Mr Justice Briggs:
Introduction
- This judgment follows the liability only trial of a
claim by the defendant Cambridge City Football Club Ltd ("the Club") to
rescind or have set aside three related transactions with the claimants Ross
River Ltd ("Ross River") and Blue River LP ("Blue River") providing for the
sale and lease-back of its football ground and stadium in Cambridge ("the
Ground"). The first of those transactions consisted of the sale of the Club's
freehold interest in the Ground to Ross River for £1.3 million plus a share in
the overage attributable to the obtaining of residential planning permission
("the Overage"), pursuant to a conditional agreement dated 3rd
February 2005, completed on the 29th April 2005. The second
consisted of a sale by the Club to Ross River of its share in the Overage for
£900,000 on 7th October 2005 ("the Overage Agreement"). The third
was a contracted-out lease of the Ground by Ross River to the Club dated 21st
June 2006, for a term which expired on the 31st May 2007, following
which the Club has continued in occupation, pending the outcome of this
litigation. That lease replaced two earlier consecutive lease-backs of the
Ground dated respectively 29th April and 7th October
2005.
- The Club claims to be entitled to have those three
transactions set aside on two distinct grounds. The first arises from payments
made in June and November 2005 and January 2006 by agents on behalf of Ross
River to Mr Arthur Eastham, the then chief executive of the Club, who took the
lead in the negotiation of the three transactions on behalf of the Club, which
the Club characterises as having constituted bribes. The second basis is that
the Club claims to have been induced to enter into the second and the
predecessor of the third of those transactions by reason of fraudulent
misrepresentations made on behalf of Ross River by a Mr Paul Harney of Waveley
Project Management Ltd ("Waveley") to a Mr Edwin Lee of the Club's surveyors
Cheffins in a letter dated 25th May 2005.
- The claimants admit that the payments to Mr Eastham
and the statement to Mr Lee were made on behalf of Ross River. As to the
payments, they allege that the first of these consisted of the discharge in
part of the Club's liability to pay consultancy fees to Mr Eastham, known to
and requested by the Club at a time when it lacked the funds to make the
payment itself. The remaining payments are said to be for work done by Mr
Eastham for Ross River after the sale of the Club's share in the Overage. As
to the representations, the claimants' defence is in outline that they were
honest and accurate expressions of the claimants' belief and (to the extent
factual) of the underlying facts, but that the Club did not rely upon them in
any event.
- The apparent oddity that the claims in this
litigation are made by the defendant against the claimants arises from the
fact that the immediate casus belli consisted of the Club's
registration of a unilateral notice on 24th October 2006 against
the claimants' title to the Ground at HM Land Registry, leading to the
claimants issuing the present proceedings for the purposes of securing the
removal of the notice, and declarations of non-liability, possession of the
Ground upon the termination of the 2006 lease, and damages for breach of
statutory duty under section 77 of the Land Registration Act 2002. The claims
with which in substance this litigation is primarily concerned were then made
by the Club in its Defence and Counterclaim.
The witnesses
- The Claimants called eight witnesses, seven of whom
were cross examined. Mr Brian Peter York gave evidence first. He and his
family beneficially own and control the claimants. He was neither a
particularly satisfactory nor obviously unreliable witness. The most
noticeable feature of his attitude towards giving oral evidence was that he
appeared to have schooled himself, (there was no suggestion that he had been
schooled), into a too easy inability to recall matters about which he was
being cross examined. In particular, he tended to confuse the question whether
he could recall an event with the question whether he could remember a
particular document in which that event had been referred to or described. An
understandable lack of recollection of the document led him all too often to
assert that he had forgotten all about the described event as well. For that
reason, amounting in substance to a disinclination to engage fully or
cooperatively with cross examination, I found it necessary to treat his
evidence, and in particular his witness statements, with caution. As will
appear, I have not found it possible to accept an important part of his
evidence about the £10,000 payment to Mr Eastham in June 2005.
- He was followed by Mr Eastham. By contrast with Mr
York, he was articulate, and talkative to the point of being garrulous. He did
not help himself by prefacing answers to sometimes straightforward questions
by lengthy self-justificatory speeches. But when regard is had to the fact
that following his departure from the Club he was subjected to criticism of
the most serious kind in the local press, I gained the impression that his
speech making was more to do with him seeking to set the record straight, as
he saw it, rather than as a means of evasion.
- It was apparent before the trial started that, when
asked to return a substantial amount of Club documentation after his
resignation, Mr Eastham chose not merely to retain that documentation for a
time, but to show it, or copies of it, to Mr Paul Harney, Mr York's principal
property adviser in connection with the Ground, in order, as he put it in
cross examination, to enable him to piece together an account of events at the
outset of the present dispute. Quite apart from the breach of fiduciary duty
involved in that use of the Club's documents, which included privileged
communications with its solicitors, the involvement of Mr Harney in Mr
Eastham's attempt to put together his account of his stewardship of the Club's
affairs gives rise to the need to treat the product of that collaboration with
considerable reserve, for reasons connected with Mr Harney's own lack of
credibility and the lack of integrity demonstrated by his behaviour in
connection with the matters in issue, which I shall describe in due course.
- Nonetheless, I did not form the impression when
listening to Mr Eastham that he was seeking deliberately to mislead the court.
On the contrary, he engaged fully with the cross examination and, on occasion,
made some significant realistic admissions. As will appear however, I have not
been able to accept certain important parts of his evidence about the
circumstances in which he accepted payment from the claimants in 2005. In
important respects, the combination of his desire to justify his conduct and
the assistance of Mr Harney in recreating his account of what happened led to
him giving a significant amount of evidence which I have found myself obliged
to disbelieve.
- Mr Harney himself followed Mr Eastham, and was
subjected to a sustained cross examination designed to portray him as the
villain of the piece. He is a highly intelligent and experienced player in the
property business, both as a project manager for others, including Mr York,
and on his own account. He plainly has above average powers of recollection,
and gave an articulate and, on occasion, highly detailed account of his
participation in the relevant events. For the most part, his evidence appeared
at first sight to be well reasoned and plausible, until subjected to a
comparison with the contemporaneous documents, in particular those created by
Mr Harney himself, when assessed in their proper context. That comparison,
which was carried out by Mr Davidson QC for the Club in cross examination at
length and with rigour, persuaded me that the critical parts of Mr Harney's
evidence were a meticulously prepared and sophisticated attempt by him to
disguise the fact that he had, in 2005, set out deliberately to mislead Mr
Lee, the Club's surveyor, about the progress of the project to obtain
residential planning permission for the Ground. I have therefore been forced
to conclude that Mr Harney was no more to be trusted as a witness than as a
professional colleague.
- At an early stage in his cross examination, Mr
Harney was caught red-handed in a blatant attempt in a letter to deceive the
Cambridge City Council's Planning Authority into thinking that a generous
planning permission would assist the Club in realising the value of its
interest in the Ground, at a time when, in January 2006, the Club had already
parted with the whole of its interest in the residential development of the
Ground, by reason of the Overage Agreement made in October 2005. By that date,
the only beneficiaries of any generosity on the part of the City Council in
its attitude to the grant of planning permission were (subject to the Club's
claims in this litigation, which had not by then been adumbrated), the
claimants and Mr Harney's own company which, as project manager, was to be
remunerated solely by a share in Mr York's companies' profit. Rather than
admit the inevitable, Mr Harney wriggled and evaded with imagination but
without candour, and this became the hallmark of his evidence in cross
examination, all the more so in relation to more directly relevant events.
- In the result, I did not find Mr Harney's evidence
to be of any assistance to the court, save in the sense that he demonstrated
the truth of that which the Club sought to prove as to the lack of integrity
with which he participated in relevant events.
- The remaining witness called by the claimants from
among their own stakeholders and advisers was Mr Derek Carr, a chartered tax
adviser and partner in the firm of Peters Elworthy & Moore. He was at the
material time Mr York's personal tax adviser, and formed a link in the chain
by which Mr York gave instructions or expressed wishes to the managers of his
Isle of Man companies. Although briefly cross examined, no significant attack,
still less inroad, was made upon his honesty or credibility. Beyond that, his
appearance in the witness box was too brief for me to form any more detailed
assessment of his value as a witness, beyond concluding that he was determined
to assist the court with his recollection of events, both in writing and
orally.
- Leaving aside Mr Eastham himself, two of the other
three directors of the Club at the material time gave evidence voluntarily for
the claimants. The first was Mr Jeremy ("Jez") George, a former player for the
Club, a full time member of its staff, and the person who persuaded Mr York
himself briefly to become a director of the Club, so as to assist it with his
experience in the property business. Apart from Mr Eastham, he was more
closely involved in the affairs of the Club than any of the others who gave
evidence.
- Although unsophisticated, (or perhaps because of
it), I found Mr George to be a most impressive and valuable witness. His
integrity was in my judgment beyond question. He gave a detailed and entirely
credible account of the awfulness of the Club's financial predicament
throughout the relevant period, and of the reasons why constantly recurring
emergencies prevented the Board from conducting its transactions with due
formality, or even with any satisfactory minutes of its decisions. He readily
acknowledged that, while he was a member of it, the Board had not in many
respects covered itself in glory, with the result that his evidence was not,
like Mr Eastham's, adversely affected by any desire for self-justification.
- There are certain significant respects in which I
have not accepted Mr George's evidence in full, where the evidence as a whole
has compelled me to a conclusion at variance with his. In those respects I
have concluded that his evidence was incorrect through defects in the accuracy
of what he was told at the time, or from imperfections in his understanding
and recollection, rather than from any lack of a sincere desire on his part to
assist the court, which in my judgment he demonstrated in abundance.
- The other director was Mr Martin Murray, who was
called by both sides as a witness of truth, having given successive witness
statements to each. His involvement with the Club's day to day affairs during
the material period was by no means as close or detailed as that of either Mr
Eastham or Mr George, and although I have no doubt of his desire to assist the
court with his recollection, it proved in certain respects to be seriously at
variance with some of the facts which, reviewing the evidence as a whole, I
have concluded occurred. That does not mean that I have rejected the whole of
his evidence. In certain particular respects, for example in his assertion
that the directors did not as a body agree upon a specific amount to be paid
to Mr Eastham in addition to his normal salary, and in his lack of knowledge
of the June 2005 payment to Mr Eastham, I found that his evidence was both
valuable and correct.
- The claimants also called the Club's surveyor at
the time, Mr Edwin Lee of Cheffins. He was a straightforward, helpful and
perceptive witness, who made no attempt to exaggerate his powers of
recollection. Although not called as an expert, I found his analysis of the
extent to which a full and frank response by Mr Harney to his enquiries as to
the progress of the project in 2005 would have assisted him in advising the
Club in relation to its negotiation of the Overage Agreement to be compelling.
In short, he was an experienced, realistic and intelligent surveyor, seeking
honestly but without exaggeration to assist the court.
- In one respect however I have concluded that his
recollection, which he admitted involved an element of inference, was not
entirely correct, in particular when compared with the contemporaneous
documents. This concerned the basis upon which the directors agreed that Mr
Eastham was to receive additional remuneration for his work in realising the
development value of the Ground, during negotiations with Mr York's companies
in 2004. Mr Lee acknowledged that this was not his area of responsibility, and
his understandable lack of concern about this matter at the time may have
contributed to a less than perfect recollection of it.
- Finally, the claimants relied upon the witness
statement of Giulio De Simone, the proprietor of restaurant premises at the
Ground, in connection with the circumstances in which he agreed, for a
substantial premium, to vacate it so as to facilitate its redevelopment. His
evidence was accepted without cross examination, so that, to the limited
extent relevant, I have treated it as reliable.
- The defendant's main witness was the remaining
director at the material time, Mr Kevin Satchell. He was a man of relatively
few words, and, like Mr York, appeared to have schooled himself to take refuge
in apparent shortcomings in his recollection in relation to virtually all
points about which he had not already provided detail in his two witness
statements. Again, like Mr York, he had an axe to grind in the litigation.
Having been the recipient of a substantial (to a considerable extent
unexpected) part of the proceeds of the sale of his family's business which
occurred almost at the same time as the making of the Overage Agreement in
late 2005, Mr Satchell has since become a principal financial supporter of the
Club, and a substantial contributor to the Club's costs of this litigation.
- He was subjected to a searching test of his powers
of recollection by Mr Seitler QC for the claimants in cross examination, in
which he performed without distinction. Again like Mr York, I did not find him
to be either an impressive or obviously unsatisfactory witness. The
corner-stone of his evidence was that he had neither known of nor approved any
negotiation by Mr Eastham for a payment of remuneration from Mr York or his
companies, or been informed that Mr Eastham had in fact obtained such payment
in June 2005. Although if unsupported, I might not have placed much weight
upon the absence of recollection of a witness with apparently limited powers
of recall, I concluded in the end, as will appear, that his evidence on this
point accorded with the probabilities of the matter, having regard to the
evidence as a whole.
- Next in importance among the Defendant's witnesses
was Mrs Jennifer Warren, a partner in the Defendant's Solicitors Taylor
Vinters, responsible for the conduct of the detailed drafting and execution of
the agreement for the sale of the Ground, and of the Club's share of the
Overage. She readily acknowledged in cross examination her less than total
powers of recall. I found her interpretation of her own files to be
compelling, and she was frank, engaging and transparently honest. I have
however concluded that her recollection failed her in one important respect,
namely whether an additional payment to Mr Eastham was mentioned at a drafting
meeting which she attended in 2004. The virtual unanimity of the other
attendees that it was mentioned prevailed over her evidence that, although she
could not be sure, it was not.
- The defendants did not in the event call Mr
Crangle, who became a director of the Club only after the relevant period.
Their other two witnesses, Mr Davidson and Mr Young, were not cross examined,
so that their evidence was accepted in full, albeit of limited relevance.
The facts
The Parties
- The Club was incorporated on 14th August 1973 as a
private company limited by shares to take over the assets, liabilities and
business of its predecessor the Cambridge City Football Sports Club Ltd. It
appears that a football club bearing the name Cambridge City can trace its
existence back approximately 100 years. It is one of two prominent football
clubs in Cambridge, the other being known as Cambridge United. It has been a
regular competitor in the FA Cup, and competes in the Conference South League.
- By late 2002, despite success from time to time on
the field, the Club was commercially insolvent, although the value of its
assets still exceeded its liabilities, due entirely to the potential for
residential development of the Ground.
- At all times prior to the adoption of new Articles
of Association in 2006 the Club's constitution provided, by Article 14 as
follows;
"A Director shall not be entitled to receive any remuneration in
respect of his office as Director or as an employee of the Club. The
Directors may be paid all travelling, hotel and other expenses properly
incurred by them in attending and returning from meetings of the Directors
or any committee of the Directors or general meetings of the Company or in
connection with the business of the Company"
- In late 2002, at the beginning of the events which
I must describe, the Club's directors were Stuart Hamilton, Kevin Satchell and
a Mr and Mrs Rolph. Mr Hamilton was the Chairman, and handled the day to day
affairs of the Club, subject to the (not very close) supervision of the Board.
- The claimants are both offshore vehicles, formed
for the purposes of the transactions in issue in these proceedings, and
ultimately beneficially owned by Mr York and his family. Blue River is an Isle
of Man limited partnership, and Ross River is its general partner. The York
family's beneficial interest in the claimants is held under a trust which is a
limited partner in Blue River.
- Mr York is a businessman with substantial
interests in and around Cambridge, in particular in connection with building
and property development, including projects for a number of Cambridge
University colleges.
Re-constitution of the Club's Board
- It became apparent to the Club's then directors in
late 2002 that the deteriorating state of its affairs was getting beyond their
control. Mr Hamilton's wife had recently died. He had become reticent about
the Club's day to day affairs, and preliminary attempts to put together a
re-location plan which would permit the Ground to be sold so as to improve the
Club's finances had made no progress. Mr George, a former player and full-time
employee of the Club, was brought onto the Board to avoid losing him, and he
was instrumental in persuading both Mr York and Mr Eastham to contribute their
considerable business experience towards turning the Club around, as
directors. I have described Mr York's background. Mr Eastham's experience lay
in sales, having in particular been a sales director for the
telecommunications company NTL. Both had, as may be expected, a keen interest
in football. In addition, another former player for the Club, Martin Murray,
was also recruited to the Board.
- A search at Companies House shows that all four
new directors were appointed on the 4th February 2003, although the
oral evidence suggested that they were invited to join the board in December
2002.
Taking Control
- The appointment of the new directors coincided
with the issue by the Football Association of a report on the Club, on the
12th February 2003, based upon work carried out in September 2001
and a draft report was issued in December 2001, upon which the then directors
had been invited to comment. The report noted, at paragraph 4.4, that despite
the prohibition in the Club's Articles upon remuneration of directors (whether
as directors or employees) the Club's then chief executive Mr Hamilton
received a salary, and recommended that Article 14 be amended. The report also
noted the parlous financial position of the Club, and the Board's intention to
resolve it by a sale of the Ground, coupled with relocation of the Club's
activities. The report noted the expectation of the then Board of receiving
about £7.5 Million net for the sale of the Ground, and recorded the directors'
intention to seek shareholders' approval for a re-location before any decision
was made. The evidence of the new directors was, regrettably, that none of
them read the FA's report, having in their view much more urgent crises to
deal with. Article 14 was not amended.
- Attempts by the new directors to appraise
themselves of the up to date financial position of the Club at a series of
board meetings in early 2003 met with a lack of co-operation from Mr Hamilton,
which culminated in a decision on 6th May 2003 that he should "step
aside" while Mr Eastham carried out a review of the books and records. Mr
Hamilton then resigned on about 12th May and, upon Mr Eastham's
discovery of large amounts of unopened correspondence, including unpaid bills,
in Mr Hamilton's office, an urgent investigation of the Club's finances was
commissioned by the Board from Peters Elworthy & Moore, a local firm of
accountants. They reported in writing on 23rd May, advising that
the Club was commercially insolvent (i.e. unable to pay its debts as they fell
due), that it had short-term liabilities to creditors in excess of its
overdraft facility in the amount of £ 122,000, that it was losing about
£12-15,000 a month, and that cash of approximately £250,000 would be needed to
meet liabilities to creditors over the following 6 months. The report noted
that the Ground represented an asset of significant but uncertain value,
noting a recent valuation prepared for its bankers of £750,000 to £1 million,
but a possibly much higher development value, subject to major uncertainties
which needed to be investigated.
- The Club had no money with which to pay Peters
Elworthy & Moore for their work. Mr York arranged for his company York
Construction (Cambridge) Ltd ("York Construction") to pay the bill of some
£15,000 odd, and the payment was treated as an unsecured loan by York
Construction to the Club.
