareholder or on behalf of a shareholder?

A. No.

Q. Is it right that certainly if the shareholders agreement was in force, they would not have been entitled to be present if the shares were issued as security and not absolutely?

A. They would not be entitled, although I should say the shareholders meeting was somewhat informal because obviously they were not trust representatives. They were representatives there, but they were not deemed to be strictly very formal. It was just a way of disseminating information about the project.

Q. But the shareholders agreement or draft agreement provides that the shares may not be charged or issued as security, does it not?

A. Yes."

7. Nature of Mistake in Issuing Shares Beneficially to Burkle

"Q. What is the mistake that you saw had been made from the review of your files?

A. Well, that these shares, rather than remaining in the name of Jedburgh Trust or Jedburgh Trust because they were there, and being held as security, were issued to them. Now, obviously, they could be held as security underneath that, but obviously that was the purpose of the letter to establish what Mr Watson's view was.

Q. Who did you regard as having made the mistake?

A. Well, based on my understanding, I had issued, or I had arranged for the issue of those shares. My understanding was that they were not subject to a loan. …

Q. … in your mind who do you see as having made the mistake? You refer to a mistake being made. A mistake can only be made by individuals.

A. Well, either in my specific instructions from Mr Laing, because my understanding was always very clear that Mr Watson, albeit via his nominee company, was giving X amount of money to get in an equity share capital. Then obviously it transpires that the money was actually not for share capital but was subject to a loan.

Q. Would it be perhaps more accurate to state that your understanding was that a mistake had been made not from a review of the file but from what you heard from Mr Laing in November 2001?

A. Yes. That was obviously when he told me the information and then, thereafter, I saw the loan agreement. I could see that a mistake had been made."^[16]

85. It had therefore clearly been Ms Krywald's understanding from the moment she received Mr Laing's instructions to issue Mr Watson shares in NFI on 1 December 1999 until November 2001 that these shares were to be and had been issued beneficially to his nominee and were neither mortgaged nor charged.
86. That is why Ms Krywald wrote a letter to Mr Watson, dated 30 November 2001, on Mr Laing's instructions, having just learnt for the first time that the ESL holding of NFI shares was held, as Mr Laing saw it, by ESL as Burkle's successor as a security and not beneficially dESLite these shares having been issued beneficially in accordance with Mr Laing and Mr Sanders' separate instructions and having subsequently been transferred beneficially into ESL's name at Burkle and Mr Watson's request. She wrote to Mr Watson as follows:

"I have been informed that the funds paid to NFI from Burkle Holdings were not paid as equity capital but were funds arising from a loan subject to various provisions contained in a loan agreement dated 23^rd December 1999. This agreement provides for certain shares in NFI to be held as security for the loan, accordingly the shares should not have been issued to European Securities (as have been on the instructions of Burkle Holdings' solicitors). Furthermore, it was inappropriate for European Securities to be party to the Shareholders Agreement."^[17]

87. Mr Sanders. Mr Sanders did not give written or oral evidence. Ms Krywald confirmed that he was alive and still living in England. He gave the critical instruction to Ms Krywald to issue shares beneficially to Mr Watson following, it is to be presumed, his having been informed by Mr Laing of the terms of the non-binding agreement reached between Mr Laing and Mr Watson in October 1999 and of the nature of the shareholding Mr Laing intended Mr Watson to have in NFI. Mr Laing did not explain in his evidence what he understood of Mr Sanders' knowledge about these matters or why Mr Sanders was not giving evidence to confirm the nature of the mistake that Mr Laing now says that both he and Mr Sanders made when separately instructing Ms Krywald to arrange for a beneficial shareholding in NFI to be issued in favour of Mr Watson.
88. Mr Watson. Mr Watson stuck to his evidence that the agreement that he would be issued with a personal issue of a 12½% stake in NFI survived, and was not superseded by, the revised arrangements of a loan to Mr Laing with its concomitant profit share. He stated that he had sought a charge over Mr Laing's personal holding in NFI as additional security to back Mr Laing's profit share obligation only because he had first learnt that NFI was a BVI company on 24^th November 1999 and he therefore wanted additional security to secure both the loan and the profit share payment obligation. Mr Watson regarded the issue by NFI of the shares to Burkle as giving effect to Mr Laing's separate but continuing obligation to issue shares to him personally. He accepted that Mr Kelly mistakenly appeared to regard the instruction given by Mr Laing to NFI that shares should be issued to Mr Watson as being a fulfilment of Mr Laing's obligation to charge shares pending payment of the profit share but explained that misunderstanding as having occurred in Mr Kelly's mind because Mr Kelly was unaware of the share issue obligation since no-one, including Mr Watson, had informed him of that obligation. Mr Watson had not informed Mr Kelly about this obligation since it was not directly related to the loan, Mr Kelly was to have no part in this separate share issue and was only being instructed in relation to the loan agreement.
89. This stark conflict between Mr Watson and Mr Laing as to the nature of the interest Mr Laing intended should be granted to Mr Watson in the NFI shares and the nature of the interest granted to Burkle in the shares issued to it by NFI can only be resolved once I have examined the actions of the two protagonists and of NFI and its shareholders following those instructions and share issue.

2.9. Parties' Conduct in Relation to Burkle's NFI Shares

90. Issue of Share Certificate to Burkle. Following the completion of the contract for the purchase of the Glory Mill site and the entry into effect of the loan agreement, Ms Krywald put into effect her instructions received separately from Mr Sanders and Mr Laing to issue NFI shares to each investor in that development. She sent Mr Laing on 25 January 2000 a letter which enclosed a letter to be sent to Jedburgh Trust's trustee to "effect the transfer" of part of its holding in NFI to Burkle. In consequence, the trustee signed a share transfer dated 9^th February 2000 which provided: "In consideration of the sum of £500,000 paid by Burkle …[ Jedburgh Trust] do hereby transfer to Burkle 6,250 shares standing in our name in the register of [NFI]". This share transfer was sent by Ms Krywald to NFI's director in Stark on 2 March 2000 and he was asked to effect this transfer and to sign the share certificate in favour of Burkle. This was done and the signed share certificate was sent to Burkle by Ms Krywald when she received it from Sark. The share certificate was dated 14 March 2000. This share transfer and the resulting share certificate can only amount to the issue of unencumbered equity shares by NFI to Burkle.
91. The Share Certificate erroneously stated that the consideration of the transfer was the payment of £500,000. This error occurred because Ms Krywald had wrongly assumed that that sum was being paid by Burkle to NFI as consideration for the shares rather than being loaned by it to NFI. The consideration actually provided for the share issue was the provision of a loan in that sum for use by NFI in acquiring the site. This erroneous statement on the share transfer had no legal effect and did not change the character of either the loan to Mr Laing or the beneficial nature of the shares issued to Burkle.
92. Shareholders agreement and Shareholders Meetings. As is common with an SPV, the affairs of NFI were subject to an agreement entered into by every shareholder. The purpose of this agreement was to protect the interests of minority shareholders, particularly in relation to the refinancing or sale of the development at the end of Phase 1 and to the distribution of the profit realised by the development in a way that gave them a fair and proportionate share of that profit. This purpose was achieved by the six shareholders and NFI entering into an agreement that protected their interests in a number of ways. The shareholders agreement regulated the way that NFI could conduct its business, it limited NFI's powers to take any step which could dilute the value of an individual share in the company, it regulated the transfer of NFI's shares, it prohibited the charging or other fettering of each shareholder's beneficial interest in those shares, it directed how the profit should be apportioned if the development was sold or refinanced and it made other provisions dictating how the affairs of NFI should be regulated.
93. Mr Laing and Ms Krywald in their evidence suggested that the shareholders agreement that each shareholder and NFI signed never came into effect because, at the last minute and following the signing of the agreement by each party to the agreement including the director of NFI, NFI's company seal was never affixed to the document. Ms Krywald gave evidence that the terms of the shareholders agreement were not finally agreed until June 2001. Each party to the agreement, including NFI's sole director on behalf of NFI, a trustee on behalf of Jedburgh Trust and a duly authorised agent on behalf of ESL, then signed a copy of the agreement. Ms Krywald, on receiving back the signed agreement noticed, in about early November 2001, that NFI had mistakenly not affixed its seal to the agreement and she returned it to Cyprus for sealing. At that point, the dispute as to whether ESL's interest was a beneficial or only a security interest finally surfaced and NFI, on Ms Krywald's advice, held off sealing the agreement to enable Mr Laing to seek to implement his contention that ESL should not be or become a party to the agreement because its interest in the shares standing in its name was not a beneficial one. Ms Krywald also stated that, subsequently, NFI and all the shareholders, except presumably ESL, had resolved that the shareholders agreement should not be implemented at all.
94. It is neither necessary nor possible, in the absence of the parties or potential parties to the shareholders agreement, to determine whether the agreement did or did not take effect when the director of NFI, as the final signatory to the agreement, placed his signature on the agreement but NFI then failed to seal it. Suffice it to say that under English law the failure by a company to seal an agreement that it has purported to enter into is not necessarily fatal to that agreement coming into effect. What is clear, however, is that all the shareholders, including Mr Laing and Mr Watson on behalf of ESL, acted from June 2001 onwards as if there was an agreement in place and had acted from the outset on the basis of the terms of the draft agreement which was first circulated in early 2000 to each shareholder. The agreement, as signed in 2001, provided that it was to take effect retroactively from 23 December 1999.
95. The agreement contained two material provisions so far as Burkle and ESL's shareholding were concerned. Firstly, it provided that no party to the agreement:

"… shall be entitled during the term of this agreement to sell transfer charge incumber grant options over or otherwise dispose of any of the shares or any beneficial interest in any of the shares now owned or to be acquired after that date of this agreement by it in the Company under or pursuant to this agreement or by virtue of its shareholding in the Company."

