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England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Dennard & Ors v Pricewaterhousecoopers Llp  EWHC 812 (Ch) (23 April 2010)
Cite as:  EWHC 812 (Ch)
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Strand, London, WC2A 2LL
B e f o r e :
| (1) Derek Dennard
(2) Michael Gearon
(3) Graham Turner
(4) Colin Peter Dixon
|- and -
Mr Justin Fenwick QC and Mr Simon Salzedo (instructed by Barlow Lyde & Gilbert LLP) for the Defendant.
Hearing dates: 9th to 11th, 15th to 19th, 23rd to 25th, 29th to 31st March 2010
Crown Copyright ©
|The terms of PwC's Engagement Letter dated 1st November 2004||84|
|Issue 1: Were the terms of the Engagement Letter applicable to PwC's retainer to undertake the valuation?||116|
|Issue 2: Did PwC owe the Claimants a common law duty of care in addition to any contractual duty?
If so, was it subject to the contractual limitation of liability?
|Issue 3: Did each of the Claimants (a) actually rely on the valuation; and (b) reasonably rely on the valuation; and
(c) were they contractually entitled to rely on the valuation,
when agreeing to sell their interests in the RBIL portfolio to BEIF in January 2006?
|Issue 4: Did PwC's minor mathematical corrections to the valuation amount to
"confirming and repeating of the valuation to the Claimants albeit with a minor adjustment" between October 2005 and January 2006?
|Issue 5: Was PwC negligent in preparing the valuation in relation to various factors?||133|
|Issue 6: Was PwC negligent in preparing the valuation in failing to attribute appropriate value to (a) gains from possible refinancing,
(b) the sinking fund upside, and (c) residual value upsides?
|Issue 7: Was PwC negligent in preparing the valuation in failing to revise its valuation in or before January 2006?||186|
|Issue 8: What value would the Defendant non-negligently have ascribed to the RBIL Portfolio (a) as at May 2005 (b) as at January 2006?||187|
|Issue 9: Would the sale to BEIF have proceeded in the event that PwC had given a non-negligent valuation?||192|
|Issue 10: Can the Claimants claim their valuation losses by reference to the subsequent sale in December 2006 to SMIF,
or, if not, what losses can they claim?
|Issue 11: If PwC is liable, were the Claimants' valuation losses caused by their own negligence and if so to what extent?||210|
|Issue 12: Was PwC affected by an unresolved conflict of interest that meant they should not have accepted the valuation retainer,
and did the Claimants give their informed consent to, or waive, the conflict?
|Issue 13: If there was a conflict, are the Claimants entitled to damages for PwC's breach of duty in acting for them
when affected by an unresolved conflict of interest, and, if so, on what basis, and how much?
|Issue 14: If the terms of the Engagement Letter apply to the valuation retainer, does the time limitation
and/or the limitation of liability satisfy the requirement of reasonableness, and, if so, are they applicable to any or all of the Claimants' claims?
|Issue 15: What damages are the Claimants entitled to for each breach of contract and/or duty relied upon?||227|
Mr Justice Vos:
i) Clause 16 which provided that the ICL and Ryhurst undertook to keep all information concerning RBIL's business confidential.ii) Clause 17.2 which provided that if either ICL or Ryhurst wanted to refinance the debt, and they did not agree, then either side would have the right to refer the merits of the proposed refinancing to an expert independent financial adviser, whose opinion would be final and binding.
i) Project Normandy 1: concerning the sale of the main Rydon businesses.
ii) Project Normandy 2: concerning the sale of Ryhurst and Ryhurst Lift.
iii) Project Normandy 3: concerning the sale of two smaller companies, Civilscent Limited and Linfold Limited.
"I caught up with Oliver [Mr Jennings of BPE] this morning
It turns out that the shareholders of Rydon want to sell both Rydon and Ryhurst. We (Andrew Pirrie [of PwC]) have the disposal mandate. As part of this work we (IGU [the Infrastructure Government & Utilities department of PwC]) will need to do a valuation of RBIL. Oliver would like to buy Ryhurst out of RBIL. And therefore suggests putting the proposed group refinancing mandate on hold until such time as the sale can be concluded.
This seems to me to be a good outcome particularly given as I said earlier our proposal might look a bit thin versus DWPF [David Wilde Project Finance]. I checked and I sent you all the models on 1 feb and again on the 7th just to make sure. Anyway there is clearly no point in proceeding with the refinancing mandate before a sale to Barclays is concluded.
Once the sale happens complete [sic] we will have been paid to review the portfolio which will necessarily include looking at refi [refinancing] upside. At that point Oliver [Mr Jennings of Barclays] will want the refi work done (assuming Barclays win the sale) and we will be first in line because we will have recently valued the portfolio. I think we are ok on conflicts as Oliver would be happy to employ us after the sale goes through and Ryhurst won't have any grounds to object as long as they are happy with our initial valuation. We would then work for BEIF who we don't as of today consider to be a SECRAC [SEC registered audit client] although this could be subject to change given recent developments ".
The emphasised passage is that relied most heavily upon by the Claimants as showing that PwC had a conflict of interests.
"I had a call from Alison Montague this morning. She is clearly anxious that we in IGU provide a valuation for their portfolio of PFI equity interests as part of your mandate. This is so she can benchmark the initial price that she is due to receive from Barclays this week.
We have all the financial models for the projects as we hav just pitched for a refinancing mandate in connection with the RBIL portfolio. I would think we could do the work in a couple of weeks to the level of detail required but would need to start asap.
I understand that there is some doubt about whether such a valuation is included in your mandate? Alison asked about extra cost so lets discuss".
i) On 2nd March 2005 at 12.18, Mr Cleal emailed Ms Montague saying: "I called earlier and left a message. I've contacted Andrew Pirrie and his view was that this work would be additional to the work he is already doing and that we should charge you separately (albeit that administratively it is probably easiest to set it up as an extension to his engagement). We think it sounds like approximately £25,000 of work depending on the exact scope to which my colleague, Conrad Williams is giving some thought. We would propose that these fees would not (unlike Andrew's disposal mandate) be contingent on the sale of the companies ".
ii) On 2nd March 2005 at 15.12, Mr Williams emailed Ms Montague more formally entitled "Valuation of the RBIL portfolio" saying (C2/249): "Further to Paul's email of earlier today I set out below the suggested scope of work for the valuation of the RBIL portfolio to assist you in your discussions with Barclays. I have also commented on the team who we would propose to use ". The email then sets out in detail both the 'Scope of Work' and the 'Fees & Team", though it does not revisit the terms that Paul Cleal had suggested in his original email, to which Mr Williams had referred in the first line of his email.
a) Under the heading "Scope of Work", Mr Williams wrote: "The first part of our work would be to develop a valuation model. This would read in and aggregate the relevant cashflows from the individual project models.
We would then provide a "basic" valuation of your interest using a range of discount rates, together with a commentary on rates we see being applied in the market. This would include consideration of differential discount rates that may, for example, be applied for equity and subordinated debt holdings, "pre" and "post" completion assets and also whether investors typically pay a premium for acquiring a controlling equity stake. In forming a view on the most appropriate range of discount rates we would also like to understand more about the lifecycle arrangements and overall performance of the assets. The output of this stage would be to provide a "basic valuation" range.
We would then consider the potential to enhance this aggregated basic valuation by reviewing the financial models for simple upsides such as the removal of trapped cash, reduction of reserve accounts and more generic improvement in finance terms. We would highlight and attempt to quantify any major changes in tax and/or accounting that could also provide enhanced value. We would also consider whether changes in risk allocation (such as lifecycle responsibility) could also be financially attractive.
We would also consider and model indicatively how the "enhanced value" could be further increased through a portfolio refinancing. This would include a summary of the structure, the finance terms and an illustrative cashflow.
All of the above would be summarised in a valuation report".
b) Under the heading "Fees & Team", Mr Williams wrote: "we estimate the work would take approximately two to three weeks and propose a fixed fee of £25,000.
We would propose to use the same team as set out in our recent proposal. As such, Paul [Cleal] would have overall responsibility, Libby Daniells and I would be your principal points of contact"
iii) On 2nd March 2005 at 15.28, Ms Montague emailed Mr Williams in the following terms: "Conrad, this seems fine. I have tried to phone and have left my numbers. BPE is hoping to provide an offer Thursday/ Friday. Will providing this information to you help or hinder your exercise? It may amend the scope of work. Can we discuss".
iv) On 2nd March 2005 at 16.39, Mr Williams emailed Mr Cleal saying: "Good news tried to get hold of Alison. my view is that the fact that they [Barclays] are providing a valuation should not be a problem for us. id prefer we start with a blank sheet rather than work towards a target anyway. i doubt whatever barclays suggest will affect our scope as i believe what weve suggested is what needs to be done. we could however compare notes in say a weeks time to see how far apart we (Barclays and us) are. we could then curtail the scope if Ryhurst wish subject to a minimum fee of say £k (assuming weve just done the first bit) or whatever is on our code? libby can start immediately so we could just get going. let me know if you disagree".