- The Board's immediate response to the discovery of
the financial crisis facing the Club was to appoint Mr Eastham as chief
executive in the place of Mr Hamilton. Although there is no documentary record
of this, the oral evidence of the directors persuades me that, at the outset,
Mr Eastham's fellow directors agreed that he should be paid £2,500 per month
(or £30,000 per annum) for his services as chief executive, a slight increase
on the £25,000 per annum which Mr Hamilton had been receiving. The Club's
shareholders had neither been asked to consent to, nor informed of the payment
of a salary to Mr Eastham, and since the board ignored the Football
Association's advice to amend Article 14, the board had no authority to commit
the Club to the making of any salary agreement or salary payments to Mr
Eastham.
Selling the Ground
- As is recorded in the minutes of the board meeting
on 4th February 2003, at which the new directors were appointed,
the sale of the Ground and consequential re-location of the Club's activities
was a cardinal item of company policy from the moment of their appointment.
The minutes noted interest by four property companies, and recorded a decision
that each of them should be invited to make offers for the Ground by
4th March. As an experienced property developer himself, Mr York
was asked by the other directors to advise the Club, alongside Mr Hamilton, in
connection with the sale of the Ground.
- It rapidly became apparent to Mr York that,
notwithstanding the optimistic figures which had been suggested to the
Football Association, the realisation of the development value of the Ground
was likely to be seriously impeded by practical difficulties, which may be
grouped under the following four headings:
1. Restrictive covenant
2. Access
3. Occupying tenants
4. Mortgages
I will deal with each of these in turn.
Restrictive Covenant
- The Ground was affected by a restrictive covenant
contained in a conveyance dated 28th October 1929 in favour of St
John's College, Cambridge, which limited the use of the Ground to a sports or
athletic ground, and prohibited the erection of any building thereon, other
than a pavilion or similar building for sporting use. The Club had not by
early 2003 taken any legal advice as to the enforceability of this covenant,
or entered into any negotiations with the College for its release.
Access
- The only access to the Ground lay though the
neighbouring Westbrook Centre pursuant to a right of way enjoyed by the Club.
By early 2003 the Club had taken no advice either upon the question whether
its existing right of way would be sufficient for a residential development
upon the Ground, whether the route of the access road was suitable in planning
and highway safety terms, or whether the road was suitable for adoption as a
public highway. It was believed that a potential alternative means of access
was subject to a ransom strip owned by the City Council.
Occupying Tenants
- There were a number of occupying tenants, all or
some of whom would be likely to require the payment of substantial premia for
early surrender. They were the Cambridgeshire Football Association, under a 99
year lease from 1st May 2001 relating to office premises within an
existing building on the Ground. Secondly, Tipacre Ltd had a lease of the
majority of the car park on the Ground expiring in January 2007. Thirdly,
Crown Castle UK Ltd had erected a mobile telephone transmitter station and
mast on part of the Ground under a lease for 20 years from 11th October 1995.
Lastly the De Simone family were tenants of a restaurant at the Ground under a
lease for 10 years from December 2001, having been tenants since 1985.
- By early 2003, the Club had not commenced
negotiations with any of its occupying tenants with a view to obtaining early
possession, and had little idea whether, and if so for what surrender
payments, each of them would be prepared to vacate.
Mortgages
- The Ground was, in early 2003, subject to two
charges, the first in favour of the Club's bankers to secure its substantial
overdraft, limited at that time to £395,000. Upon a sale therefore, the Club
would have to be able to continue trading with a much reduced (if any)
overdraft. Secondly, Cambridgeshire FA had a charge to secure a loan to the
Club in excess of £150,000.
- The combined effect of these difficulties meant
that, as became apparent when interested purchasers submitted written offers,
the Club had no prospect of an early sale of the Ground on terms which would
realise its development potential by a significant immediate monetary payment.
For example, David Wilson Homes only offered to pay £100,000 for a 5 year
option to purchase. Bovis Homes made an offer which, although substantial, at
£7.46 million, was conditional upon the receipt of planning permission for
which in early 2003 the Club had not even applied, offering only a £50,000
deposit in the meantime.
- Faced with unsatisfactory offers and an
increasingly desperate need for cash in the short term, the directors began to
focus upon Mr York as a potential lender and, in due course, buyer of the
Ground. Mr Hamilton asked Mr York whether he could provide £100,000 as short
term funding pending sale but this was not pursued before he resigned. I have
already described how Mr York arranged for York Construction to lend money to
pay for the investigation by Peters Elworthy & Moore.
- At a board meeting in June 2003 Mr York was asked
by Mr Murray and Mr Satchell whether he would be interested in purchasing the
Ground on terms which would provide for the Club both a share in its
development potential and cash in the short term. Mr York agreed to think
about it and, having decided that he was interested, informed his colleagues
in July of his intention to resign as a director, as he eventually did by
letter dated 4th September. By then he had at Mr Eastham's request
made two unsecured loans to the Club, each of £50,000, on 7th and
15th August.
- In the meantime the Board arranged for
professional advice in connection with the sale of the Ground. Taylor Vinters,
a Cambridge based firm of solicitors, were retained to provide legal advice on
23rd May, and Cheffins, a Cambridge based firm of chartered
surveyors, were retained to provide valuation and marketing advice in August.
- Mr York's first move towards acquiring the Ground
consisted of a proposed agreement pursuant to which, in return for increasing
his companies' lending to the Club from £100,000 to £200,000, his company York
Developments Cambridge Ltd ("York Developments") would receive first, a
debenture by way of security, and secondly an option exercisable within 12
years (or longer if there was a pending planning appeal) to purchase the
Ground at a formula price consisting of half the difference between the market
value of the Ground at the time of exercise and indexed linked planning and
development costs (as defined). Any outstanding lending secured by the
debenture at the time of exercise of the option was to be deducted from the
amount payable to the Club.
- Mr Lee of Cheffins advised the Club against the
proposed agreement but the directors nonetheless executed the proposed Option
Agreement on 1st September 2003, on terms making it conditional upon
shareholder consent. Whether the Board's decision to execute the Option
Agreement was a measure of the then extremity of the Club's financial
predicament or of the lack of business acumen on the part of its directors was
not explored in evidence, and need not be decided, because at an Extraordinary
General Meeting of the Club on 26th September 2003 the shareholders
declined to provide the necessary consent, with the consequence that the
Option Agreement never became unconditional, and lapsed. Although the
shareholders' meeting was merely adjourned, and the shareholders told that it
(or a further meeting) would be re-convened to discuss varied proposals, the
shareholders were not thereafter either invited to, nor did they, take any
further part in the disposal of the Ground.
- Following the shareholders' meeting, there ensued
almost exactly one year's negotiations between the Club and a small group of
interested purchasers, before the Club signed a contract for the sale of the
Ground to York Developments ("the 2004 Sale Agreement") together with an
associated loan agreement, on 28th September 2004. For the most
part, that course of negotiations gives rise to no factual controversy, and is
of limited relevance to the issues which I have to decide. It may for present
purposes sufficiently be summarised as follows.
- Five potential developers were in competition with
each other, albeit never all at the same time. They were Ashwell Group Plc,
the Burford Group Ltd (which owned the adjacent Westbrook centre), Conygar
Investment Company Plc, Yorkshire Ventures Ltd, and York Developments itself.
The Club managed to avoid financial collapse by borrowing from two of the
competitors, Mr York's companies (as already described) and Conygar. From time
to time each lender sought to use its status as such to improve its bargaining
position in the negotiations. On 11th May 2004 the Club was obliged
to secure repayments of its borrowing from York Construction by the grant of a
debenture for what was described therein as an advance of £176,000 odd. The
evidence suggests that this amount was rather larger than the actual debt of
the club to York Construction at the time, but the Debenture was drafted on
the assumption that York Construction would lend the additional amount
necessary to enable the Club to repay its loan from Conygar, which it did in
July.
- With the assistance of Taylor Vinters and
Cheffins, the Club's directors led by Mr Eastham played off the various
competing purchasers with considerable skill. As late as the day before the
2004 Sale Agreement, the Club was still in active negotiations with Yorkshire
Ventures. At the same time, the Club was facing constant pressure from
creditors, including both HM Customs and Excise and the Inland Revenue, and
struggling to pay the necessary players and staff wages required to enable it
to continue with its sporting programme.
- Despite being advised by Cheffins to do so, the
Club did not however pursue the detailed investigations and negotiations which
were required to enable the various difficulties in the way the successful
development of the Ground to be either evaluated or surmounted. To do so would
have been beyond the Club's financial and administrative resources at the
time. The result was that in seeking to identify the most attractive bidder
for the Ground, the Club was obliged to proceed very much in the dark as to
the true development value of the Ground.
- It is nonetheless no part of the Club's case that
it was induced to make the 2004 Sale Agreement with York Developments by
reason of any misrepresentation by that company, or any breach of fiduciary
duty by Mr Eastham or any of its directors. Furthermore, the evidence (both
oral and documentary) shows that the 2004 Sale Agreement, and the Head of
Terms between the same parties which preceded it, were the subject of vigorous
and detailed negotiation, both between the representatives of the parties
(principally but not only Mr Eastham and Mr York) and their professional
advisors. It was, in summary, a hard fought arms' length commercial deal.
- Although the course of that year's negotiations is
in general neither contentious nor relevant, there is one important and highly
contentious issue of fact relating to this period, namely whether during the
negotiations between the Club and York Developments there was made any
agreement for the provision of additional remuneration for Mr Eastham (beyond
his basic salary), and if so between which parties, involving which of those
parties' representatives, and upon what terms both as to entitlement and
method of payment. That issue is of central relevance to the Club's case that
Mr Eastham was bribed, but I have found it easier to make my findings of fact
about the bribery issue as a whole, rather than stage by stage in its precise
chronological position in the story.
The 2004 Sale Agreement.
- The 2004 Sale Agreement consisted in essence of a
conditional sale of the Ground by the Club to York Developments for £1.3
million, of mutual promises by each party to co-operate with the other in the
obtaining of vacant possession and of planning permission for the development
of the Ground, and of the sharing between them on a broadly 50/50 basis of the
increase in the value of the Ground attributable to the obtaining of vacant
possession and planning permission. At the same time, the Agreement provided
for the grant of a contracted–out lease of the Ground by York Developments
back to the Club for a term of 5 years (from completion) at a rent of £70,000
per annum, with provision for earlier termination at any time after
10th May 2006, provided that a satisfactory Planning Permission had
by then been obtained. I shall refer (as have the parties) to the increase in
the value of the Ground as "the Overage".
- The Club's share of the Overage is defined in the
Agreement as the "Additional Consideration" pursuant to a formula for its
calculation described in Schedule 5, paragraph 1, as follows:
i) "A – (B +C) x D – (E +F +G) = AC."
- Schedule 5 then explains that algebraic formula by
reference to the definitions to be found in a 14 page definition section in
the Agreement. For brevity, but at the expense of precise accuracy, the
formula is explicable as follows.
- A is either the gross sale proceeds (if the Ground
is sold to a third party buyer with planning permission and vacant possession)
or the market value (as defined) of the Ground in certain stated events at
least five years after the making of the Agreement.
B is the aggregate of the Planning and Development Costs plus interest. I
shall have to return to the definition of Planning and Developments Costs.
C is the original sale price of £1.3 Million increased by indexation.
D is 50 %.
E is the amount of the York Advances and York Loans (as defined) as at the
calculation date (defined as the Sale Date) plus interest. The York Advances
was the £180,000 owing by the Club to York Construction (or its associates) at
the date of the Agreement. The York Loans was an additional £135,000 advanced
to the Club, together with all other monies due by the Club to York
Construction or York Developments by the Sale Date.
F is the amount of any outstanding rent at the Sale Date, plus
interest.
G is the amount paid by the York companies to obtain termination of the
Cambridgeshire FA lease and the release of St John's College restrictive
covenant in excess of £450,000 and £75,000 respectively.
- With that explanation, it will be apparent that
the Club's share of the Overage was to be half the net increase in the value
of the Ground in excess of the £1.3 million purchase price, net of Planning
and Development Costs, from which was to be deducted various amounts by then
owing by the Club to any of the York companies. It was the purchase by the
Claimants of the Club's share of the Overage in October 2005 for £900,000
which has given rise to this litigation.
- I have described the 2004 Sale Agreement as a
conditional sale. The conditions precedent, subject to waiver by York
Developments, were:
i) The obtaining of an agreement with Cambridgeshire FA for the
vacation of its office premises at the Ground on or before the termination
of the Club's lease, in defined terms.
ii) The obtaining of an agreement with St John's College for the release
of the restrictive covenant affecting the Ground, again on defined
terms.
iii) The obtaining of restrictive covenant indemnity insurance, again on
defined terms.
All the conditions precedent were satisfied or waived by April 2005.
- There is (because it was in writing) no dispute as
to the express terms of the 2004 Sale Agreement, but there is an important
issue as to its legal effect. Although it contained an express declaration
against partnership, the Club claims that the Agreement constituted, or
included, a sufficient element of joint venture so as to give rise to mutual
obligations of good faith as between its parties, and in particular to an
obligation of the Purchaser to give full and fair disclosure to the club of
all information relevant to the value of the Club's share of the Overage, in
connection with any negotiations between the parties for the purchase of that
share. I shall deal with the legal principles relevant to that issue later in
this judgment. At this stage, it is necessary only to summarise the provisions
of the Agreement upon which the claim is based.
- Paragraph 1.1 of Schedule 3 required York
Developments, as soon as reasonably practicable after Completion, and after
taking all necessary advice, considering all relevant matters, and making all
necessary investigations, to produce a draft Scheme for the development and
maximisation of the value of the Ground, for approval by the Club, not to be
unreasonably withheld or delayed. The Scheme was to be produced in any event
not later than 12 months after completion.
- By paragraph 1.2 of Schedule 3, the Scheme was to
be followed by the production by York Developments of a draft planning
application, again for approval by the Club. By paragraph 1.5.1 York
Developments was to keep the Club informed, at reasonable intervals, of the
progress of the planning application, and to give the Club an opportunity to
make reasonable representations in respect of both of the Scheme and planning
application, and to notify and obtain the approval of the Club in relation to
any Material Variations (as defined).
- By Schedules 4 and 6, provision was made for the
obtaining of vacant possession of the Ground, and the obtaining of planning
permission, the obtaining of all necessary types of access for the purposes of
the Scheme, and for the removing or the releasing of the restrictive covenant
and other encumbrances. Those are defined in Schedule 6 as the Development
Conditions.
- Paragraph 1.1.1 of Schedule 4 provides as follows:
"After Completion the Vendor shall co-operate with the Purchaser
and take all reasonable action required by the Purchaser from time to time
to secure vacant possession of the Property by the Lease Termination Date
and satisfy the Development Conditions:"
- By paragraph 1.1.2 the Club was protected from
having to incur third party costs in relation to any aspect of its
co-operation required by the Purchaser, unless and until the Purchaser agreed
to pay for them.
- By paragraph 1.2 the Purchaser was obliged to use
all reasonable endeavours to obtain the planning permission and satisfy the
Development Conditions taking into consideration "…(b) the obligation to
obtain best value …" By paragraph 1.2.1, where payments were to be made or
Costs or Liabilities (as defined) incurred by the Purchaser within the meaning
of Planning and Development Costs, the Purchaser was to use reasonable
endeavours to achieve the lowest cost or best value.
- "Costs" was broadly defined. "Planning and
Development Costs" was defined as meaning for the Cost and/or compensation
reasonably and properly due or incurred by the Purchaser or any Associated
Companies (at any time) in relation to those matters set out or referred to in
Schedule 7. That Schedule set out an exhaustive list of Planning and
Development Costs which included all duties and taxes payable, the cost of the
satisfaction of the Conditions Precedent, all professional fees, the cost of
purchasing any necessary additional land and the cost of satisfying the
Development Conditions.
- In summary therefore, the Agreement contained
within it obligations of mutual cooperation in relation to the maximisation of
the value of the Ground by the obtaining of planning permission and vacant
possession, obligations of the Purchaser to consult with and obtain the
approval of the Club in relation the Scheme and to the planning application,
and an obligation to obtain the best value and/or the lowest cost in incurring
expenditure in connection with the Scheme in circumstances where that
expenditure was to constitute a deduction against the amount payable to the
Club as its share of the Overage.
- Although the inclusion of express provisions
providing for the early purchase by York Developments of the Club's share of
the Overage was contemplated during negotiations, no such provisions of any
kind were ultimately included within the 2004 Sale Agreement. It therefore
contains no express terms regulating the conduct of the parties toward each
other in the event of any negotiation for such a purchase.
- The loan agreement made between York Construction
and the Club at the same time as the 2004 Sale Agreement provided for the loan
of an additional £135,000 to the Club, secured by the May 2004 Debenture. The
immediate cash requirements of the Club pending completion of the 2004 Sale
Agreement were thereby provided for.
The Isle of Man Companies
- Shortly after the making of the September 2004
transactions, Mr York was advised that tax savings could be achieved for
himself and his family if York Developments' part in the scheme contemplated
by the 2004 Sale Agreement was carried out instead by an offshore corporate
structure. Accordingly the Ross River and Blue River entities were set up in
the Isle of Man in the manner which I have already described, as the vehicles
for this and other development projects. The Club was persuaded that the
substitution of the Isle of Man entities for York Developments was not adverse
to its interests, and this was achieved by two agreements each made on
3rd February 2005. The first was a Termination Agreement between
the Club and York Developments, which simply provided for the termination for
the 2004 Sale Agreement. The second was a fresh Sale Agreement in
substantially identical terms to the 2004 Sale Agreement, but now between the
Club and Ross River, on behalf of Blue River. I shall refer to it as "the 2005
Sale Agreement", and to the 2004 and 2005 Sale Agreements as "the Sale
Agreements".
Completion
- As contemplated by clause 4 of the Sale
Agreements, the first requirements for the realisation of the development of
the Ground consisted of satisfying the Conditions Precedent, for which the
Club was to use all reasonable endeavours, but in relation to which the
Purchaser was to be entitled to conduct all relevant discussions and
negotiations with Cambridgeshire FA and St John's College, so as to procure
agreement with them on the best terms reasonably available.
- Agreement was reached with St John's College for
the release of the restrictive covenant on 10th January 2005, for
the release fee of £75,000 index linked until completion, which was to be a
date chosen by the owner from time to time of the Ground not later than the
fifth anniversary of the date of the agreement.
- Agreement was reached with Cambridgeshire FA for
the surrender of its lease and the release of its mortgage on 8th
April 2005, pursuant to which the owner for the time being of the Ground was
entitled to obtain vacant possession from Cambridgeshire FA in May of each of
2006-9 inclusive, for a surrender premium of between £450,000 and 500,000 odd
depending on the date.