Secondly, it provided that:

"In the event it is resolved by the Company that the Property is sold … or is refinanced and all creditors of the Company can be paid in full:

14.1.1 Warwick, ESL, Mr Mattar and Armorica will be paid a sum equal to their rESLective initial investments and in the event the accumulated profits are insufficient to meet the payments provided by virtue of this subclause in full the payments will be made on a pro rata basis."

96. The significance of these provisions is three-fold:

(1) These provisions prohibited any NFI share being held as security rather than beneficially. This prohibition would cover any charging or mortgaging of the shares and any beneficial transfer of them as a security with an agreement to retransfer them once the relevant indebtedness had been discharged. Mr Laing played a prominent part at shareholder meetings which took decisions on the basis of the agreement being in force. By acting as if the agreement was in force, Mr Laing was effectively acknowledging that all the shares held by the parties to that agreement were beneficially held by those parties.

(2) Ms Krywald, speaking as NFI's solicitor, stated in evidence that only those who were beneficial shareholders or their nominees could attend and vote at shareholders meetings. If the NFI shares issued in Burkle or ESL's name had not been held beneficially, neither of those companies could have appointed a representative either to attend or to vote at a shareholders meeting.

(3) The terms of the agreement stated that ESL had made an initial investment into NFI which allowed it to rank first in any distribution of the assets of NFI. That provision is inconsistent with ESL's interest in the shares issued in its name being merely a security interest with beneficial ownership remaining with Mr Laing and is also inconsistent with those shares being held as security for a loan made by Burkle to Mr Laing.

97. By signing up to this agreement, and by acting previously on the basis that the terms of the agreement were in force, Mr Laing, through the Jedburgh Trust, Mr Watson and NFI were all apparently acknowledging that Burkle and ESL's interest in NFI's shares was a beneficial and not a security interest. Throughout 2000 and 2001, whenever shareholders meetings were held, Mr Laing attended, as did a duly appointed representative of Burkle or ESL without demur from any shareholder or from Mr Laing. Moreover, Burkle or ESL's representative was allowed to vote whenever resolutions were put to a vote and all NFI's other shareholders agreed to the proposal that Burkle's shares should be transferred into ESL's name.
98. A particularly significant example of ESL's involvement as a beneficial shareholder in the affairs of NFI was when it participated in the shareholders' decision to agree to Mr Laing's proposal as to how the development should be refinanced by NFI. In July 2001, a proposal was circulated to all shareholders to the effect that the development be refinanced using a facility that had been negotiated in principle with the Allied Irish Bank. This proposal required the unanimous agreement of all beneficial shareholders under the shareholders agreement before it could be implemented. Ms Krywald wrote to ESL in its capacity of a beneficial shareholder in NFI on 23 July 2001 as follows:

"We have been requested to submit the enclosed counterpart Resolution of Members relating to [NFI]. This Resolution is required to authorise [NFI] to refinance the Property known as Glory Mill … . The terms of the Shareholders agreement requires the unanimous consent of the members to refinancing.

We would be obliged if the counterpart Resolution could be signed, dated and returned …"

ESL signed and returned the Resolution. This letter shows that the shareholders agreement was being treated by all shareholders and NFI as being in force and that ESL was regarded by all, including NFI and its solicitor who took her instructions from Mr Sanders, as being a beneficial equity shareholder whose shareholding was not subject to any security or charge.

99. Mr Stuart Watson. Mr Stuart Watson is Mr Watson's son. He is a Chartered Accountant and was and remains the chairman of Burkle. He often acts for his father in relation to his father's business affairs. On 18 April 2000, he represented his father at a shareholders meeting held in a meeting room of the RIBA in Portland Place, London, W1. This meeting discussed, amongst other topics, the contents of the draft shareholders agreement which Mr Laing was attempting to finalise and have executed by all shareholders. It was therefore, on any point of view, an important meeting. Mr Stuart Watson stated in evidence that he had a pre-meeting with Mr Laing so that Mr Laing could brief him since Mr Stuart Watson had no knowledge of the Glory Mill development or of the structure of that development. He made notes of both the pre-meeting and the meeting itself. His notes record that, at that pre-meeting, Mr Laing informed him that Mr Laing and Mr Stuart Watson's father held between them about 50% of the equity in NFI and that this was the vehicle through which the site was owned and the development was being undertaken. This is a highly relevant piece of evidence because, if Mr Laing did state this to Mr Stuart Watson, it would amount to an unequivocal contemporaneous admission by Mr Laing that Mr Watson's shareholding in NFI through Burkle was a beneficial and not a security shareholding and that Mr Laing had accepted in his own mind at that time that Mr Watson was entitled to be a beneficial shareholder.
100. Mr Laing denied that he had made this statement to Mr Stuart Watson and, indeed, could not remember that he had had any separate meeting with him before any shareholders meeting. He did accept that Mr Stuart Watson had attended this particular meeting as the representative of his father in his father's role of the principal of Burkle which was, in turn, a shareholder of NFI. Mr Laing also accepted that no-one else at the meeting was aware that Burkle had loaned him the money to enable him to loan money to NFI. He insisted that he had not deliberately kept this information quiet from the other shareholders even though it was information that they were entitled to be given and was relevant to their consideration of the draft shareholders agreement.
101. Mr Stuart Watson's recollection of what Mr Laing told him was supported by the contents of what he stated was his contemporaneous manuscript note that he had taken during the pre-meeting. This note was, therefore, both a document from which he could refresh his memory and one whose contents amounted to contemporaneous evidence in its own right of what Mr Laing had said. This note clearly states:

"Glory Mill, High Wycombe

David)

) 50%

Dad )

Sanders Snr - architect )

) 50%

Sanders Jnr - md Brightstar who will run it)

New Fed Inc owns property at the moment

Paid £8m, sold residential for £5m to Taywood 12 acres left

£173k of existing

£2½ m loan from Leopold Joseph

£2m from equity

Approx £½ m surplus"

