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Cite as: [2008] EWHC 1622 (Ch)

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Neutral Citation Number: [2008] EWHC 1622 (Ch)
Case No: HC07C01134


Royal Courts of Justice
Strand, London, WC2A 2LL

B e f o r e :


- and -



Mr David Cavender (instructed by Hamlins LLP) for the Claimant
Mr Peter Ralls QC and Mr Robert-Jan Temmink (instructed by Cripps Harries Hall LLP) for the Defendants
Hearing dates: 7, 8, 9, 12, 13, 14, 15 and 19 May 2008



Crown Copyright ©

    Mr Justice Henderson :


  1. In 2004 the first defendant in this action, Mr Neil Morgan, was the owner of a substantial portfolio of residential, commercial and office property in south east and south west London, Croydon and Kent. He thought its market value was in the region of 16 million, or 10 million net of the external borrowing of about 6 million from the Britannia Building Society ("Britannia") which was secured on the portfolio. He decided that he wished to sell it, and instructed a well-known firm of chartered surveyors, Allsop & Co ("Allsops"), to advise him and to market the property.
  2. Mr Morgan held most of the portfolio (including nearly all the residential property) through a simple corporate structure. There was a holding company called Sledgehammer Holdings Company Limited ("Holdings"), the 10,000 ordinary shares of which were owned by Mr Morgan (as to 9,999 shares) and his wife, Mrs Fiona Morgan, the second defendant (as to one share). There were also two wholly-owned subsidiaries of Holdings, called Sledgehammer Properties Limited ("SPL") and Roadrunner Properties Limited ("Roadrunner"). All three companies were registered in England and Wales and resident in the United Kingdom, as were Mr and Mrs Morgan who live at Sissinghurst in Kent.
  3. Legal title to each of the corporately owned properties (with the exception of a French property which I will mention later) was vested in one or other of the three companies, including Holdings which carried on an active business of property management and development in its own right as well as acting as the holding company of the small group. The properties owned by each company were, and always had been, treated in the accounts, and for taxation purposes, as trading stock, not as investments. They therefore appeared in each company's balance sheet as current assets, under the description "stocks", at their historic cost. Most of the properties had been owned for a number of years, and as a result of the general rise in property values during the late 1990s and the early years of the present century, the aggregate book values of the properties reflected in the accounts were much lower than their current market values. The figures shown for "stocks" in the individual balance sheets of the three companies as at 30 September 2004 were as follows:
  4. Holdings 973,801
    SPL 963,452
    Roadrunner 1,394,801

  5. Apart from the companies, Mr Morgan also carried on business through a limited liability partnership ("LLP") owned and controlled by himself and his wife, Ocean Properties LLP ("Ocean"). Ocean was the legal owner of three substantial commercial and office properties in Kent, one in Dartford, one in Ashford and one in Maidstone ("the Ocean properties"). The acquisition and development of the Ocean properties had been funded by Holdings, out of the money borrowed by Holdings from Britannia, as a result of which Ocean owed Holdings an internal debt of 3,219,409 ("the Ocean debt").
  6. Finally, there were two long leasehold flats in Clapham, legal title to which was vested in Mr and Mrs Morgan in their personal capacities. These two properties were therefore held outside the corporate and LLP structure through which the remainder of the portfolio was owned.
  7. In September 2004 Allsops recommended that the corporately owned part of the portfolio should be sold by way of a sale of the shares in Holdings rather than a sale of the properties themselves. This advice was accepted by Mr Morgan. Allsops then approached a number of potential purchasers, including the Ackerman group of companies headed by Mr Joseph Ackerman. The Ackerman group were very large investors in the property market, and Allsops had often done business with them in the past. In a letter to Mr Joseph Ackerman dated 12 November 2004 Allsops said that the combined value of the portfolio was "presently considered to be circa 16 million", and they therefore sought offers "in the region of 10 million with the borrowing remaining, or alternatively in the region of 16 million with the borrowing to be fully repaid". It was made clear that the offer had to be for the shares in Holdings and the separately owned assets (i.e. the Ocean properties and the two Clapham flats) in their entirety.
  8. On 3 December 2004 the Ackerman group submitted an offer, on behalf of a newly incorporated group subsidiary, in the sum of 13.6 million. This offer was subsequently increased to 14.05 million, and on 15 December 2004 a sale for that price was agreed, subject to contract, and Allsops duly sent a memorandum recording the details of the agreement to the Morgans' solicitor, Mr Adam Cohen of the Adam Cohen Partnership. Mr Cohen was a sole practitioner, who had his office at Elsinore House, 77 Fulham Palace Road, London W6. Mr Cohen quickly made contact with his opposite numbers at the purchaser's solicitors, Hamlins LLP, who were Mr Mark Copping (a partner in the firm's Company Commercial department) and Mr Mark Hurst (a partner in the Commercial Property department). Mr Copping acted on the corporate side of the acquisition, while Mr Hurst was mainly involved on the property side, although he also had overall responsibility for the transaction as the lead client partner.
  9. The negotiations and the drafting exercise which then ensued were difficult and protracted, but they eventually bore fruit in an agreement for the sale and purchase of the shares in Holdings dated 6 April 2005 ("the SPA") and three associated contracts of the same date for the sale and purchase of the Ocean properties and the two Clapham flats.
  10. The parties to the SPA were Mr and Mrs Morgan, together with SPL and Roadrunner, as vendors (1) and a newly incorporated company called Croftcall Limited ("Croftcall") (2). Croftcall had been incorporated by the Ackerman group for the sole purpose of entering into the transaction, as foreshadowed in the group's initial offer letter of 3 December 2004. Croftcall is the claimant in the present action.
  11. The terms of the SPA included the following:
  12. (a) The consideration for the shares in Holdings was agreed to be a fixed price of 3,178,000, but subject to adjustment in accordance with four specified provisions.
    (b) Two of those adjustment provisions related to taxation, and in the context of the present case are of only marginal relevance.
    (c) The third adjustment related to a property in France ("the French property"), legal title to which was vested in Mr and Mrs Morgan but which was owned beneficially by Roadrunner. The Morgans wished to exclude the French property from the sale. The machinery agreed for this purpose was set out in clause 4.6, and provided in short for the French property to be transferred to the Morgans simultaneously with completion of the SPA for a price of 400,000, which would subsequently be adjusted when the current market value of the French property had been ascertained.
    (d) The fourth adjustment provision, in clause 4.8, said that the consideration for the shares in Holdings would be adjusted "having regard to the assets and liabilities" of Holdings at completion, to be determined in accordance with Schedule 8, and
    "the Purchaser shall pay to the Vendors the amount for the current net assets of [Holdings] as set out in the Completion Accounts (as defined in Schedule 8) or vice versa should such current net assets be negative."
    Schedule 8 obliged the Morgans to procure the preparation of draft Completion Accounts within 60 days of completion, comprising a draft consolidated profit and loss account covering the period from the date of the last audited accounts (30 September 2004) to the date of completion, a draft consolidated balance sheet as at the completion date, and a draft statement of the net assets of Holdings at completion. This last document was to state the amount (defined as the "Completion Net Assets") by which the net current assets of Holdings exceeded its net current liabilities, as derived in each case from the draft consolidated balance sheet. Part II of schedule 8 provided that the assumptions to be made for the Completion Accounts were to be the same as those for the last audited accounts.
    (e) Schedule 8 went on to say that unless Croftcall served written notice on the Morgans within 30 business days of delivery of the draft Completion Accounts saying that Croftcall did not accept them, the parties should at the end of that period be deemed to have accepted them and they would then be final and binding on the parties "save in the event of manifest error".
    (f) There were conflicting provisions relating to the date of completion, but in practice completion took place six days later, on 12 April 2005.
    (g) Completion of the SPA was tied in with completion of the sales of the Ocean properties and the two Clapham flats, defined as "the Parallel Transactions".
    (h) It was also agreed that Ocean and Croftcall would enter into a novation of the Ocean debt, in a form agreed between the parties.
  13. The remaining contracts dated 6 April 2005 were:
  14. (a) a contract between Ocean (1) and another Ackerman company called Vernexia Limited (2) for the sale and purchase of the Ocean properties for the price of 4.725 million;
    (b) a contract between Mr and Mrs Morgan (1) and Croftcall (2) for the sale and purchase of one of the Clapham flats (Flat C, 32 Lynn Road, London SW12) for 248,000; and
    (c) a contract between Mr and Mrs Morgan (1) and a third Ackerman company called Opendrive Limited (2) for the sale and purchase of the other Clapham flat (32A Yukon Road, London SW12) for 249,000.
  15. The aggregate amount of the unadjusted purchase price under the SPA and of the purchase prices under the other three contracts was 8.4 million. This reflected the fact that Croftcall was to take over the existing external indebtedness of 6 million to Britannia, and was therefore equivalent to a purchase price of 14.4 million for the shares in Holdings, the Ocean properties and the two flats free from external debt. The purchase price which had originally been agreed, subject to contract, in December 2004 was only 14.05 million, but during the course of the negotiations Mr Morgan had in February 2005 demanded a further 600,000 and after some hard bargaining agreement had eventually been reached in early March on the figure of 14.4 million, which represented an increase of 395,000 over the price originally agreed.
  16. Completion took place, as I have said, on 12 April 2005. On the same date, a novation agreement was entered into between Ocean (1), Croftcall (2) and Holdings (3), whereby liability for the Ocean debt of 3,219,409 was taken over by Croftcall, and Ocean was released from it. In consideration of Croftcall's agreement to take over the Ocean debt, it had been agreed that the purchase price for the shares in Holdings would not be increased by an amount equivalent to the Ocean debt. This point may require a little elucidation. The Ocean debt was a current asset of Holdings, and was shown as such on Holdings' balance sheet. If that asset were to be acquired by Croftcall, through its purchase of the shares in Holdings, it would need to be reflected in a corresponding addition to the purchase price, which had been fixed by reference to the values of the underlying properties and the external borrowing of 6 million, and not by reference to the values of any other assets. However, such a solution would be clumsy (Croftcall would effectively be paying cash of 3,219,409 in order to acquire cash of the same amount, because the Ocean debt would be repaid immediately upon completion out of the proceeds of sale of the Ocean properties), and it would also involve payment of additional stamp duty of more than 16,000 on the increased consideration for the shares. Accordingly, the neater solution was to novate the Ocean debt so that its burden was taken over by Croftcall, and to leave the purchase price for the shares at its originally agreed level. This way the Ocean debt would effectively be extinguished once Croftcall acquired Holdings, because Croftcall would now owe the money to a company which it wholly owned, but the Morgans would not be prejudiced because, through Ocean, they would now receive the proceeds of sale of the Ocean properties free from the liability to repay the Ocean debt. The important point is that the arrangements dealt in a practical and tax-efficient way with the Ocean debt, without any disadvantage to the Morgans. The arrangement had no effect at all on the basic price of 3.178 million agreed for the shares in Holdings.
  17. In the event, no draft Completion Accounts were provided by the Morgans within the period of 60 days from completion, which expired on 12 June 2005. However, some eight months later, on 13 February 2006, the Morgans' accountant, Mr Jeffrey Sloneem, sent to Croftcall's accountant, Mr Nigel Gamble of BDO Stoy Hayward LLP ("BDO"), and copied to Mr Hurst of Hamlins, an Excel file containing what he described as "the Consolidated Completion Accounts and Consolidated Statement of Net Assets as at 6 April 2005". He added: "After you have looked through these perhaps we should talk to ascertain the way forward."
  18. The consolidated balance sheet which Mr Sloneem had prepared showed fixed tangible assets of 2,646 (representing furniture, fixtures and fittings within the properties), and net current assets of 13,749,158 calculated as follows:
  19. Current Assets