- I assume (but the evidence does not describe) that
the condition precedent in the obtaining of restrictive covenant insurance was
either satisfied or waived. Completion of the 2005 Sale Agreement took place
on 29th April 2005, whereupon the Ground was transferred by the
Club to Ross River and leased back to the Club on the terms which I have
already briefly described. In order to give good title, the Cambridgeshire FA
mortgage and the Club's bank's charge had to be, and were, redeemed. A letter
from Taylor Vinters to Mr Eastham dated 29th April 2005 shows how
the £1.3 million odd purchase money was applied. £472,000 odd was needed to
redeem the bank's charge. Just under £400,000 was required to redeem the
Cambridgeshire FA Mortgage. Taylor Vinters' fees slightly exceeded £100,000.
After other deductions consisting of professional fees, an outstanding
judgment debt, an insurance premium tax on the new lease, the Club received
only £249,000 odd, of which the letter described £220,500 as being the VAT
element of the sale price. Accordingly, although the completion of the sale of
the Ground discharged a substantial amount of the Club's outstanding
liabilities, it did little of substance to provide it with ongoing cash flow
to satisfy the demands of its loss-making activities. It comes as no surprise
therefore that even before completion, discussions commenced between the Club
and Ross River with a view to the purchase by Ross River of the Club's share
of the Overage. Before describing those discussions, it is convenient first to
describe the process by which initially York Developments but later Ross River
set about preparing the Scheme and the planning application, and discharging
their obligations to satisfy the Development Conditions pursuant to the Sale
Agreements.
Pursuing the Development Project
- Mr York had as early as mid 2004 approached Mr
Harney of Waveley for advice in connection with his intended acquisition of
the Ground. In July and October 2004 respectively, Mr Harney interviewed
Bidwells and Savills as potential valuers and planning consultants to the
project. Savills signed a confidentiality undertaking in relation to the
project on 29th October 2004, and were formally retained after a
fee proposal made by them by letter of 17th March 2005.
- In order to address the problem of obtaining a
satisfactory means of access to the developed site, Mr Harney approached
Rutherfords, a Cambridge based firm of highway planning consultants, who
signed a confidentiality undertaking on 21 February 2005. He also arranged for
Williams & Co, a Cambridge based firm of solicitors, to be instructed on
behalf or Ross River, for the purposes of obtaining the advice of Mr Robin
Purchas QC in connection with the access issue. Instructions were sent to Mr
Purchas on 11th April with a view to him advising in consultation
on 13th April.
- Each of Messrs Savills, Rutherfords, Williams
& Co and Mr Purchas were retained for the benefit of the project, i.e. in
order to enable Ross River to formulate the Scheme and the planning
application pursuant to Schedule 3 of the Sale Agreements, and to work towards
satisfying the Development Conditions in co-operation with the Club, pursuant
to Schedule 4. Their professional fees would all constitute Planning and
Development Costs pursuant to Schedule 7, to be shared, in effect, equally
between Ross River and the Club pursuant to the formula in Schedule 5.
- The position of Waveley is less straightforward.
Prima facie, as project manager, Waveley might be supposed to have fallen into
the same category, for the purposes of analysis of its role in relation to the
project and liability for its fees, as the other professionals to whom I have
referred. In particular, (although this was not explored in evidence) the Club
may reasonably have supposed that Waveley was retained for the benefit of the
project, and therefore the mutual benefit of Ross River and the Club, in the
same way as those other professionals. Mr Harney disputed this position, in
cross examination, by reference to the terms upon which Ross River engaged
Waveley. By letter of 25th January 2005 Tenon (the Isle of Man
managers of Ross River and Blue River) requested Waveley to act on behalf of
Blue River as project manager of the proposed development of the Ground, and
on 22nd February Mr Harney replied on Waveley's behalf enclosing a
signed agreement to act as requested, stating for the record that fees had
been agreed at £6,000 per month for 9 months commencing December 2004 followed
by a payment on 10% of the Gross profit realised by Blue River, acknowledging
that an interim payment of £10,000 had already been received in December 2004.
On 8th March Tenon replied to "clarify" Waveley's terms of
appointment, on the basis that its fee was to be 10% of the net rather than
gross profit on the development payable once realised, and that the interim
payments of £6,000 per month were to be treated as an advance of the profit
share rather than an addition to it. By then, £24,000 had been paid on
account.
- Mr Harney said that because his firm was to be
paid purely by way of a share in Blue River's net profit from the project, he
did not regard his fees as falling within the meaning of Planning and
Development Costs pursuant to the Sale Agreements. In his view, Waveley was
"part of" the project in the sense of having a share in Blue River's part of
it, rather than an advisor to the project, for the benefit of all its
participants. In the events which have happened, this question has not had to
be resolved. Mr Harney's attitude to Waveley's role is however of relevance to
the issue of misrepresentation which I have to decide. It is sufficient for
those purposes to say that the basis of Waveley's remuneration was not, so far
as the evidence goes, ever explained to the Club, with the consequence that
the Club and its professional advisors, including in particular Mr Lee of
Cheffins, were entitled to assume that Waveley and Mr Harney had been retained
for the benefit of the project, and therefore for the mutual benefit of the
Club and Ross River and its participants, such that they could look to Waveley
for reasonable co-operation, and for the disclosure of information, to the
extent contemplated by the terms of the Sale Agreements. Whether the Club and
Mr Lee entertained any such expectation in fact is a quite different question.
- Mr Harney was nonetheless well aware that the Sale
Agreements imposed obligations of co-operation and disclosure, initially on
York Construction and thereafter on Ross River. This much is apparent from the
two page outline of a two phase campaign for the realisation of the Ground's
development value which he prepared on the 19th October 2004. In
relation to both phases (being respectively before and after completion of the
purchase of the Ground) the document expressly contemplated that it would be
necessary to "liaise with CCFC seeking and obtaining their agreement where
appropriate".
- In cross examination, Mr Harney said that he was
well aware that the Sale Agreements required both the Scheme and Planning
Application to be submitted to the Club for consultation and approval, but
that in his view, it was entirely a matter for his clients' (the River
entities') choice when within the period of twelve months from completion to
initiate a process of consultation with the Club, for the purposes of
obtaining its approval to the Scheme. In this respect, in my judgment, Mr
Harney recognised neither the spirit nor the letter of the Sale Agreements.
Paragraph 1.1 of schedule 3 required the Purchaser "as soon a reasonably
practicable after Completion… but in any event not later than 12 months from
the date of Actual Completion to produce a draft Scheme for approval by the
Vendor…."
- It will be recalled that Ross River and Blue River
were Isle of Man entities managed by corporate managers in the Isle of Man who
had no experience of property development. All major decisions were ultimately
formulated by Mr York whose family were the ultimate beneficial owners of the
River entities, and decisions were communicated to the directors of the River
entities via Mr York's tax adviser Mr Carr of the same firm of Peters Elworthy
& Moore whom Mr York had paid to carry out the investigation of the Club's
affairs, in early 2003. Mr Carr normally passed on Mr York's instructions (no
doubt expressed as non-binding wishes, for reasons of tax efficiency) to
Tenon.
- Nonetheless, for most practical purposes, the
person in day to day charge of the River entities' part in the realisation of
the development value of the Ground pursuant to the Sale Agreements was Mr
Harney. The evidence, both from Mr Harney, Mr York and in an internal
memorandum by Savills, is that Mr Harney's particular skill lay in the
realisation of the development value of property, whereas Mr York's skill and
experience lay more in the carrying out of developments as a builder. The
consequence of this differentiation of skill and experience was that Mr York
did not merely look to Mr Harney for advice from time to time, but largely
left the conduct of the project (or rather his companies' role in the project)
to Mr Harney under the broadest possible de facto delegated authority.
- Mr Harney's recruitment of planning, highways and
legal professional advisers in the manner which I have described had not begun
to bear fruit in terms of the receipt of useful advice by the time when, in
February or March 2005, discussions began between Ross River and the Club with
a view to Ross River's purchase of the Club's share of the Overage. I shall,
for clarity, describe that process separately in due course. It is however
important to note Mr Harney's evidence as to the consequence of the existence
of such discussions upon his and Ross River's responsibilities under the Sale
Agreements. He said that, from the moment those negotiations in relation to
the Club's share in the Overage commenced, he regarded the Club and Ross River
as having become arms' length opposing parties in an ordinary commercial
property negotiation, and his role as being strictly limited to the
advancement of Ross River's interests in that negotiation. The advancement of
the project, in terms of the preparation of the Scheme, the planning
application and the satisfaction of the Development Conditions, with all its
attendant obligations of cooperation, consultation and disclosure were, in his
view, in suspension, from the moment when that negotiation commenced.
- By the time Mr Harney gave that evidence, he had
of course the benefit of hindsight in knowing that the negotiations had led to
a successful conclusion, much later in 2005, pursuant to which his client
acquired the whole of the Club's continuing interest in the Ground, (save for
short term rights as occupying tenant), thereby putting an end to the regime
of mutual cooperation for the maximisation of its development value
contemplated by the Sale Agreements. Furthermore, although this was not
explored in evidence, I have little doubt that both Mr Harney and Mr York
regarded the continuing urgent requirement of the Club for cash as a factor
which would, sooner or later, be bound to force the Club into a sale of its
share of the Overage to Mr York's companies, it being unable to wait for the
realisation of the value of its share by the detailed working out of the
processes of obtaining planning permission, and satisfying the Development
Conditions.
- I have no hesitation in accepting Mr Harney's
evidence that his conduct from the outset of those negotiations was the
product of a perception that his role from then on was to maximise his
client's interest, regardless of the interests of the Club. Waveley was, after
all, a sharer in Ross River's net profit, such that his own company's interest
lay in minimising the amount paid to the Club by Ross River for the purchase
of the Club's share of the Overage.
- Ross River's obligations under the Sale Agreements
were, of course, not suspended merely because of the commencement of
negotiations for the purchase of the Club's share of the Overage. Such a
suspension could have been agreed, but it was not, and it is not to be implied
merely from the fact that such negotiations commenced. Furthermore, the
process of the preparation of a scheme for the realisation of the development
value of the Ground, of preparing for a planning application, and of
satisfying the Development Conditions did not in fact stop. On the contrary,
Mr Harney proceeded with vigour to obtain the advice of the planning, highways
and legal professionals whom he had retained, and although the first planning
application for the residential development of the Ground was not made until
2006, its preparation was well advanced by the time when the Club's share in
the Overage was acquired by Ross River, on 7th October 2005. For
clarity, I will describe the continuation of that process of preparation down
to that date, before describing the course of the negotiations, and the
representations made in connection with it.
- By the end of March 2005, Mr Harney had instructed
Rutherfords to carry out a highway traffic survey, had prepared an outline of
Instructions to be given to Mr Purchas, had a preliminary meeting with
Savills, with a view to their preparation of a preliminary planning appraisal,
and had instructed Camal, a Cambridge firm of architects, to prepare, among
other things, a preliminary schedule of accommodation.
- The documentary evidence shows that, from the
outset, Mr Harney intended to apply for planning permission for approximately
250 residential units or, putting it more broadly, for a number between 200
and 300 units. This is apparent first from Camal's schedule of accommodation
prepared in March 2005, which provides for 194 private units and 54 units of
affordable housing. Secondly, the Instructions to Mr Purchas QC which Mr
Harney saw and approved in advance, required Mr Purchas to advise on the basis
on an assumed density estimate "somewhere between 200 -300 residential units".
- Of course, an intention to apply for planning
permission for 200-300 units does not, as Mr Harney was at pains to point out,
mean that he regarded this as a safe assumption upon which to value the
Ground. But it is a fair inference that Mr Harney did not regard the prospect
of achieving planning permission at that level of density as fanciful, having
regard to the substantial cost (including the fees) associated with the making
of a planning application on that scale.
- Relevant advice began to flow in during April
2005. On 4th April Rutherfords reported that the access way though
the Westbrook Centre had been designed and constructed with a view to eventual
adoption, and that both in terms of quality of construction and layout, the
existing road exceeded that normally to be expected of a purely private road.
Rutherfords' only reservation was that at its junction with Milton Road, the
private road over the Westbrook Centre used kerb radii well below the normal
requirement of 10 metres. But Rutherfords' opinion was that this had probably
been pre-agreed at the stage of the planning application for the Westbrook
Centre so that this apparent shortfall in layout specification might well not
constitute an obstacle to adoption.
- Mr Purchas's advice, given in consultation on
13th April, was equally encouraging. His opinion was that the right
of way reserved over the Westbrook Centre land for the benefit of the Ground
was sufficiently widely drawn to permit access to and from a residential
development of the Ground along the existing access route, and that Burford
(the owner of the Westbrook Centre) would be unlikely to be able to impose a
ransom as the price of permitting the adoption of the existing access way as a
public highway.
- Mr Harney obtained a draft preliminary planning
appraisal from Savills on or shortly before the 12th April. It
noted that the applicable Regional Planning Policy Structure Plan had called
for significant increases in the supply of housing within Cambridge, and
identified the Ground as a potential site for residential development, with an
optimal density of 99 dwellings, but with the possibility of more intensive
development. Various constraints on density were mentioned, such as the
preservation of the Cambridge skyline, and the loss of existing open space,
and Savills warned that the existing policy on affordable housing calling for
a 30% element of that type in any redevelopment was in due course to be
replaced by a 50% requirement when the re-deposited local plan achieved
adoption, and that the Planning Authority would be likely to place increasing
weight upon that percentage increase as adoption of the local plan drew
nearer.
- Savills commented on initial drawings prepared by
Camal Architects (not available at the trial) showing a development including
248 units, with a 21% element of affordable housing. This was described by
Savills "Clearly at odds with the current Brief for the site and also the
policies adopted by the City Council". Their main concerns were first, that
progress needed to be made with the relocation of the Club before a planning
application for the development of its existing ground was submitted; secondly
that more attention need to be given to the requirement for open space, either
on-site or by a contribution towards the acquisition of open space elsewhere:
thirdly that 21% affordable housing fell below the current requirement of 30%,
rising to 50% in due course; and fourthly that although the proposed scale of
the development fitted well with the adjacent Westbrook Centre, some
modification of scale might be needed to harmonise with residential properties
to the north and south. Nonetheless, Savills' overall conclusion was that
there was a good prospect of achieving a beneficial planning permission on the
site, once those specific issues had been addressed.
- Mr Harney commented on the draft Savills'
appraisal by letter of 12th April, making it clear in passing, even
prior to receiving Mr Purchas' opinion, that his aim was to secure access via
the existing roadway, which he described as having been built to an adoptable
standard and as therefore being suitable for public use. Savills then issued
their formal preliminary planning appraisal on an unspecified date in April,
substantially in the same form as the draft, but with advice on Mr Harney's
comments. In particular, the final version offered advice as to how their
specific concerns which I have summarised from the draft appraisal might be
satisfactorily addressed within the context of the proposed 248 unit scheme.
In particular, Savills took on board Mr Harney's point that although in terms
of numbers of units the affordable housing element was below the current
requirement, it was in fact 40% of the total in terms of area. By reference to
an appendix to the appraisal (not available at trial) Savills noted that the
Council regarded the access route over the Westbrook Centre as satisfactory,
but warned that the Highway Authority might consider that a second access
would be necessary for a development of the density contemplated by the
proposal.
- Mr Harney's reaction to the Savills appraisal
appears from a note of a meeting which he had with Mr Popoff of Savills on
6th June, the accuracy of which Mr Harney confirmed in evidence.
His view was that the Ground would accommodate a scheme of 200 Units of which
30% would be affordable. He expected to achieve planning permission for a
total of 160,000 sq ft of accommodation, of which 38,000 sq ft would be public
sector. Mr Popoff's note records his view that " through experience… Paul will
maximise the development potential from this site at planning".
- Although the planning application for the Ground
was not submitted by Waveley until 2006, it is evident from its enclosures
that a substantial part of the plans used for it had been drawn by Camal by
September 2005. They showed a density of 230 units, with 66 of them being
affordable (being a unit to unit ratio of 28.7%). The evidence therefore
discloses a consistent plan by Mr Harney to seek planning permission for a
development of at least 200 units. If Ross River had ever complied with its
obligation to submit a Scheme to the Club pursuant to Schedule 3 of the Sale
Agreements, I have no doubt that such a Scheme would have consisted of a
project for the residential re-development of the Ground at a density of, or
exceeding, 200 units.
Negotiations for the Purchase of the Club's Share of the Overage
- The evidence does not reveal precisely when
these negotiations started, but they were certainly on foot by 7th
March 2005, when Mr Harney prepared a "Proposal for Early Payment of the
Additional Consideration to Facilitate CCFC's Proposed Ground Share with
CUFC". This was not intended to be a document shared with the Club, but rather
one used internally by Mr Harney in advising Mr York as to the level of offer
which might be made by Ross River. In outline, it assumed a residual land
value of £7.8 million, acquisition and development costs of £6 million,
Overage of £1.8 million (land value – costs), the Club share of £900,000, and
a deduction of 35% for early settlement, interest and risk, leading to an
offer of £585,000.
- The residual land value was arrived at upon the
basis of assumptions that there would be 150 units, of which 40% would be
affordable, and would only contribute £480,000 to the land value. The
development costs included an assumption that a ransom of 30% of the land
value (i.e. £2.4 million) would have to be paid to secure access, but a
marginal note suggested that there was potential for a significant rise in
that cost assumption.
- Mr Harney prepared a second version of this
document on 27th May 2005. This assumed a contribution to value by
a 40% provision of affordable units of £132,000 and only 80 private units,
(the total density being reduced from 150 to 135 units, but the land value was
still assumed to be £7.8 Million. Costs were increased by a rounded up to
£100,000 to £6.1 million and the discount for early settlement, interest and
risk was raised to 40%, giving rise to an offer of £510,000.
- Mr Harney described these documents as the basis
of his honest opinion provided to Mr York of the value of the Overage, basing
himself, as he said a bank's valuer would do, strictly upon what could be
achieved with certainty, rather than speculative possibilities of a more
beneficial development. In my judgment, Mr Harney believed throughout the
process of the negotiation of the purchase of the Club's share of the Overage
that its value was substantially greater than that reflected in either of
those two documents. The documents were in my judgment designed to justify a
pessimistic appraisal of the value of the Overage, for the purpose of
supporting an offer designed to leave the lion's share of the Overage in the
hands of Ross River at the end of the transaction, a share from which, of
course, Waveley was to derive the whole of its remuneration from its
management of the project. My reasons for that conclusion are as follows.
- First, the two most important variables in Mr
Harney's calculations were the residual land value of £7.8million, and the
amount to be paid for access, of £2.4 million or more. Both of these were in
my opinion based upon much more pessimistic assumptions than Mr Harney
actually made at the time. The land value was based upon an assumed total
density of 150, revised down to 135 units, whereas within 10 days of the
second of those documents, Mr Harney was expressing his confidence in
obtaining planning permission for 200 units, after considering Savills'
advice. The consequence of those different densities is reflected in the fact
that at his meeting with Savills on 6th June the 200 unit density
assumption was calculated as leading to a consequential land value of £13.1
million.