102. I am satisfied that Mr Stuart Watson had the conversation with Mr Laing that he stated that he had had and that Mr Laing did state to him that Mr Laing, and Mr Stuart Watson's father, if their rESLective shareholdings in NFI were accumulated, held about 50% of the equity in that company. Mr Stuart Watson was already, at the date of the meeting in March 2000, experienced in business affairs and was a practising Chartered Accountant. He was therefore very familiar with what was meant by a beneficial ownership of shares and as to the difference between beneficial and security interests in shares and is unlikely to have misunderstood what Mr Laing had told him. His evidence of what he recollected Mr Laing had said to him about the structure of the Glory Mill development SPV, particularly as it was recorded by him at the time, is therefore reliable and I accept it.
103. Transfer of Burkle Shares to ESL. The share certificate issued in relation to the shares to be held by Mr Watson's nominee was issued in the name "Burkle Holdings Investments" which is a non-existing entity. This was clearly a typing or other administrative error since the share transfer was in the name "Burkle Holdings Limited". The issue of the shares in favour of Burkle rather than in favour of Mr Watson had been done at Mr Kelly's request when Ms Krywald checked with him whether NFI shares should be issued in Mr Watson's name, in accordance with Mr Laing and Mr Sanders' instructions, or in Burkle's name, being the party who Mr Kelly had informed her would be providing £500,000 towards the site purchase price. Mr Kelly, without seeking Mr Watson's instructions, rESLonded that the shares should be issued in Burkle's name.
104. Mr Watson had always intended that the shares to be issued to him, being the personal share issue additional to the share issue or profit share directly associated with the loan, should be issued in the name of his off-shore investment vehicle, ESL. In June 2000, when the terms of the shareholders agreement were being discussed, it came to Mr Watson's notice that his shares were issued in the name of a non-existing entity and, in any case, were not issued in ESL's name as he intended. He first spoke to Mr Laing who indicated that he saw no reason why the shares could not be transferred from Burkle to ESL. Mr Watson therefore wrote to Ms Krywald on 13 July 2000 and informed her that the Burkle shareholding in NFI should have been issued in the name of ESL. Ms Krywald first raised this request to transfer the shares from Burkle to ESL at a shareholders meeting held on 17 August 2000 and those present agreed to that request. She then asked Mr Watson to obtain written confirmation from Mr Kelly that he should instruct her that the certificate should have been issued in ESL's name since he had originally instructed her that the issue should be in Burkle's name. Mr Kelly wrote to Ms Krywald on 31 October 2000 stating that he confirmed that the share certificate should be issued in ESL's name and asked her to arrange for this to be done. Ms Krywald then arranged for the share certificate for 6,250 shares to be issued in the name of ESL. The share certificate was issued in late November 2000 by NFI and it was backdated to 14 March 2000 so that the certificate replaced the originally issued certificate and ESL was treated by everyone as having replaced Burkle as the holder of 6,250 shares in NFI with effect from the original date of their issue.
105. Mr Laing was present at the shareholders meeting held on 17 August 2000 when the question of substituting ESL for Burkle as shareholder was raised and agreed. Mr Laing did not inform the meeting that Burkle was only a security shareholder and that its shareholding was as security for its loan to himself. That was a significant omission since it would not ordinarily be appropriate for a loan from one party to be secured by security held by a second party in its own right and not as the agent or nominee of the first party. Such an arrangement would need a clear agreement between all three parties as to how the security could be enforced, the cancellation of the debt secured if the security was enforced and the rights of the creditor and the security holder. Moreover, the shareholders would need to know that ESL was to be a security and not a beneficial shareholder, given the prohibition of such a shareholding provided for in the shareholders agreement, the draft of which had by then been agreed. Finally, the registration of ESL as a shareholder without qualification, would obviously be taken to be the registration of ESL as a beneficial shareholder.
106. The Challenge to ESL's Beneficial Shareholding. The issue of whether ESL was a beneficial or a security shareholder first arose when Mr Laing wrote to Mr Watson a letter dated 31 October 2001 but only first faxed to Mr Watson on 19 November 2001. The letter stated that it was referring to matters discussed between them a few days earlier. Mr Watson had no recollection of that earlier meeting and stated that he had been in Spain for most if not all of the preceding period of time. I am not satisfied that there had been an earlier meeting. Mr Laing's reference to such a meeting appeared to be a device to enable him to raise for the first time what he knew would be a very vexed series of topics including the deferral of the loan redemption and his contention that the nature of ESL's NFI shareholding was a security and not a beneficial interest.
107. What had immediately prompted the letter was undoubtedly the imminent arrival of the redemption date for the loan that Mr Laing had to repay. The problem facing Mr Laing was the difficulty he was experiencing in obtaining suitable terms for the refinancing of the development, his preferred course since he now estimated that the site being developed by NFI was worth £18 million with its value continuing to rise. He could not, however, afford to fund either the interest payments payable on the loan or the repayment of the loan out of his own resources in the immediate future. As a result, he had not paid interest for some months on the loan. In his letter, Mr Laing stated that:

"Our meeting the other day and the topics discussed in relation to Burkle's loan have focused my attention on the basis of your investment.

Investments into the Glory Mill opportunity have been made by a number of parties and I approached you to see if you would be interested. The answer was positive but to protect your investment you wished to make the investment by way of a loan to me personally in order that you could draw on additional security in the event there was a failure.

Funds have passed through me to purchase shares in 'Glory Mill', which should in fact still be in my name, and these then lodged with M. Kelly as the main security for the loan together with the other securities forwarded to him to hold. Over the last two years the site has been secured, initial planning confirmed and the resident land sold. Subsequently, the B1 commercial planning application has been approved. As a result of these various steps the primary security for your loan, i.e. the shares in the holding company, have a value in excess of the loan, the site currently being valued in excess of £18m . Accordingly I would be grateful if the security detailed in the schedule to our loan agreement other than the NFI shares could be released.

Repayment of the loan is of course due on 3^rd December 2001 when the NFI shares will then revert to me and although all the security will fall in on repayment of the loan it would be of assistance to me to have the other shares released at this juncture."

108. Mr Watson contended that this letter came as a great surprise to him. It was stating, as he saw it for the first time, that the ESL shares were held as security for the loan that he had arranged for Burkle to make to Mr Laing and would be returned to Mr Laing when the loan was repaid. Mr Watson did not, however, directly raise his concerns in his reply. He merely referred to the non-payment of interest for some months, stated that he did not wish to draw on the security he held. In Mr Watson's mind, that security included the security provided by part of Jedburgh Trust's shareholding in NFI but did not include ESL's shareholding in NFI. Mr Watson also stated that he was not prepared to reduce this security whilst the loan was in default and he suggested a meeting in the near future on his return to the UK.
109. Mr Watson regarded Mr Laing's letter as raising a number of issues of concern. Firstly, he could see that the loan would not, or might not, be repaid in the near future and interest remained unpaid. Secondly, he was concerned that the profit share payment might not be paid and, in any case, there might be difficulties in agreeing the size of the profit share payment since the development might not be sold or refinanced for some time. Thirdly, Mr Laing appeared to be suggesting that ESL did not have a beneficial interest in the shares it held in NFI.
110. Mr Watson was also concerned at the way that the letter was written. It was drafted, as he saw it, so as to "re-write" history. In other words, it appeared as if Mr Laing was attempting to reclaim shares held by ESL, which ESL was entitled to retain a beneficial interest in, even though Mr Laing knew that he had no entitlement to them. This suggested to Mr Watson that, for whatever reason, Mr Laing was attempting to reduce Mr Watson's entitlement to the development profit to be earned from the development. Mr Watson was aware, from the information provided to the shareholders, that difficulties had been encountered in the negotiations that had been progressing for some time to enable NFI to sell the entire development to a third party or refinance it and he speculated in his mind that that might explain this unexpected turn of events.
111. Mr Watson's rESLonse to Mr Laing's letter was two-fold. Firstly, he was aware that he had an entitlement, through ESL, to appoint a director to Brightstar. This entitlement arose by virtue of the shareholders agreement which allowed each shareholder to nominate one director. He decided to arrange for ESL to exercise this entitlement by seeking to appoint Mr Barrs, who was the director of ESL, to Brightstar's board. This would enable Mr Watson to exercise some influence in the way that the development proceeded. Secondly, he decided to seek to re-negotiate the loan agreement so as to provide for revised terms for the loan and a clearer and more certain set of provisions relating to the time for payment and the calculation of the size of the profit share payment. These steps would, he hoped, secure his loan and interest payments, ensure prompt and satisfactory payment of the profit share payment and preserve his personal stake in NFI that was preserved by ESL's beneficial shareholding.
112. ESL therefore wrote to Brightstar seeking to exercise its entitlement to have Mr Barrs appointed to the Board of Brightstar. This letter was tabled at, or before, a Board meeting of Brightstar held on 29^th November 2001. This letter prompted Mr Laing to reveal for the first time to those present, including Ms Krywald, that he regarded ESL as holding shares in NFI merely as security for the loan which had in fact been made to him. This led the Board, who included Mr Sanders, to resolve that the request would be refused since ESL, as security shareholders, had no rights under the shareholders agreement and no right to a nominee director on the Brightstar Board. The conclusion that the Board reached, on Ms Krywald's advice, was that ESL should not have been issued with shares in NFI nor parties to the shareholders agreement.
113. These decisions were communicated by Ms Krywald to Mr Watson in a letter dated 30^th November 2001. This stated:

"A matter arose at [Brightstar's] Board Meeting yesterday as a result of European Security's request for Mr Barrs to be appointed to the Board by virtue of the provisions in the Shareholders Agreement, which has given me serious cause for concern.

I have been informed that the funds paid to NFI from Burkle Holdings were not paid as equity capital but were fund arising from a loan subject to various provisions contained in a loan agreement dated 23^rd December 1999. This agreement provides for certain shares in NFI to be held as security for the loan, accordingly the shares should not have been issued to European Securities (as have been on the instruction of Burkle Holdings Solicitors). Furthermore it was inappropriate for European Securities to be party to the Shareholders Agreement.

I am instructed that in fact the loan is to be repaid. The funds will be sent to my firm plus any outstanding interest which will be released to Burkle Holdings Solicitors on receipt of a signed transfer of shares form, which will then, in effect, rectify the above situation."

114. This letter was written by Ms Krywald on the instructions of the Brightstar Board, of which company she was company secretary, and on the instructions of Mr Laing on his own behalf and on behalf of NFI. Ms Krywald wrote the letter on the basis of Mr Laing's instructions. What he did not tell her was how he came to issue the original instructions that Mr Watson should be issued with a beneficial shareholding in NFI, nor that Mr Watson believed that ESL's shareholding was held beneficially as a result of an agreement he had reached with Mr Laing in October 1999 nor why he had not informed her or his fellow directors of Brightstar or his fellow shareholders in NFI that Mr Watson had loaned him the £500,000 pursuant to a loan agreement and that he, rather than Burkle, was the lender of that sum to NFI

3. The Terms of the October 1999 Agreement and the Share Issue to Burkle and ESL

115. 1. The Law
116. Before reaching conclusions as to the conflicting evidence of Mr Watson and Mr Laing, it is worth considering the relevant law relating to the ways in which shares may be used as security for loans and other indebtedness. The relevant law is set out in Fisher and Lightwood's Law of Mortgagee^[18]. This explains that shares may be charged or mortgaged or made the subject of an equitable mortgage. The text explains:

"A legal mortgage of shares is effected by a transfer of the shares to the mortgagee, subject to an agreement for their re-transfer on repayment of the loan. The mortgagee is registered in the register of members as a fully entitled shareholder of the company. … the transfer will operate as an out and out transfer and will give the mortgagee the rights and impose upon him the liabilities, where they exist, of a shareholder. … Any person inspecting the register or the share certificate issued to the mortgagee will be induced, if ignorant of the true facts, to treat the mortgagee as the absolute legal and equitable owner of the shares. The mortgagor may, therefore, be well advised to protect his equity of redemption by serving a 'stop notice' on the company.