    Stock of Properties 10,726,250
    Trade Debtors 80,049
    Deferred Tax 11,037
    Other Debtors 4,165,556


    Current Liabilities

    Trade Creditors 59,722
    Corporation Tax 42,154
    Other creditors 1,131,858
    Balance 13,749,158

  20. The notes to the accounts prepared by Mr Sloneem stated, among other things:
  21. (a) that the profit and loss account and balance sheet for the period from 1 October 2004 to 6 April 2005 had been prepared under schedule 8 of the SPA;
    (b) that the stock of properties was shown at valuation, their original cost having been 2,954,370, and the properties having always been shown in the accounts as current assets;
    (c) that the "other debtors" comprised the novated Ocean debt of 3,219,409, a total of 400,000 in respect of the disposal proceeds of the French property, and bank balances which had been taken over of 546,147; and
    (d) that the "other creditors" comprised various specified "accruals" totalling 1,076,276, the largest of which were a provision of 738,338 for claims for Council Tax unpaid by tenants and a provision of 115,000 for legal fees, together with a sum of 55,582 owing on director's current account.
  22. Mr Sloneem's consolidated statement of net assets as at 6 April 2005 was identical to the statement of current assets and liabilities in the consolidated balance sheet, except that the stock of properties was shown at book cost (2,954,370) instead of at current value (10,726,250). The difference of 7,771,880 was described as a "revaluation reserve". The effect of this change, which of course mirrored the treatment of the properties in the 2004 (and earlier) accounts of the companies, was to reduce the amount of the net assets at completion to 5,977,278, i.e. the figure of 13,749,158 shown on the consolidated balance sheet less the revaluation reserve of 7,771,880.
  23. Although Mr Sloneem did not say so in as many words in his email to Mr Gamble, the implication clearly was that the Morgans proposed to claim payment of 5,977,278 as an "adjustment" to the purchase price under the SPA, pursuant to the provisions of clause 4.8 and schedule 8. Since this would have had the effect of increasing the unadjusted purchase price for the shares by about 188%, or in other words of nearly trebling it, it is not surprising that Croftcall and the Ackerman group took strong exception to the calculation. On 7 May 2006 Mr Gamble sent an email to Mr Sloneem saying:
  24. "I am sure it will come as no surprise to you that I do not accept your draft calculation of Completion Net Assets. The primary reasons for disagreement are with your interpretation of the treatment of property stock, including the French property and of the Ocean debt. I believe these should be excluded from the calculation. These have already been paid for/dealt with on completion."
  25. Mr Gamble attached to his email a revised calculation which eliminated from the current assets at completion the stock of properties, the proceeds of the French property and the Ocean debt, thereby producing a negative figure for net current assets of 596,501. He also proposed various further adjustments, which resulted in a negative balance of 687,327 payable by the Morgans to Croftcall.
  26. It appeared for a time that the parties might be able to resolve their differences amicably. On 14 June 2006 Mr Sloneem informed Mr Gamble by email that the vendors "have examined your proposed adjustments and are not fully in agreement thereto". He enclosed a revised schedule, which he said was "based upon the vendors' understanding of the negotiations". This schedule eliminated the stock of properties and the Ocean debt from the current assets, and therefore appeared to accept the validity of Croftcall's two main complaints. However, the proceeds of the French property were brought back in to the calculations, and a number of other substantial changes were also proposed which resulted in a bottom line balance of 926,123 payable by Croftcall to the Morgans. The parties were therefore still more than 1.6 million apart.
  27. The present proceedings