- Secondly, as for the amount needed to secure
access, the whole tenor of the advice of Rutherfords and of Mr Purchas QC was
to the effect that it was probable, albeit not certain, that the existing
access through the Westbrook Centre could be used for the purposes of the
proposed development, without the need to pay a ransom to anyone. It is plain
that, by April 2005, Mr Harney intended to seek planning permission on the
basis of a single access through the Westbrook Centre. While the risk that the
Highway Authority might require either a second access, or alterations to the
existing access which might give Burford a ransom claim, could not be wholly
disregarded, I consider notwithstanding his evidence to the contrary, that Mr
Harney confidently expected to be able to obtain access for the proposed
development at substantially less than the conventional Stokes v
Cambridge amount of 30% of the land value, rather than 30% or more, as
reflected in his offer calculations.
- I do not mean to imply by those conclusions that
Mr Harney set out to mislead Mr York. In advising as to the offer to be made
for the Club's share of the overage Mr Harney was perfectly entitled to
propose a basis designed to maximise the interests of Ross River, by the use
of the most pessimistic assumptions for the purposes of quantifying the two
most important variables in the calculation. But, as would appear, Mr Harney
then allowed his approach to the maximisation of the interests of Mr York's
companies in the project to lead him into grievous error in his dealings with
the Club's representative Mr Lee, when he asked Mr Harney for information
about the progress of the project, so as to enable him to advise the Club.
Correspondence with Mr Lee
- Mr Lee wrote seeking information from Mr Harney
on 22nd April 2005, shortly after Mr Harney had received the advice
from Savills, Rutherfords and Mr Purchas QC which I have described. By that
time, Mr York had raised Ross River's offer for the Club's share of the
Overage from £250,000 to £500,000. Mr Lee's letter followed a meeting with Mr
Harney, and began as follows:
"Further to our meeting last Tuesday, I note that Brian would
like to purchase the overage for £500,000. There would appear to be some
misunderstanding. I am not asking you to justify or provide a valuation but,
obviously, in order to consider the proposal, need a fairly detailed
analysis of where you are with regard to the various negotiations such as
planning, densities, access, public open space, highways etc in order to
form an opinion and advise the Club accordingly. Without such information I
am, obviously, not able to offer an opinion as to whether the proposal is a
favourable one or not. Would you, therefore, please supply me with further
details."
- Mr Harney replied on 29th April as
follows, after referring to Mr Lee's letter:
"In assessing the offer of an early settlement of Additional
Consideration, Ross River Limited, as General Partner of Blue River Limited
Partnership, have taken the following planning policies, planning
obligations, development costs, compensation costs, and site constrains into
consideration."
There then follow references to the various regional and local planning
policies to which Savills had referred in their appraisal. In relation to open
space, Mr Harney added that 40% of the total site area would be needed. In
relation to the proposed increase of the affordable housing requirement from
30% to 50%, Mr Harney added that the 50% provision had already been agreed on
at least 3 significant developments within the City. In relation to density he
said that the 99 dwellings anticipated by the Council in the relevant
Development Brief assumed more land available than merely the Ground, so that
number would have to be reduced.
- In relation to development costs Mr Harney
provided the following bullet point:
"Securing an acceptable right of access or securing an
alternative access to the site either capable of adoption by the Highway
Authority- Minimum 30% of land value"
The letter concluded "I understand the offer from Ross River will be
withdrawn if they do not receive a response by 31 May 2005. Therefore your
early consideration is important to both parties and if I can be of any
further assistance please do not hesitate to contact me".
- Mr Harney's letter made copious references to
information such as planning policies already in the public domain, with
which, as he no doubt appreciated, Mr Lee would already have been familiar.
But he provided no analysis or even information about where he had reached
with regard to preparation of the Scheme, mentioning none of the advice
received from the various professionals which I have described, save that part
of Savills' advice which referred to publicly available planning policies.
That this is how Mr Lee regarded it is apparent from the following paragraph
of a letter he wrote on 3rd May to Mr Eastham, enclosing Mr
Harney's letter of 29th April:
"Paul Harney's letter is, to say the least, of limited value.
Bearing in mind Brian's previous mantra about there being an open book
between him and the Club and for the transaction to be of mutual benefit, it
will be interesting to see what further information, if any, is forthcoming
from Paul Harney. I am not, to be frank, holding my breath. Without the
information requested, it is, obviously, difficult to advise on the overage
clause. The information supplied in Paul's letter is basically no more or
less than we knew already. "
- Mr Lee replied on the 6th May to Mr
Harney. The following are relevant extracts:
"The information, with respect, is of a somewhat standard nature
known to us at the time of entering into the transaction and does not, from
a valuation point of view, assist to any great extent in quantifying the
potential value of the site and thus an appropriate overage payment.
I note that the Urban Capacity has identified the site for up to
99 dwellings. Do you, as yet, have any indication as to the gross and net
areas of the development proposed, the mix and type of units and also a
layout plan?
Are you anticipating 30% or 50% of affordable housing? If so,
does this form part of the 99 dwellings? Is there also likely to be a
requirement for key worker housing? Please clarify.
With regard to access, please clarify whether access will be via
Burford land or, alternatively, County Council land, the state of
negotiations to date and the anticipated cost of such access. Your reference
to 30% is somewhat of a standard payment and I would have thought, with the
benefit of alternative access, could be reduced."
"…. Would you also please supply any other relevant reports,
etc. as may be available that will assist me in forming a view on the
overage payment and advising the Club accordingly."
He concluded by suggesting that, after provision of the information
requested, he and Mr Harney have a further meeting in mid/late May.
- After Mr Lee had chased for a response by
further letters on 17th and 20th May, Mr Harney replied
on 25th May. Since this is the letter upon which the Club's
misrepresentation in cases is based, I must set it out in full;
"Dear Edwin
RE: Cambridge City Football club
I refer to your letters dated 6, 17 and 20 May 2005 and your
email received today.
I can confirm that the offer made by Ross River Limited was
based solely on assessment of the information provided to you in my letter
on 29 April 2005.
The implications of applying all current and emerging planning
policies to the development are particularly onerous and these, together
with the development costs, access, timescales and risk are factors taken
into consideration and on which the offer was made.
Since my letter to you a preliminary meeting has been held with
the Planning Authority whose officer reaffirmed that it was their intention
to ensure that all relevant planning policies and the objectives of the
Mitchams Corner Area Strategic Planning and Development Brief be delivered
on this site.
Below, where I can, I have answered the various questions you
raise in the order that you raise them:
- The Urban Capacity study does suggest that up to 99 dwellings could
be accommodated on this allocated site. However the density is based on
all of the identified land and this includes the County Council owned
car park area and school land. The football club site is approximately
0.7 acres smaller than the allocated site. Nevertheless I have taken a
more robust view and consider that taking all relevant site constraints
into account that up to 130 dwellings could be achieved within the land
available. This total assumes that up to 130 dwellings could be achieved
within the land available. This total assumes that the development would
be up to 4 storeys in height, that only part of the required public open
space is provide on site (balance by commuted sum) and a mixed
development where at least 75% of the dwellings are flats.
- It would be prudent at this stage to base the provision of
affordable housing on the proposed Local Plan, i.e. 50%, however the
final total will be depend on timing of the planning application and the
status of the Local Plan at that time and of course the weight the Local
Authority are giving to its emerging policy. The affordable housing
requirement will include key worker and shared equity and is based on
either a percentage of the developable land area or on the total number
of dwellings. The type and mix of affordable housing will depend upon
local need and the advice/requirements of the Housing Authority.
- At least 30% of the total land value should be allowed for the cost
of providing a suitable access. The Highway Authority has advised the
Planning Authority that the existing access is, in their opinion,
unsuitable. I am also aware that the County Council retained ransom
strips around the boundaries of the former Milton Road School site. The
County have also restricted development of that site to all a new access
to the City ground off Gilbert Road. Initial approaches have also been
made to owners of other properties in Gilbert Road, but at this stage
and until such time as this matter is resolved, it is essential that a
substantial budget is set aside to achieve a satisfactory access.
- The initial survey work for the traffic impact assessment has been
carried out and I await the report. I do not consider that contributions
for improvements to Mitchams Corner or to the Northern Area Transport
Policy will be necessary as I anticipate a nett reduction in the overall
trip rates.
- I have not commissioned a development brief as the Local Authority
have already produced the Mitchams Corner Area Strategic Planning and
Development Brief which forms the basis of their planning policy for
this area. However, a design and planning statement will be produced as
part of the planning application. I have taken specialist planning
advice, the substance of which, was included in my letter to you dated
29 April.
- There have been no negotiations with the Desimones although I am in
the process of seeking further legal advice and intend taking up this
matter in the near future.
- I will not be progressing matters in respect of the communication
mast until an overall planning, development and design strategy is in
place. Although I do not anticipate significant costs associated with
relocation within the site I am advised that this installation will have
significant negative impact on sales values. Off site relocation, if
possible, is the preferred option.
- I do not have any reports, either relevant or otherwise, that would
assist your further in advising your clients.
I look forward to our meeting tomorrow afternoon when we can
discuss this matter in more detail.
Yours sincerely
Paul Harney"
- The bulk of Mr Harney's letter purported to
provide answers to the questions raised by Mr Lee in his letter of
6th May. That letter was not seeking a justification of any
valuation of the site by Mr Harney, but information about the essential
features of the proposed development for which in due course Mr Harney would
be applying for planning permission. That much is plainly apparent from Mr
Lee's letter of 6th May, in particular when read in the context of
his original letter of 22nd April. Furthermore, in asking for any
relevant reports, Mr Lee was plainly seeking copies of professional advice
obtained by Mr Harney for the purpose of preparing the Scheme and the Planning
Application, pursuant to Ross River's obligations under the Sale Agreements.
Mr Harney acknowledged that this was the fair reading of Mr Lee's letters, in
cross examination. In my judgment Mr Harney well understood that when he
prepared his reply on 25th May.
- In my judgment, viewed as a response to Mr Lee's
enquiries, Mr Harney's letter contained the following material
misrepresentations. First, in stating that he had taken a "more robust view…
that up to 130 dwellings could be achieved within the land available" he
deliberately understated his true view which, as recorded by Savills' note of
their meeting with Mr Harney on 6th June, was that he believed that
200 units could be accommodated on the site.
- Mr Harney did not suggest that his view had
changed between 29th May and 6th June, but he sought to
explain the difference by suggesting that he had gilded the lily when speaking
to Savills out of a desire of maximise the importance of the Ground as part of
a much larger possible development including the Westbrook Centre and other
land, which he was seeking to put together. I do not believe that explanation.
In my judgment 200 units was Mr Harney's "robust view" at the material time.
- Secondly, Mr Harney plainly implied that he was
working on a proposal to include 50% of affordable housing, although reserving
the possibility of including a lower percentage. By contrast, on
6th June he expressed to Savills the view that he expected to be
able to limit the affordable housing to 30%.
- Thirdly, Mr Harney seriously misrepresented what
he intended to include within the Scheme with regard to access. It is
apparent, as I have already described, that Mr Harney firmly intended to use
the Westbrook Centre road as the means of access to the development, but the
relevant passage of his letter of 25th May implied that the
existing access had already been ruled unsuitable by the Highway authority,
that he was expecting to have to pay ransom money either to the County Council
or to property owners in Gilbert Road (i.e. to have to obtain an access other
than through the Westbrook Centre). While I accept Mr Harney's evidence that
access through the Westbrook Centre without having to pay a ransom to Burford
(for example for altering the radii) could not be regarded as certain, in my
judgment Mr Harney's expectation as to access by late May 2005 was that it
probably could be obtained without making a full 30% Stokes v Cambridge
arrangement. Furthermore, Mr Harney deliberately concealed the favourable
advice which he had by then received in that respect both from Rutherfords and
from Mr Purchas, advice obtained at a cost which, should there be no buy-out
of the Club's share of the Overage, would be payable as to half by the Club
itself under the formula in Schedule 5 of the Sale Agreements.
- Fourthly, in stating on the first page of the
letter that "whenever I can, I have answered the various questions you
raised…." Mr Harney clearly implied, falsely, that he had no information
beyond that provided in the rest of his letter by way of answer to the
specific requests in Mr Lee's letter of the 6th May. He therefore
implied that, for example, he had no available indication as to gross and net
areas of the development, or of the mix and type of units. This was untrue
because he had all that information. Savills' appraisal included in paragraph
3.10 advice about the appropriate mix and type of affordable accommodation.
The Camal specifications already obtained by Mr Harney contained precisely
such information, and on 6th June Mr Harney was able to inform Savills of his
expectation as to the square footage of the developable area, and the split of
that square footage between private and public sector housing.
- Fifthly, Mr Harney's statement that the
substance of the specialist planning advice which he had taken was included in
his letter on 29th April was untrue. He had included those parts of
Savills' advice which were in the public domain, but none of the further
advice. It is in my judgment no coincidence that the parts of Savills' advice
which he included in his earlier letter were the most pessimistic, so far as
concerns the added value to be obtained from the proposed development.
- Finally, and most blatantly of all, Mr Harney's
final bullet point; ("I do not have any reports, either relevant or otherwise,
that would assist you further in advising your clients"), was a complete
falsehood. Mr Harney had by that time Savills' appraisal (in draft and final
form), Rutherfords' report and had received, at that stage only orally, Mr
Purchas's advice. All of them had been obtained at the ultimate joint expense
of Ross River and of the Club. Mr Lee first saw the Savills' appraisal,
Rutherfords' report and a note later signed by Mr Purchas confirming Williams
& Co's attendance note of the consultation shortly before giving evidence.
He told me that he regarded them as of the highest relevance to the task of
evaluating the Clubs' share of the Overage, and I believe him.
- Mr Harney stoutly maintained throughout his
evidence that in communicating with Mr Lee he did no more nor less than
provide his honest opinion as to the matters relevant to a valuation of the
Club's share of the Overage, omitting nothing that he had taken into account
himself, and nothing which he had himself communicated to Mr York, or
otherwise to Ross River. Again, I have come to the conclusion that this stance
of Mr Harney is itself a sophisticated falsehood. It is literally true that
the information communicated by Mr Harney broadly reflects the matters
specifically referred to in his two assessments of the amounts which should be
offered for the Club's share of the Overage, but as I have already concluded,
those assessments did not represent Mr Harney's real expectation of the value
of the Overage, or therefore of the Club's share of it, but rather a
pessimistic basis for a minimum valuation based upon taking account only of
that which could be regarded as certain, and ignoring all that for which Mr
Harney was planning, hoping, and indeed to a substantial extent, (as reported
to Savills on 6th June), expecting to achieve. Furthermore, in
response to my enquiry, Mr Harney admitted at the end of his evidence that he
had probably shown Mr York the Savills' appraisal and the Rutherfords report
and explained Mr Purchas' opinion, albeit that he entertained no expectation
that Mr York had the experience or the will to understand the implications of
that information in depth.
- In my judgment the misrepresentations contained
in Mr Harney's letter of 25th May to Mr Lee were both deliberate
and dishonest. I use the adjective dishonest in both its objective and
subjective sense. Mr Harney was the most sophisticated, careful and
intelligent of all the witnesses who gave evidence at the trial. His conduct
in revealing all information detrimental to the value of the Overage and
concealing the rest, however far motivated by a desire to maximise the
interest of his Ross River clients and Mr York (but also of course his own
interest as a profit sharer with them), was not honest conduct by the
standards of honest and reasonable people. While acknowledging that the
property world could be something of a jungle, Mr Harney readily acknowledged
his understanding that property negotiators are expected and required to tell
the truth when negotiating with each other. He therefore fell short of his own
professed standard, since he cannot have been ignorant of the respects in
which, as I have described, his letter of 25th May contained
falsehoods.
- Mr Harney's falsehoods did not however induce
the Club to accept Ross River's offer of £500,000 for its share of the
Overage. Negotiations dragged on, and on 7th July the Club's
solicitors and valuers stated at a meeting attended by Mr York and Mr Harney
that the Club wanted closer to £1 million for its share of the Overage. This
led to a walk-out by Mr Harney and Mr York. Eventually, in September, a figure
of £900,000 was agreed. Before completing the relevant sale agreement, on
7th October, the Club sought final advice from Mr Lee, who
responded in a letter on that same day which included the following passage:
"It is very possible that the Club would secure a greater
financial benefit as and when the site is subsequently sold for development
as opposed to accepting the payment of £900,000 offered for the
extinguishment of the overage at the present time.
It is, however, obviously, very difficult to give accurate
advice on this without having the benefit of a draft development brief, to
include density, off-site improvement works, etc. or at least an indication
of such. From our previous experience with Paul Harney it is unlikely that
such information or assistance would be given, as at best he is obstructive
and worst objectionable.
If, however, as discussed, the Club can make better use of a
cash payment now as opposed to a future payment, acceptance of the sum
offered, subject to the remaining terms being acceptable, merits serious
consideration. From what you say, a payment to the Club now would enable the
Customs & Excise to be paid and prevent a winding up procedure and also
strengthen the Club's position with regard to negotiations for a new ground,
etc.
I am, therefore, obviously, not able to advise you as to whether
or not the Club should accept the payment suggested for the release of the
overage, although if such payment can be used to a better advantage now for
the Club it, obviously, merits serious consideration providing that the Club
is aware that it is more than likely that a greater figure than that
currently offered might be achieved as and when the overage provision
originally agreed is triggered."
- The agreement made on 7th October included a
surrender of the Club's existing lease (which could only be terminated early
after the obtaining of planning permission) in exchange for a new lease
terminable by Ross River by 6 months notice expiring of 31st May in
any year of the term. Like its predecessor, it was contracted out.
- On 14th September 2005 Waveley had,
in a letter to the Club offering £900,000, said:
"It is Ross River's intention to retain the Football Club on
site for as long as possible and at least until such time as a satisfactory
planning permission has been achieved and all other development issues
resolved. …
However Ross River reserve the right to gain vacant possession
at any time following the end of 2005/2006 season (May 2006)."
In fact, on 29th November 2005, Waveley gave notice on behalf of
Ross River terminating the lease on 31st May 2006.
Payments by Ross River to Mr Eastham
- It is common ground that, funded by Ross River,
Mr Harney caused Waveley to pay Mr Eastham the sum of £10,000 on
20th June 2005, roughly half way in terms of time through the
negotiations for the purchase of the Club's share of the Overage. It is also
common ground that, following the conclusion of the Sale of the Club's share
in October 2005, the Club paid Mr Eastham a further £40,000 out of the
proceeds of sale. Thereafter Mr Eastham also received two further payments of
£4,000 from Waveley in December 2005 and January 2006 respectively. These
payments were all made in addition to Mr Eastham's ordinary salary of £2,500
per month, which the directors had agreed that he should be paid when, once
the true financial predicament of the Club had become apparent on Mr
Hamilton's departure, Mr Eastham agreed to take the lead in attempting to
secure its survival, as chief executive.