A mortgage of shares is most commonly effected by a deposit of the share certificates with the mortgagee, usually accompanied by a memorandum of deposit. … Amongst other matters, the memorandum usually contains: a statement that the deposit is by way of security, a covenant for payment of principal and interest, a proviso for redemption, a power for the mortgagee to sell the shares, a covenant by the mortgagor not to incur a forfeiture and an undertaking by the mortgagor to execute a registered transfer."

117. It can be seen, from these extracts, that the loan agreement provided for security to be given by the second stated way, namely be way of a deposit of the share certificate. There was, in actuality, no need for the physical deposit of the certificate by Mr Laing with Mr Kelly. This is because Mr Laing, in the loan agreement, had undertaken to charge that part of his NFI shareholding representing 12½% of NFI's issued share capital and to procure the trustee of Jedburgh Trust to do the same and his evidence was that he had the power to require the trustee to charge Jedburgh Trust's shareholding in this way. That was sufficient to create an enforceable charge on the shares. Since equity sees done what ought to be done, a court would order, if necessary, the trustee to deposit the share certificate with Mr Watson and to sell such part of the shareholding as would be needed to redeem the charge. It follows that part of Jedburgh Trust's NFI shareholding, representing 14,750 shares,^[19] had been effectively charged by the loan agreement with effect from 23^rd December 1999 notwithstanding the failure to lodge the share certificate with Mr Kelly and those shares remain charged in that way. Furthermore, ESL, with effect from 14 March 2000, has been and remains the beneficial owner of a further 12½% shareholding of NFI's issued shares.
118. It can also be seen that both the recognised ways whereby shares may be used as security were prohibited by the terms of the shareholders agreement from being used in relation to NFI's issued shares. Both of these ways were prohibited by the express terms of the shareholders agreement since each would amount to the sale or encumbrance of the shares or to a disposal of them on being re-registered in Jedburgh Trust's name.
119. A further matter that emerges from these extracts from Fisher and Lightwood is that whichever way is chosen as the means of using shares to provide security, the debtor, creditor, original shareholder and nominee replacement shareholder must all reach a clear agreement as to how, when and by what means the shares will cease to be encumbered and will be returned beneficially to the original shareholder. No such agreement was reached or entered into in this case dESLite the need, if the ESL shareholding had in fact been charged, for a four-way agreement involving Burkle, Mr Laing, Jedburgh Trust and ESL.
120. 2. Findings of Fact
121. I now turn to the three critical questions of fact: (1) what was agreed in October 1999; (2) were the 6,250 shares issued on 14 March 2000 issued beneficially or as security; and (3) if these shares were issued beneficially, were they issued subject to an agreement that they would be returned by Burkle or ESL once the loan and any other outstanding indebtedness was paid off by Mr Laing?
122. October 1999 Agreement. I am clear that it was orally agreed in late October 1999 between Mr Watson and Mr Laing, in a non-contractual agreement, that Mr Watson or his nominee would receive from NFI a 12½% shareholding in NFI in addition to a second 12½% shareholding that Burkle would also receive from NFI in return for Burkle advancing a loan to NFI of £500,000. The second part of this agreement was varied on about 25 November 1999 so that the loan would be made to Mr Laing in return for an agreement that he would pay Burkle a profit share payment calculated in accordance with the formula provided for in the loan agreement. This profit share payment, the loan and any outstanding interest would be secured by a deposit of shares including 6,250 of Jedburgh Trust's overall shareholding in NFI of 14,750 shares. The shares to be charged would be different from those to be issued by NFI to Mr Watson under the first part of the agreement which survived unaltered.
123. Share Issue to Burkle. It follows that the issue by NFI of 6,250 shares to Burkle was an issue of a beneficial interest in the shares and that there was no agreement that these shares would be mortgaged or charged or subject to being returned when the loan, profit share payment or any other charged indebtedness had been discharged in full by Mr Laing to Burkle.
124. Agreement as to Return of Shares by ESL to Jedburgh Trust. As I have already found, there was no such agreement to which ESL or Jedburgh Trust were parties or which could give rise to an enforceable obligation binding ESL to return the shares to Jedburgh Trust even if Mr Laing's entire indebtedness to Burkle under the loan agreement had been discharged.
125. Summary of Reasons for Findings. I reach these findings having reviewed the totality of the evidence, the salient parts of which I have already summarised. Overall, I found Mr Watson to be a convincing and credible witness and his evidence to have remained unshaken following his extensive cross-examination. This evidence was also consistent with his statements and actions following the October and December 1999 agreements, in a way that Mr Laing's evidence was not.
126. The principal submission advanced by Mr Laing in seeking to rebut Mr Watson's case was that it was inconceivable that he would have agreed to give Mr Watson a larger share of the development than his nominee Jedburgh Trust was obtaining or that other investors were obtaining, if compared on a pro rata basis with their investment. However, this submission overlooks the fact that Mr Watson was able to drive a tough bargain, given Mr Laing's dESLeration to obtain the last vital slice of the required funding without which the project would have collapsed. Mr Watson was, after all, providing at very short notice the final 25% of the private investment finance needed to enable the site purchase to proceed and that sale would have gone off unless Mr Watson had been prepared to provide this funding immediately.
127. In those circumstances, it is readily understandable that Mr Watson sought and obtained the equivalent of 25% of the net profit that was to be earned from Phase 1 of the development project. It was for Mr Laing to decide whether to accept Mr Watson's terms. In doing so, Mr Laing had to decide whether he would accept the consequent reduction in the share of the profit that he, or he and Mr Sanders, would receive. Alternatively, Mr Laing could have rejected Mr Watson's proposed terms and thereby have run the real risk of losing the project and the entirety of the anticipated development profit that it could earn. Mr Laing decided to accept Mr Watson's terms.
128. It follows that Mr Watson's special status meant that his position cannot be equated with the position of the other investors since they had not been in the position of being able to dictate to Mr Laing the terms on which they were to invest in the development.
129. I did not find Mr Laing's evidence credible or consistent with his contemporaneous statements and actions. In particular, I reject his evidence that he never agreed with Mr Watson that Mr Watson should receive a second personal holding of shares in addition to the profit share payment associated with the loan. This adverse finding, from Mr Laing's point of view, is supported by there being a total absence of any independent evidence that the share issue to Burkle was associated with an agreement reached between Burkle and Mr Laing that Burkle would return the shares to Mr Laing once its loan to Mr Laing had been redeemed by him.
130. Mr Laing's behaviour throughout the period from October 1999 until October 2001 was consistent only with his intention to arrange for Mr Watson's nominee company to receive shares beneficially in addition to Burkle receiving a profit share payment. Mr Laing never told anyone before the issue of the shares to Burkle or for nearly two years after their issue that the shares were to be held as security shares and were to be returned to him once he had repaid Burkle's loan. He acted throughout as if these shares had been beneficially issued to Burkle and he was unable to explain why he had acted in that way notwithstanding his subsequent assertion that the shares had merely been issued as security.
131. Both Mr Laing and Ms Krywald accepted that the shares were issued beneficially but both maintained that that beneficial issue had been a mistake. The only basis for this assertion was that Mr Watson was making a loan to Mr Laing and not to NFI and that Mr Laing was asserting that he had never agreed to provide Mr Watson with a second personal unencumbered shareholding. However, the only evidence of this version of the October 1999 agreement was Mr Laing's say-so. Mr Laing produced no supporting documentary or corroborative evidence to back up his version of the agreement and all his contemporary actions and the actions of Mr Sanders, Ms Krywald, NFI and the other shareholders were inconsistent with his version of the October 1999 agreement.
132. There are two further particularly cogent reasons why I should reject Mr Laing's case. The first further reason to reject Mr Laing's case is the evidence of his state of mind at the time of both the first loan agreement and the share issue to Burkle. This evidence is provided by his own admission or declaration against his interest he made to Mr Watson's son, Mr Stuart Watson, on 18 April 2000. As I have found, he admitted that Mr Watson's father, Mr Watson senior, was a beneficial shareholder in NFI. In making that statement, Mr Laing must have been of the view that Burkle held the shares beneficially that it had recently been issued with and, if he held that view, he must, at that time, also have been of the view that Mr Watson's nominee was entitled both to treat those issued shares as having been beneficially issued to Burkle and to receive a profit share payment from Mr Laing.
133. The second further reason to reject Mr Laing's case was Mr Laing's failure to adduce any independent evidence from Mr Sanders that supported his case that the beneficial issue of shares to Burkle had been a mistake or to provide an explanation as to why Mr Sanders was not giving evidence at all or so as to support his case.
134. It has to be remembered that this is a case where the relevant agreement, or alleged agreement, as to the personal share issue was reached orally and was not recorded in any contemporary document. There is therefore a stark conflict between the oral evidence of the two parties to that agreement as to whether or not it was agreed that Mr Watson's nominee would receive a second personal beneficial shareholding in NFI. I must decide whether I can accept Mr Laing's version on the balance of probabilities. Clearly, Mr Laing's version would have been much more credible if there had also been independent evidence that showed that Mr Laing's version should be accepted.
135. Where there is an apparently readily available independent witness who can throw light on a crucial issue, it is to be expected that the party whose case that witness would appear to support will call that witness or provide an explanation as to why that witness has not been called. In the absence of that witness or an explanation for his absence, it is permissible to draw the inference that that witness has not been called because he will give evidence that will not support that party's case. This approach accords with that adopted in a series of authorities drawn to my attention which are referred to and applied by Peter Smith J in Lennox Lewis v Eliades and others^[20].
136. The crucial issue I must resolve is whether or not the NFI shares issued to Burkle were to be charged and were then to be returned once Burkle's loan had been repaid by Mr Laing. The case advanced by Mr Laing was that these shares were issued, or should have been issued solely as security for the loan and that it was a mistake that they were issued beneficially. Indeed, both Ms Krywald and Mr Laing stated in evidence that this share issue was a mistake and that Burkle should not have received the shares at all. Mr Sanders was the NFI shareholder who instructed Ms Krywald in relation to NFI's affairs and it was his instructions that led to the beneficial, but allegedly mistaken, issue of shares to Burkle. Mr Sanders could be expected to give first hand evidence as to why these shares should not have been issued and as to how and why he mistakenly instructed Ms Krywald to arrange for their beneficial issue. His failure to give evidence was both glaring and very surprising since, as Ms Krywald accepted, he was alive and living in England at the time of the trial. It was therefore incumbent on Mr Laing to explain why Mr Sanders was not giving evidence in either oral or written form to support his case.
137. The obvious inference to be drawn from the absence of such evidence or of Mr Sanders as a witness in the case and of any explanation for these absences is that Mr Sanders would not have supported Mr Laing's case and would have accepted that Mr Watson's nominee company was entitled to receive the NFI shares beneficially without any obligation to return them and had not been mistakenly issued with those shares beneficially.
138. For all these reasons, I accept Mr Watson's case as to the October 1999 agreement, as to his entitlement, through his nominee companies, to receive a personal shareholding in NFI in addition to a profit share payment from Mr Laing, as to the non-returnable beneficial interest obtained by Burkle and subsequently ESL in the NFI shares issued in their name and as to his additional entitlement to a charge over 6,250 of Jedburgh Trust's holding in NFI shares pending repayment of the loan to Mr Laing. Equally, I reject Mr Laing's case that Mr Watson was confined to a profit share payment and that the share issue to Burkle and ESL was of security shares subject to these shares being returned to Jedburgh Trust or to NFI when Burkle's loan was repaid.