  28. Since the matter proved incapable of resolution by agreement, Croftcall started the present action by issuing a claim form in the Chancery Division of the High Court on 27 April 2007.
  29. The particulars of claim, in their original form, pleaded the relevant provisions of the SPA, and the exchange of emails between Mr Sloneem and Mr Gamble from February to June 2006 which I have outlined above. It was then contended:
  30. (a) that the notice procedure and the deeming provision in paragraph 1.3 of schedule 8 to the SPA had never been triggered, because draft completion accounts were not prepared by the Morgans and delivered to Croftcall within 60 days of completion, and on its true construction paragraph 1.3 applied only to draft completion accounts which were prepared and delivered within the prescribed time limit; alternatively,
    (b) that if the accounts sent by Mr Sloneem to Mr Gamble in February 2006 were delivered within the contractual time limit, they were not "draft Completion Accounts" within the meaning of paragraph 1.1 of schedule 8, because they were submitted for discussion purposes only and as a preliminary to the subsequent submission of formal draft Completion Accounts; alternatively,
    (c) that the Morgans had waived any right to contend, and/or had estopped themselves from contending, that the documents delivered by Mr Sloneem constituted draft Completion Accounts within the meaning of the deeming provision in paragraph 1.3 of schedule 8; alternatively,
    (d) that the accounts submitted by Mr Sloneem deviated in significant respects from the accounting treatment in Holdings' latest audited accounts, again with the consequence that they were not draft Completion Accounts within the meaning of schedule 8; alternatively,
    (e) that the Morgans had by waiver or estoppel precluded themselves from relying upon the deeming provision in paragraph 1.3 of schedule 8, because the revised statement of net current assets which was submitted by Mr Sloneem in June 2006 accepted a number of the points made by Croftcall, with the result that the Morgans must be taken to have elected to withdraw the original statement; alternatively,
    (f) that accounts submitted by Mr Sloneem were in any event subject to a "manifest error" within the meaning of paragraph 1.3 of schedule 8, in that they included the stock of properties, the Ocean debt and the French property, all of which had already been taken into account in the agreed sum payable on completion or in other express provisions of the SPA.

    Croftcall sought appropriate declarations to reflect these contentions, and an account of all sums due to it on the basis of the revised schedule submitted by Mr Gamble in June 2006.

  31. The particulars of claim were settled by Mr David Cavender of counsel, who has at all stages acted for Croftcall and who appeared for Croftcall at the trial. It is worth noting that the claim as originally pleaded did not include any claim for rectification of the SPA. It did, however, implicitly allege that on the true construction of the SPA the stock of properties, the Ocean debt and the French property should never have been included in the draft statement of net assets at completion in the first place, because it is only on that basis that their inclusion could be said to have constituted a "manifest error".
  32. By an order made on 13 December 2007 Master Bowles gave Croftcall permission to amend the particulars of claim, in the form of an annexed draft. The principal effect of the amendments was to add (in paragraphs 28A and B) an express claim that as a matter of construction the term "net current assets" in the SPA was not intended to include the stock of properties, the Ocean debt or the French property (or the proceeds of sale thereof), and also to add (in paragraphs 28C and D) a claim that the SPA should be rectified "to properly record the terms of the commercial deal agreed between the parties".
  33. Paragraph 28B of the amended particulars of claim reads as follows:
  34. "The Claimant will contend that the alternative construction contended for by the Defendants is commercially absurd and, in effect, requires [Croftcall] to pay twice over for the same assets and/or pay a total price far in excess of what was agreed. The agreement reached was a fixed price to include the Properties and the French Property. The Completion Accounts mechanism was designed to deal primarily with a reconciliation of rents, deposits and the bank accounts which had been used for personal and corporate use and which at completion could not be accurately assessed. It was not intended to result in a fundamental recalculation of the price to be paid for the assets."
  35. The rectification sought in paragraph 28D of the amended particulars of claim was to the effect that:
  36. (a) paragraph 1.1(c) of schedule 8 to the SPA should be rectified so as to read

    "a draft statement of the net assets of the Company at Completion save that the Properties, the Ocean Loan, and the French Property (or the proceeds of sale thereof), shall be excluded from such "net assets"."


    (b) Part II of schedule 8 should be rectified so as to read

    "The assumptions for the Completion Accounts shall be the same as those for the Accounts save that [the] Properties, the Ocean Loan, and the French Property (or the proceeds of sale thereof), shall be excluded from the net assets."

    In each case, the words in italics are those which it is alleged should be added in order "to accurately reflect the commercial deal reached between the parties".

  37. The amended particulars of claim did not make it clear whether Croftcall sought to rely on an express agreement between it and the Morgans that the above items were to be excluded from the net assets, or only on a continuing common intention that they should be excluded, together with some outward expression of accord (see Snell's Equity, 31st edition, para 14-14 at pp.336-7 for the basic ingredients of rectification based on a common mistake). This point was taken at an early stage of the hearing before me, by counsel who had very recently been instructed by the Morgans, Mr Peter Ralls QC leading Mr Robert-Jan Temmink, in place of leading and junior counsel previously instructed, Mr Christopher Moger QC and Mr Benjamin Pilling. In response, counsel for Croftcall confirmed that no express agreement was relied upon, and the plea of rectification was primarily based on an alleged continuing common intention.
  38. Counsel for Croftcall also sought permission soon after the start of the hearing to re-amend the particulars of claim so as to add an alternative plea of rectification on the basis of unilateral mistake. The circumstances in which such a plea may succeed are stated in Snell at paragraph 14-15, on page 339, as follows:
  39. "By what appears to be a species of equitable estoppel, if one party to a transaction knows that the instrument contains a mistake in his favour but does nothing to correct it, he (and those claiming under him) will be precluded from resisting rectification on the ground that the mistake is unilateral and not common. Under this head the evidence of the knowledge and intention of the defendant must be such as to involve him in a degree of sharp practice, or at least "the conduct must be such as to affect the conscience of the party who has suppressed the fact that he has recognised the presence of a mistake" [the footnote refers to Thomas Bates and Son Limited v Wyndham's (Lingerie) Limited [1981] 1 WLR 505 at 515, per Buckley LJ]. Actual knowledge by the defendant of the mistake is not necessarily required. It is sufficient that he wilfully and recklessly shut his eyes to the obvious or intended the other party to labour under a mistake and suspected, though does not actually know, that the other party is mistaken."
  40. The reason for the application to re-amend was that in his witness statement dated 24 April 2008 Mr Morgan had said that in late March and early April 2005 he expected a substantial amount to be payable to him and his wife under the Completion Accounts mechanism, and had in mind a figure of the order of 1.8 million. Furthermore, on Wednesday, 30 April 2008, only a week before the start of the trial, Mr Morgan had disclosed through his solicitors a memorandum stored in his computer, apparently dated 7 April 2005, which appeared to corroborate this figure. The authenticity of this document, which I will call "the April memorandum", became a major issue during the course of the trial, and was the subject of a good deal of last-minute evidence, both expert and factual. The application to re-amend was not opposed by counsel for the Morgans, and I gave permission for it to be made. It seemed to me desirable that the factual context in which the SPA was concluded should be fully investigated in the oral evidence, and on one possible view of the facts a claim for rectification on the basis of unilateral mistake might be properly arguable.
  41. Like the particulars of claim, the Morgans' defence and counterclaim went through a number of evolutions. In its final form, for which I gave permission at the hearing, the re-amended defence and counterclaim denied that Croftcall was entitled to any of the relief claimed, and asserted that on a proper construction of the SPA the stock of properties, the Ocean debt and the French property all fell to be included in the statement of net current assets under schedule 8. Reliance was placed on the ordinary and natural meaning of the words used in the SPA, and the result contended for by the Morgans was said to be "the logical consequence of the terms freely agreed between the parties whilst represented by competent solicitors and accountants" (paragraph 33.2). Paragraph 33.3 went on to say that the Completion Accounts were not intended to deal just with the reconciliation of rents, deposits and bank balances, and that on the contrary:
  42. "the intention was a fundamental recalculation of the consideration in order to determine the final balance payable in light of the initial consideration, as reflected by the words used in clause 4.8 of, and schedule 8 to, the SPA."
  43. In the counterclaim, the Morgans claimed payment of the sum of 5,977,278 set out in Mr Sloneem's calculation of the consolidated net assets as at 6 April 2005 (see paragraph 17 above), together with the sum of 164,000 retained by Croftcall under clause 5.2 of the SPA, making a total of 6,141,278, plus interest at the contractual rate of 4% over the base rate from time to time of Lloyds Bank Plc. Alternatively, in a paragraph which was only added to the draft re-amended defence and counterclaim very shortly before the hearing, it was contended that credit must be given for the initial consideration of 3.178 million paid on completion for the shares in Holdings, thereby reducing the sum claimed in respect of the net assets from 5,977,278 to 2,799,278.
  44. The question of construction