"Please find attached the first draft of our report. As discussed this takes into account the 10 PFI projects but not the LIFT that I note you have now forwarded to me. It also includes a revised estimate for the refinancing upside (I mentioned I thought the previous number was too low) which now looks healthier and takes the total value to around £4 million.
Please treat as WIP at this stage. We have some more checks to conduct and we will add in the LIFT as requested. You will also note there are a few points where some clarification would assist us "
i) In the Methodology and Assumptions section: "the preliminary analysis is based on Net Present Value ("NPV") analysis of the latest project financial models supplied to us by Ryhurst "
ii) In the Indicative Valuation section:-
a) "We are currently seeing a lot of secondary market activity with strong competition for quality assets".
b) "Particular care is needed in the choice of discount rates as there are a number of factors need to be considered. These include:
- Nature of the assets projects which include demand or residual value risk are generally considered more risky than basic availability style accommodation projects, and hence, discount rates for such projects are often higher.
- Stage of development/ asset performance where portfolios include a large number of non-operational assets and/or assets that are performing below expectation, discount rates are usually higher to reflect the increased risk.
- Nature of Investment the investments being sold in many asset portfolio sales are the full equity interests (i.e. both subordinated debt and equity). We have not seen the RBIL shareholder agreement, but assuming the subordinated debt holder has rights senior to those of pure equity (as you would often expect) the discount rate would usually be higher to reflect the increased risk of payments to the equity holder being eroded.
- Equity risks we understand that within the RBIL portfolio, in many cases, lifecycle risk is passed down through the sub-contracts and, as a result, the equity exposure is arguably lower than is the norm. This would suggest a lower discount rate is applicable.
- Return profile most, if not all, of the principal secondary market investors want a smooth profile of returns. Where equity flows are highly variable year on year, some investors will not be interested at all; those that are, are likely to materially increase their discount rate".
c) "We would suggest that, at the current time, a mid market discount rate for an equity portfolio sale is approximately 10%, assuming:
- Most of the assets are performing well;
- Most assets are accommodation assets with availability style payment mechanisms;
- Most assets are operational; and
- Both the pure equity and subordinated debt interests are being sold together".
d) "In this case we believe the "blended" discount rate for Ryhurst's interest would be materially higher than 10% as:
- the two largest projects Avon Wilts and Lymington that together represent approximately 60% of the portfolio will not become operational until December 2006;
- All projects except Bexley have subordinated debt that (we believe) is serviced before pure equity. The resulting equity value is much smaller than the subordinated debt value. The subordinated debt is already owned by Barclays.
- The equity value in the portfolio is very back-ended. Dividend payments in 7 out of the 10 projects are not forecast to start until 2015 or later. "
e) The Base Case Valuation provided as follows:-
i) "The table below sets out a Base Case portfolio valuation, applying different discount rates to each project. These values are gross of potential transaction costs:"
ii) "In summary, we have used:
- 10% for Bexley, which has no subordinated debt and is operational;
- 12% for Black Country, which is operational and has some subordinated debt but around equity value accounts for 75% of the total equity and subordinated debt value;
- 14% for Redbridge, which like Black Country is operational but the equity proportion of value is lower at approximately 50%; and
- 18% for the remaining projects, all of which have low equity proportions of value and some of which are non operational".
f) "Project Discount Rate (%) NPV £'000"
Avon Wilts 18% 0.2
Bexley 10% 1.3
Black Country 12% 0.6
Essex Herts 18% 0.1
Hertford 18% 0.0
Liskeard 18% 0.0
Lymington 18% 0.1
Redbridge 14% 0.3
South Essex 18% 0.1
West Mendip 18% 0.0
Total Portfolio value 2.7
iii) In relation to Simple Upsides as to "Removal of Trapped Cash":-
a) "We have reviewed the level of trapped cash within each of the financial models to determine the potential to enhance the aggregated basic valuation through early release of this trapped cash. A review of the models suggests that greatest value could be achieved through releasing cash in the following 4 projects Black Country, Essex Herts, Liskeard and Redbridge".
b) "The table sets out a revised portfolio valuation based on the release of trapped cash in the 4 projects detailed above ".
c) "Our analysis indicates that releasing the trapped cash in these projects, based on distributing all cash balances irrespective of retained reserves, could increase the valuation from £2.7 million to £3.1 million"
d) "Project Discount Rate (%) NPV £'000"
Avon Wilts 18% 0.2
Bexley 10% 1.3
Black Country 12% 0.7
Essex Herts 18% 0.1
Hertford 18% 0.0
Liskeard 18% 0.1
Lymington 18% 0.1
Redbridge 14% 0.5
South Essex 18% 0.1
West Mendip 18% 0.0
Total Portfolio value 3.1
iv) In relation to "Other" Simple Upsides:-
a) "Reductions to Reserve Accounts we have reviewed the level of reserve accounts in the financial models to determine whether there is any potential to increase the valuation through reductions to these reserves. At this stage, however, any potential upside seems limited as a number of projects already contain Debt Service Reserve Facilities, rather than more expensive Debt Service Reserve Accounts. In addition, a number of the projects do not appear to contain any provision for maintenance reserves or sinking funds".
b) "Lifecycle Upsides we have not yet reviewed the potential to enhance the valuation through lifecycle upsides, and we would need to discuss this with you"
v) In relation to Indicative Refinancing Upsides:-
a) "In our recent proposal [i.e. the one sent to Mr Jennings and Ms Montague on 18th February 2005] we suggested it may be possible to effect a refinancing through a debt novation and a private placement to lower the cost of finance. Whilst we have not modelled this structure in detail we have undertaken some preliminary modelling to estimate the potential increase in value".
b) "In essence, we have simply adjusted the debt margins to a value more reflective of the current private placement market which we estimate to be 50 basis points over swaps".
c) "The table below sets out a revised portfolio valuation, based on replacing the current operating margins in each of the models with a margin of 50 basis points ".
d) "The Bexley and Black Country terms have not been amended as interest is hard coded in the model".
e) "Our analysis indicates that improving the finance terms could increase the basic raw valuation from £2.7 million to £3.7 million. These values do not include any upside from the release of trapped cash".
f) "Project Discount Rate (%) NPV £'000"
Avon Wilts 18% 0.9
Bexley 10% 1.3
Black Country 12% 0.6
Essex Herts 18% 0.1
Hertford 18% 0.0
Liskeard 18% 0.1
Lymington 18% 0.3
Redbridge 14% 0.4
South Essex 18% 0.1
West Mendip 18% 0.0
Total Portfolio value 3.7
vi) PwC's Preliminary Conclusions summarised what is set out above and said:-
a) "Our preliminary analysis indicates a raw valuation of £2.7 million" and "[the potential increase from a refinancing through a debt novation and a private placement] with the upside achieved through the release of trapped cash suggest an overall valuation of £4.1 million".
b) "The analysis performed to date is preliminary and has been based on the existing financial models. At this stage it should be recognised that time has not allowed a detailed analysis of all the projects and a number of assumptions need to be checked within the models. There may well be issues within the individual projects that affect value, such as current performance, tax and accounting changes, insurance premia and macroeconomic variables".
i) First, she informed Mr Williams that she had indicated some concern to Messrs McClatchey and Jennings about Barclays' initial offer (which was for £4 million).
ii) Secondly, she said that Barclays was aware that PwC had produced an indicative valuation and that she had some comments: "Once we have got over these initial comments it is proposed by BPE that you and they sit down an[d] analyse their bid."
iii) Thirdly, she said that "Their methodology is reasonably different from yours, however this is probably to be expected."
iv) Fourthly, she raised a number of specific queries including:-
a) "[Avon & Wilts] is phased, one of the most significant facilities (£20m) is being handed over in Sept. 05. Our contractor has never handed over a PFI project late, this must have some impact on discount rates".
b) "the discount rates selected seem, in the main very high. We would like to understand your rationale for some of the levels chosen. The resultant valuations thus mean nil or low values for certain projects. I would advise the shareholders that it is probably better to hold some of the schemes than sell for a poor return".
v) After a number of detailed points on specific projects and upsides including cash, sinking funds, refinancing and insurance, she concluded by saying "the broad parameters of the valuation are understood. I really need Ryhurst's accountant [Mr Nigel Dodds] to get involved with the detail".
i) In relation to trapped cash: "Initial analysis indicates that the release of trapped cash in these projects then this could increase the equity value by approximately £0.8 million (ignoring tax), in today's terms at secondary market rates of 10% to 12%".
ii) In relation to the proposed refinancing, for which PwC had pitched: "Simply replacing the existing project margins with 50 basis points increases the overall equity value by approximately £2.5 3 million in NPV terms. This is before any further gearing that could be introduced into the projects Further gearing, however, would clearly increase such liabilities but also offer a material cash extraction and hence increase in NPV. Preliminary analysis suggests this could be up to around a £5 million enhancement on the base case cashflows before gain share or transaction costs".