4. April 2002 Agreement and Second Loan Agreement

139. 1. The Facts
140. The situation in late November 2001 was that Mr Laing and Mr Watson had found themselves to be in disagreement on six separate albeit related fronts. These disputes arose at that time because the loan repayment and the profit share payment were due on 23 December 2001 when the development was due to be refinanced or sold, there had developed an unexpected delay in arranging for the refinancing or sale of the development and Mr Laing did not have sufficient cash from his own resources to pay the interest or profit share payment until the development had been refinanced. It is clear that Mr Watson was not aware of Mr Laing's contention or belief that the Burkle shareholding in NFI was a security holding securing the loan and the profit share until the discussions as to the deferral or other refinancing of the loan started in October 2001. The six separate areas of disagreement between Mr Watson and Mr Laing therefore crystallised at the same time in November 2001.
141. These areas of disagreement were, in summary:

(1) Repayment of Loan. The loan was due for repayment on 23 December 2001 and it was clear that Phase 1 of the development, and any associated rescheduling of the financing, or any sale, of the development would be delayed beyond that date. Mr Laing therefore needed to negotiate an extension of the date for repayment and to renegotiate the terms of the loan.

(2) Unpaid Interest. Interest payments were nearly 9 months in arrears and Mr Watson was looking to Mr Laing to bring these up to date.

(3) Profit share Payment. There was fundamental disagreement as to when the profit share payment should be made and how it should be calculated. These disputes were:

(a) Repayment Date. The loan agreement stipulated that the profit share payment should be made on the Repayment Date but did not define what that date was. Mr Watson regarded that date as being the same as the Redemption Date which was defined as being 3^rd December 2001 whereas Mr Laing took it to be the date when Phase 1 was brought to an end by either a refinancing or sale of the development. If Phase 1 was extended beyond the initial 24-month period, Mr Laing contended that the Repayment date was also extended accordingly.

(b) Manner of Calculating Payment. The loan agreement stipulated that the profit share payment should represent 12½% of the profit taken from the proceeds of sale, if a sale took place, or of the value of the property if a refinancing took place. As it turned out, the profit share payment calculation would have to be undertaken at a time and by reference to a date when neither of these stipulated events had occurred. Mr Watson considered that the payment should reflect the development value of the site on 3^rd December 2001. Mr Laing considered that it should only reflect the sale value of the site on that date.

(4) Security. There were three related disputes:

(a) Shares Held in Security. The loan agreement provided that that part of Jedburgh Trust's holding of NFI shares, representing 12½% of the NFI share capital, was charged in favour of Burkle pending repayment of the monies due to be paid under the loan agreement including the profit share payment. Mr Watson contended that these shares were already fully charged by virtue of the terms of the loan agreement whereas Mr Laing contended that these shares were neither charged nor chargeable and that the loan agreement terms had not been implemented because no share certificate had been deposited with Mr Kelly and also because this charging obligation had been fulfilled by the issue of NFI shares to Burkle.

(b) ESL's NFI Shareholding. Mr Watson contended that this shareholding represented his entitlement to a personal issue of shares in NFI in addition to the profit share payment and that these shares had been issued on his instructions to ESL in consequence. The shares were beneficially owned by ESL and were not subject to being returned when the Burkle loan was repaid. Mr Laing contended that the shares were security shares issued in compliance with the loan agreement requirement to provide security by a charge on part of Mr Laing's holding of NFI shares.

(c) Release of Part of Security. Mr Laing contended that the value of the development site had increased to such an extent that the NFI shares held as security by Mr Watson were now worth so much more than when the security was issued that they provided sufficient security to Mr Watson and that Mr Laing's other shareholdings held in security should now be released. Mr Watson did not agree.

(5) ESL's Nominee as Director of Brightstar. Mr Watson was pressing for Mr Barrs, as ESL's nominee, to be appointed as a director of Brightstar whereas Mr Laing was still contending that, since ESL did not hold a beneficial shareholding and should not have been a party to the shareholders agreement, this appointment should not be made.

(6) Profit share Agreement Transferred to ESL. Mr Watson wanted to separate the profit share agreement and the loan agreement into two separate agreements so that the profit share would be payable to, and received by, ESL whereas the loan would be repaid to Burkle. This was for tax purposes so as to make it clear that the profit share payment would be taxable as the income and receipts of an off-shore company and would not to be taxed as profit associated with a loan in the hands of a UK-based company.

142. Mr Watson flew back from Spain and met Mr Laing at Mr Laing's house on 5 December 2001. All these disputes were discussed. Mr Watson prepared a minute of the meeting which he stated accurately summarised the discussion albeit that he never sent a copy of it to Mr Laing following the meeting. The minute, or note, provided as follows:

"Loan capital repayment of £50,000 made by DL with cheque dated 3/12/01.

Agreed to extend loan until 3/1/02 upon payment of 9 months interest to 31/12/01 being made by 3/1/02.

No security to be released.

Further loan capital repayment due April 2002 of £50,000 from W. Sand dividend. …

Shares in NF Inc to remain as issued, DL to instruct Sandra accordingly.

R.G. Barrs to be a director of Brightstar Properties Ltd.

Loan/Profit share to be transferred from Burkle to ESL on 3/1/02 on same terms except interest to be paid gross.

IW agreed not to press for repayment pending DL sale negotiations with J & J on GM site."