  45. I will begin by considering the question of construction, because if it is decided in Croftcall's favour the alternative claim of rectification does not arise. The question, in essence, is whether on the true construction of the SPA the statement of net assets at completion which the vendors undertook to procure was, or was not, intended to include any or all of the stock of properties, the Ocean debt and the French property (or its proceeds of sale).
  46. I have already summarised the main relevant provisions of the SPA. I will now set out the precise terms of the key provisions on which this issue turns.
  47. Clause 5.1 provided that:
  48. "The consideration price for the Shares [i.e. the 10,000 issued ordinary shares in Holdings] shall be 3,178,000 adjusted in accordance with Clauses 4.6, 4.8, 4.11 and 5.2. Completion shall take place simultaneously with exchange on the date hereof or such later date as shall be agreed between the parties PROVIDED THAT the Vendor and the Purchaser simultaneously complete the transactions listed in the Seventh Schedule hereto ("the Parallel Transactions") failing which (by reason of any default other than a default attributable to the Vendor) the Vendor shall be entitled to withhold from completing this transaction unless and until completion of the Parallel Transactions."
  49. Clause 6.10 provided that:
  50. "The Vendors will procure that Ocean Properties LLP will, and the Purchaser will, enter into the Ocean Debt Novation."
  51. Clause 4.8 stated that:
  52. "The Consideration shall be adjusted having regard to the assets and liabilities of the Company at Completion to be determined in accordance with Schedule 8 and the Purchaser shall pay to the Vendors the amount for the current net assets of the Company as set out in the Completion Accounts (as defined in Schedule 8) or vice versa should such current net assets be negative."
  53. Schedule 8 was headed "Completion Accounts", and by paragraph 1.1 provided that:
  54. "The Vendors shall procure that the Company shall within sixty (60) days of Completion prepare:
    (a) a draft consolidated profit and loss account of the Company in respect of the period from and including the day following the Accounts Date [defined as 30 September 2004] to the Completion Date;
    (b) a draft consolidated balance sheet of the Company as at the Completion Date; and
    (c) a draft statement of the net assets of the Company at Completion
    (such profit and loss account, balance sheet and statement being the "draft Completion Accounts"). The said draft statement of the Completion Net Assets shall comprise a statement of the amount (the "Completion Net Assets") by which the net current assets of the Company (as derived from the said draft balance sheet) exceed the net current liabilities of the Company (as derived from the said draft balance sheet).
    The Vendor shall procure that the draft Completion Accounts shall be prepared in accordance with the provisions of Paragraph 2 of this Schedule and that on their preparation the draft Completion Accounts shall be delivered to the Purchaser for review."
  55. Part II of schedule 8 provided, in an un-numbered paragraph, that:
  56. "The assumptions for the Completion Accounts shall be the same as those for the Accounts."

    The "Accounts" were defined in clause 3.2 of the SPA as meaning the audited financial statements of Holdings prepared in accordance with the Companies Acts for the accounting reference period ending on the Accounts Date, i.e. 30 September 2004.

  57. The principles of construction which should be applied in interpreting a commercial contract are by now well settled, and were not the subject of any disagreement between the parties. The leading authority is the speech of Lord Hoffmann in Investors Compensation Scheme Limited v West Bromwich Building Society [1998] 1 WLR 896 ("West Bromwich") at 912-13. Familiar though it is, I will cite the key passage in full, beginning at 912F:
  58. "But I think I should preface my explanation of my reasons with some general remarks about the principles by which contractual documents are nowadays construed. I do not think that the fundamental change which has overtaken this branch of the law, particularly as a result of the speeches of Lord Wilberforce in Prenn v Simmonds [1971] 1 WLR 1381, 1384-1386 and Reardon Smith Line Limited v Yngvar Hansen-Tangen [1976] 1 WLR 989, is always sufficiently appreciated. The result has been, subject to one important exception, to assimilate the way in which such documents are interpreted by judges to the common sense principles by which any serious utterance would be interpreted in ordinary life. Almost all the old intellectual baggage of "legal" interpretation has been discarded. The principles may be summarised as follows.
    (1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.
    (2) The background was famously referred to by Lord Wilberforce as the "matrix of fact", but this phrase is, if anything, an understated description of what the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.
    (3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear
    (4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammar; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax: see Mannai Investments Co Limited v Eaglestar Life Assurance Co Limited [1997] AC 749.
    (5) The "rule" that words should be given their "natural and ordinary meaning" reflects the commonsense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaios Compania Naviera S.A. v Salen Rederierna A.B. [1985] AC 191, 201:
    "if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense." "
  59. In Bank of Credit and Commerce International S.A v Ali [2001] UKHL/8, [2002] 1 AC 251, Lord Hoffmann subsequently made it clear that his second principle in West Bromwich confined the admissible background material to "anything which a reasonable man would have regarded as relevant": see paragraph 39.
  60. What, then, is the relevant background material in the light of which the SPA must be construed? I have already summarised most of it in the introductory section of this judgment. Mr Morgan and his wife owned the portfolio of properties through the simple structure which I have described. Mr Morgan wished to sell the portfolio. The decision was taken, on the advice of Allsops, to dispose of the corporately owned properties by selling the shares in Holdings, not the underlying properties themselves. The Ackerman group submitted an offer for the whole portfolio, including the shares in Holdings, in December 2004, and on 15 December a sale was agreed subject to contract for 14.05 million. This price was subsequently negotiated upwards to 14.4 million in February and early March 2005. On the footing that the purchaser would take over the existing external indebtedness of 6 million to Britannia, the net purchase price of 8.4 million was allocated between the shares in Holdings (3.178 million), the Ocean properties and the two Clapham flats.
  61. One point which I have not yet mentioned is that the Ackerman group, as one would expect, sought valuation advice of their own. According to the unchallenged evidence of Mr Daniel Wulwick, who is the Property Manager of the Ackerman group, he took initial advice from the surveyors, King Sturge, in December 2004, and was told by them that the portfolio was worth in the region of 14 million. After the group's offer had been accepted, he arranged for formal valuations to be made, and investigated potential finance for the deal. Mr Morgan knew that these valuations had been obtained, because in a letter which he sent to the Ackermans on 4 February 2005 he complained that "I have spent a day of my time chauffeuring around your valuation surveyor in order to conduct a valuation". In a subsequent email to Mr Wulwick dated 22 February 2005, he said:
  62. "King Sturge's valuation is irrelevant. They may well have given [you] their valuation of 14M for the whole because this is precisely what you told them you were paying. If you had told them you were paying 18m they would have doubtless produced a valuation at that level. You know that this is common practice, the whole valuation process is subjective, arbitrary and subject to manipulation."