"Saw oj [Mr Jennings] this evening. Think they will go to 5 [million] for the portfolio. He accepts that they have taken a very simple approach and that [things] like [insurance] cost savings, trapped cash and maybe [refinancing] mean they will have to up their offer. He suggested that as we were at 6 [million] and they were at 4 [million] then about 5 [million] was where things would end up. If they move to that I think that's a good deal for Alison [Ms Montague]. Can you [forward] the [Mirror Report] just so I can check not [missed] anything
[In relation to new business] What's your view on [Barclays] though? Mentioned them earlier today but can I try to get position or should I assume Nigel c et al will eventually [veto] and focus elsewhere?".
It became clear that it had been Ms Montague that had suggested that PwC were valuing the portfolio at £6 million, and Mr Williams, understandably, did not want to contradict her in front of Mr Jennings.
i) To Ms Daniells asking what PwC's valuation would be using Barclays' discount rates and Ryhurst's cashflows; and
ii) To Ms Daniells and Mr Williams to say that "the real issue is that we don't think that the price is fair, in which case surely the main point of dispute would be the discount rate?"
i) Each of the Claimants sold their 160 shares in Ryhurst (save for Mr Dixon who sold 90 shares only) at £5,500 per share to BEIF (£880,000 for each of Messrs Dennard, Turner and Gearon, and £495,000 for Mr Dixon). In total, as I have said, 72% of Ryhurst was sold to BEIF.
ii) The Claimants sold the Rydon Group, in a management buy-out backed by HBOS, for nearly £40 million, from which Mr Dennard was paid some £12.6 million, Mr Turner some £12.7 million, and Mr Gearon some £7.2 million, because his ex-wife had an interest in his stake.
i) "There was some trading of infrastructure equity dating back to around 2001 but the main secondary funds (SMIF, Henderson and Infrastructure Investors) only really started to become active in early 2004. The activity increased through 2004 and since then has continued to grow. Pricing has continued to become more and more aggressive such that in today's market, it's very hard to see how they can justify the prices they are paying in some cases the implied discount rates are below UK gilt rates.
One of the main exercises we undertook in mid 2004 was to help Innisfree (a PPP investor) sell a portfolio of projects to M&G. PwC were engaged to undertake a study on secondary market activity and also provide a view on value. Our view of value at that time implied a discount rate of approximately 10% across the portfolio, but the characteristics of the investments in the portfolio were very different to Ryhurst's interests: [larger projects, both equity and subordinated debt, and yields more even]".
ii) "During the discussions it was suggested that clearly the value to Barclays was greater than the value a non-connected third party may pay but their view probably to be expected was "so what?". They would only pay what any other investor would pay this was made quite clear."
The terms of PwC's Engagement Letter dated 1st November 2004
i) "We [PwC] are pleased that [the Claimants] (the "Shareholders") and Ryhurst Limited and Ryhurst Lift Limited (together the "Companies" and collectively the "Initial Addressees") have appointed us [PwC] as your exclusive financial adviser and intermediary to provide the financial advisory services set out in this letter of engagement and its appendices "
ii) "In the event that a potential conflict of interest arises between PwC providing particular Services to both the Companies and to the Shareholders we will notify the Companies In such circumstances, those particular Services in relation to which a potential conflict has arisen shall be provided to and for the benefit of the Shareholders alone".
iii) "This Engagement will continue for an initial period of 12 months from the date of your agreement to its terms [23rd and 25th November 2004]. The agreement will then be subject to termination by either party giving one month's notice in writing expiring at any time on or after the end of the initial 12 month period".
iv) "With regard to paragraph 7.1.4 [of the Terms and Conditions] the limit of our liability to you shall in no circumstances exceed the higher of five times the aggregate fees paid and payable by you in respect of the Services, or £1 million".
v) Section B of Appendix 1 delineated the Services provided to the Companies and to the Shareholders as follows "Throughout the period when we are providing Services to the Companies and the Shareholders under this Section B we will be (i) updating our initial strategic advice to the Companies and providing ongoing advice to the Companies on the disposal strategy; (ii) providing strategic advice to the Shareholders as part of the intermediary service to assist them with the decision whether to proceed with the disposal strategy; and (iii) monitoring the implications of the process in respect of the other strategic options available and advising the Companies and the Shareholders accordingly".
vi) Section C of Appendix 1 delineated the Services outside the scope of the Engagement including: "A formal valuation is unlikely to be cost-effective since a true market value will emerge from the competitive tender process and our fees as set out in Appendix 2 do not include this".
vii) Appendix 2 contained a description of the fees and expenses payable making it clear that "our fee will be fully contingent on the successful disposal of the Businesses". The success fee was 1.5% of the Consideration.
i) Paragraph 1.1: "Reliance on drafts you shall not place reliance on draft reports, conclusions or advice, whether oral or written, issued by us as the same may be subject to further work, revision and other factors which may mean that such drafts are substantially different from any final report or advice issued".
ii) Paragraph 3.1: "Provision of information and assistance our performance of the Services is dependent upon you providing us with such information and assistance as we may reasonably require from you from time to time".
iii) Paragraph 3.2: "Information from outside the Engagement We shall not be deemed to have knowledge of information from previous engagements for the purposes of the provision of the Services, except to the extent specified in the Letter of Engagement. If you intend us, or any other [PwC] Entity to use any information already made available to another team within PwC as part of another engagement, you should inform us of this in writing and provide such information to us".
iv) Paragraph 7.1: "Limitation of our liability":-
a) Paragraph 7.1.1: "We will use reasonable skill and care in the provision of the Services".
b) Paragraph 7.1.2: "We will accept liability without limit for (i) death or personal injury (ii) any fraudulent pre-contractual misrepresentations ; and (iii) any other liability which by law we cannot exclude or limit. This does not in any way confer greater rights than you would otherwise have by law".
c) Paragraph 7.1.3: "If you are an intermediate customer, or a private customer who has been reclassified as an intermediate customer, nothing in this paragraph 7 or elsewhere in these terms will exclude or restrict any liability or duty we may have to you under the Financial Services and Markets Act 2000 ("FSMA") or the rules of the FSA when supplying you with services which constitute mainstream regulated activities (as defined in the FSA Handbook)".
d) Paragraph 7.1.4: "Our liability to pay damages for all losses, including consequential damages, economic loss or failure to realise anticipated profits, savings or other benefits, incurred by you as a direct result of breach of contract or negligence or any other tort by us or any other PwC Entity in connection with or arising out of the Engagement or any addition or variation thereto shall be limited to that proportion only of your actual loss which was directly caused by us or any other PwC Entity and, subject to paragraph 7.1.2, our liability shall in no circumstances exceed in the aggregate the amount specified in the Letter of Engagement ("the Limit")".
e) Paragraph 7.1.5 provided that: "where there is more than one Addressee, the limit of liability specified in paragraph 7.1.4 above will have to be allocated between Addressees. It is agreed that such allocation will be entirely a matter for the Addressees who will be under no obligation to inform us of it "
v) Paragraph 7.4: "Commencement of legal proceedings you accept and acknowledge that any legal proceedings arising from or in connection with the Engagement (or any variation or addition thereto) must be commenced within 2 years from the date when you became aware of or ought to have become aware of the facts which give rise to our alleged liability and in any event not later than 4 years after any alleged breach of contract or act of negligence or commission of any other tort".
i) Issue 1: Were the terms of the Engagement Letter applicable to PwC's retainer to undertake the valuation?
ii) Issue 2: Did PwC owe the Claimants a common law duty of care in addition to any contractual duty? If so, was it subject to the contractual limitation of liability?
iii) Issue 3: Did each of the Claimants (a) actually rely on the valuation; and (b) reasonably rely on the valuation; and (c) were they contractually entitled to rely on the valuation, when agreeing to sell their interests in the RBIL portfolio to BEIF in January 2006?