143. Mr Laing accepted in evidence that he agreed with the contents of this note in general terms. At the meeting he had explained to Mr Watson that he was not in a position to repay Burkle £500,000 at that time because he had not been able to arrange alternative financing for the Glory Mill site. He was, however, agreeable to the loan being transferred to ESL. He would not object to Mr Barrs becoming a director of Brightstar albeit that it was not in his power to grant that request. Finally, the ESL shareholding in NFI would remain whilst the loan remained unpaid with Mr Laing continuing to contend that these shares were held as security and Mr Watson continuing to contend that they were held beneficially.
144. It was clear from their evidence that Mr Watson and Mr Laing remained at loggerheads on most of the matters in dispute following that meeting. In particular, Mr Laing contended that the item referred to in Mr Watson's note as "release of security" related to the security provided by the Burkle shareholding in NFI. Therefore, the entry in Mr Watson's note: "No security to be released" was referring to the same matter as the subsequent entry: "Shares in NFI to remain as issued". However, it is clear from the wording of the note as a whole and from the underlying disputes that had by then crystallised that the first entry was referring to the security being provided by 12.5% of the Laing/Jedburgh shareholding in NFI whereas the second entry was referring to the separate beneficial shareholding that had been issued to Burkle.
145. What the two men clearly agreed to was to continue discussing how the loan repayment and interest payments would be made and how the agreed size of the profit share payment and its date for payment could be identified. As to the dispute relating to the existence or otherwise of a further equity interest in NFI, the two accepted that that dispute should be parked to await resolution of the other disputes and the outcome of NFI's attempts to either sell or refinance the development.
146. That no more than an uneasy standstill agreement governing the immediate future was reached can be seen from the letter Mr Laing wrote to Mr Watson on 11 February 2002 following another meeting between them on 30 January 2002. Mr Laing wrote:

"1) Richard has forwarded funds to Sandra Krywald's account to cover payment of loan interest due under the Loan Agreement …

2) You agreed that the existing loan facility can continue at 12.5% interest for this year or until a sale is achieved but it may be repaid at any time earlier. If the site is not refinanced in the near future you have asked for the agreement to be transferred to European Securities in which case interest will be paid gross and on repayment the bundle of security would be released.

3) You acknowledged that the shares in the Glory Mill Company are retained as security under the loan agreement and will be released to me on the later of repayment of the loan and payment of the profit share.

4) You asked for the profit share element under the agreement to be held to the credit of European Securities.

5) You are looking to achieve agreement of a "minimum" profit share. To advise you of such a figure there would have to be an agreed value. I will give some thought and see if I can get some financial costings to arrive at an assessment of the current net value. Obviously this is somewhat involved and may take a little time."

147. Mr Watson, in his reply, referred expressly to paragraphs 2 and 5 of Mr Laing's letter. This reply showed that the two men had reached a modus vivendi in relation to the repayment date for the loan and would review the position generally by the end of March as both men wanted an amicable solution. However, such a solution would have appeared unlikely to both men since each was sticking firm on his rESLective view as to whether or not ESL's NFI shareholding was a beneficial or security holding, as to how the profit share payment should be calculated and as to whether or not Mr Barrs should be allowed to be appointed a director of NFI's subsidiary company.
148. The two men did, however, continue to discuss their rESLective points of view on the profit share payment disputes. Mr Laing informed Mr Watson in a fax dated 20 February 2002 that he was preparing a valuation of the land and summarised the basis of how he proposed that this calculation should be made. He stated that this valuation would be forwarded to Mr Watson shortly. On the same date, Mr Watson faxed Mr Barrs a note summarising the widely differing views that he and Mr Laing had as to how the profit share payment should be calculated and sought his views as to the basis of this profit share calculation. In writing to Mr Barrs in this way, Mr Watson was looking for the disinterested views of an informed third party to assist him in the continuing debate on this subject that he was having with Mr Laing.
149. The two men remained at loggerheads over the shareholding issue. On 27 February 2002, Mr Laing faxed Mr Watson a letter which made it clear that he regarded the shareholding as being a security holding against the repayment of the loan. The letter continued:

"With regard to the current position, it is likely that I would continue with the loan and we should arrange for it to be made in the name of ESL with interest running at 12½% rate paid gross. I am not in the market to offer a minimum profit share or to increase the share level beyond the 12½%. I confirm that the existing securities will remain as security until repayment of the loan and that the company shares will continue to be held as security until repayment of the profit share is made."

150. A further meeting was held in early March 2002. Some progress appears to have been made because, following the meeting, Mr Watson felt able to fax to Mr Laing a manuscript document which summarised the contents of two agreements which would, if overall agreement could be reached, supersede the loan agreement. The first proposed agreement was a loan agreement relating to the outstanding part of the Burkle loan to Mr Laing. This would be entered into by Burkle and Mr Laing and would contain the same loan terms as the earlier agreement save for changes relating to the repayment date. The security would be Mr Laing's Eskmuir Properties Plc and Wheathampstead Land Co Ltd shareholdings. The second proposed agreement was a profit share payment agreement which would be entered into between ESL and Mr Laing. This would redefine how the profit share payment would be calculated, would provide a clear formula relating to when the profit share payment would be paid and would provide for interest to be paid in the event of late payment. The security for this payment would be a 12½% interest in NFI charged on 6,250 of Jedburgh Trust's shareholding in NFI.
151. It is clear that no progress was made in relation to the thorny issue of the basis on which ESL held the NFI shareholding it had been issued with. Mr Watson was clearly continuing to maintain that this shareholding was both beneficial and additional to any profit share payment. Mr Laing suggested in evidence that Mr Watson had appeared to accept by the time that these meetings, culminating with the one held in early March 2002, had been concluded that there was only one 12½% interest in the development reflected by the profit share payment and that ESL's NFI shareholding would be held as security for that payment. Mr Watson strenuously denied that he had changed his position and support for that denial is found in the draft heads of agreement he produced in his own handwriting relating to the profit share agreement. This provided that the profit share agreement would be:

"Exactly the same as previously so we [i.e. Burkle] shall be in no worse a position

EXCEPT

1. Security to exclude Esmuir and W. Land shares and to include the "Glory Mill" shares."

152. In context, this draft can have no other meaning than that the "Glory Mill" shares to be held as security against the profit share payment would be the same Glory Mill shares as had been provided as security in the original loan agreement, namely part of the Jedburgh Trust/Laing personal holding, and not any additional holding issued to ESL. That proposed draft is wholly inconsistent with any change in position having been adopted by Mr Watson on the NFI shareholding issue.
153. Mr Kelly was then instructed by Mr Watson to draft two agreements to accord with the heads of agreement prepared by Mr Watson which he had also sent to Mr Laing for comments. Mr Watson forwarded his two heads of agreement documents to Mr Kelly on 18 March 2002 with instructions to prepare the drafts of the two proposed agreements. It is clear that the two men had previously discussed the possibility that the first loan agreement would be superseded but that discussion only considered the possible superseding of the first loan agreement if both draft agreements were entered into and it did not cover the situation that would arise if only a loan agreement was entered into. This can be seen from Mr Kelly's letter that he wrote two days later on 20 March 2002 to Mr Laing enclosing the proposed drafts of the two agreements which he stated:

"I note that the loan has been reduced to £442,000 and that you are now, in substitution for the previous Agreement with Burkle Holdings, to enter into two separate Agreements, one with Burkle Holdings relating to the repayment of the loan and the other with European Securities Limited relating to the share in Glory Mill. I note also that the security offered under the previous Agreement with Burkle is to be split between these two companies."

154. The next documents in chronological sequence are two letters from Mr Kelly to Mr Laing and Mr Watson, both dated 3 May 2002, which enclosed an engrossed copy of the Burkle Holdings Loan Agreement. These letters were sent, according to the letter sent to Mr Watson, in furtherance to a recent telephone conversation he had had with Mr Watson. Apart from the statement in Mr Laing's letter that:

"I understand from Ian [Watson] that you are happy with the Burkle Holdings' Agreement in the form I sent you with my letter of 20 March."

there was no explanation set out in the letters as to why only the loan agreement had been executed, what had happened to cause the draft profit share payment agreement to be dropped or as to whether the single loan agreement was superseding or merely amending the original loan agreement. The draft loan agreement itself did not expressly state that it was superseding or amending that earlier agreement.

155. Mr Laing gave evidence that this letter had been preceded by a telephone conversation he had initiated with Mr Watson in late April during which Mr Watson agreed that the ESL shareholding in NFI was a security holding and that, to avoid continuing dispute about the basis on which the profit share payment should be calculated, that shareholding would there and then be transformed into a beneficial shareholding in substitution for the obligation to pay a profit share. In consequence, the profit share payment agreement and the obligation to pay a profit share payment would both be discharged. That, according to Mr Laing, explains why only one agreement was entered into and why it is clear, as he sees the position, that that agreement superseded the original loan agreement, including the profit share payment provisions, in its entirety.
156. Mr Watson, on the other hand, flatly denies that any such conversation took place or, indeed, that any conversation took place between him and Mr Laing in the period between 20 March 2002 and 3 May 2002. He contends that he withdrew his proposal that Burkle and Mr Laing should enter into a second profit share agreement because he realised that no agreement on the terms of such a replacement profit share agreement was possible. In consequence, he instructed Mr Kelly to proceed only with the proposed loan agreement. He was clear that both he and Mr Laing then executed the second loan agreement on the basis that it would amend but not supersede the first loan agreement.
157. There is no supporting or corroborating evidence of the telephone conversation referred to by Mr Laing. He did not follow it up with a letter or fax or, indeed, refer to it until his solicitors raised a general allegation, in a letter dated 19 March 2004, that the two protagonists had reached an agreement sometime in the period March to September 2002 that ESL's shareholding replaced the profit share obligation. This allegation was again repeated in very general terms in Mr Laing's Statement of Case which was served on 1^st March 2005. Even then, the reference was scant, paragraph 12 of that document merely stating that:

"in or about April 2002, Mr Watson and Mr Laing agreed orally that … the 12.5% shareholding in NFI, hitherto held by ESL as security for the advance from Burkle to Mr Laing would henceforth be held by ESL beneficially in lieu of the profit share to which ESL would have been entitled under the draft 2002 Profit share Agreement."