- Beyond this bare outline, there is no common
ground. One of the perplexities of this part of the case is that not even the
claimants' witnesses put forward a single coherent account of the
circumstances in which these payments were made. In two successive witness
statements Mr Eastham himself gave different accounts, both which he purported
to verify under oath, without any apparent consciousness of their divergence.
- I shall begin by summarising the alternative
explanations for these additional payments to Mr Eastham, before addressing
the question which, or which combination, of those versions I should conclude
is the most probable.
- The first ("version one") was that in or shortly
before September 2004 it was agreed that the Club should pay Mr Eastham an
additional £50,000 in recognition of his contribution to the sale then being
negotiated pursuant to Heads of Terms already signed, to be paid on completion
of the sale when it was assumed that the Club would be in funds to do so, as
the Club's cost of the negotiations, rather than as a Development Cost.
Completion of the sale in April 2005 did not leave the Club with funds
sufficient for that purpose, so Mr Eastham asked Mr York for help, and Mr York
agreed that Ross River would pay him £2,500 per month for his ongoing work in
relation to the project, to be treated as a Development Cost (so that the
burden would be shared equally between the River companies and the Club). Upon
completion of the Overage Agreement the £900,000 was treated as inclusive of
any obligation towards Mr Eastham in relation to the project, so that he was
obliged to, and did look to the Club for the balance of £40,000. Finally, the
£8,000 later paid by Ross River to Mr Eastham after the making of the Overage
Agreement was simply part of a consultancy fee paid for Mr Eastham's
contribution to the reaching of an agreement with the DeSimones (owners of the
restaurant), for providing vacant possession, having nothing to do with the
Club at all, which had by then sold the entirety of its financial interest in
the Ground.
- Version 1 was contended for by Mr York in his
evidence, and by Mr Eastham in the second of his witness statements to be
prepared, which on 13th June 2007 became the first which he signed.
I shall refer to it as his second witness statement. Mr Eastham said that his
fellow directors, Messrs George, Murray and Satchell had suggested that he
approach Mr York for payment when, upon completion, it became apparent that
the Club lacked the resources to pay him. Mr York confirmed that this is what
he had been told at the time.
- By version 2, the Board agreed in or about
September 2004 that Mr Eastham should receive an additional £50,000, but at
the sole cost of Mr York's companies, who would pay the additional amount to
the Club, which would then be paid by the Club on to Mr Eastham "for
transparency". Then, in or about March 2005 it is said that it was agreed both
by the Board and by Mr York that his companies should pay up to £50,000 direct
to Mr Eastham as consultancy fees at the rate of £2,500 per month for his work
on the project, but set against the originally agreed £50,000 at the end of
the day. Under version 2 therefore, Mr Eastham received £10,000 simply for
acting as consultant to Ross River, but with an obligation to account for any
such receipt against what had originally "for transparency" been agreed to be
paid to him by the Club, from monies received from Mr York's companies.
Version 2 deals with the additional payment of £8,000 in the same way as
version 1. This is the version to which Mr Eastham subscribed in his first
witness statement, prepared in March 2007 and, according to him, delivered
unsigned to both sides in this dispute. I shall refer to it as Mr Eastham's
first witness statement, although it remained unsigned and was not even
included in the trial bundles. It first came to my attention when Mr Eastham
was asked to verify it, still unsigned, at the commencement of his examination
in chief, following which, after a brief adjournment for him to re-read it, he
signed it.
- Mr George supplied a slight variation on version
2, which I will call version 2A. In his recollection, there was never a stage
at which additional payments to Mr Eastham coming from Mr York's companies
were to be routed through the Club, whether for transparency or otherwise. Mr
York's companies were to pay Mr Eastham any additional remuneration above the
basic salary of £2,500 per month. In his mind, the £10,000 was simply an
advance payment of money which Mr Eastham would otherwise have received from
Mr York's companies at the end of the development project.
- Under version 3, it was always agreed from
approximately mid 2004 that Mr Eastham should obtain additional remuneration
for his work on the development project, the necessary cash for which would be
provided by whichever developer was chosen as the Club's joint venture
partner, but accounted for at the end of the day as a Development Cost, and
therefore shared 50/50 between the Club and the chosen developer. This version
derives from Mr Lee's recollection, to which he adhered and upon which he
expanded in his cross examination. Mr Lee did not however testify to any
knowledge of the June 2005 payment of £10,000, or to having been aware of the
amount of extra remuneration which it was agreed that Mr Eastham should
receive.
- The final version ("version 4") discernable from
the claimants' evidence came from Mr Murray. He said that the directors had
been in agreement from the outset that, in order to retain Mr Eastham's
services for a sufficient period to enable him to see through the sale of the
Ground and the realisation of its development value to a satisfactory
conclusion, it was necessary that Mr Eastham should receive more than his
basic salary. Since the Club lacked the money with which to deal with that
requirement, it would have to be satisfied by Mr York or his companies, so the
directors left it to Mr Eastham to negotiate additional remuneration with Mr
York, both as to amount and as to the timing of payments. This process was
agreed by the Board during the negotiation of the 2004 Sale Agreement when it
appeared that the interests of the Club and Mr York's companies would be
wholly aligned toward the maximisation of the development potential of the
Ground. There was, said Mr Murray, then no problem of conflict of interest
involved in leaving the Club's chief executive to negotiate additional
remuneration with Mr York.
- In a second witness statement provided to the
Club, Mr Murray said he was unaware of the £10,000 received by Mr Eastham in
June 2005, having been neither consulted nor informed about it at the time.
- The Defendant's evidence exhibited less
variation, if only because the Club called only two witnesses on this issue,
in addition to relying on Mr Murray's second statement. Mr Satchell was the
Club's main witness on this issue. His evidence was that while he recalls a
recognition on the part of the Board that it would be necessary to pay Mr
Eastham an additional lump sum from the proceeds of any successful sale of the
Ground, he could not recall any specific sum being agreed, still less any
agreement that Mr York or his companies should play any part in making that
additional payment available, whether by providing the money or incurring part
of the burden of its provision as a matter of joint venture accounting. Mr
Satchell denied being either informed of, still less consenting to the June
2005 payment to Mr Eastham, and said that he would have opposed any such
arrangement at the time when Mr Eastham was negotiating for the Club for the
sale of its share of the Overage to Mr York's companies, because of the
conflict of interest to which any such payment would give rise.
- The Club's other witness on this issue was Mrs
Warren of Taylor Vinters. Her evidence was that she could not recall any
mention of payment to be made to Mr Eastham by Mr York's companies. Her
recollection, supported as will be seen from her files, was that at the stage
of negotiating the Heads of Terms with York Developments' solicitors in 2004,
she attempted to obtain a commitment by York Developments to treat the Club's
internal costs (including Mr Eastham's salary) as part of the shared
development expenses, but was rebuffed.
- Those being the alternative explanations put
forward by the parties and their witnesses, I turn first to the relevant
surviving documents. Their most striking feature is their paucity. There are
no agreements, no board minutes or other notes recording the basis upon which
Mr Eastham was to be paid. He does not even appear as a salaried employee on
the Club's books because, despite being forced by the financial plight of the
Club to work full time to ensure its survival, and working for no one else, Mr
Eastham arranged to be paid gross, as a self-employed consultant, an
arrangement which is, unsurprisingly, the subject of a continuing challenge by
Revenue & Customs, who regard the Club as having failed to comply with its
PAYE and NIC obligations in relation to the employment of Mr Eastham.
- It might have been expected that Mr Eastham
would have produced documents, such as tax returns, relevant to the receipt of
the £10,000 in June 2005 as a self-employed consultant. No such documents were
produced, and the unchallenged evidence of Mr Robert Young, who had been
assisting the Club with certain of its financial affairs from January 2007, is
that it appears from a conversation he had with a Mr Moseley, an accountant
dealing with Mr Eastham's personal tax affairs, that Mr Eastham had not by the
beginning of March 2007 disclosed his receipt of that payment to Mr Moseley.
- With that unpromising introduction, the relevant
documents are as follows. I have already referred to the Club's Articles of
Association, which at all material times prohibited the payment of any
remuneration to a director, whether as director or employee, and to the
attention drawn to that provision in the Football Association's February 2003
report.
- The next relevant document consists of the
exchange of emails passing between Mrs Warren of Taylor Vinters and a Mr
Philip Wheater, a partner in Forbes Wheater, Mr York's solicitors, concerning
the negotiation of the Heads of Terms in late June and early July 2004. A
first draft of the Heads of Terms had been discussed at a meeting between the
two firms, together with Mr Lee, Mr Eastham and Mr York on 30th
June. On 1st July the travelling draft was sent by email by Forbes
Wheater to Taylor Vinters with a comment by Mr Wheater in relation to clause
31.2 that :
"… the buyer will pay third party costs, but not internal
expenses or other salary costs etc., and accordingly this provision reflects
that."
In its context, this observation plainly meant, and was understood to mean,
that Mr York's companies were not prepared as part of the joint venture then
being negotiated, to take responsibility for any part of what the Club had to
pay its own staff in connection with its role in the project.
- In a reply email dated 2nd July, Mrs
Warren responded as follows,
"It is not agreed that where my clients are required to
cooperate with your clients in satisfying the development conditions their
own costs and expenses should not be recoverable. For example they might be
required to attend meetings at some distance away or incur other expenses
and I can see no reason why these should not form part of development
costs."
- Mr Wheater's response, on 6th July,
was that:
"I do not think we have a problem about third party expenses or
expenses reasonably incurred, but we cannot agree internal salaries or costs
which should not be charged."
- In an email to Mr Eastham and Mr Lee of the same
date, Miss Warren advised that:
"I think we could compromise by agreeing that internal salaries
would not be charged but that all expenses and costs should be recoverable –
they will form part of Development Costs in any event so whatever happens
CCFC will effectively be bearing half of these costs."
Later the same day, she responded to Mr Wheater as follows:
"I think my client would accept that internal salaries would not
be charged as long as all costs and fees and expenses incurred in assisting
your client werecovered."
- On the next day, in a further email to Mr
Eastham and Mr Lee, Mrs Warren said:
"In Clause 12 relating to the Club's obligations please note
that you are allowed recovery of third party costs. I think we should accept
this now in order to make progress".
On the following day, Mr Lee wrote to Miss Warren to the effect that:
"… a further outstanding point was that the developer, while
indemnifying the Club for third party costs, would not indemnify the Club
for their own costs. I have spoken with Arthur on this and agreed that the
proposed wording is satisfactory. He is not concerned about recouping of the
Club's costs, etc."
There, according to the documents (and Mrs Warren's recollection) that
issue rested.
- I have already referred to the provisions in the
Sale Agreements about Costs and Planning and Development Costs, and to
paragraph 1.1.2 of Schedule 4 where the concept of the Club's third party
costs re-appeared. The exclusion of internal (as opposed to third party) costs
of the Club from the ambit of Planning and Development Costs is not as clear
in the Sale Agreements as it is in the email correspondence concerning
negotiation of the Heads of Terms, but there is no documentary evidence that
this point, once clearly settled as it was in July 2004, was ever
re-negotiated between the parties' solicitors.
- An attempt was made by the claimants and
specifically by Mr Eastham in his evidence to suggest that a passage in an
email from Taylor Vinters to him, copied to Mr Lee, dated 28th
September 2004 provided contemporaneous documentary evidence that an
additional payment to him of £50,000 had been agreed and disclosed to the
Club's solicitors. This email was sent on the very day of the exchange of the
2004 Sale Agreement. The typed versions of the Sale Agreement and of the
contemporaneous Loan Agreement defined "The York Loans" as meaning the sum
£75,000 paid to the Club on exchange. But in both, that sum has been changed
in manuscript to £135,000.
- In paragraph 5 of the email, sent at 14.22 on
the day of exchange, Mrs Warren said this:
"The York Loans are now stipulated to be £125,000 paid on or
before the date of exchange. I have no idea whether this figure is correct
but it needs to be checked and amended if not. I had intended the figure to
relate only to the £75,000 paid on completion.
ARTHUR– Have you received a further £50,000 on top of
this?"
- It needed no assistance from Mrs Warren's
evidence for it to be clear that the paragraph which I have quoted had nothing
whatsoever to do with an agreed additional remuneration payable to Mr Eastham
personally of £50,000. It was concerned entirely with the question whether the
amount of the York Loans typed as being £75,000 was to be increased in
manuscript (as presumably Forbes Wheater were then suggesting) to £125,000
i.e. £50,000 greater than the amount originally contemplated and, no doubt,
the amount due to pass later that day between the respective solicitors'
client accounts. In the event, the amount actually inserted was £10,000
greater, at £135,000, for reasons which have not survived in documents or in
the recollection of any witnesses. By the expression "Arthur- have you
received…" in an email addressed to Mr Eastham and Mr Lee, Mrs Warren
obviously meant to enquire whether the Club have received a further sum, not
due to be transmitted between solicitors that day, sufficient to justify an
acknowledgment of receipt then proposed to be £50,000 greater than that which
appeared on the typed engrossment.
- Mrs Warren, not a witness to over-state the
firmness with which she could recall past events, was emphatic that this
natural interpretation of that paragraph was indeed the correct one, albeit
that she accepted having become slightly confused between exchange and
completion in the passage which I have quoted, as the result of earlier
correspondence with Forbes Wheater. This document therefore affords no
assistance in resolving the issues as to the remuneration agreed for Mr
Eastham.
- There then follows a documentary silence until
June 2005. In passing, I have looked to see whether Mr Harney's calculations
for deciding the amount to be offered to the Club for its share of the Overage
sheds any light on this issue. In both of them he included a round sum of
£450,000 for "fees", which provides no assistance either way.
- Three relevant documents survive from June 2005.
The first is the office copy of Mr Harney's letter to Mr Eastham dated
20th June enclosing "three cheques in the sum of £5,000, £2,500 and
£2,500 in respect of your consultancy fees in the above matter."
The letter looked forward to receiving Mr Eastham's invoices to cover those
payments in due course. It may be inferred, as Mr Eastham confirmed, that he
received and banked the three cheques in those amounts.
- The second document is an email from Vanessa
Roberts at Tenon (the River entities' Isle of Man managers) to Derek Carr on
22nd June, notifying Mr Carr of the receipt of correspondence from
Mr Harney in relation to counsel's fees and Williams and Co's fees in respect
of the consultation with Mr Purchas, and seeking Mr Carr's comments. While
that email is of no particular relevance, Mr Carr's reply of the next day was
as follows:
"Vanessa,
As discussed, these fees can be paid.
In addition can you please transfer £10,000 this afternoon to
Waveley Project Management as a contribution to the professional fees
incurred by CCFC. This is in anticipation of a successful conclusion to
agreeing a buy out of CCFC's 50% share of the development
profit."
It is common ground that the £10,000 to which Mr Carr referred was the
aggregate of the sums paid by cheque by Mr Harney to Mr Eastham.
- Mr Carr was, as I have described, Mr York's tax
adviser, through whom he was accustomed to communicate his instructions or
wishes to the managers of this Isle of Man entities. In his first witness
statement Mr Carr said that he was aware of an agreement which he described as
a "Fee Agreement" pursuant to which Ross River was to make monthly instalments
of £2,500 on behalf of the Club to Mr Eastham. His understanding was that the
monthly payments were to be paid to Mr Eastham for consultancy work that he
was carrying out in respect of "the joint development of the Ground by Ross
River and CCFC" under the terms of what he described as the overage agreement
between them (which I interpret to mean the Sale Agreements). He said that the
Fee Agreement was to start from March 2005 and that the £2,500 per month
payments were "brought up to date in June 2005" because Ross River anticipated
that the Overage sale negotiations would be concluded shortly, and wanted to
get the payments up to date before the sale took place. He also said that "it
was not considered appropriate for Ross River to continue making payments to
Arthur Eastham while he was involved in these negotiations." In cross
examination he said that the information upon the basis of which he had
composed his email to Vanessa Roberts came either from Mr Harney from Mr York.
- In response to an enquiry from me at the
beginning of the trial as to how the £10,000 payment to Mr Eastham had been
dealt with in Ross River's books, (there being no relevant disclosure in the
trial bundles), Mr Carr made a further witness statement in which he referred
to a note on Ross River's copy bank statements to the effect that the £10,000
was a "Cont to CCFC fees" and explained that "Cont" meant "contribution". He
acknowledged in cross examination that, although Ross River may not have kept
conventional books, emails were often used to provide accurate and transparent
paper trails in relation to transactions, in order to ensure that the planned
tax effectiveness of the use of Isle of Man entities was in due course
satisfactorily secured.
- On or about 2nd September 2005, in
anticipation of the successful conclusion of the Overage Agreement then in the
sum of £950,000, Mr Harney composed a draft e-mail to the Club in which he
described the net sum payable of £683,500 (after deductions for rent and an
outstanding loan) as being intended:
"to include £100,000 consultancy fee payable to Arthur
Eastham"
Mr Harney said that this was the result of a mistaken understanding on his
part. The final version of this document received by the Club contained no
such reference. Neither the draft nor the final version made any mention of
the £10,000 already paid.
- Mr Eastham did not provide invoices in respect
of the £10,000 "in due course" or at all, prior to the completion of the
Overage Agreement. Rather, he prepared four invoices each dated 1st
November 2005, the first three of which acknowledged receipt of each of the
three cheques sent to him in June, describing the payments as "Consultancy
fees in regards to work done at Cambridge City FC". The fourth invoice related
to his anticipated receipt of the £4,000 which he described as relating to his
effort to secure an agreement with the DeSimones, and included exactly the
same text. The invoices are numbered 1 to 4 consecutively in a series prefixed
"205/" and, as might be expected, Mr Eastham acknowledged that they were the
first invoices of any kind which he had prepared that year. He explained that
his ability to remember the way in which the £10,000 had been made up arose
from having photocopied the three cheques received in June, before banking
them.
- Finally, there is documentary evidence recording
Mr Eastham's receipt of £40,000, including an invoice numbered 207/12 and
dated 1st March 2006 recording as "monies already received" £40,000
for:
"Consultancy fees in regards to work done at Cambridge City FC –
bonus in Chief Executive role for services rendered in sale of ground to
enable Club to pay off creditors. Bonus agreed by board of CCFC, advisors
Cheffins, Taylor Vinters and all tendering parties, and covered by monies
paid to the club by ground purchasers."
- The £40,000 was in fact received by Mr Eastham
on the 30th November 2005, according to his unchallenged evidence
on this point. Although the timing of the invoice was not explored in oral
evidence, it seems to me from the lengthy and rather self-serving content
which I have quoted above, that it was in all probability prepared after the
present dispute had arisen, or at least in anticipation of it.