iv) Issue 4: Did PwC's minor mathematical corrections to the valuation amount to "confirming and repeating of the valuation to the Claimants albeit with a minor adjustment" between October 2005 and January 2006?
v) Issue 5: Was PwC negligent in preparing the valuation in relation to its choice of discount rates, and in particular (a) in the analysis it undertook of the projects in the portfolio, (b) in taking the wrong base discount rate, (c) in the importance it attached to the fact that the portfolio comprised equity only, (d) in the importance it attached to the fact that Avon & Wilts and Lymington were under construction, (e) in failing to build up discount rates, (f) in failing to review comparables, (g) in ignoring previous discount rates used for the same portfolio, and would a non-negligent valuation have increased the discount rate as a result of the confidentiality and pre-emption provisions?
vi) Issue 6: Was PwC negligent in preparing the valuation in failing to attribute appropriate value to (a) gains from possible refinancing, (b) the sinking fund upside, and (c) residual value upsides?
vii) Issue 7: Was PwC negligent in preparing the valuation in failing to revise its valuation in or before January 2006?
viii) Issue 8: What value would the Defendant non-negligently have ascribed to the RBIL Portfolio (a) as at May 2005 (b) as at January 2006?
ix) Issue 9: Would the sale to BEIF have proceeded in the event that PwC had given a non-negligent valuation?
x) Issue 10: Can the Claimants claim their valuation losses by reference to the subsequent sale in December 2006 to SMIF, or, if not, what losses can they claim?
xi) Issue 11: If PwC is liable, were the Claimants' valuation losses caused by their own negligence and if so to what extent?
xii) Issue 12: Was PwC affected by an unresolved conflict of interest that meant they should not have accepted the valuation retainer, and did the Claimants give their informed consent to, or waive, the conflict?
xiii) Issue 13: If there was a conflict, are the Claimants entitled to damages for PwC's breach of duty in acting for them when affected by an unresolved conflict of interest, and, if so, on what basis, and how much?
xiv) Issue 14: If the terms of the Engagement Letter apply to the valuation retainer, does the time limitation and/or the limitation of liability satisfy the requirement of reasonableness, and, if so, are they applicable to any or all of the Claimants' claims?
xv) Issue 15: What damages are the Claimants entitled to for each breach of contract and/or duty relied upon?
i) Mr Gearon said that it was convenient, but not absolutely essential, to dispose of Ryhurst to the person to whom they sold Rydon. There was linkage and synergy, and the Claimants wanted to sell them together.
Engaging PwC to undertake the valuation
ii) Mr Gearon accepted that they had discussed instructing various other firms, but he could not recall which they were. He said that they leant towards PwC as the biggest player and the best, in acting on the sale of groups such as theirs.
iii) Mr Gearon said he read the Engagement Letter before signing it, although in later re-examination, he said he only spent about 5 minutes looking at it. He said that he understood that the Engagement Letter contained strict limits on liability for negligence. He said he had signed it so he "must have lived with it anyway". He did not recollect the level of the limitation, but he was content to sign it in relation to a £50 million transaction. He realised he could go to other firms, and that he could negotiate it, but he decided to sign.
iv) Mr Gearon knew that the valuation was an extra of some sort, but it did not occur to him that PwC would do the valuation on the same terms as Project Normandy 2. He had no active thought about that. But he would not have been surprised to know the valuation was being done on the same terms. Had he known that the valuation was on the same terms, he would have responded as before, by saying 'OK'.
v) Mr Gearon did not recollect ever seeing the 2nd March 2005 email saying what PwC would do, although he was told about the fee.
The position of Barclays
vi) There were strict confidentiality rights. In practice, it became impossible to sell the interest in the RBIL joint venture freely on the open market. Mr Gearon accepted that they had only one purchaser if they were to sell it. He said that it was clear that they needed Barclays on board with their proposal from an early stage, and Barclays had said they wished to acquire the balance of the joint venture. Mr Gearon said that there was not a huge amount of negotiation with Barclays.
What would have happened with a higher valuation?
vii) Mr Gearon said that if Barclays had not been prepared to pay £20 million to £40 million, and they had been told that was what it was worth, they would have stopped the sale of the whole group. Barclays would have been very resistant if they had not sold them the equity, and they had no power to force Barclays.
viii) It follows that if Mr Gearon had been told that the PFI secondary market might continue to improve, and that he would get another 50% for the equity, that would not have changed his mind as to whether to sell at £5.5 million, as there was a double uncertainty of whether the market would rise and whether Barclays would sell.
ix) Mr Gearon said he would not have wanted to rock the boat unless there was a very clear reason for doing so. The gist of his evidence was that if there had been another £20-30 million, he would have wanted to stop and work out how to get it.
x) Mr Gearon said he only read the part of PwC's Draft Report on value concerning the bottom line saying it was worth £4.something million. He scanned it for 5 minutes. He did not read the body of the Draft Report, and he did not have a copy. He read the figure of £2.7 million. He told Messrs Dennard and Turner about the number, and about the work Ms Montague and Mr Dodds were doing to update the valuation. Mr Gearon knew they had done a base case plus upsides, trapped cash, insurance benefits and that sort of thing.
xi) Mr Gearon assumed that Barclays had reached a value based on PwC's valuation. He believed that there was communication between PwC and Barclays, but he would have expected PwC to ask Ms Montague's permission before disclosing their valuation.
Updating the report
xii) Mr Gearon said he was not expecting PwC to revisit their initial assumptions. He knew that PwC was still involved in May-August 2005, but he did not ask for an up to date valuation, and he did not expect PwC to go back to square one and revalue without his asking them to do so.
Limitation of liability
i) Mr Dixon realised that the Engagement Letter contained a limitation of liability, and that most major accountancy firms had a standard set of terms, and that the terms were perfectly normal for the scope of the works in the Engagement Letter.
ii) Mr Dixon assumed that the valuation engagement would be subject to an engagement letter of some sort, but he would be surprised if it were the same as the Engagement Letter for the disposal, as the jobs were undertaken by different teams. He said that he would have expected the limitations of liability to be different. I found this part of Mr Dixon's evidence hard to accept.
iii) Mr Dixon said that it was Mr Turner's forte to deal with these kinds of documents and he would have trusted his judgment. Mr Dixon did not have a view as to whether there was a separate engagement letter.
iv) Mr Dixon did not ask to see a copy of the Draft Report. He did not see the May Valuation and did not ask to see it, but he did ask whether there was an allowance for excess sinking funds, which was his pet subject.
v) Mr Dixon said that he was content to accept £5.5 million as it had been validated by PwC's valuation.
What would have happened with a higher valuation?
vi) Mr Dixon accepted that Barclays held the whip hand in relation to the disposal of the Ryhurst business. But Mr Dixon said that he had little confidence in the management buyout team. He was disappointed when he was told in August 2005 that his 3 co-Claimants had agreed to sell.
vii) Mr Dixon said that he meant what he had said on 18th December 2005 about the business rapidly going downhill.
viii) Mr Dixon said that, if he had been told that the value was 100% or more than PwC's valuation, he would not have sold. He would have simply kept his shares. And if that meant that McClatchey said the deal was off, then the deal was off. He would have been prepared to lose the deal for that.
ix) Mr Dixon took a commercial decision that retaining 70 shares, and selling 90 shares, was an appropriate balance, based on PwC's advice. He said he knew that Barclays would turn the investment at some stage, and he expected a 50% uplift.
i) PwC acted for Barclays in the Mirror transaction. Ms Montague discussed with Mr Gearon whether to use PwC given how close they were to Barclays. They decided that it was helpful as they knew the portfolio. They knew that PwC would continue to work for Barclays anyway.
ii) She and Mr Gearon made the decision to instruct PwC jointly. They were probably deciding on behalf of Ryhurst at that stage. Mr Gearon was Chairman of Ryhurst, and he spoke for the shareholders. Ms Montague was acting for the shareholders, but she was not clear as to which of the two she was acting for at the time.
iii) Barclays controlled the rights of pre-emption and of confidentiality, so there was no choice but to offer the shares to Barclays first. And Barclays had rights which could make it difficult to separate Ryhurst from the SPVs. Barclays was keen to acquire RBIL.
iv) Ms Montague said she read the Engagement Letter. She read and noted the limitation clause and understood what it was saying. She thought it was sufficiently reasonable that she should sign it. She qualified this in re-examination by saying that she signed only on behalf of Ryhurst Lift, but I think that she saw herself as reviewing the terms of the Engagement Letter on behalf of the Claimants generally.
v) The business plan for Ryhurst prepared in late 2004 showed that Ryhurst's board's view was that potentials for refinancing were likely to be substantial. The shareholders were informed of that view.
vi) Ms Montague knew that PwC had started to look at the potential refinancing exercise, and had signed a confidentiality agreement, and she sent PwC information for that exercise. PwC's refinancing proposal dated 18th February 2005 was sent to both Ms Montague and Mr Jennings. The draft of 17th February 2005 mentioning that the refinancing could be worth £20-30 million was not sent to her, but she did not know if Mr Jennings received it.
vii) When the shareholders decided to sell, Ms Montague thought that that was the catalyst which stopped the refinancing. Barclays did not know that the Engagement Letter had been signed in November 2004, and the parties had not formally decided to go ahead with the refinancing at that stage. Barclays became aware of PwC's engagement in February/ March 2005.