158. Moreover, the suggested agreement, if entered into, would have represented a remarkable climb down by Mr Watson in that he would have simply foregone the profit share payment he was entitled to receive from Mr Laing without anything in return, given that he already held, through ESL, a 12½% beneficial shareholding in NFI in addition to that entitlement. There must have been some contact between the two men, however, since the two appear to have agreed that the draft profit share agreement would not be proceeded with. This is not surprising since the draft provided for a definition of how the profit share payment was to be calculated which Mr Laing had never accepted and which he regarded as providing far too generous a payment to Burkle. Thus, the obvious conclusion is that a telephone conversation did take place and that the two men agreed that they would continue to differ about all aspects of their dispute save for the revised loan terms. In other words, they agreed to execute the draft loan agreement as an amendment to the existing loan agreement.
159. The only suggested piece of additional supporting evidence proffered by Mr Laing to support his evidence as to the terms of an oral agreement reached with Mr Watson in late April 2002 is hearsay evidence from Mr Kelly which it is suggested reports an admission made by Mr Watson on about 2 May 2002 to the effect that he had agreed to forego his entitlement to a profit share payment in return for ESL's shareholding in NFI being treated as a beneficial shareholding. The circumstances in which this evidence, coming from Mr Watson's solicitor, came to be in the hands of Mr Laing and the reasons why I directed that it could be adduced in evidence dESLite its protection as legally privileged material are set out in the two procedural judgments already delivered in this case.^[21]
160. I will summarise the relevant factual circumstances which are relevant so as to place the relevant hearsay statements into their appropriate context and are admissible as an aid to the proper construction of the text which reports those statements. These circumstances are:

(1) At Mr Laing's suggestion, Mr Watson instructed Mr Kelly to act for him in drafting the first loan agreement. Mr Kelly was subsequently instructed by Mr Watson to draft the second loan agreement as well as the draft profit share agreement which was not ultimately adopted or signed by the two protagonists.

(2) Mr Watson at no time informed Mr Kelly of the existence of the collateral agreement whereby he or his nominee would be allotted a 12½% beneficial shareholding in NFI and none of the material adduced in evidence, by way of letters or other documents written by Mr Kelly, shows that he was aware that Mr Watson was contending that he or his nominee was entitled to both an equity shareholding and a profit share payment totalling in combination 25% of the profit to be earned from the development. Mr Kelly seems to have been of the view, certainly until after the second loan agreement was finally executed in September 2002, that Mr Watson was not claiming an entitlement to an equity shareholding in addition to a profit share payment.

(3) Mr Kelly had been Mr Laing's solicitor in relation to a series of matters over a number of years and appears from the documents adduced in evidence to have retained a parti pris for Mr Laing's point of view, particularly after the two protagonists became embroiled in the current dispute.

(4) Mr Watson consulted Mr Kelly on at least three occasions following his sending Mr Kelly on 20 March 2002 draft heads of agreement for use in drafting the two draft agreements. The critical admission, or suggested admission, occurred during the course of one of these occasions. Mr Watson does not appear to have referred to his claim to a security interest in part of Mr Laing's Jedburgh Trust holding of NFI shares in addition to his claim to an entitlement to an equity shareholding in other NFI shares during these discussions.

(5) Mr Watson maintained privilege over all communications, both oral and written, between himself and Mr Kelly and only addressed submissions as to the meaning of the material adduced in evidence because I had ruled that it could be referred to in evidence.

161. I should also summarise the relevant law relating to the approach I must adopt in considering what meaning and weight should be placed on the hearsay material allegedly containing evidence of an admission made by Mr Watson. This is:

(1) No adverse inference should be made against a party who declines to waive legal professional privilege, even where the waiver refusal occurs following an involuntary partial waiver or a breach of legal professional privilege giving rise to a partial disclosure. This principle relates to undisclosed passages in documents where related passages have been revealed or disclosed.

(2) A court may make findings of fact based on hearsay statements where the maker of the statement is not called to give evidence but particular care should be taken in weighing up that evidence before it is accepted as being reliable.

(3) In assessing the weight to be given to a hearsay statement admitted in the circumstances of the statements in question, a court must have regard to such factors as whether the original statement, that is Mr Kelly's report, was made contemporaneously with the stated occurrence, that is Mr Watson's alleged admission; whether the statement involves multiple hearsay; whether the original statement was edited and the circumstances surrounding the original admission and the making of the subsequent hearsay statement.

162. The various documents adduced in evidence are all based on the document first issued, being an attendance note made by Mr Kelly of a conversation he had had with Mr Watson on or immediately before Mr Kelly wrote to both protagonists on 3 May 2002 stating that he understood that the profit share revised agreement was not to be proceeded with. This attendance note was not placed in evidence, the actual document that was placed in evidence was a subsequent attendance note made by Mr Kelly of a telephone conversation he had had with Mr Laing nearly one year later on 24 February 2003. The relevant passage reads:

"[Mr Laing] is no sure whether there is going to be a dispute but [Mr Watson] does seem still to be querying what has happened to his 12.5% share in the Glory Mill Development. I [Mr Kelly] said that I had faxed a letter to [Mr Watson] on Friday reminding him that he had told me last May that I need not bother about this 12.5% share; because ESL now had a 12.5% shareholding in New Federal Inc, the company which owned the development."

163. Mr Laing contends that that passage amounts to a statement that Mr Watson conceded and admitted that he had agreed to give up Burkle's entitlement to a profit share payment from Mr Laing in return for ESL's shareholding in NFI being treated as an equity or beneficial shareholding. I cannot accept that that statement can be read in that way or that it provides evidence of Mr Watson's state of mind in May 2002 or of his acceptance that he reached the agreement with Mr Laing at that time that Mr Laing contends for.
164. It is particularly important to consider the context of the statement allegedly made by Mr Watson when assessing what Mr Watson may reasonably have been taken to have said to Mr Kelly and the meaning and significance that should be placed on that statement. The statement was made at a time when Mr Watson was attempting to reach agreement with Mr Laing as to how the profit share payment should be calculated. He had attempted to agree the heads of agreement for two separate agreements, one dealing with the loan and the second with a redrafted profit share payment obligation. It was clear to Mr Watson, at the time he made the statement in question to Mr Kelly, that he would not reach agreement on the terms of a new profit share agreement with Mr Laing. Mr Watson was therefore apparently explaining to Mr Kelly that he would have to live with the existing profit share payment terms. He did need, however, a new loan agreement since the loan was now overdue for repayment. Finally, he had recently persuaded Mr Laing to transfer the shareholding originally issued to Burkle into ESL's name.
165. It is therefore reasonable to interpret what he said to Mr Kelly as follows:

"Proceed with the proposed new loan agreement but do not proceed further with the proposed new profit share agreement. I can't reach agreement with David [Laing] on the proposed new terms for that second agreement but I am not unduly bothered since the new agreement would merely have clarified the terms of the existing profit share provisions of the existing agreement. I can live with the original profit share terms for the time being, particularly as the Burkle equity shareholding has now been transferred to ESL."

166. Mr Kelly can be excused for not understanding in that sense what Mr Watson said to him since Mr Kelly remained unaware of the 1999 side agreement whereby Mr Watson's nominee company would receive a beneficial shareholding in NFI in addition to Burkle receiving a profit share payment from Mr Laing. Moreover, Mr Kelly clearly remained sympathetic to Mr Laing's point of view and seemed prepared to accept that point of view in preference to the instructions he was getting from Mr Watson. In context, the meaning to be placed on Mr Watson's words that I have just suggested is preferable to the meaning now contended for by Mr Laing.
167. In reaching that conclusion, I take into account the inherent unlikelihood that Mr Watson had had a Pauline conversion to Mr Laing's point of view during the course of a solitary telephone conversation, particularly as Mr Laing did not then refer to this apparent conversion until the dispute had crystallised into threatened court proceedings over two years later. On the other hand, Mr Watson continued to assert his longstanding position that he was entitled to both the shareholding and the profit share. For example, he sent Mr Laing a note on 14 February 2003 which contained this PS:

"Have you had any more thoughts on the Profit share Value of Glory Mill at 3/12/01?"

168. Instead of roundly denying that Mr Watson remained entitled to a profit share, given their agreement 12 months previously, Mr Laing provided this enigmatic reply:

"With regard to your comment on the value of Glory Mill I was confused when you bought this up on your last visit, and remain confused. I have consulted M Kelly and Sandra Krywald to confirm that at the time the shares were issued to you last year, the Burkle agreement now remains the only document in place – this they have confirmed. You accepted that you would have the same rights as other shareholders at that time – correct, there will be a profit share, but from the profits realised, which it is in everyone's interest to achieve and maximise."