- In its accounts for the year ending
30th June 2005, approved by the Board on 21st August
2006 and signed by Mr Satchell, note 2 disclosed the payment of directors'
fees in that year of £48,492. This was broken down in note 8 as £32,000 to Mr
Eastham and £16,491 to Mr George, payments being made under consultancy
contracts. The Club's accounts do not therefore appear to have treated the
£10,000 paid in June 2005 as part of Mr Eastham's receipts from or on behalf
of the Club.
- I must now state my conclusions on the issues
relating to payment from Mr Eastham. First, I am satisfied that Mr Eastham's
basic salary of £2,500 per month was both agreed and paid with the knowledge
and approval of all the Club's directors. They appear to have been blithely
unconcerned about the prohibition upon such payments in the company's
Articles, and equally impervious to the advice of the Football Association,
whose report appears not to have been studied by any of the directors at the
time. In any event, they told me that they placed compliance with the
requirements of what one of them described as a "fluffy" organisation like the
Football Association as well down their list of priorities, compared with
ensuring, if possible, the survival of the Club. In their defence, it may be
said that the restriction in question was a rule by then more favoured in the
breach than in the observance, and that the shareholders have not, since the
Club's accounts recording those payments were laid before them, protested at
the remuneration either of Mr Eastham, or of his predecessor Mr Hamilton.
- In my judgment none of the payments which the
directors purported to agree should be paid at the Club's expense to Mr
Eastham were duly authorised by the Club, either at the time they were made,
or subsequently, save in so far as the shareholders may have ratified them by
approving the accounts. Authority would have required either unanimous
shareholder approval or an amendment to the Articles by a resolution at an
appropriately constituted general meeting.
- I am in that context wholly un-persuaded by Mr
Seitler's submissions to the effect that the payments were within the Board's
power to authorise because they were consultancy payments rather than
remuneration to Mr Eastham as an employee, or because he was also the Club's
Secretary and in principle entitled to be paid as such. The directors well
knew that Mr Eastham needed to work full time for the Club to have any
prospect of ensuring its survival, and that he would not be able to work for
anyone else at the same time. He was in my judgment an employee rather than a
consultant, and his remuneration could not be purportedly authorised by being
mis-described as consultancy payments. Nor on any view did he receive his
payments for performing the modest official duties of a company secretary.
- Secondly, I am also persuaded that it is
probable that the directors all appreciated the need for, and agreed that in
principle Mr Eastham should be paid, additional remuneration over and above
his basic salary to ensure that he continued to work for the Club for the
whole of the period necessary to turn into money the perceived potential
development value of the Ground. I am also persuaded that in 2004 they agreed
that Mr Eastham should be paid a substantial sum once the proceeds of the
realisation of that development value provided the Club with sufficient funds
to do so, and that those directors who gave the matter any thought expected
that this would occur upon the completion of the Sale Agreements, rather at
the later date when the Club's share in the Overage was realised. The
directors' witness statements left the anticipated timing of that additional
payment unclear, but the evidence of those who were asked about it in cross
examination was (slightly to my surprise) that it was, in 2004, expected to be
possible upon completion of the Sale Agreement.
- Implicit in that conclusion is a finding that
the directors expected throughout 2004 that Mr Eastham's additional payment
would fall to be made to him by the Club, once in funds do so, rather than by
any of Mr York's companies, albeit that of course the source of funds with
which the Club was to make payment was to be payments by Mr York's relevant
company under the Sale Agreement (once made) or by any other developer that
might beat Mr York and his companies to the finishing line as the Club's
chosen joint venture partner, during the period prior to October 2004 when the
Club was playing off rival bidders against each other.
- I am not persuaded that the directors as a body
entertained any uniform, clear or consistent understanding at any time as to
the incidence of the burden of the additional payment to be made to Mr
Eastham, as a matter of joint venture accounting.
- By contrast, I consider it probable, and
therefore find, that at no time prior to March 2005 did Mr York or any of his
companies agree to be responsible for any additional payment for Mr Eastham,
either in terms of cash flow or in terms of being responsible for, or even
sharing, the ultimate burden as part of the costs of the project. In that
respect, Mr York's evidence coincides with the documentary evidence concerning
the negotiation of that point in July 2004 between the parties' solicitors,
with Mrs Warren's evidence and, albeit not perhaps as clearly, with the terms
of the Sale Agreements themselves. Such a payment would not on any reasonable
analysis have been a third party payment so far as the Club was concerned.
- A substantial part of the evidence of the
relevant witnesses was focussed upon what was said to have been mentioned at a
negotiating or drafting meeting in or shortly before September 2004 at the
offices of Taylor Vinters, attended by Mr York, Mr Harney, Mrs Warren, Mr Lee
and Mr Eastham. All those attending other than Mrs Warren gave evidence that
they could recall it being discussed at the meeting that, in principle, Mr
Eastham should receive an additional payment for his work in progressing the
project, and that Mrs Warren had advised that if so, it should be recorded in
the Sale Agreement, but that Mr Eastham responded that, since this was a
private matter between him and the Club, he would prefer that it was not so
recorded. Mrs Warren could recall none of this, and said that, had it
occurred, she would have expected to have made a note of it, which she did
not.
- In my judgment, something of the kind probably
was said at the meeting, but not in terms that involved the placing of any
obligation upon Mr York's companies in relation to the additional payment, nor
in terms which even identified any specific amount. In my judgment the
discussion went no further than acknowledging that in principle, the Club was
to pay an additional amount to Mr Eastham. Had the discussion involved the
imposition of any obligations upon Mr York's companies in connection with it,
it would undoubtedly have required inclusion in the Sale Agreement, all the
more so because any such responsibility had been expressly rejected in the
negotiations between the parties' solicitors leading to the signing of the
Heads of Terms. Were any such responsibility to be placed on Mr York or his
companies, the additional payment would not have been a "private matter"
between Mr Eastham and the Club. I can well understand how, being responsible
for the accurate drafting of an agreement recording the mutual
responsibilities of Mr York's companies and the Club in relation to the
development of the Ground, Mrs Warren may have forgotten about the mention of
this private matter, not least because, despite her undoubted integrity and
realism as a witness, her powers of recollection of past events were not, as
she would be the first to concede, of the highest order.
- I have on balance also come to the conclusion
that it is less than likely that the directors had, as a body, resolved upon
the amount to be paid to Mr Eastham by way of additional payment, upon the
successful completion of the sale of the Ground, either in 2004, or indeed, at
any significantly earlier time than when payment to Mr Eastham of the £40,000
was actually made in November 2005. In this respect, the evidence was, taken
as a whole, vague and unsatisfactory. Mr Eastham said that a sum of £50,000
had been agreed at a board meeting towards the end of September 2004, although
his first witness statement suggested that it was in 2005, that being what Mr
Eastham described as an error, which was only corrected during his cross
examination. Mr George's written and oral evidence ascribed no date at all to
the fixing of £50,000 as the amount of the additional payment. His witness
statements merely assumed that it had been agreed by November 2005 without
describing when or how. In cross examination Mr George was constrained to
admit to the possibility that Mr Satchell had not known of or been involved in
fixing Mr Eastham's additional payment at £50,000.
- Mr York's evidence was only that he was told
"some time after" September 2004 that Mr Eastham's additional payment was
ultimately agreed to be £50,000. Mr Murray's recollection was that the fixing
of the amount and timing of any additional payment for Mr Eastham was a matter
between him and the chosen developer, since the Club could not pay anything.
Mr Satchell denied any involvement in a Board decision to fix the amount, or
any contemporaneous knowledge that Mr Eastham had been paid either £40,000 by
the Club, or an additional £10,000 by Ross River.
- I recognise that in concluding that there was no
Board decision fixing Mr Eastham's additional payment at £50,000 I am
departing from the evidence of Mr Eastham himself, and from the gist of the
recollection of Mr George who, as I have said, was generally a most impressive
witness. I have not done so lightly. My reasons for doing so are first, the
absence of any unanimity or even particularity among any of the claimants'
witnesses as to how or when this was agreed; secondly the fact that two out of
the four directors were firm in their evidence that it was not, albeit that
their evidence was less impressive than that of Mr George; and thirdly because
the directors had by then become so accustomed to dealing with the never
ending stream of emergencies affecting the Club's survival by informal
processes, that it is easy to see how the need to sit down together,
preferably in the absence of Mr Eastham, and decide carefully what he should
be paid for his undoubted services, was overlooked.
- I note in passing that as late as 2nd
September 2005 Mr Harney was able to sit in front of his computer and draft a
letter to the Club purporting to record that a £100,000 consultancy fee was
payable to Mr Eastham, until subsequent discussion with Mr York caused him to
delete that sentence. The fact that Mr Harney was at that late stage
apparently unaware of any agreement that Mr Eastham should be paid £50,000 is
a slight, but no means decisive, pointer towards the conclusion which I have
reached on balance.
- The sum total of my conclusions on this issue so
far means that, as completion of the Sale Agreements approached in April 2005,
and the directors came to appreciate that the Club would have insufficient
funds from the completion monies with which to make a substantial additional
payment to Mr Eastham, all that had been agreed between them was the principle
that he should receive a substantial payment as soon as the Club was in a
position to make it, out of monies flowing to the Club from Mr York's
companies in connection with the project, but that no specific amount had been
agreed, nor any requests made to Mr York that his companies should bear the
burden, either in terms of cash flow or expense sharing.
- Mr York's evidence was that this changed "in
late February/ early March 2005", when the Club suggested that, with no
resources of its own, Mr Eastham should approach Ross River as purchaser "to
see if it would be willing to pay (some of) the Consultancy Fees on its
behalf". I take this quotation from Mr York's first witness statement, the
phrase in brackets having been added by him in cross examination. Mr Eastham
confirmed the timing of that approach in his second witness statement, and
said that the other directors of the Board had suggested that he approach Ross
River.
- Mr George's evidence was only that Mr Eastham
had told him in June 2005 that he had asked Mr York for some financial help
with his daughter's wedding costs, and that, in October 2005, Mr Eastham had
told Mr George to deduct the £10,000 received by him in June from the £50,000
which was otherwise to be paid to him as a result of the successful conclusion
of the Overage Agreement.
- In cross examination Mr Eastham could no longer
recall when between September 2004 and June 2005 a direct payment to him by
Ross River was first mooted, but he acknowledged that the impetus for that
change came about because of the impending marriage of his eldest daughter,
due to take place on 7th August 2005, and the understandable
pressure from his wife to demonstrate a better financial return for all his
hard work at the Club than had so far been represented by the payment of a
modest £2,500 per month.
- Mr Satchell absolutely denied any knowledge of,
still less invitation by him to Mr Eastham to seek, payments direct from Ross
River. Mr Murray's evidence was that as far as he was concerned the question
of additional payments was, from first to last, a matter between Mr Eastham
and Mr York, with which the Club was not involved. While I accept that this
may have been Mr Murray's personal view of the matter in 2004, during the
negotiation of the Heads of Terms and the Sale Agreements, this is not what
either the Board or Mr York and his companies had agreed. There is no
compelling evidence that Mr Murray re-considered whether this was appropriate
in or after March 2005, when the commencement of negotiations for the sale of
the Club's share of the Overage meant that there was for the first time (after
September 2004) a risk of conflict between the Club's and Ross River's
interests. Mr Murray's own evidence was that he knew nothing of the June 2005
payment, and I believe him.
- I find that Mr Eastham probably approached Mr
York nearer to June than February/March 2005, and that he did so because of
the financial embarrassment threatened by his daughter's wedding, without any
invitation to do so by any of his colleagues on the Club's Board. I find that
the payment of £10,000 was structured as if it were arrears of monthly
consultancy fees of £2,500 per month due in respect of consultancy services
starting to be provided in March 2005, and that both Mr York and Mr Eastham
expected it to be taken into account in any final settlement between the
parties to the project, whether under the terms of the Sale Agreement or as
part of any earlier purchase by Ross River of the Club's share in the Overage.
- For present purposes, the question is not
whether the artificial attribution of the payment of £10,000 to arrears of
monthly third party fees was itself dishonest, but whether the payment was
deliberately concealed from the Club until after the conclusion of the
negotiations for the purchase of the Club's share of the Overage.
- In support of a conclusion that it was
deliberately concealed is the fact that Mr Eastham's invoices in respect of
the £10,000 were not prepared or sent until November 2005, after the making of
the Overage Agreement, in circumstances where the Club and Ross River had by
then finally severed the relationship constituted by the Sale Agreements. The
invoices, and therefore the underlying payment, would be unlikely ever to have
been drawn to the Club's attention, and no reference was made to the payment
in either the draft or final versions of Mr Harney's letter to the Club in
early September 2005. In fact, it appears that the Club found out about the
invoices only because a disaffected member of Mr Harney's staff later made
them available, together with other relevant documents, to the Club's
solicitors retained for the purposes of this dispute.
- Against that conclusion is the evidence of Mr
George, that Mr Eastham told him about the £10,000 when, or soon after, it was
paid, and that he invited him to deduct it from the £50,000 which Mr George
was otherwise minded to arrange for the Club to pay Mr Eastham after the
conclusion of the Overage Agreement. I have considered but rejected the
submission that Mr Carr's email to Miss Roberts referring to the £10,000 as
payable in anticipation of the successful outcome of the overage negotiations
points one way or the other. In my judgment, taken as a whole, it is neutral,
not least because Mr Carr appears to have been told that it was a payment on
account of CCFC's (rather than Ross River's) professional fees.
- I have decided that the June 2005 payment of
£10,000 was not actively or deliberately concealed by Mr Eastham from the
Club. My reasons now follow.
- It was in my judgment in the highest degree
improper for Mr Eastham as the chief executive of a company engaged in tough
negotiations with Mr York's companies to seek, let alone obtain, a payment
from Mr York or from one of his companies. By doing so, he put himself into Mr
York's debt, morally speaking, and plainly committed a breach of the
fundamental obligation of a fiduciary not to place himself in a position of
potential conflict between his duties and his interest. Anyone more aware than
Mr Eastham of his fiduciary responsibilities would have had the strongest
temptation to conceal that conduct from his principal, and I have rejected Mr
Eastham's explanation that his fellow directors invited him to approach Mr
York for assistance.
- Mr Eastham's evidence that he did not conceal
the payment is however supported by Mr George, a most impressive witness of
complete honesty, and a loyal and devoted supporter and servant of the Club.
There is no suggestion from Mr George that Mr Eastham asked him to keep that
information to himself. Furthermore, both Mr Eastham and Mr George's evidence
shows that, if believed, Mr Eastham invited Mr George to deduct £10,000 from
that which Mr George would otherwise have been prepared to pay him once the
Club was funds after the conclusion of the Overage Agreement.
- More broadly, Mr Eastham's own record speaks for
itself as a diligent and determined fighter for the Club's survival, at
considerable personal expense and financial embarrassment to himself. After a
shaky start, he secured the Sale Agreements by the skilful playing-off of
rival developers, despite the crippling financial trouble of the Club, which
would have driven many similarly challenged companies into administration or
liquidation. After receiving the June 2005 payment, he continued vigorously to
fight the Club's corner against Mr York's companies in the overage
negotiations, ultimately leaving to a deal at figure 80% higher than that on
offer in June.
- I bear in mind also Mr Eastham's demeanour as a
witness. Although I have not accepted the whole of his evidence, and although
he did himself no favours by his tendency to make speeches rather than answer
questions directly, he did not strike me as a subtle or deceitful witness. I
have not ignored his decision, again contrary to his duty, to make a quantity
of the Club's confidential documents, including privileged documents,
available to the claimants. It was another plain breach of duty by someone
with a great deal to learn about fiduciary responsibilities, but it was in my
judgment an exercise of misguided self-defence rather than dishonesty.
- Finally, on this most serious allegation, Mr
Eastham is entitled to the benefit of the doubt, albeit that he owes it mainly
to Mr George's evidence rather than to his own that I have concluded in his
favour on this issue.
- The question whether, as I have found, Mr
Eastham's disclosure of his receipt of £10,000 in June 2005 to Mr George means
that his principal the Club must be taken to have had knowledge of it, in
circumstances where, as I have also found, neither Mr Murray nor Mr Satchell,
still less the Club's legal or valuation advisers knew about it, is a question
of law to which I shall shortly return.
- The next factual question raised by this issue
is whether in assisting Mr Eastham to commit a serious breach of his fiduciary
duties to the Club by making him a payment of £10,000 in June 2005, Ross River
did so either knowingly, or dishonestly. I have rejected the evidence that Mr
Eastham was in fact asked by his fellow directors to approach Mr York for
financial assistance in 2005. For the avoidance of doubt, I also reject both
Mr Eastham's and Mr York's evidence that Mr Eastham made any such suggestion
to Mr York. It is not suggested that Mr York, his companies, or advisors made
any independent attempt of their own either to inform the Club of the payment,
or to find out whether any such payment was known or approved by the Club. For
my part, I doubt whether anyone on Mr York's side gave the matter a moment's
thought.
- The most rudimentary appreciation of the nature
of fiduciary duties should have suggested to those on Mr York's side that a
payment to the chief executive of the Club during the course of the Overage
negotiations would involve a commission by him of a breach of fiduciary duty,
in the absence of the clearest possible informed consent to such a payment by
those, other than Mr Eastham, responsible for the Club's affairs. In my
judgment the proper conclusion as to the state of mind to be attributed to the
claimants in this respect is that they simply did not care whether the payment
had been disclosed to or been approved by the Club. I do not however conclude
that the payment was made with the intent of procuring an improperly
favourable attitude towards the claimants in Mr Eastham's further conduct of
the Overage negotiations, or with the intent that it be deliberately
concealed.
- Finally, I broadly accept the claimants' case
and their witnesses' evidence as to the circumstances of the making of the
further payments each of £4,000 in December 2005 and January 2006. It was not
even suggested that this had in any way been promised or hinted at in advance
of the conclusion of the Overage Agreement. Accordingly, the making and
receipt of them can be of no relevance to the Club's claim to set aside that
agreement. The question whether in obtaining those further payments Mr Eastham
made use of his position as a fiduciary of the Club, so that he ought to be
accountable to the Club in respect of it, is not raised by these proceedings,
and I say nothing further about it.
The Law
Rescission for Misrepresentation
- The making by one contracting party to another
of a material misrepresentation of fact which induces that other to make the
contract gives that other the right to rescind the contract, qualified in
cases of innocent or negligent misrepresentation by the court's statutory
discretion to award damages in lieu, but not so qualified where, as here, the
misrepresentation is fraudulent.
- Although silence as to the material facts is not
in general capable of constituting a misrepresentation, it may do so where the
defendant is under a positive duty of disclosure, for example when negotiating
a species of contracts regarded as uberrimae fidei, or where an
existing relationship between the parties, such as a fiduciary relationship,
imposes an obligation of disclosure.