The valuation engagement
viii) Ms Montague accepted that Mr Cleal's 2nd March 2005 email said that the valuation would be easiest as an extension to the Engagement Letter, but she said she neither accepted that suggestion nor turned it down. She thought it seemed reasonable, but she did not think they crystallised it one way or the other.
ix) Ms Montague accepted that the parties entered into the agreement for the valuation engagement in the 2nd March 2005 emails, unless there was a document that is lost. But she thought there was some other correspondence suggesting it was a separate engagement.
The Draft Report
x) Ms Montague read the Draft Report. She is 90% sure that she gave a copy to Mr Gearon, and she cannot believe she did not discuss it with Mr Gearon.
Negotiations with Barclays
xi) On 14th May 2005, Ms Montague indicated to Mr Jennings that PwC thought the value was £6 million in the hearing of Mr Williams, when the three of them went out for a drink. She was trying to get the price up. Mr Jennings said that they would probably meet in the middle, but he was not really involved in the deal.
xii) At some stage, Ms Montague says that she authorised PwC to let Barclays see the PwC valuation including the discount rates, but she did not know if the Draft Report was actually disclosed. I am satisfied from all the evidence that PwC never disclosed its valuation to Barclays orally or in writing.
xiii) Ms Montague felt that ultimately they had extracted as much from Barclays as they could.
xiv) Ms Montague did not agree with Mr Dixon's view that Ryhurst's business was going downhill rapidly.
xv) Ms Montague bought the additional 3% of Ryhurst as she did not want to see Ryhurst sold, and she did not want to sell her shares in the SPVs. She thought it would be worth more after the marriage value between equity and debt had been realised, and after Avon & Wilts was completed. The Claimants were aware that she did not want to sell and that she thought the value would be greater later for these reasons, but they had decided to retire and sever their links with the business.
xvi) In April 2005, PwC had shifted into assisting in the negotiations. Their work drifted into that once Ms Montague had their valuation figures. From the May Valuation, she expected PwC to keep her abreast of where the valuation was, as she only had a draft valuation. Ms Montague said that Mr Nigel Dodds asked PwC for a final valuation. In this regard, I should say that there was no reliable evidence before me that anyone asked PwC to finalise its Draft Report, and I do not think it was ever asked to do so. Had PwC been so asked, it would surely have done so. Both sides proceeded on the basis that it had done what it had been asked to do by preparing the Draft Report and updating it in the May Valuation.
Authority for the Claimants
xvii) Ms Montague said that she did a lot off her own bat with Mr Dodds, although big issues were discussed with Mr Gearon, but she did not think she was authorised by the Claimants to waive any objection to conflicts or to agree to limitation clauses. I find this latter evidence hard to accept. It seems to me that the Claimants (with the limited exception of Mr Dixon) left everything concerned with Ryhurst and RBIL to Ms Montague, and that there is no basis for the suggested limitations on her authority, which seem to have been inspired only by hindsight.
The valuation retainer
i) Mr Cleal said that Ms Montague was very price sensitive, and they had agreed to do a desktop valuation without looking under all the rocks. The purpose was to have a benchmark of what the value would be without the confidentiality and pre-emption rights.
ii) Mr Cleal accepted that the Claimants were wholly reliant on PwC in relation to the discount rate and the refinancing.
Discount rate generally
iii) Mr Cleal said that financial investors are not typically interested in cashflows that are very long-dated. The more exotic the market, the thinner it is.
iv) Mr Cleal thought that the market had strengthened from mid-2004 to March 2005, though it was hard to say by how much. It continued to strengthen thereafter. There was a bubble in the PFI market in 2006/2007.
v) Mr Cleal thought that the rates of 5-7% used in the Project Maze prospectus were very low, but were not an unfair reflection of the market at the time. Rates were certainly lower in 2006 than in early 2005 by some distance. Mr Cleal accepted an estimate of about 3% as the difference between early 2005 and mid-2006. He thought that Barclays' Maze prospectus might have cherry picked the rates, as there was an element of 'estate agency' in the sale process.
vi) Mr Cleal said that he would not change the discount rate during the construction period, as things can go wrong late in the day, and that is the way financial investors look at it. He gave no credit for the fact that the contract was on time with no known defects, or for the good track record of the contractor.
vii) Mr Cleal was pressed to agree that all that really mattered was the income stream, and that the level of the coupon on the subordinated debt was irrelevant. He agreed subject to the possibility that the coupon is so high that HMRC questions whether it is genuine debt and, therefore, tax deductible to the SPV.
viii) In undertaking the valuation, Mr Cleal did not carry out market research, or a detailed investigation of previous comparable rates, so he could not say precisely what part of the rates he used was for the pure equity point. He thought his approach at the time was reasonable, but analysis has become more detailed in recent years. He accepted that one methodology was to add up rates, but just because that was done did not mean that the resulting number was correct.
ix) Mr Cleal accepted that Mr Williams had told him that he had a disagreement with Ms Daniells as to discount rates, and that he was given the numbers and probably thought they were too low.
x) Mr Cleal said he had done research on discount rates when PwC had evaluated that the mid-market discount rate was 10% for Innisfree in 2004. Moreover, he said that he spent every day talking to people in this market, so PwC was current as to the market rate at the time. Mr Cleal did not agree that he thought that 10% was at the lower end of the range in May 2005.
Valuing equity alone
xi) Mr Cleal said that he had never advised on the sale of equity alone, without the subordinated debt, but he accepted that holding the equity as well as the subordinated debt does not affect the risk and vice versa, although holding the equity as well as the subordinated debt does allow more flexibility to restructure.
xii) Mr Cleal said that, when a bank is financing, all the volatility and risk is in the top slice of subordinated debt and equity, and as a result, when things go wrong, payment to shareholders can be postponed. The subordinated debt holder can be paid first, and out of the next instalments, because they are in the front of the queue.
xiii) Mr Cleal thought that the discount rate for debt would be lower than equity.
Identity of the client
xiv) Although the pleadings show that the valuation work was admitted to have been for the shareholders and for Ryhurst, Mr Cleal did not at the time believe it was for the shareholders.
xv) Mr Cleal said that, by the time of the 28th February 2005 email, he had spoken to the potential client who presented herself as the managing director of Ryhurst.
xvi) Mr Cleal did not accept that PwC was desperately pursuing Barclays as a client; otherwise, he said PwC would not have overlooked looking at the models for 2 weeks in early February 2005.
xvii) Mr Cleal denied that his 22nd February 2005 email showed that he saw PwC as the front runner for the work for refinancing RBIL. He said that he would have expected David Wilde Project Finance (DWPF) to have quoted lower fees, and to have done more work, so he concluded there was a good chance that DWPF's bid would be stronger than PwC's.
xviii) Mr Cleal accepted that he would have had to have given some thought to conflicts at the end of February 2005. He thought a possible conflict was Barclays saying that PwC did not do a proper job on the refinancing, because they were in bed with Ryhurst. Mr Cleal said that he looked at conflicts more broadly than the legal profession does, for example because of confidential information, and that was the Ryhurst conflict that he had referred to in his 22nd February 2005 email.
xix) Mr Cleal placed emphasis on the fact that Ms Montague knew that PwC had made a refinancing proposal.
xx) Mr Cleal did not agree that it would give rise to a risk of conflict, if he were actively pursuing a counterparty to the same transaction as a client. He did not think there was a risk of conflict in this case. He did not think PwC's valuation work was likely to be biased by the prospect of refinancing work for Barclays.
xxi) When Mr Cleal was recalled, PwC had disclosed some more communications with Barclays and had prepared a table of PwC's engagements for Barclays or entities connected with Barclays between September 2004 and May 2005. The fees included £20,000 for Alma Mater, £100,000 for Emirates Stadium refinancing, £380,000 for the Tricomm refinancing, and £490,000 for the Alert refinancing.
xxii) In the result, PwC was prevented for acting for funds associated with Barclays after this valuation, as Mr Cleal had predicted, because of the SECRAC issue.