    On the same day, Mr Wulwick replied saying:

    "What you seem to ignore is that unlike you who made an estimate of the value of the properties, I paid more than 20,000 to obtain a full, complete, impartial and up-to-date valuation in accordance with the RIBS valuation standards. The bank's valuers have no idea what we are paying but were under instruction to produce the highest valuation they could in order to allow us to borrow as much as we wanted. Your assertion otherwise is unhelpful."
  63. I refer to this material on valuation, not as inadmissible evidence of the negotiations between the parties, but in order to bring out the important and undisputed point that the agreed price for the deal was throughout intended by each side to reflect the open market value of the properties. That was the basis on which the portfolio had originally been offered for sale by Allsops, and that was the context in which the subsequent negotiations about the price took place in February 2005. Furthermore, Mr Morgan knew that the Ackerman group had obtained the valuations, from a reputable firm, not only in order to satisfy themselves that they were paying a fair price for the portfolio, but also in order to raise money to finance the transaction.
  64. It is also important to note that the Ackerman group were, or at least should have been, well aware that the corporately owned properties were shown as trading stock, and thus as current assets, in the accounts of the three companies concerned. The information pack sent by Allsops to prospective purchasers included a statement that "All the Companies since inception have had their accounts prepared on a trading company basis", and at an early stage after the Ackerman group's offer had been accepted they were supplied with full corporate accounts of the three companies for the four year period from 30 September 1999 to 30 September 2003 inclusive: see paragraph 2(a) of the Replies to Corporate Enquiries signed by Mr Cohen on behalf of the vendors on 19 January 2005.
  65. The same Replies to Corporate Enquiries also informed the Ackerman group that, surprising though it may seem, there were no company bank accounts. It was explained that for the past 15 years the companies had used personal bank accounts belonging to Mr and Mrs Morgan held at Lloyds TSB, and "by way of general information, in essence the companies have existed and traded as an extension of Neil Morgan": see paragraph 3(a). In response to enquiries about the existence of assets other than property, it was stated that there were none "save as disclosed in the annual financial accounts", with the exception of one vehicle which was to be retained by the Morgans: see paragraph 5(a).
  66. It is unnecessary to explore the factual background to the SPA any further. In my view it is inconceivable that the parties could ever have intended the purchase price for the shares in Holdings to be adjusted by reference to current assets of the three companies which had already been taken fully into account in fixing the agreed purchase price before adjustment of 3.178 million, or for which the terms of the SPA and the linked contractual documents already made full provision. The parties cannot rationally have contemplated that Croftcall should pay twice over for the corporately owned stock of properties, once as part of the net price of 8.4 million agreed for the portfolio as a whole, and again as part of the net current assets of the companies at completion. The absurdity of the contention is compounded by the fact that the properties were shown in the accounts to 30 September 2004 (as they had been in the earlier accounts) at their historic book values, which bore no relation to their current market values: see paragraph 17 above. The idea that a purchaser should be obliged to pay twice for the same assets, once by reference to their full current market value and again by reference to their historic book values, is nothing short of absurd. Similarly, the parties cannot rationally have contemplated that Croftcall should pay again for the Ocean debt and the French property, when the parties had expressly agreed to deal with the Ocean debt by means of the novation agreement (see clause 6.10 of the SPA), and to transfer the French property to the Morgans on completion for an adjustable consideration of 400,000 (see clause 4.6).
  67. It is true that, on a purely literal construction, the draft statement of net assets at completion required by paragraph 1.1 of schedule 8 to the SPA should have included the stock of properties, the Ocean debt and the French property (or its proceeds of sale). All these items were properly included as current assets in the draft consolidated balance sheet of Holdings as at the date of completion, and Part II of schedule 8 provided that the assumptions for the Completion Accounts were to be the same as those for the last audited accounts. This is the approach that Mr Sloneem followed in February 2006. However, when a literal construction produces an absurd result that the parties cannot have intended, the court should if possible interpret the language which the parties have used in a way which produces a sensible result: see Lord Hoffmann's fourth and fifth principles in West Bromwich, and his citation from the speech of Lord Diplock in Antaios.
  68. In the present case, it is not in my judgment even necessary to postulate that the parties made a mistake. All that is needed in order to restore good sense to schedule 8 is to read in a qualification or saving to paragraph 1.1(c), to the effect that the draft statement of the net assets of Holdings at completion is to exclude the stock of properties, the Ocean debt and the French property, because they have already fully been taken into account elsewhere. To construe paragraph 1.1(c) as being subject to such a qualification or saving is not to imply a term into the SPA (which has not been pleaded by Croftcall, and might arguably fall foul of the "entire agreement" provision in clause 15); nor is it to give the words in question a meaning which they cannot bear. It is simply to recognise that, read in context, they are subject to an implied limitation which needs to be spelt out so that the provision makes commercial sense.
  69. Let me give a simple example of what I mean. At Gatwick Airport there used to be a prominent sign by the check-in desks which said "Important Notice only one piece of hand luggage may be taken on board the aircraft". Read literally, and out of context, by somebody unfamiliar with air travel, the notice might have been supposed to "mean what it says": only one piece of hand luggage may be taken on board the aircraft, and once the first passenger with a single piece of hand luggage has been allowed to board, no other passengers may take any items of hand luggage into the cabin. In fact, however, the context makes the meaning obvious. The message that the notice intended to convey was that each passenger was confined to a single piece of hand luggage, and the words "per passenger", or something similar, have to be read in. There is no error or mistake in the notice: it just needs to be read in the context for which it was designed, and with a little common sense.
  70. I would only add that, even if (contrary to my view) the omission of the qualification or saving to which I have referred is properly to be regarded as a mistake, it would still fall well within the province of construction to correct it: see Lewison, The Interpretation of Contracts, 2007 edition, at paragraph 9.01 and the cases there cited. So, for example, in East v Pantiles (Plant Hire) Ltd [1982] 2 EGLR 111 Brightman LJ said that a mistake in a written instrument could be corrected as a matter of construction if two conditions were satisfied:
  71. "first there must be a clear mistake on the face of the instrument; secondly it must be clear what correction ought to be made in order to cure the mistake. If those conditions are satisfied, then the correction is made as a matter of construction. If they are not satisfied then either the claimant must pursue an action for rectification or he must leave it to a court of construction to reach what answer it can on the basis that the uncorrected wording represents the manner in which the parties decided to express their intention."

    Sir Kim Lewison goes on to say that, although Brightman LJ spoke of an error "on the face of the instrument", in order to decide whether there is such a mistake, the court may take into account such evidence of background facts as is admissible in order to interpret the contract. That observation, in an earlier edition, was approved by the Court of Appeal in KPMG LLP v Network Rail Infrastructure Ltd [2007] EWCA Civ 363 at paragraph 46 per Carnwath LJ, with whom Sir Paul Kennedy and Mummery LJ agreed.

  72. In the present case there would in my judgment be no difficulty in satisfying either of the above conditions. In the light of the relevant background material, it would be obvious that a mistake had been made. Equally, it would be clear what correction needs to be made in order to cure the mistake.
  73. If further support for this construction of the SPA is needed and in my view it is not it may be found in the final words of clause 4.8, " or vice versa should such current net assets be negative". This wording plainly contemplated that the final adjustment required as a result of the Completion Accounts could lead to the Morgans making a payment to Croftcall, on the footing that the current net assets were negative, rather than the other way round. However, if the Morgans' construction of clause 4.8 and schedule 8 is correct, and the net assets include the stock of properties, the Ocean debt and the French property, it would have been impossible for the parties to contemplate a situation where the current net assets would be negative. Accordingly, as counsel for Croftcall submits, the fact that this was objectively seen as a possibility provides further support for the construction which would exclude those assets from the calculation.
  74. Nor can it be said that elimination of these items leaves clause 4.8 and schedule 8 without any function to perform. On the contrary, it was clearly necessary to have some mechanism to deal with cash balances and associated liabilities at completion, and with any other current assets of the three companies which had not been taken into account in the calculation of the basic purchase price. In particular, it was known that there were substantial cash balances of the order of 500,000 held by the Morgans in personal bank accounts on behalf of the companies. There would also be accrued liabilities for matters such as building insurance, service charges and repairs and maintenance. The mechanism of clause 4.8 and schedule 8 made perfect sense for dealing with matters of this kind. What it cannot, by any stretch of the imagination, have been intended to do was to enable the Morgans to be paid twice over for the same assets.
  75. For all these reasons I have no hesitation in concluding that Croftcall's case on construction succeeds, and that the stock of properties, the Ocean debt and the French property (or its proceeds) should be excluded from the calculation of net current assets to be made pursuant to schedule 8. Indeed, this conclusion seems to me so obviously right that I find it astonishing that the Morgans should have persisted with their contention down to a full trial of the action. In my judgment it is a claim which should never have seen the light of day.
  76. I should also say that the alternative formulation of the Morgans' case in paragraph 51A of the re-amended defence and counterclaim in my judgment does nothing to improve it. By accepting that credit should be given for the initial consideration of 3.178 million paid on completion, the formulation implicitly recognises that Croftcall should not have to pay again for what it had already bought. But it does nothing to address the basic problem that the claim for 5,977,298, from which the 3.178 million is deducted, is itself largely composed of items which in one way or another had already been paid for or otherwise fully taken into account. The effect of the alternative formulation is that Croftcall would still be paying for the historic book values of the corporately owned properties, the Ocean debt and the French property, as well as the other net current assets at completion, but would now be getting a credit representing the price agreed for the properties by reference to their current market values. There is no rhyme or reason in such a result, and its only merit is to reduce the amount of the Morgans' counterclaim to a rather less extravagant, although still very high, level.
  77. Other issues