- In the present case, the contentious issues of
legal analysis are, first, whether there existed a duty of disclosure upon
Ross River when negotiating the purchase of the Club's share of the Overage,
by reason of the relationship between the parties created by the Sale
Agreements, and secondly, whether Mr Harney's misrepresentations made on Ross
River's behalf were material, and if so, such as to induce the Club to enter
into the Overage Agreement.
- As to the first of those issues, it is well
settled that the duty of good faith which subsists between partners extends to
any process, whether by negotiation or otherwise, designed to bring about the
termination of that relationship: see Blisset v Daniel (1853) 10 Hare
493.
- In relationships falling short of partnership,
but having in them elements of joint enterprise or joint venture, there is no
hard and fast rule as to the existence or otherwise either of a duty of good
faith, a fiduciary duty or a duty of disclosure. Each case will turn on its
own facts, but if the relationship is regulated by a contract, then the terms
of that contract will be of primary importance, and wider duties will not
lightly be implied, in particular in commercial contracts negotiated at arms'
length between parties with comparable bargaining power, and all the more so
where the contract in question sets out in detail the extent, for example, of
a party's disclosure obligations : see more generally Hospital Products Ltd
v United States Surgical Corporation (1984) 156 CLR 41, at 97, where Mason
J said this:
"That contractual and fiduciary relationships may co-exist
between the same parties has never been doubted. Indeed, the existence of a
basic contractual relationship has in many situations provided a foundation
for the erection of a fiduciary relationship. In these situations it is the
contractual foundation which is all important because it is the contract
that regulates the basic rights and liabilities of the parties. The
fiduciary relationship, if it is to exist at all, must accommodate itself to
the terms of the contract so that it is consistent with, and conforms to,
them. The fiduciary relationship cannot be superimposed upon the contract in
such a way as to alter the effect the contract is intended to have according
to its true construction."
- There are however well known badges or hallmarks
of a fiduciary relationship, such as:
"Whenever the plaintiff entrusts to the defendant a job to be
performed, for instance, the negotiation of a contract on his behalf or for
his benefit, and relies on the defendant to procure for the plaintiff the
best terms available…"
Per Asquith LJ in Reading v The King [1949] 2KB 232 at 236.
- I was invited by Mr Seitler for the claimants to
take note of the following passage in Paul Finn's essay "Fiduciary Law in the
Modern Commercial World" collected in McKendrick on Commercial aspects of
fiduciary obligation (1992):
"An appraisal (i) of the manner in which, and the apparent
purpose for which rights, powers, duties and discretions are allocated by
the contract; (ii) of the contract's particular commercial or business
setting, and (iii): of the self-serving actions lawfully open to a party
both under, and not withstanding the contract will, as a rule, indicate
decisively whether the role and reason of a party in the contract (or in a
discrete part of it) can properly be said to be to serve his own
interests, the parties' joint interests, or the interests of the other
party."
I shall adopt that the guidance, in analysing the relationship created by
the Sale Agreements.
- Turing to the issues of materiality and
inducement, there is a material misrepresentation where the false part of a
statement is objectively likely to have constituted an inducement to the
recipient to enter the contract, not in the sense of being the sole or the
predominant cause but merely one of the inducing causes.
- Once the misstatement is shown to have been
material, then there is "a fair inference of fact" that the recipient was
induced by the statement: see Chitty on Contracts (29th Ed) at Para
6-035 and the numerous cases cited in note 162.
- In cases of fraudulent misrepresentation a more
rigorous rule is applied, sometimes described as being by way of deterrence:
see Chitty (op. cit.) at para 6-034. It is not enough for the representor to
show that the representee would, even if the representation had not been made,
still have entered the contract. It is sufficient for the representee to show
that the misrepresentation "was actively present to his mind" (per Bowen LJ in
Edgington v Fitzmaurice (1885) 29Ch. D 459 at 483).
Bribery
- Bribery is committed where one person makes, or
agrees to make, a payment to the agent of another person with whom he is
dealing without the knowledge and consent of the agent's principal. Where a
contract ensues from those dealings, the principal is entitled to rescission
if he neither knew nor consented to the payment. If he knew of it, but did not
give his informed consent, the court may award rescission as a discretionary
remedy, if it is just and proportionate to do so : See Wilson v Hurstanger
Ltd [2007] EWCA Civ.299 Per Tuckey LJ at paragraphs 47 to 51, following
Johnson v EBS Pensioner Trustees Ltd [2002] Lloyds Rep PN 309.
- The essential vice inherent in bribery is that
it deprives the principal, without his knowledge or informed consent, of the
disinterested advice which he is entitled to expect from his agent, free from
the potentially corrupting influence of an interest of his own : see
Logicrose Ltd v Southend United Football Club [1988] 1 WLR 1256 at
1260-61 per Millett J, who continued:
"It is immaterial whether the agent's mind had been affected or
whether the principal has suffered any loss as a result: "the safety of
mankind requires that no agent shall be able to put his principal to the
danger of such an enquiry as that": Parker v McKenna (1874) LR 10 Ch.
App 96, at 124-5)…. The principal, having been deprived by the other party
to the transaction of the disinterested advice of his agent, is entitled to
a further opportunity to consider whether it is in his interests to affirm
it."
- The liability of the payer to having the ensuing
contract rescinded is based upon him having been an accessory to the agent's
breach of fiduciary duty to his principal : see Wilson v Hurstanger Ltd
(supra) at paragraph 35. But the payer will not merely by paying his
counterparty's agent incur liability as an accessory, unless the payer
actually knows that, or is wilfully blind to the question whether the agent
has concealed the payment from his principal : see again per Millett J per
Logicrose v Southend (supra) at page 1261, where he said:
"Parties to negotiations do not owe each other a duty to act
reasonably, but only to act honestly. In the present context, the
principal's right is a right to rescind for fraud, not negligence. There is
in my judgment a close parallel with the cases on knowing assistance in a
breach of trust…. In my judgment, the difference between the two lines of
authority (that is to say the "bribery" cases and knowing assistance) lies
not in the factual background but in the remedy sought: The state of mind
necessary to make the other party liable ought to be the same whether claim
is for an account of the money which he helped the agent to misappropriate,
or rescission of the transaction itself.
My one reservation, which I make for the sake of completeness,
is this. It is clear that, where one party to a transaction takes what
Collins LJ described as "the hazardous course of making a payment for the
personal benefit of the other person's agent, and does not disclose it to
the principal, he cannot afterwards defend the transaction by claiming that
he believed the agent to be an honest man who would disclose it himself…
Where therefore, knowing that the agent has an interest of his own he does
not himself disclose it to the other party, then in the words of Collins LJ…
"he must at least accept the risk of the agent not doing so."
- None of these principles were in dispute between
the parties before me. The real bone of legal contention lay in the analysis
of what, in the context of a limited company such as the Club, constitutes
knowledge and, separately, consent. In particular, would any disclosure to
directors other than to the whole board, and consent by directors other than
the whole board, be sufficient in the event that, as I have found, Mr Eastham
failed to disclose his receipt of £10,000 in June 2005 to all his colleagues
on the board, and did not receive the consent of all of them?
- I was originally disposed to think that, in the
context of a company with Articles of Association which prohibited the
provision of any remuneration to its directors, whether as directors or
employees, nothing short of disclosure to, and consent from, the shareholders
would suffice. On further reflection however, I have concluded (without
opposition from Mr Davidson) that it is the directors, rather than the
shareholders whose knowledge and consent matters. This is because, on any
view, they rather than the shareholders were seized of the question whether
and on what terms to sell the Club's share in the Overage, and it was to them,
rather than to the shareholders that for practical purposes Mr Eastham was to
be expected to provide disinterested advice, as the director with primary
delegated responsibility for the conduct of the negotiations with Ross River.
- Mr Seitler did not seriously challenge the
proposition that for the Club to be said to have given its informed consent to
a payment by Ross River to Mr Eastham, it would be necessary to show that all
the then directors approved of it. I accept his submission that such approval
need not have been resolved upon at a formal meeting attended by all of them
at the same time: see Runciman v Walter Runciman Plc [1993] BCC 223.
- Much more difficult is the question whether
disclosure by Mr Eastham to one of his colleagues on the board, namely Mr
George, constituted disclosure to the Club. I was referred to the unreported
decision of the Court of Appeal in Mohammad Jafari-Fini v Skillglass Ltd
& others [2007] EWCA Civ 261, in which the question was whether the payment of a bribe to an agent
of the defendant had come to the attention of a limited company "PAL" so as to
trigger PAL's obligation as the borrower under a debenture to make disclosure
of it to its lender Skillglass. It was proved that one of PAL's directors, a
Mr Webster, knew of the bribe, but the evidence showed that he did not
communicate it to his colleagues on PAL's board.
- At paragraph 98, Moore-Bick LJ (with whom the
other members of the court agreed) said this:
"The question in the case is whether information in the case
which comes to the attention of one director, but which he has not shared
with the rest of the board, is to be treated as information in the
possession of the company. In MAN v Freightliner I expressed the view
that where the board of directors is properly to be regarded as the
directing mind and will of the company in relation to a particular
transaction the knowledge of each is to be attributed to the company. That
case, however, was concerned with the liability of the company for a false
statement made in a written contract which the board as a whole had resolved
that the company should enter into. The present case differs in as much as
it is concerned with the acquisition by the company of information, but
there are nonetheless certain similarities arising from the fact that the
members of the board can generally be regarded as collectively representing
the company. In general, therefore, I think that where information relevant
to the company's affairs comes into the possession of one director, however
that may occur, it can property be regarded as information in the possession
of the company itself. In my view that presumption informs the present
contract and points to the conclusion that information in the possession of
Mr Webster relating to the bribe is to be regarded as information in the
possession of PAL itself."
- Mr Davidson submits that the decision in
Jafari-Fini was as a matter of general principle distinguishable from
the present case, because of the different purpose for which the company
needed the information. There, the information was "needed" only in the sense
that it triggered the company's obligation to report it to its lender under
the debenture. In the present case the Club needed the information so as to
enable it to make an informed decision whether to permit Mr Eastham to be paid
by Ross River, while leading the Club's negotiations for the sale to Ross
River of the Club's share of the Overage. He referred me to Meridian Global
Funds Management Asia Ltd v Securities Commission [1995] 2AC 500 as
authority for the proposition that in discerning the appropriate "special rule
of attribution" the question whose act or knowledge was intended to count as
the act or knowledge of the company depended upon the purpose for which it is
necessary to make that decision. I consider that the passage in Lord
Hoffmann's well known judgment on this point on page 507 B to F supports Mr
Davidson's submission.
- The application of that purposive principle to
the question whether a payment to the agent of a limited company has been
sufficiently disclosed to deprive it of the character of a bribe is confirmed
by the following passage in the judgment of Tuckey LJ in Wilson v
Hurstanger (supra):
"What amounts to sufficient disclosure for these purposes?
Bowstead says : Consent of the principal is not uncommon. But it must be
positively shown. The burden of proving full disclosure lies on the agent
and it is not sufficient for him merely to disclose that he has an interest
or to make such statements at to what could put the principal on enquiry:
nor is it a defence to prove that had he asked for permission it would have
been given. I think this is an accurate statement of the law. Whether there
has been sufficient disclosure must depend upon the facts of each case given
that the requirement is for the principal's informed consent to his agent
acting with a potential conflict of interest."
- Tuckey LJ's analysis was concerned not with the
question whether disclosure to one director rather than to the whole board was
sufficient, but with the quantity or quality of the information communicated.
Accordingly, Wilson v Hurstanger Ltd does not in terms answer the
question in issue in this case. But in my judgment it points the way to the
answer. A payment to the agent of a company is by the law relating to bribery
required to be disclosed to the company so as to enable it to make an informed
decision whether to permit the agent to do something giving rise to a
potential conflict of interest. Such an informed decision can in general be
made only by the company's board. Contrary therefore to the general rule
propounded by Moore Bick LJ in Jafari–Fini (supra) I conclude therefore
that a payment by a person dealing with a company to a managing director of
the company charged with the negotiation on the company's behalf is only
disclosed to the company by the director if that disclosure is made to
all its directors or to a properly convened board meeting attended by a
sufficient quorum.
- In the present case the question is as to the
disclosure required to be made by the director himself, where the payer took
no steps to make the disclosure, leaving it to the payee director. It may be
that a less stringent rule is to be applied where the payer makes the
disclosure. For example, Mr Davidson conceded that disclosure by Ross River to
the company's solicitors would have sufficed. But where (as here) the only
disclosure made by the payee director was to one of his colleagues on the
board, that was in my judgment insufficient to bring the existence of the
payment to the knowledge of the company.
- It may also be that where the payee is not the
managing director or (as here) the chief executive, the payee may make
sufficient disclosure by telling the MD or CEO. As Mr Davidson put it in
closing: "If you disclose to someone who is the leader, that is good enough.
But if you are the leader, merely disclosing in a vague way to a follower is
not good enough".
- That analysis may be tested by reference to Mr
Seitler's submission that the Club approved the payment by acquiescence, once
Mr George knew of it, on the basis that Mr George's knowledge was to be
attributed to the Club. That would be a result at variance with the reality,
because the board neither knew nor approved of the payment, by acquiescence or
otherwise. The flaw in the submission lies not in the notion that knowledge
followed by acquiescence signifies consent, but rather in the proposition that
Mr George's knowledge is to be attributed to the Club.
- I have considered whether my conclusion on this
issue conflicts with El Ajou v Dollar Land Holdings plc [1994]
2 All ER 685 where, reversing Millett J, the Court of Appeal held that the
knowledge of one of DLH's directors (a Mr Ferdman) was to be attributed to the
company for the purposes of a claim against it based upon knowing receipt. In
my judgment it does not conflict. There, the appeal succeeded not because Mr
Ferdman was a director, but because, in relation to the relevant transaction,
he had sufficient individual authority from the company to require his mind to
be identified for that purpose as the company's governing mind and will. No
such classification can here be applied to the mind of Mr George, the only
director whom Mr Eastham informed about the June 2005 payment.
- Despite its emotive label, it has never been an
essential part of the cause of action in bribery to prove that the payer or
the agent had a consciously improper motive or intent. Bribery is established
wherever the payment brings about the requisite conflict of interest which is
not disclosed to, or consented to by, the principal. It follows that in a case
of non-disclosure bribery may be established even where both the payer and the
agent were unaware that they were doing anything wrong. Nonetheless, in cases
where there has been disclosure to, but not informed consent by, the
principal, questions of improper motive and intent may be relevant to the
exercise of discretion.
- The final legal issue under this heading
concerns the question whether the right of rescission, or the court's
discretion to award rescission, can extend so as to bring about the unwinding
of a transaction prior in time to the payment or agreement for payment
constituting the relevant bribe so as, in this case, to enable the Club to
seek the rescission not merely of the Overage Agreement, but of the 2005 Sale
Agreement as well.
- For that purpose, Mr Davidson advanced two
alternative submissions. The first, based upon a well known decision of a two
judge Court of Appeal in Panama and South Pacific Telegraph Company v India
Gutta Percha Telegraph Works Company (1875) 10 Ch App 515, at 527, was
that "if you find a case where, in the contemplation of this court, a
principal is conspiring with the servant of the other principal to cheat his
master in the execution of a contract, then in common sense, justice, honesty
and this Court, the master is entitled to say, "I will have nothing more to do
with the business":" (per James LJ).
- In that case, it was shown that shortly after
the plaintiff contracted with the defendant for the laying of a cable, the
plaintiff's certifying engineer secretly subcontracted with the defendant to
lay the cable himself. As James LJ put it "a surreptitious sub-contact with
the agent (the engineer) is regarded as a bribe to him for violating or
neglecting his duty". On discovery of the subcontract, the plaintiff was
entitled to terminate the cable laying contract with the defendant, and to
receive back money already paid to the defendant pursuant to its terms. He
described the relief afforded to the plaintiff as being by way of rescission
of the cable laying contract, notwithstanding that it was earlier in time than
the subcontract between the defendant and the plaintiff's certifying engineer.
- As part of the justification for his conclusion,
James LJ said this, at page 526:
"If a man hired a vetturino to take him from one place to
another, and found that the vetturino, after he had accepted the
hiring, had conspired with the servant to rob him on the way, he would be
entitled to get rid both of the vetturino and the
servant."
I would with great respect regard that in modern terms as an illustration
not of rescission in the strict sense but of an accepted anticipatory
repudiatory breach putting an end to the contract.
- Mellish LJ put the matter more cautiously.
First, at page 530, he drew the inference from the facts that, although the
sub-contract shortly followed the cable laying contract between the parties,
the engineer had it in mind to make the sub-contract from the outset. It was
not therefore a simple case of a bribe being agreed after the making of the
contract sought to be rescinded.
- Nor did Mellish LJ treat the case as one of
rescission. This appears from the following passages at pages 531-2:
"I am not quite certain that I go the full length to which the
Lord Justice has gone in thinking that because a person has been a party to
fraudulent act of this kind after the contract was made, the mere fact of
him having been guilty of such fraudulent conduct, supposing that a full
remedy for the fraud could be otherwise obtained, would entitle the other
party to say, "because you acted fraudulently, therefore I will having
nothing more to do with you, and I will not carry out my contract with you."
I am not aware of any authority which has gone to that extent. As far as I
know, the consequence of fraud is, that the Court see that the party
defrauded obtains, as far as can be given, full redress to the fraud, and as
I may have thought it, necessary on this part of the case to consider
whether the plaintiff could be relived from the consequences of this fraud
by any thing short of the relief which Vice Chancellor has given to
them….Now, the way in which the question arises in the present case is
really this: the contract has been broken, and it seems to be clear on the
facts that, independently of the question which is raised for us, it has
been broken by the plaintiff, and so long a time has elapsed that neither
party is bound to the other to complete the contract. The only question,
remains is, whether the defendants ought to keep the £40,000, and beside
that, ought to be allowed to sue at law for any damages they have sustained
on the grounds of the plaintiffs not having completed the contract".
Then, at page 533:
"It seems to me that it would be in the highest degree
inequitable to allow the defendants to keep the £40,000 the contract having
been broken, and having come to an end, is it to be treated as having been
broken by the default of the plaintiffs, or by the default of the
defendants? It appears to me clearly that the defendants have deprived the
plaintiffs of the advice of the engineer, and having by proper conduct
deprived them of this advice the contract really must be treated as having
been broken off through the default of the defendants: and having been
broken off through their default and misconduct, it follows that the
plaintiffs are entitled to have £40,000 claimed back…"
- Making due allowance for subsequent changes in
the language of contractual analysis, it seems to me that Mellish LJ was
indeed treating the case as one of termination by an accepted repudiatory
breach, and the repayment of the £40,000 as appropriate monetary relief in the
respect of the fraud which had been committed. Accordingly, the Panama
case affords no assistance to Mr Davidson in seeking the rescission of the
2005 Sale Agreement. If further performance of it were to be excused by the
Club accepting Ross River's repudiatory breach, the consequence would
nonetheless be to leave the Ground in the possession of Ross River, with
consequential monetary compensation for breach.