That reply is not consistent with there having been reached a recent agreement whereby Burkle's profit share entitlement had been replaced by ESL's equity shareholding in NFI.

169. 2. Conclusion - April 2002 Oral Agreement
170. I conclude that there was no agreement reached, whether informally or formally, in April or May 2002 whereby Mr Watson and his companies would forego Burkle's existing entitlement to a profit share payment from Mr Laing or would accept anything less than a 25% interest in the profit realised from the Glory Mill Development to be paid by a dividend payment on ESL's 12½% shareholding in NFI and by a further 12½% profit share payment by Mr Laing to Burkle. That composite entitlement existed prior to April 2002 and it remained in place after 2 May 2002.

5. 2002 Loan Agreement

5.1. The Facts

171. Following the agreement reached between Mr Laing and Mr Watson as to the terms of the second loan agreement in April 2002, there was a delay until 18 September 2002 before it was executed by Mr Laing and thereafter it immediately took effect. No further communication occurred between them in that period between April and September 2002 save that Mr Watson was pressing for the agreement to be executed and Mr Laing appeared to be dragging his feet to execute it. However, once executed, it clearly governed the terms of the outstanding loan.
172. The dispute that must now be determined is whether that second loan agreement, when properly construed, has the effect of superseding or discharging the entire 1999 loan agreement so that the profit share provisions of the 1999 agreement have ceased to apply and Mr Laing's obligations in relation to that contractual obligation to pay Burkle a profit share payment no longer operate.

5.2. The Second Loan Agreement

173. The second loan agreement, dated 18 September 2002, was entered into, like the first loan agreement, between Burkle and Mr Laing. It is entitled a Loan Agreement and it defines the Advance as being £442,000, namely the amount outstanding of the advance of £500,000 referred to in the first loan agreement. The Redemption Date is defined as being 3^rd December 2002. The agreement then provides for repayment, interest, security, costs and other liabilities, indulgence and waiver, demands and arbitration. The agreement also contains a provision that:

"Each of the provisions of this agreement is severable and distinct from the others and if at any time one or more of such provisions is or becomes invalid, illegal or unenforceable, the validity and enforceability of the remaining provisions shall not be affected or impaired."

The security was defined as being 100,000 ordinary £1 shares in Eskmuir Properties plc and 17 ordinary £1 shares in Wheathampstead Land Company Limited.

174. The structure and wording of the second loan agreement is almost identical with the relevant provisions of the first loan agreement. The security is the same as the second and third items of the security provided for by the first agreement and the severability clause is also identical in both agreements.
175. Mr Watson contended that this agreement is to be read with the first loan agreement and that, save where the second loan agreement clearly amends the terms of the first loan agreement, both agreements survive and remain enforceable. This was the result of the clear words of both agreements. It was also the result of the absence of any specific provision in the second loan agreement which stipulated that the second agreement discharged the first agreement. This construction conformed to the clear intention of the parties that the profit share provisions of the first agreement survived the completion and execution of the second loan agreement which was clearly only concerned with Burkle's loan to Mr Laing.
176. Mr Watson also pointed to the fact that the first agreement must have survived. This was because it provided that all its separate provisions were severable and any provision in it continued in force even if other provisions had become invalid or unenforceable. Thus, the profit share payment provisions survived any abrogation of the original loan provisions.
177. Finally, Mr Watson contended that the second loan agreement only covered part of the original loan so that the first loan agreement must have continued to survive in relation to the balance of the loan, albeit that that balance had already been repaid. The continuing need for the first loan agreement was so as to provide for any unpaid interest, for the terms under which the partial repayment discharged the continuing obligation to repay that money and for arbitration in relation to any dispute arising out of that repaid part of the loan.
178. Mr Laing contended that the second loan agreement, by necessary implication, discharged the first loan agreement in its entirety. This contention arose from his further contention that that is what the parties had agreed to and had intended to agree to in April or early May 2002 and from the further contention that Mr Watson was only to receive a 12½% profit share from the development with no additional beneficial shareholding in NFI.
179. However, as I have already decided, these further contentions of Mr Laing were incorrect. In particular, contrary to his submission, the parties only intended to discharge the first loan agreement in its entirety if they had reached agreement as to, and then executed, both proposed agreements drafted in March 2002. In fact, as already determined, the two protagonists shelved the proposed replacement profit share agreement because they could not agree on an amended definition of how that profit share payment should be calculated. In agreeing to shelve that new proposed definition, they were necessarily agreeing to the continuation of the existing profit share provisions.
180. 3. Conclusion - 2002 Loan Agreement
181. I conclude that the 2002 loan agreement does not supersede or discharge the 1999 loan agreement. Both survive and are to be read together. Thus, the profit share provisions of the first loan agreement remain in force and are enforceable. I reach this conclusion as a result of the clear words of the second loan agreement, the intention of the parties and the factual matrix out of which the second loan agreement arose. This second loan agreement, in reality, provides necessary amendments to the first loan agreement and to the details of the obligations surrounding the loan necessitated by the non-repayment of that loan at its Redemption Date and by Mr Laing's need to obtain an extended extension of the period of the loan. In short, I accept all of Mr Watson's contentions in support of the survival of the first loan agreement following the execution of the second loan agreement.
182. 4. Rectification and Estoppel
183. Mr Laing sought, if his primary contention as to the meaning of the second loan agreement was incorrect, to rectify it so that it provided expressly that the first loan agreement was superseded or discharged in its entirety. He also sought to rely on an estoppel to the effect that it would be unconscionable or contrary to the parties' agreed convention if Mr Watson was able to rely on the strict wording of the second loan agreement to enforce the profit share provisions of the first agreement. Both these claims and defences are, however, untenable in the light of my findings that there always was, and remained, enforceable agreements providing for both an equity shareholding in NFI and a profit share payment, cumulatively worth about 25% of the value of the profit realised by the development.

6. Conclusion

184. Mr Laing is not entitled to any of the declarations he seeks. Mr Watson is entitled to declarations that the 1999 loan agreement was not superseded or discharged by the 2002 loan agreement and that, in consequence, Burkle's entitlement to a profit share payment from Mr Laing as provided for by the 1999 loan agreement remains enforceable in the terms provided for by that agreement; that ESL is the beneficial holder of the 6,250 NFI shares issued to it by NFI with effect from 14 March 2000; and that that part of Jedburgh Trust's holding of shares in NFI representing 6,250 shares or 12½% of NFI's issued shares is charged with Mr Laing's obligations to pay Burkle the profit share provided for by the first loan agreement.
185. I will hear from the parties as to the appropriate order to make in the light of this judgment.

HH Judge Thornton QC

Technology and Construction Court

September 2005

Note 1    Laing xx D1/145/19 – 23.    [Back]

Note 2    Laing xx D2/31/23 - /32/10/. He referred at other points in his evidence to this shareholding as being his own shareholding.    [Back]

Note 3    Laing xx D1/155/3 - /155/19.    [Back]

Note 4    Watson 1/12/304/9.    [Back]

Note 5    Unreported, 29 April 2005 [2005] EWHC 638 (TCC).    [Back]

Note 6    Watson xx D6/39/14 - /40/8.    [Back]

Note 7    Watson xx D6/38/18 – 21.    [Back]

Note 8    Watson xx D6/43/13 – 19.    [Back]

Note 9    Watson xx D6/45/25 – 47/19.    [Back]

Note 10    Krywald xx D5/97/25 - /98/15; /108/13 – 19.     [Back]

Note 11    Bundle 1A/10/55/10 – 11.    [Back]

Note 12    Laing xx D2/27/2 - /30/7.    [Back]

Note 13    Laing xx D2/107/5 – 16.    [Back]

Note 14    Krywald xx D5/109/17 - /110/18.    [Back]

Note 15    The instructions from Mr Sanders as to the share allocations in NFI (see paragraph 69 above).    [Back]

Note 16    These passages are taken from the part of Ms Krywald’s cross-examination dealing with the issue of the shareholding to Burkle which is set out at D5/58/6 – 123/4.    [Back]

Note 17    2/129.    [Back]

Note 18    Eleventh edition, chapter 7, paragraphs 7.21 – 7.23.    [Back]

Note 19    This was the 29.5% holding it retained in NFI once the investors had been issued with their rESLective shareholdings. The number charged represented 12½% of the total number of issued shares.     [Back]

Note 20    Unreported, 23 March 2005, [2005] EWHC 488 (Ch), paragraph 60.    [Back]

Note 21    Burkle Holdings Limited v David Eric Laing (No 1) Judge Toulmin CMG, QC, Unreported, 23 March 2005, [2005] EWHC 638 TCC; Burkle Holdings Limited v David Eric Laing (No 2) Judge Thornton QC, Unreported, 27 June 2005, [2005] EWHC [] TCC.    [Back]