  78. In the light of the clear conclusion which I have reached on the question of construction, it is unnecessary for me to consider Croftcall's alternative claim for rectification of the SPA, or the other contentions of a more or less technical nature summarised in paragraph 22 above. I would proceed to do so if I felt that there was any room for reasonable doubt on the issue of construction, but I do not: I regard this as a plain case.
  79. It was agreed at the hearing that I should rule at this stage on only the main issues, and that consideration of the true balance of account between the parties should be left to be dealt with at a short subsequent hearing, if they were unable to reach agreement in the meantime in the light of my judgment on the main issues. Accordingly I did not hear evidence or argument directed to issues of quantum, and they remain to be determined on a future occasion in default of agreement. I would ask the parties to try to agree suitable directions for this purpose.
  80. Finally, although I do not need to make findings of fact about the course of the negotiations, or to review the oral evidence in any detail, I will make some fairly brief comments about the witnesses and their evidence. I will also state my conclusion on the authenticity of the April memorandum, because the allegation that Mr Morgan deliberately fabricated it shortly before the trial is a very grave one, and he is entitled to know whether I consider it to be made out.
  81. The witnesses

  82. Leaving aside the evidence directed to the April memorandum, I heard evidence on behalf of Croftcall from Mr Copping, Mr Hurst, Mr Wulwick and Mr Gamble, and on behalf of the defendants from Mr Morgan, Mrs Morgan and Mr Sloneem.
  83. I am satisfied that all of Croftcall's witnesses did their best to assist the court, and I accept their evidence.
  84. In particular, I accept Mr Wulwick's evidence of his perception of how the deal was viewed by the Ackerman group and their lenders in paragraph 16 of his witness statement:
  85. "The vast majority of the purchase funds were provided by the mortgagees. It is inconceivable that they would lend based on a purchase price that would need to be fundamentally renegotiated or increased after completion. This just would not happen in the "real world". The independent valuation is the critical driver as it is a one off impartial opinion of value. The banks cannot be expected to pay additional consideration once they have already lent on the security of the assets being valued."
  86. Mr Gamble is a Director/Senior Manager of BDO in one of its Business Assurance Groups specialising in real estate and construction. He has worked at BDO since 1998, and been a director for six years. His experience of real estate deals includes involvement in similar transactions to the present one.
  87. In paragraph 14 of his witness statement Mr Gamble refers to an email which he sent to two of his colleagues at BDO on 5 April 2005. In that email he said he was struggling to fully understand the deal, and referred to "an ill defined provision for an adjustment to the purchase price for the net [current] assets at completion in the latest draft of the SPA that I have seen". He goes on to explain this comment as follows:
  88. "What I meant by this was, on my understanding of the transaction, the only adjustment to the purchase price would be in relation to various cash balances, rents, sundry liabilities and small ancillary matters, etc. On an asset based transaction such as this, in essence, you would have agreed a price for the property with or without debt. The vendor would receive a net amount for the assets on completion with a minimal amount to be received in the future once the balancing aspect of the completion accounts was carried out. It is usual prior to completion to seek to minimise the monies going in either direction after completion, although in this case because of the way the business was run it was difficult to get a grip of the cash issues. You do not expect either party to have to pay a significant sum to the other post completion."

    In my judgment this provides a helpful account of the role that completion accounts usually play in a transaction of this nature. I do not, however, read it as implying that the balancing payment in the present case would necessarily be a small one, because as Mr Gamble recognised there were "cash issues" to be resolved, and it is not in dispute that cash amounting to very approximately 500,000 was held by the Morgans in personal bank accounts on behalf of the three companies.