- Mr Davidson's alternative submission was that
since the Sale Agreements constituted the Club and Ross River joint venturers
in a project requiring mutual good faith and cooperation, the court should not
by stopping short at rescission of the Overage Agreement leave the parties
bound to each other under the Sale Agreement to a mutually self destructive
future in seeking to realise the development value in the Ground while in a
relationship of hostile distrust. Rescission of the Sale Agreements was
therefore an appropriate solution to that unsatisfactory state of affairs,
with appropriate accounts and enquiries to ensure restitutio in
integrum.
- Mr Davidson's difficulty was to find any basis
for the court having or exercising such a jurisdiction. In the analogous
example of partnership, the court could of course decree a dissolution of the
partnership upon proof of an irretrievable breakdown in trust and confidence
between the parties. But no comparable jurisdiction exists in relation to
joint ventures falling short of partnership. Furthermore, dissolution would
not be designed to achieve, nor would it achieve anything approaching
rescission of the 2005 Sale Agreement, any more than the dissolution of a
partnership is intended to restore the parties to the status which existed
prior to the making of the partnership agreement.
- It follows that I have been unable to discern
any basis whereby the court could give effect either to the Club's desire to
recover the Ground free from the terms of the 2005 Sale Agreement, or to the
perhaps understandable wish of the Club not to have to continue in an
obviously unsatisfactory relationship with Ross River in the future, pursuant
to the Sale Agreement, in the event that the Overage Agreement was set aside.
Conclusions
Duty of Disclosure
- In my judgment the project for the realisation
of the development value of the Ground constituted by the mutual obligations
of the Club and Ross River set out in the Sale Agreements had enough about it
in the nature of a joint venture to require the parties to conduct themselves
with mutual good faith in relation both to the carrying out of their various
obligations, and in relation to any negotiations for a buy-out of either
party's share in the hoped–for Overage. Clearly, the project was to be carried
out for their mutual benefit, as sharers in the anticipated profit, and the
costs of the exercise (as Planning and Development Costs) were in substance to
be shared by way of deduction before distribution of profits, albeit that the
Club assumed no liability for those costs if the project merely broke even or
made a loss. In my judgment, neither party entertained any serious
apprehension that there might be no Overage at all.
- Furthermore, for the parties' mutual benefit,
the Sale Agreements clearly imposed upon Ross River in its conduct of the
lion's share of the work necessary to realise the Overage, obligations to
obtain best value and to minimise costs. Adapting the words of Professor
(later Justice) Finn's analysis which I have quoted above, my appraisal of the
rights, powers, duties and discretions given to Ross River under the Sale
Agreements indicates decisively that the role of Ross River in taking steps
and obtaining information for the purpose of developing the Scheme, obtaining
the Planning Permission and satisfying the Development Conditions can properly
be said to have been for the purpose of serving the parties' joint interests,
rather than simply the separate interests of Ross River, to the extent that
they might diverge from the interests of the Club.
- In particular, I accept Mr Davidson's submission
that it makes no sense at all to conclude (as Mr Harney appears to have done)
that, when it came to a negotiation of a buy-out of the Club's financial
interest in the project, Ross River was at liberty to use, conceal or
otherwise deal with information which it had obtained from outside
professionals at an expense which was to be shared by the parties as a
deduction from their profits, purely for the separate interests of Ross River.
- I prefer to describe that duty as being a duty
of good faith, by analogy with the well known obligation that subsists between
partners, than as a fiduciary duty, albeit that it has an element of fiduciary
obligation embedded in it.
- I am not however persuaded that the Sale
Agreements, and the relationship thereby created between the parties, imposed
a positive obligation upon Ross River to volunteer disclosure of all the
information which it had gained in discharging its function under the Sale
Agreements, once a negotiation for a buyout of the Club's interest started.
The Sale Agreements made detailed provision for the stages in the project at
which, either expressly or by necessary implication, Ross River was to make
disclosure to the Club. Those stages were (i) the time of the submission to
the Club of the Scheme, (ii) the time of the submission to the Club of the
draft Planning Application, (iii) routinely thereafter, by way of report on
the progress of the Planning Application (iv) upon seeking to sell the Ground
to an independent third party after satisfying the Development Conditions, and
(v) upon any calculation of the Additional Consideration payable to the Club,
for example after five years, in the event that the Club should serve a Sale
Notice and Ross River should elect to pay the Club its share of the Overage.
- Although it may be said that a duty at all
times, and in connection with any matter relevant to the project, to make
disclosure of relevant information to the Club would add little to the
detailed regime for disclosure set out in the Sale Agreements, the fact
remains that after considering whether to do so, the parties deliberately
declined to make any provision (whether express or otherwise) in circumstances
that, prior to five years or prior to a sale of the Ground to an independent
third party, they should wish to negotiate a purchase by one of them of the
other's share of the Overage. This is in my judgment a case in which the
specific obligations to volunteer information were exhaustively set out in the
Sale Agreements, such that the identification of any wider or more general
obligation of disclosure would conflict with those detailed provisions by
rendering them unnecessary.
- Nonetheless, the obligation of good faith did in
my judgment require Ross River, once its agent Mr Harney was asked to provide
precisely that information to enable Mr Lee to advise the Club, either to
provide it or, if not, to state in the most unambiguous terms that the request
was being refused. By purporting to respond positively, while in fact
concealing the critical parts of the information by then received most
favourable to an optimistic view of the value of the Overage (and therefore of
the Club's share in it in the buyout negotiations) Ross River by Mr Harney
committed a grave breach of that obligation of good faith. He took the narrow
and misguided view that, because the deadline for submission to the Club of a
draft Scheme had not yet arrived, he was entitled in negotiations for the
purchase of the Club's share of the Overage to have single-minded regard to
Ross River's (and of course his own) interests, and to treat the provisions of
the Sale Agreements as, for that purpose, in suspense.
Misrepresentation
- It will be apparent from my findings of fact
that I have concluded that Mr Harney made dishonest and therefore fraudulent
misrepresentations of fact when responding to Mr Lee's enquiries in May 2005.
In doing so he acted as Ross River's authorised representative, and it has not
been suggested that Ross River is otherwise than fully responsible for his
misconduct, even though I make clear that the evidence did not show Mr York to
have been an active participant in it.
- It is equally clear in my judgment that Mr
Harney's misrepresentations were material, despite his denial that they were,
and despite Mr Seitler's submissions that they were not.
- Mr Lee's task, as he clearly explained to Mr
Harney, was to advise the Club about the value, including the commercial
value, of its share in the Overage, having regard in particular to the type of
Scheme being prepared on Ross River's behalf for the parties' mutual benefit.
His task was not simply to value the Ground at the time of the negotiations.
Regardless whether other valuers might take a different course, Mr Lee made it
clear to Mr Harney that his approach to an appraisal of the net present value
of the Club's share of a future as yet unrealised Overage, required him to
gain an understanding as far as he could of the type of Scheme and associated
Planning Application which was in due course planned to be made. Of course the
appraisal of present value would require the value attributable to any
proposed scheme to be discounted by reference to its prospects of success. But
that by no means reduces an attempt to understand and appraise the proposed
Scheme to the status of irrelevance. On the contrary, Mr Lee made it clear
that he regarded it as essential, and in due course his advice to the Club was
that he could offer no useful appraisal of value, not having obtained that
information.
- The question of materiality may be tested by
asking what effect upon Mr Lee's advice to the Club would have been occasioned
by Mr Harney telling him the truth as to his preparations for the Planning
Application, rather than the falsehoods which he actually told, and providing
the third party professional reports, the existence of which he falsely
denied. To that analysis there can in my judgment only be one answer, namely
the answer given by Mr Lee in cross examination, to the effect that had he
been told the truth, he would have been able to advise the Club in much
clearer terms of the added value which they might forgo if resolved to settle
in 2005 for a cash payment in advance of the realisation of the Overage
pursuant to the machinery contained in the Sale Agreements.
- The sheet anchor of the claimants' case in
relation to misrepresentation was that, even if material, and even if intended
to induce a buyout of the Overage on terms favourable to the claimants, Mr
Harney's statements to Mr Lee were not in fact an inducement, because Mr Lee
did not rely upon them in any respect. Further, Mr Seitler submitted that it
was the mere refusal of Mr Harney to provide information about his plans and
third party professional reports that led Mr Lee to advise the way he did,
rather than Mr Harney's lies about his plans (for example in relation to
density) or his denial of the existence of any relevant reports. He pointed to
Mr Lee's view, clearly expressed in October 2005 that "it is unlikely that
such information or assistance would be given, as at best he (Mr Harney) is
obstructive and at worst objectionable."
- The claimants' submissions on inducement are of
real force, and I have found this issue to be by no means easy to resolve. In
the end, I have not been persuaded by them for the following reasons. First
and foremost, in a case where fraudulent material misrepresentations have been
deliberately made with a view ( as I find ) improperly to influence the
outcome of the negotiation of the contact in favour of the maker and his
principal, by an experienced player in the relevant market, there is the most
powerful inference that the fraudsman achieved his objective, at least to the
limited extent required by the law, namely that his fraud was actively in the
mind of the recipient when the contract came to be made. For present purposes,
the relevant mind is that of Mr Lee when giving his final advice to the Club
before it entered into the Overage Agreement.
- Secondly, although Mr Lee's evident belief was
that Mr Harney was obstructive and objectionable, he did not suggest either in
his witness statement or in cross examination, when called by the claimants to
give evidence, that his lack of regard for Mr Harney at the time went so far
as extending to a belief that he had lied to him. In my judgment Mr Lee only
appreciated that he had been lied to, when for the first time outside court
just before giving his evidence, he saw the third party professional reports,
the existence of which Mr Harney had denied, and the evidence of Mr Harney's
real intentions in relation to density, when seeking Planning Permission.
- Thirdly, as has been frequently emphasised,
analysis of misrepresentation, particularly in relation to materiality and
inducement, requires a comparison to be carried out between the statement
actually made, and the truth, rather than between the statement made and
silence, i.e. no statement. That this is the correct approach is in my
judgment all the more apposite when the maker of the statement is, as was the
representative of Ross River in this case, under an obligation of good faith,
even if that obligation falls short of a strict duty of disclosure.
- Fourthly, I reject the submission that the Club
would have been forced to complete the Overage Agreement at the price offered
by Ross River in any event, due to its financial predicament. It is certainly
true that the Club's lack of working capital led it into the overage
negotiations, and that it was facing ever increasing pressure from its
creditors by October 2005. The question for the Club was undoubtedly whether
to take the bird in the hand rather than wait for the possibility of two in
the bush, but its choice was made on the basis of Mr Lee's inability to offer
useful advice as to what the Overage might in due course prove to be worth in
circumstances where Mr Lee would have been able to provide worthwhile advice,
had he been told the truth by Mr Harney. Pressed though the Club was by its
creditors, Mr Satchell was at the very same time coming into possession of
substantial funds with which he was prepared to assist the Club. Furthermore,
as Mr Eastham very frankly acknowledged in cross examination, if Mr Lee had
been able to proffer some valuation advice about the Overage, the Club might
have been able to obtain some alleviation of its cash flow crisis by borrowing
against its share, having paid off the bulk of its previous borrowing upon
completion of the sale of the Ground in April that year.
- It follows in my judgment that the natural
inference that the deception practised by Mr Harney achieved its objective in
affecting the outcome of the Overage negotiations in favour of himself and
Ross River has not been displaced by the evidence. In my judgment, Mr Harney's
fraud was still actively present in the Club's mind, in the sense which I have
described, when the Overage Agreement was made.
- It follows that the Club is entitled to rescind
the Overage Agreement, and having been induced to make it by a fraudulent
misrepresentation for which the Claimants are responsible, rescission is not
subject to the Court's statutory discretion to award damages in lieu. No
equitable bar to rescission (such as delay) was advanced by the claimants.
- It is therefore unnecessary for me to decide
whether, separately from misrepresentation, the Club would have been entitled
in any event to rescind the Overage Agreement by reason of the plain breach of
the claimants' duty of good faith constituted by Mr Harney's conduct towards
Mr Lee. In my judgment, again by analogy with settled law in relation to the
partnership, such a breach of duty would have given rise to a discretion in
the court to grant equitable relief, including the setting aside of any
agreement for the termination of that relationship obtained by breach of duty
while it was subsisting. But since the only circumstances in which I might
have concluded that the Club's case in misrepresentation failed would have
been if I had found that Mr Harney's lies played no part in inducing the
Overage Agreement, I consider it unlikely that I would have reached a
different and positive conclusion in relation to the exercise of that
discretion. Since the question does not need to be decided, I say no more
about it.
Bribery
- My findings of fact necessitate the conclusion
that Mr Eastham received from Ross River a payment of £10,000 in June 2005, of
which two of the Clubs four directors were not informed, and to which the Club
did not give its informed consent.
- Mr Seitler tried hard to pursuade me that since
the payment was simply a response to Mr Eastham's request of Mr York to assist
in his funding of his daughter's wedding, it had nothing to do with the
negotiations concerning the Club's share of the Overage, and therefore gave
rise to no conflict of interest, so that the vice inherent in a case of
bribery was wholly absent. I reject that submission. While there would in my
judgment have been no conflict of interest occasioned by Ross River providing
additional remuneration to Mr Eastham during the course of the progression of
the project contemplated by the Sale Agreements in the absence of any
negotiation to buy out the Club's share, the position was inevitably different
once those negotiations commenced, and until they reached their conclusion.
- True it is that the payments were not in any
sense conditional upon Mr Eastham taking any particular attitude in the
negotiations, or even conditional upon their successful outcome. But the ways
in which the single-minded loyalty of a fiduciary to his principal can be
undermined are by no means limited to such crude methods. Just as Mr York
obtained leverage in the negotiations leading to the Sale Agreements by
lending to the Club and then, at critical moments, threatening to call in his
loans, he gained at the very least by doing Mr Eastham the favour of making
£10,000 available to him to save him financial embarrassment, the prospect of
calling in that favour at some later date. I make it clear that there is no
evidence that Mr York ever intended or attempted to do so, between June and
October 2005. But it is the propensity for doing so created by the making of
such a payment that undermines the fiduciary's loyalty.
- Having decided as a matter of law that
disclosure by Mr Eastham to one rather than all of his colleagues on the
Club's board was insufficient to constitute disclosure of the £10,000 payment
to the Club, the question remains whether the claimants can avoid rescission
by asserting the absence of knowledge on their part that the payment had
neither been properly disclosed to, nor approved by the Club. I have concluded
as a matter of fact that the claimants (in reality Mr York and Mr Harney)
probably gave no thought one way or the other to the question whether the
payment had been properly disclosed to or approved by the Club. It is
unnecessary for me to conclude whether this constituted willful blindness on
the claimants' part (that is, being conscious of a risk of an improper failure
to disclose and not caring one way or the other) because, on any view, the
claimants made no attempt of their own either to notify the Club of the
payment, or to obtain the Club's approval of it. Mr Davidson acknowledged that
this might have been achieved had the Club's Solicitors been informed by Ross
River, but I have found as a fact that they were not. In those circumstances,
following as I do the decision of Millett J in Logicrose (supra) that
if the payer leaves it to the agent to inform the principal of the payment, he
does so at his own risk, the claimants therefore fail to establish the
necessary basis for avoiding the consequence that, in order to give the Club a
second opportunity to consider the wisdom of the transaction, the claimants
must submit to the rescission of the Overage Agreement.
Rescission of the Sale Agreements
- It will be apparent from my above analysis of
the applicable legal principles that, while reluctant to leave the parties to
re-forge the relationship necessary to make a success out of the continued
performance of their mutual obligations under the Sale Agreements, in the
light of what has so far occurred, I do not consider that my findings in
relation to misrepresentation and bribery give me jurisdiction to accede to
the Club's invitation to set aside the Sale Agreements. Nor would I have done
so even if I considered that I had jurisdiction to award such relief by way of
equitable discretion. Nothing in this trial has begun to persuade me that
there was any impropriety in the hard fought arms' length commercial
negotiation which led to the making of the Sale Agreements, and therefore to
the conferring upon the claimants of the valuable opportunity to realise the
development value of the Ground for a benefit to be shared between them and
the Club, (and others such as Waverley with whom they chose to sub-divide
their share). It would, to my mind, be a positive injustice to the claimants
to require them now to transfer the Ground back to the Club, even if they were
to obtain restitutio in integrum.
- No claim has been advanced that the Club is
entitled to treat the Sale Agreements as terminated by accepted repudiation,
notwithstanding the claimants' breach of their duty of good faith. I can well
understand why not. That would leave the Ground in the hands of the claimants,
and the Club compensated merely in damages for any shortfall occasioned by the
breach of duty in their realisation of the value of their share of the
Overage.
- In my judgment, the just consequence of the
claimants' misconduct which I have identified is precisely that, in the words
of Millett J in Logicrose, the Club should be given a further
opportunity to consider whether it is in its interests to affirm the Overage
Agreement free from the debilitating disadvantages of having had their advisor
Mr Lee deliberately misled by Mr Harney, and having had the undivided loyalty
of their chief negotiator Mr Eastham undermined by his receipt of a payment
from the claimants during the course of those negotiations, without the Club's
knowledge or consent.
- It by no means follows from the justice of the
Club being given that opportunity, that the Overage Agreement was necessarily
a bad agreement in October 2005, but, taking matters as a whole, it seems to
me eminently just that the Club should be entitled to reconsider what it
wishes to do with its Overage rights.
- It follows from the setting aside of the Overage
Agreement that the Club is entitled to be restored to its position as lessee
under the lease which was surrendered as part of this arrangement, under a
lease which is not terminable by the claimants in advance of their obtaining
Planning Permission. I will hear submissions as to how that aspect of
restoring the status quo ante is to be achieved, consistent with the
requirements of the Landlord and Tenant Act 1954, as amended.
- Furthermore, the inevitable price of rescission
is that the Club must restore to the claimants the £900,000 which it received
by reason of the Overage Agreement together with any other relevant benefit
thereunder. Again, I will hear submissions as to the question of interest, and
as to the form of any necessary order to achieve that result.
- Finally, the Claimants' claims for possession of
the Ground and under the Land Registration Act 2002 must be addressed. The
claim for possession must be dismissed. The rights of the Club recognised by
this judgment do not extend as far as those asserted in the Unilateral Notice
registered on its behalf in relation to the Ground. I will hear submissions as
to how that disparity should be dealt with.