What if the valuation had been higher?
xxiii) Mr Cleal accepted that, if the valuation had been higher and they could not have agreed a deal, Barclays might have suggested getting on with the refinancing co-operatively whilst the Claimants remained as shareholders, as Mr McClatchey's 19th April 2005 email suggests.
i) Broadly, Mr Williams agreed with Mr Cleal's evidence on valuation. He drew attention to the fact that PwC's valuation produces a very similar result to Barclays' valuation by a very different methodology.
ii) Mr Williams did not agree that the positive factors took the discount rate down to the bottom of a range of 8-12%, although he accepted that if there was a competition for the assets, and the mid-market rate was 10%, the outcome might be below that. Mr Williams's starting point was around 10% at the time, applicable to operational availability assets.
iii) Mr Williams denied that he had a disagreement with Ms Daniells on discount rates. I think he must have forgotten this, as I am sure he did disagree with her proposed discount rates.
iv) Mr Williams's thoughts on the risk factors affecting discount rates were as follows:-
a) Demand assets increased the risk and the discount rate.
b) A small number of projects would not necessarily make the portfolio higher risk than a large number of projects.
c) The complexity of the projects generally increases the risk, subject to mitigating factors including insurance.
d) The risk does not diminish as the construction of the project develops. Sophisticated market investors take the view that risk is only mitigated at the point where you get past the completion tests. John Laing plc's ("Laing") approach is an example. Mr Williams considered a 2% differential as referable to construction risk at the time.
e) A risk free record of construction is not irrelevant but would not necessarily reduce the discount rate applied by investors.
Valuing equity alone
v) Mr Williams explained that PFI schemes are structured with subordinated debt and equity so as to make them tax efficient, and to make them more certain in aggregate because there are less accounting restrictions (on dividend distribution, the point being that a company can pay interest on debt without having sufficient distributable profits, but could not pay dividends without them).
vi) Owning subordinated debt as well as equity does not affect risk, but does affect your flexibility, in that you can defer payments. The market views them both together as more attractive. 99% of PFI investments are structured as stapled equity and subordinated debt.
vii) Most institutional investors are backed by pension funds and are looking for long term assets to back their liabilities, and are looking for a steady stream of income, which is why they will look on pure equity as unattractive.
viii) Mr Williams denied that PwC had become fixated with the pure equity factor, but he accepted that the pure equity point was a very significant factor when PwC increased the discount rates on 14th March 2005, and he accepted that he had not done market research on the point at the time.
ix) Mr Williams did not know which of equity or subordinated debt was more attractive to investors, because he was comparing equity with equity and subordinated debt together.
x) Mr Williams had recently approached a Mr Alan Ritchie, a well-known figure in the PFI market, who had said that he put them in order of attractiveness: (1) equity and subordinated debt (2) equity alone (3) subordinated debt alone.
xi) Mr Williams accepted that he had an existing relationship with Barclays, although the only active engagement was the Alert refinancing, where Barclays was one of 3 shareholders. Barclays had been a client in 2004 as one of the sponsors on the Bromley Hospital refinancing. Mr Jennings was an ex colleague and a friend.
xii) Mr Williams said that the issue of conflict did not cross his mind at the end of February 2005.
Dealings with Barclays
xiii) Although Ms Daniells's first discount rates on 4th March 2005 were very close to Barclays' rates, Mr Williams was sure that PwC had not had any dialogue with Barclays at that stage.
xiv) PwC was paid £75,000 for providing modelling support to Infrastructure Investors (II) in relation to Project Maze. Ms Rachel Keys and Mr Liam Foulkes (both from PwC) were stationed at II's offices working directly for them. Mr Williams did not know that II were looking to bid £70 million for the equity.
i) He would not have raised Barclays as a possible conflict in relation to past or possible future work.
ii) Mr Wilkinson got involved with Mr McClatchey in August or September 2005. He found him a reasonable but firm person.
iii) If the valuation had been much higher, from what Mr Wilkinson saw, there was nothing to suggest that Barclays would have gone to £10 million, since it took 6 months to get them to £5 million, and 3 months to get them up a further £½ million.
i) 8% for the eight projects in operation; and
ii) 10% for the three projects under construction.
i) Mr White did not consider that there was any significant difference between discount rates in May 2005 and in January 2006, but there was a change in discount rates for the 8-10 months before May 2005.
ii) In relation to the build up of discount rates generally, Mr White cautioned against constantly adding up all the way along. Whilst accepting that it is useful to segment out risks, he said that one needed to be sure that the ultimate figure was not something inappropriate to the portfolio.
iii) Mr White said first that he had not included anything in his discount rate for the existence of Barclays' pre-emption rights or the fact that the portfolio consisted of equity only. But later in his cross-examination, he said that he had taken the pre-emption rights into account by using comparables that valued minority interests that would inevitably also be subject to pre-emption rights.
iv) Mr White disagreed with Mr Neville's 2% factor for pre-emption and confidentiality rights because he said that he had been asked to value the portfolio on the basis of a willing buyer/willing seller transaction with access to all relevant information. He thought the effect of pre-emption rights depended on the way the asset was marketed. He accepted, however, that his valuation had not taken into account the fact that a 3rd party purchaser would have been buying an asset that would be less easy to sell because of the continuing pre-emption and confidentiality rights.
v) In any event, Mr White said that he did not think that the restrictions made a huge difference to value, because: (a) secondary buyers always face pre-emption rights (b) the vendor might underwrite the bid costs, which would not be great, perhaps £½m for due diligence costs, and a secondary buyer may take the risk.
vi) Mr White did not take into account the fact that after the sale, the buyer will be subject to a confidentiality clause. He thought it could affect the discount rate.
vii) Mr White accepted that the pre-emption rights were a disincentive to outside bidders. Ultimately, Mr White did not consider Mr Neville's 2% premium for pre-emption rights and confidentiality unreasonable, but he did not agree with it.
viii) Mr White said that he was actively involved in the PFI Infrastructure transaction in July 2004. Page 28 of the Prospectus prepared by KPMG showed discount rates of 9.7% to 12.1%. He said that the transaction was a key moment in the secondary market, and that he had considered it in deciding what discount rates to apply in this case.
ix) The PFI Infrastructure transaction had a similar mix of projects, those under construction and those completed, to the RBIL portfolio, but Mr White thought the discount rates were completely out of date by May 2005. He did not know why he had omitted a reference to this transaction from his report. When asked to say which transactions had occurred between July 2004 and May 2005, which demonstrated that rates had moved, Mr White was unable to identify any. Instead he pointed to two transactions (Wates and Miller) that post-dated May 2005.
x) Mr White said that he did not think a reasonably competent accountant could have regarded 10% as a mid-market rate in May 2005. He continued, however, by saying that 10% was "a little bit higher than what people with knowledge in the industry would agree would consider was about right", and later that he thought in relation to the base rate of 10% that PwC used: "you could use that as a starting point".
xi) Mr White said in his report that average discount rates in company reports in 2005 were between 8% and 10.6%. But he accepted that the following rates were used, although pointing out that directors' rates were usually higher than transaction rates:-
a) Laing used a discount rate of 10.6% in 2004, with 15% for the Project Chiltern railway. Mr White said in his appendix 5 that 9 out of 46 projects in the Laing portfolio are highly comparable with the RBIL portfolio.
b) Laing's March 2005 report also used a discount rate of 10.6%, and a base rate of 7.5% plus 6% = 13.5% for the construction phase. Mr White said that a construction premium of 6% was in his view beyond a reasonable range.
c) PFI Infrastructure's March 2005 accounts used a weighted average of 9.3%, with 11.5% for construction, 9.5% for ramp up, and 0.5% to 4% premium for other risks, including refinancing discount.
xii) Mr White accepted that a 3.5% premium for construction was in a reasonable range, and a 2% premium for a project in 'ramp-up' was not unreasonable.
xiii) Mr White said he had placed no weight on the fact that Barclays' valuation used indicative discount rates of 10.5% and 12.5%.
xiv) Mr White said that he had adopted a linear approach to the premium to be added to discount rates for construction. He had applied premiums between 1% and 1.9%. He accepted that no public document had ever adopted such an approach, and agreed that a reasonably competent valuer could decide that a linear approach was inappropriate.