  89. Later in his witness statement Mr Gamble refers to a meeting with Mr Sloneem at the latter's office on 20 February 2006 at which they discussed the draft Completion Accounts which Mr Sloneem had sent to him on 13 February. Mr Gamble says that Mr Sloneem made it absolutely clear at this meeting "that he was having trouble understanding the SPA and that for the purpose of the draft he had prepared he had simply taken a literal reading of the SPA". He goes on to say that Mr Sloneem told him he was "not at all comfortable with the way he was putting the draft Completion Accounts", and he did not disagree with Mr Gamble's reasons as to why the properties and the Ocean loan should not be included. Mr Sloneem's evidence was that he could not specifically recall this meeting, although he accepted that it happened because it was recorded in the time sheets of his assistant. He denied having made the comments attributed to him by Mr Gamble, but I see no reason to doubt the accuracy of Mr Gamble's recollection on this point. Since Mr Sloneem does not remember the meeting at all, he cannot have any positive recollection of what he said at it, and his belief as to what he thinks he would have said cannot in my judgment carry much weight when set against Mr Gamble's positive recollection.
  90. Mr Gamble also made it clear in cross-examination that he did not regard the timetable in paragraph 1.3 of schedule 8 as having been triggered by the draft accounts sent to him by Mr Sloneem. He agreed (Transcript, Day 2, p.136) that there had been no discussion at the meeting about the contractual procedure, but only
  91. "because I didn't consider we were into that process. I considered at that meeting that we were in a position of two professional people who were trying to resolve a fairly mucky situation, and that we were seeking to do that in as amicable [a] way as we could, which involved subsequently Mr Sloneem sending me further information so I could look at everything."
  92. Mr Sloneem has been a Fellow of the Institute of Chartered Accountants since 1979, and a partner in Harold Everett Wreford, a firm of chartered accountants and registered auditors, since 1976. He confirms in his first witness statement that he prepared the draft Completion Accounts which he sent to Mr Gamble on 13 February 2006 on a basis that was consistent with the 2004 accounts. He therefore included in the net current assets the stock of properties and the Ocean debt, because they had likewise been included in the 2004 accounts and those of previous years. He included the proceeds of sale of the French property, because the property itself had previously been included as an asset but, as it was now to be sold to the Morgans, it was appropriate to include the proceeds rather than the property itself. In cross-examination, he said that it was never his practice to submit discussion documents, and he considered the draft accounts which he sent to Mr Gamble on 13 February 2006 to be those required under the SPA. On this point, however, I again prefer the evidence of Mr Gamble. It seems to me that if Mr Sloneem had intended the drafts which he sent to be a formal submission of draft Completion Accounts for the purposes of paragraph 1.3 of schedule 8, he would have said so expressly in his covering email, and would also have explained why he was proceeding in this way although the 60 day period for submission of the draft accounts had long since elapsed. I think the true position is that he was conscientiously trying to prepare the accounts on the basis laid down in schedule 8, read literally, but in view of the self-evidently absurd result which this produced he decided to send the draft documents to Mr Gamble for discussion purposes only in the first instance. If he had intended to set in motion the strict timetable of paragraph 1.3, he would not have said in his covering email of 13 February "After you have looked through these perhaps we should talk to ascertain the way forward".
  93. I now turn to the evidence of Mr and Mrs Morgan. Mrs Morgan's involvement in the transaction was very much a secondary one. As she says in paragraph 1 of her witness statement, "I had little involvement in the matters giving rise to these proceedings". She was, however, present at the crucial meeting which culminated in the signing of the SPA and started at about 5.00 pm on 6 April 2005. She says that the meeting continued into the small hours of the morning, and that when matters finally reached a conclusion she and her husband both signed the SPA. At first sight, this evidence seems to imply that the SPA was not signed until after midnight, which, if true, might have had serious tax repercussions for Mr Morgan, who had been advised that in order to obtain certain tax reliefs it was essential for him to conclude an agreement before midnight on that day. In cross-examination, however, Mrs Morgan accepted that she did not know the precise time when the SPA was signed, and agreed that it might well have been signed before midnight, as Mr Morgan had said in his oral evidence. The question of the precise time at which the SPA was signed is not material to any issue which I have to decide, and I expressly refrain from making any finding of fact about it. Mr Morgan told me that he had been able to satisfy the Revenue authorities on the point, and I have no reason to doubt what he says; but in case there may still be an issue about it, I prefer to leave the point open.
  94. In her witness statement Mrs Morgan goes on to say this:
  95. "11. Neil had told me before we signed on 6 April that the monies we got on that day were not everything we were going to get and my understanding at the time was that something like a further 2m would be paid later.
    12. I knew that the residential properties in the three companies combined were worth somewhere between 11 and 12 million. I had known this for some time and certainly from the period when we decided to sell the companies in the autumn of 2004 when the values had been extensively discussed between us.
    13. I also knew that we were initially receiving only 3.178 million for the shares and that there would be a process involving accounts, which I did not really understand, and which would result in more money being paid to us.
    14. I had it in mind that something like 2 million would be paid to us at this later stage because this was the figure that Neil had told me on a few occasions. Neil had told me this figure not only on the day of completion itself, but he had told me this figure for about 10 14 days before then as well."
  96. In the course of her brief cross-examination, it was put to Mrs Morgan that she was mistaken in her recollection that Mr Morgan told her on 6 April that he expected to receive another 2 million or so, and that he had made similar comments over the previous 10 to 14 days. However, Mrs Morgan confirmed that her evidence was correct. She said that they discussed it at the time, both at the meeting on 6 April and before then as well. This evidence needs to be considered in conjunction with the question of the authenticity of the April memorandum, and I will therefore defer making any findings of fact in relation to it until I have considered that document. For the moment, I simply record that Mrs Morgan was adamant in saying that there was no error in this part of her evidence.
  97. Mr Morgan was cross-examined for two days. His evidence covered a wide range of topics, and he was taken at length through the contemporary documentary record. I regret to say that I did not find him to be a reliable witness, and I agree with the submission of counsel for Croftcall that he seemed to be making much of his evidence up as he went along, in an increasingly desperate attempt to deflect attention from the natural inferences to be drawn from the documents.
  98. I will give two examples. First, in his oral evidence Mr Morgan said on a number of occasions that he paid little attention to the detailed terms of the draft SPA as it evolved, and probably did not read any of the versions of it thoroughly until it was signed on 6 April 2005. Thus he said (Transcript, Day 5, p.166):
  99. "There were lots of SPAs bouncing around. I don't remember reading any of them particularly thoroughly. I knew what the deal was. I was going to wait, I suppose, until we got to the point of signature, and then I was going to read it really thoroughly."

    Mr Morgan made this comment in relation to the draft of the SPA sent by Hamlins to his solicitor, Mr Cohen, on 14 March 2005, under cover of an email which raised various points in relation to the latest suggested amendments. There was then a meeting on the following day, 15 March, attended by (among others) Mr Copping, Mr Morgan and Mr Cohen. In an email which he subsequently sent to Mr Copping on 24 March, Mr Morgan said of this meeting:

    "Adam and I were criticised by you as we tried to examine each part of your SPA on 15th March. Adam and I were obviously trying to deal with every aspect of the SPA and we tried to reach an agreement and resolve all possible problems within the time that we had left on the 15th. We left that meeting with the view, (which seemed to be mutual), that the above objective had largely been achieved."

    When the apparent contradiction between this contemporary document, and his oral testimony, was put to Mr Morgan on Day 6, he was unable to provide any intelligible explanation and claimed to have no recollection of the meeting of 15 March.

  100. Secondly, it was a repeated theme of Mr Morgan's oral evidence that he was repeatedly assured by Mr Hurst of Hamlins, in a number of telephone calls in late February and early March 2005 of which no record remains, that following completion there would be a "divvy-up" of assets such that Mr Morgan could expect to receive a substantial additional sum for his shares in the region of 2 million. This allegation did not form part of Mr Morgan's pleaded case, where it was alleged in paragraph 79E of the amended defence and counterclaim, verified by a statement of truth signed by both Mr and Mrs Morgan, that the mechanism for the completion accounts was introduced into the drafting of the SPA only on 5 April 2005, following a revision of the commercial terms agreed between the parties "shortly before" that date. Furthermore, it is inherently unlikely that such assurances would have been given by Mr Hurst to Mr Morgan, because Mr Hurst was primarily concerned with the property side of the transaction, and it was Mr Copping who had day to day conduct of the negotiations with Mr Cohen. It is also highly surprising, to put it mildly, that no documentary record of or corroboration for the alleged assurances can now be found, particularly if (as Mr Morgan at one stage said in evidence) he was speaking to Mr Hurst by telephone as often as six times a day (Transcript, Day 5, p.122).
  101. Later on Day 5, Mr Morgan referred to his conversations with Mr Hurst in the following terms (Transcript, p.185):
  102. "He was the chap I spoke to many times, most days, over a prolonged period, whom I know fairly well, by this contact, almost intimately to some extent. I knew him very well and I trusted him, and he explained it to me. He called it the divvy up. He heard my complaints, what I was talking about. He said: We will take all the assets in the books, the liabilities in the books, we will add it all up, we will have a divvy-up, and you will get paid what is left. I said fine. He asked if the headline price could be reduced a bit more, given that more money would be coming in through that mechanism. I said fine."

    Despite the evident, and increasing, importance which Mr Morgan attached to these assurances in his cross-examination, the matter was barely touched upon by his own leading counsel, Mr Ralls QC, when he cross-examined Mr Copping and Mr Hurst on Day 2. It was never put to Mr Copping that he knew about the alleged "divvy-up", although this must have been a necessary part of Mr Morgan's case because it was Mr Copping who drafted the provisions relating to the completion accounts. So far as Mr Hurst was concerned, he agreed in the course of his brief cross-examination that he had had telephone conversations with Mr Morgan, and he remembered that the tone of them was "generally cordial". He was unable to recall the details, however, and the only reference to a divvy-up came right at the end of his cross-examination (Transcript, Day 2, p.96):