Effect of selling equity alone
xv) Mr White said that there was no logical reason for an increase in the discount rate as a result of the offering being equity only, although he later agreed that a 2% premium on the discount rate for equity only was something that a reasonable valuer could come to.
xvi) Mr White accepted that equity and subordinated debt are normally sold together, and that discount rates normally reflect that practice. He accepted that equity is riskier than subordinated debt.
xvii) Mr White referred in his report to the market soundings he had taken in 2005 to the effect that subordinated debt alone was unattractive as compared to equity alone. But he accepted at one point that stapled equity and subordinated debt together was generally preferred to equity alone, thinking that the differential discount rate between the two would only be up to ½%. Thereafter, he retracted this saying that the people he spoke to in 2005 gave no indication that there was an additional value to having equity and sub debt together.
xviii) Mr White looked at the Project Maze financial model and accepted that it showed a discount rate of 10% for equity and for subordinated debt, and a rate of 7.5% for the two together. He accepted that this was open to the interpretation that a reasonably competent valuer could conclude there should be a significantly higher discount rate for equity alone than for equity and subordinated debt, and that on one calculation, that equated to a premium of 4% on a discount rate of 12%. He still did not think, however, that it was appropriate in 2005 to attribute different discount rates to equity and to equity and subordinated debt together.
xix) Mr White was subjected to a sustained cross-examination on his assessment that there was a residual value upside between £0.5 million and £0.6 million. It turned out that he had calculated those figures using the Project Maze valuations prepared by CB Richard Ellis in 2006, long after PwC's valuation, adjusted to make the end dates 2038 and 2040. But he accepted that it would be dangerous to undertake a 2005 valuation using figures only available in 2006.
xx) Mr White ultimately accepted that a reasonably competent valuer in May 2005 would have used the figures that PwC used as derived from the 30th April 2005 email, rather than the figures he had used derived from Mr Dixon. He accepted that if the figures for Bexley and Black Country of £29 million and £12 million include that residual value upside, his evidence on residual value upside between £0.5 million and £0.6 million was wrong.
xxi) Mr White made at least 5 assumptions on refinancing:-
a) That a 70 basis point margin over LIBOR could be achieved for the old debt (as opposed to the existing margin of 125-150 basis points), and for the new debt, taken on as result of the refinancing.
b) That the average debt service cover ratio (ADSCR) could be reduced from 1.20:1 to 1.15:1 for every project after completion (this is the ratio of income to debt acceptable to lenders).
c) That the appropriate discount rate for the enhancement to the cashflows occasioned by the refinancing was 10% for new debt, rather than his original 8%, as the enhancements to the cashflows are more risky than underlying cashflows that come out of the projects themselves.
d) That additional debt of some £20.7 million would be taken on across the portfolio beyond the level of the original debt taken on at financial close, factoring in assumptions as to improved cashflow and property revaluations.
e) That the dates of the assumed refinancing of each project were different and were across a period from 30th June 2005 to 1st April 2007, and many of them shortly after completion.
xxii) As to these 5 assumptions, Mr White said that he was not able to say whether PwC's approach was reasonable or reasonably competent, because he was not a refinancing expert. PwC's approach assumed a 50 basis points margin, an ADSCR staying at 1.20:1, and no increase in debt. He accepted that a different valuer could reach a different view on these issues.
xxiii) On the second day of his evidence, Mr White said that he recognised that some of the dates that he had taken for the proposed refinancing were too early individually. He thought that the 1st April 2007 was a better assumption for a whole portfolio refinancing. Taking that date, the refinancing gain was reduced from £3.5 million in his report to £2.7 million. He said he had made a mistake about this and had got it wrong. After he finished his evidence, he revised this figure twice more, first to £3.0 million, and then to £2.9 million.
xxiv) Though Mr White was reducing both the margin and the ADSCR, he did not regard his assumptions as aggressive, although when he was asked to identify transactions in which similar assumptions had been used, Mr White was unable to do so.
xxv) Mr White accepted that some of the specific project focussed assumptions in Mr Neville's appendix 8 were reasonable including:-
a) A period of 2 years from completion of construction to refinance (in March 2009) in respect of Avon & Wilts.
b) Refinancing to the level of the original debt.
c) Refinancing South Essex was uneconomic as the transaction costs were likely to exceed the benefit.
Barclays and Project Maze cashflows
xxvi) Mr White did not contest that PwC's cashflows were far more aggressive than Barclays's cashflows: some £132 million against some £48 million. He also accepted that, if Barclays was asked to use more aggressive cashflows, it could well have wanted to apply a higher discount rate.
xxvii) Mr White accepted that the Maze cashflows were quite different to the cashflows provided to PwC by management. He agreed that it is common for a valuer to use the cashflows provided by management as PwC had done. It was clear, therefore that Mr White had been wrong to say in paragraph 3.4.1 of his report that there had been no material changes in the performance or status of the assets between May 2005 and Project Maze.
xxviii) Mr White accepted on the second day of his evidence that there was insufficient appropriate evidence for the figures on sinking funds that he had included in his report. He said he should not have included any figure for the sinking fund in the valuation. He had originally included £5 - £6 million by way of upside for this item.
i) 12% for the six projects in operation;
ii) 14% for the 2 projects he seems to have regarded as being in ramp-up (Hertford and West Mendip), although in fact Liskeard and South Essex seem also to have been in ramp up in that 2 years had not expired in May 2005 since construction had been completed; and
iii) 16% for the three projects under construction (Avon & Wilts, Epping and Lymington).
i) Mr Neville first explained something that is, in my judgment, quite important to understand. There are usually at least 3 different sets of cashflows for each project:-
a) Cashflows modelled as at financial close;
b) A base case cashflow model periodically updated for macroeconomic assumptions; and
c) Cashflows showing potential upsides in the project to add to the base case cashflows.
Different parties to a transaction may be applying discount rates to different sets of cashflows, and may, for that reason, be quite legitimately applying different discount factors in their valuation method. This is exemplified by the fact that Barclays were using more pessimistic cashflows, but were applying rather lower discount rates, and still came out with lower valuations than PwC.
ii) Mr Neville was asked about the relevance of Weighted Average Cost of Capital ("WACC") to discount rates. In terms of PFI projects, WACC is a calculation of the expected rate of return from the investment in equity and subordinated debt, weighted to reflect the balance between the different sources of capital invested. Mr Neville said that WACC was illogical as a starting point for discount rates, but he had nonetheless used WACC as a cross check comparison with the risk-free part of the discount rate. He had done this because Laing did so, whilst he was there, because (a) the Stock Exchange had taken a great interest in how the company performed versus Laing's WACC, (b) Laing was a listed company which had to report its costs of capital; and (c) Laing was a leader in PFI and wanted a consistent valuation rate. Whilst the logic is hard to understand, it may be that the risk free rate is the starting point for a discount rate assuming the project is just that risk-free. That aspect of the calculation, therefore, represents what would need to be produced by the capital invested even if there were no risks, and therefore how much the value should be discounted to allow for that return.
iii) Mr Neville did not do market research: he applied his experience to the particular circumstances of the transaction, which was not an open market transaction. Mr Neville said that his valuations were neither at the top or bottom of the range they are somewhere around the middle of the range.
iv) Mr Neville assumed that PwC had built up their rates and gone through the same process. That building up approach is one approach that is reasonable. It is a good methodology, which a reasonable valuer would adopt.
v) The secondary market gained momentum in 2004, and increased in 2005. Infrastructure was seen as a distinct asset class in 2005. Acquisition prices for infrastructure assets rose markedly during 2005. One or two people thought the market had gone too far, but not everyone agreed it would last too long. The number of secondary market participants increased in 2005. Rates were falling between 2004 and 2005. There is a real danger of generalising without looking at specific assets. Rates probably moved downwards by 1 or 2% between 2004 and 2005.
vi) Mr Neville agreed with Mr White's point about the risk of keeping adding on to the discount rate. He said it was equally dangerous to do the same in reverse, by starting with a mid-market rate and adding upsides.
vii) Mr Neville said that he thought that 10% was a reasonable start point, though it is not a precise science.
viii) Mr Neville agreed with Mr White's build up, or thought his figures were generally reasonable, except for equity, pre-emption rights and confidentiality. For those items, he thought that it would be hard to justify adding no premium.