    "Q. Just two points. In your conversations with Mr Morgan, when he was asserting that he was entitled to a substantial sum once the completion accounts were sorted out, it is right, isn't it, that you assured him, in very general terms, that he was getting full value for the transaction?
    A. I don't believe that is the phrase I would have used.
    Q. And that you said that, at the end of the day, there would be what you described as a divvy-up of the sums when the completion accounts were done?
    A. Again, I don't believe I would have said that sort of thing."
  103. The inference which I draw, in agreement with the submission of counsel for Croftcall, is that the alleged assurances relating to a divvy-up were only a marginal feature of Mr Morgan's case before he went into the witness box, and that under the pressure of cross-examination he expanded and elaborated on the theme in a vain attempt to persuade the court that he genuinely expected the price adjustment mechanism under clause 4.8 and schedule 8 to yield a substantial payment in his favour of the order of 2 million. Indeed, on Day 5 Mr Morgan went so far as to suggest that the fixed price of 3.178 million for the shares in Holdings was "a rather meaningless figure that Mark Hurst asked me to ascribe to it", and that it "was a mechanism, as I understood it, for Croftcall to obscure the true value of the acquisition of the company", with a view to avoiding the payment of stamp duty on the true value. These were in my judgment desperate allegations, and I have no hesitation in rejecting them.
  104. I hope that I have now said enough to explain why I found Mr Morgan to be an unreliable, and at times untruthful, witness. My conclusion is that, except in relation to uncontroversial matters, I cannot safely accept Mr Morgan's evidence where it appears to be at odds with the contemporary documents or is otherwise uncorroborated. The real problem, I think, is that he quickly came to regret the price at which he agreed to sell the portfolio to Croftcall, in a rapidly rising market and at a time when he was faced with the imperative need, for tax reasons, to conclude the sale by 6 April 2005. At some later stage, probably in the Autumn of 2005, Mr Morgan realised that he might be able to construct an argument based on the literal terms of schedule 8 so as to reverse the consequences of the bad bargain which he thought he had struck.
  105. The April memorandum

  106. Against this background, I come finally to the April memorandum. The document consists of a single page of figures, to some of which a brief description is attached. The figure at the top of the page (7,407,141.40) appears to represent the sum payable by Croftcall and the other purchasers at completion. Various additions to this are then listed, including one of the taxation retentions (870,000) and what appear to be a number of substantial amounts of cash. The additions bring the total up to 10,079,141.40. There is then a list of deductions, identified as "Agent", "Mortgages", "Tax", "Britannia" and so on, which reduce the total to 9,445,641.40. In a second column, there are then the words "interest rate fall?", and beneath that a separate calculation which starts with an unidentified figure of 5,950,000 and then deducts from it 3.178 million, 63,000 and 870,000, producing a balance of 1,839,000. That figure is then taken into the first column, and added to the running total of 9,445,641.40, thus producing a new total of 11,284,641.40.
  107. In paragraph 64 of his first witness statement, Mr Morgan described the purpose of the April memorandum in the following terms:
  108. "In the event the matter completed on 6 April I was quite clear that the mechanism of the Completion Accounts was designed to pass additional value to us. The headline residual figure for the price in the SPA was a figure simply paid at the time of completion with further monies to come. I knew the practical effect of the words that were used. I had mentally added up the net current assets over the three Companies. I came to the figure of 5.95m. From this figure I deducted 3.178m as the initial payment received as well as retentions of 870,000 and 63,000. This produced 1.839m. I recorded this calculation in an Excel spreadsheet that I created on 7 April 2005 [i.e. the April memorandum]. Specifically I knew and had consistently identified the Companies as being property trading companies that had the stock of property as current assets "
  109. If this explanation is to be believed, it must follow that when the SPA was signed Mr Morgan already fully appreciated the way in which the adjustment mechanism in clause 4.8 and schedule 8 was going to work, and performed a mental calculation of the net current assets of the three companies in order to arrive at the additional payment he might expect to receive. He then reduced that figure by the 3.178 million paid for the shares on completion, and also (for reasons which I do not begin to understand) by the 870,000 retention for tax and a further unspecified retention of 63,000, in order to arrive at a net expected adjustment in his favour of 1.839 million. In other words, he apparently adopted within hours of the signing of the SPA an approach very similar to the alternative case advanced for the first time in the final re-amendment to the defence and counterclaim, shortly before the start of the trial: see paragraph 31 above.
  110. I am afraid that I find this simply incredible, and impossible to reconcile with the undisputed contemporary documents, quite apart from the problem that the approach is a deeply irrational one (as to which see paragraph 55 above). If Mr Morgan had truly believed on 7 April 2005 that the completion accounts mechanism was going to yield him an additional payment in excess of 1.8 million, it is to my mind inconceivable that he would not immediately have discussed this with Mr Cohen and Mr Sloneem, and that he would have allowed the production of the draft Completion Accounts to be delayed until long after the 60 day period stipulated in schedule 8 had elapsed. Perhaps realising the implausibility of this scenario, Mr Morgan belatedly sought to play down the significance of the April memorandum when he was cross examined about it. He said that it was "just a doodle", and "it was completely wrong anyway". In answer to the question why he did not chase the matter up vigorously, if he thought he was owed an extra 1.8 million, he answered (Transcript, Day 6, p.103):
  111. "This was just a projection, a doodle. It depended on the outcome of many things. I knew we had to go through the process of the completion accounts, which I knew was going to be long and detailed. I imagined it was also going to be fraught with controversy. I wasn't looking forward to that."
  112. He went on to claim that the completion accounts were prepared as diligently as possible, after he and his wife had returned from a long summer holiday, and he thought he was adequately protected because the sum due to him would carry interest from 6 April.
  113. I am unable to accept any of this evidence, and I therefore conclude that the April memorandum cannot be a genuine document prepared by Mr Morgan on 7 April 2005. This conclusion is reinforced by Mr Morgan's account of the circumstances in which it allegedly came to light. In his second witness statement, produced during the course of the hearing, he said that he saved the document on his computer in the evening of 7 April 2005, and did not look at it again until very recently, when his memory was jogged when he went through in great detail the sequence of events and what had happened on and around 6 and 7 April 2005. He sent it to his solicitor, Mr Peter Ashford of Cripps Harries Hall LLP, on 17 April 2008, as an attachment to an email saying:
  114. "I had a bit of a brainstorm at 3.30 in the morning and remembered something.
    Please see the attached. Please see the date the file was created 07 April 2005, 20:10:48.
    Will call to discuss."

    The fact that Mr Morgan drew attention so pointedly to the date and time at which the file had been created is itself a factor which excites suspicion. It is also inherently most unlikely that a document of this importance should have been forgotten about by Mr Morgan for so long, despite the detailed preparations which had been made for trial, and despite the fact that he had attended an unsuccessful mediation which lasted for a full day. In cross examination Mr Morgan implausibly tried to maintain that when he sent the document to Mr Ashford he did not attach any importance to it, and did not think it could be used to support his case. I reject this evidence, which seems to me incredible in view of the terms of Mr Morgan's email to Mr Ashford. I find myself unable to escape the conclusion, and I find on the balance of probabilities, that the April memorandum is a false document which Mr Morgan created for the first time on or shortly before 17 April 2008, in a misguided attempt to bolster his case.

  115. In reaching this conclusion I have not been assisted by the expert evidence which was called on each side on this issue. The reason for this is that the expert evidence was ultimately inconclusive. The experts agreed that the file was created on a computer with its time clock set at the date and time stated in the relevant "metadata", but also agreed that the timing of the clock could have been changed without undue difficulty. There were various discrepancies in the different versions of the file which the experts had examined, but those discrepancies might have had an innocent explanation, and neither expert had been permitted to examine the hard drive of Mr Morgan's computer, which was the only way in which a reliable conclusion might have been reached about the authenticity of the file creation dates.
  116. The conclusion which I have reached also means that I am unable to accept the evidence in paragraphs 11 14 of Mrs Morgan's witness statement, to the effect that Mr Morgan told her he was expecting an additional payment of around 2 million on 6 April 2005 and during the preceding fortnight: see paragraphs 68 and 69 above. I am reluctantly driven to conclude that in this part of her evidence Mrs Morgan has allowed her loyalty to her husband to take precedence over her obligation to tell the truth.
  117. Conclusion

  118. For the reasons which I have given this action succeeds, and Croftcall is entitled to a declaration that upon the true construction of the SPA the stock of properties owned by the three companies, the Ocean debt and the French property (or its proceeds of sale) fall to be excluded from the draft statement of the net assets of Holdings at completion referred to in paragraph 1.1(c) of Part I of schedule 8 to the SPA.

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