Mid market rates
ix) PwC came up with a mid-market rate of 10% in 2004. The market strengthened all the way through to the end of 2006. It was a general trend, but it is on the basis of transactions. Project Maze gave 5-7% in 2006.
x) Mr Neville did not think that the 6% mid-market rate in Project Maze was comparable to his start point of 10%, as Barclays had used mid-market rates as applicable to the base case. Mr Neville thought that the Project Maze memorandum was a marketing document in 2006 for other institutions. It combined equity and subordinated debt. He did not know how comparable the transaction was.
xi) Mr Neville accepted that you could look at the mid-market rates as 10% in 2004, 8% in 2005, and 6% in 2006, as an indication of the overall open market for all types of assets, but you then need to look at the specific projects.
xii) Any reasonable valuer should have looked at whether the market had moved from 12 months before, if he was using research from 12 months before.
Blended discount rate
xiii) The blended rate prevents you being penalised for being in the construction period. You take 3 figures for discount rate, for construction, ramp-up and steady state periods, but you can derive a single figure.
xiv) Mr Neville said there were two acceptable methodologies in use at the time, but he used PwC's approach because he concluded the approach they used was reasonable, although he had started out using both methods. Using the blended rate, you use the same figure to discount future cashflows from the end of construction back to the present day.
Implied discount rates
xv) An implied discount rate is one which takes the value of an asset including all of the upsides and then back-solves from that value against a different model which could be the base case model, which is approved by the bank, or the financial close model, which is also approved by the bank, and derives an implied discount rate that you would have needed to have applied to those cashflows in order to get back to the value that was started with.
Premium for pre-emptions and confidentiality
xvi) On pre-emptions, Mr Neville said that it was true that a buyer is often faced with pre-emptions, but Laing would seek a prior waiver, and if it could not get that, it would apply a premium.
xvii) Pre-emption rights mean that there cannot be a competition in the market, without underwriting the outside bidders' costs. That could amount to £1.5 million for 3 bidders. Laing's M40 project proves that the value is about 2%, as Laing sold 50% having earlier acquired it and changed the articles, and obtained an increase in value indicative of a 2.8% decrease in discount rate.
Discount rate for equity alone
xviii) The practical fact of the matter is that nobody in the PFI industry faced with the choice of whether to buy equity, debt or equity and debt ever bought one without the other. The choice arises where equity and debt are not legally stapled together. Mr Neville said that Laing never asked anyone to sell it just the equity when both were available.
xix) Mr Neville accepted that the Maze model showed that it was valuing equity more highly than subordinated debt (though this was later suggested to have been on a false basis).
xx) Mr Neville's expectation would be that the market would prefer combined equity and debt to either individually. You cannot generalise on whether an investor would prefer debt alone or equity alone. It would depend on the investment strategy.
Construction stage and the discount rate
xxi) Mr Neville explained how the discount rate is not affected until a project is actually completed, but the value does, of course, increase because the anticipated income streams draw closer. The discount rate remains the same until completion, because the risk to an investor is wholly dependent on completion, because there is no income until completion, and many factors can prevent the income starting to come on stream.
xxii) Mr Neville thought that the premiums applicable for construction and ramp up would be the same whether you were using a single discount rate or a blended rate.
xxiii) Mr Neville's construction rate was 4%, and ramp-up rate was 2%, both on top of 2% for operations. It would be difficult to use 2% for construction and to use the blended rate, but it could be reasonable. The risks in the ramp-up period include snagging and bedding down of operations.
Contractor's track record and discount rate
xxiv) Mr Neville said that the contractors' track record is relevant to discount rate, but is taken into account in a negative way, by adding more risk premium if the contractor has a bad record, and not by reducing the rate for a good record, because every contractor has a good track record until the first project that goes wrong.
xxv) Mr Neville considered the residual values for Bexley and Black Country (the latter in his supplemental report), but did not think there was any evidence to show that there was extra value beyond PwC's cash flows. He assumed that the values at financial close were still valid.
xxvi) Mr Neville looked at the revaluations in Project Maze, and at the assumed break for Bexley in 2025, but did not see how that could have been assumed in 2005.
xxvii) Mr Neville said that the risk of the sinking funds had been passed to Ryhurst. He explained that a reduction to the discount rate was not appropriate simply because that risk had been passed to Ryhurst. If the responsibility for the sinking fund was retained by the SPV, it would be required by the lenders to hold additional cash, so if it has passed the risk over, it can make use of that cash, increasing the cashflow, at the bank's insistence. Effectively, the requirement to have a reserve is replaced by passing the risk and the upside to Ryhurst. The reduction in risk is reflected in increased availability of cash in the SPV, which would otherwise have had to have been retained.
xxviii) Mr Neville valued the upside for a possible refinancing at £1.1 million to £1.3 million. His assumptions were:-
a) That a 90 basis point margin over LIBOR could be achieved (as opposed to the existing margin of 90-150 basis points). He thought PwC's assumption of a reduction to 50 basis points was too aggressive.
b) That the average debt service cover ratio (ADSCR) could not be reduced from 1.20:1, and each would be the same as they would be refinanced either as soon as possible or at the end of the ramp-up period.
c) That debt could be topped up to the level at financial close, because there was an increasing resistance from the public sector to increasing termination liabilities as representing value for money.
d) That the dates of the assumed refinancing of each project were different and were across a period from 31st March 2006 to 31st March 2009, which were intended to be the end of the model period or the end of ramp-up. He accepted that, in some cases, the assumed dates were pushed forward a little pessimistically, but he thought the timings were when the refinancings could actually have taken place in practice.
e) That the existing swaps would not be broken.
f) That there would be a 30% sharing with the public sector across the board, although the more recent ones would have to have been at 50% in reality.
xxix) Mr Neville explained that margin compares with actual swap rate in each case, so that the margin reduction would be a reduction to or saving on the long term swap rate.
Issue 1: Were the terms of the Engagement Letter applicable to PwC's retainer to undertake the valuation?
Issue 2: Did PwC owe the Claimants a common law duty of care in addition to any contractual duty? If so, was it subject to the contractual limitation of liability?
Issue 3: Did each of the Claimants (a) actually rely on the valuation; and (b) reasonably rely on the valuation; and (c) were they contractually entitled to rely on the valuation, when agreeing to sell their interests in the RBIL portfolio to BEIF in January 2006?
Issue 4: Did PwC's minor mathematical corrections to the valuation amount to "confirming and repeating of the valuation to the Claimants albeit with a minor adjustment" between October 2005 and January 2006?
Issue 5: Was PwC negligent in preparing the valuation in relation to its choice of discount rates, and in particular (a) in the analysis it undertook of the projects in the portfolio, (b) in taking the wrong base discount rate, (c) in the importance it attached to the fact that the portfolio comprised equity only, (d) in the importance it attached to the fact that Avon & Wilts and Lymington were under construction, (e) in failing to build up discount rates, (f) in failing to review comparables, (g) in ignoring previous discount rates used for the same portfolio, and would a non-negligent valuation have increased the discount rate as a result of the confidentiality and pre-emption provisions?
"39. I was referred to a number of authorities. I find it difficult to reconcile them all, and to extract a coherent and principled approach to the question of valuer's negligence. It may be that the divergent streams of authority will have to be resolved by a higher court. But that is not a task for me.
40. In Zubaida v. Hargreaves  1 EGLR 127 Hoffmann LJ said:
"In an action for negligence against an expert, it is not enough to show that another expert would have given a different answer. Valuation is not an exact science; it involves questions of judgment on which experts may differ without forfeiting their claim to professional competence. The fact that a judge may think one approach better than another is therefore irrelevant... The issue is not whether the expert's valuation was right, in the sense of being the figure which a judge after hearing the evidence would determine. It is whether he has acted in accordance with practices which are regarded as acceptable by a respectable body of opinion in his profession: see Bolam v. Friern Hospital Management Committee  1 W.L.R. 582 at p. 587, a well-known citation"
41. This is in line with the general principle that a professional does not warrant a result. He agrees only to use reasonable skill and care in forming his opinion or giving his advice. In other words it is the process that must be examined rather than simply the end result. That is not to say that the end result is irrelevant. First, the end result may be very far from opinions given by other experts, or may be falsified by some empirical outcome, with the result that one must infer that something has gone wrong with the process. Second, a professional may have a duty, as part of the process, to stand back and look at the end result in the round to see if it accords with his instinctive feel.
42. In Lion Nathan Ltd v. C-C Bottlers Ltd  1 WLR 1438 Lord Hoffmann, giving the advice of the Privy Council, said:
"As has been said, a forecast is always the forecaster's estimate of the most probable outcome, the mean figure within the range of foreseeable deviation. The judge appears to have assumed that if a figure would have been within the range of foreseeable deviation from the mean of a properly prepared forecast, it must follow that it would have been proper to put that figure forward as the mean. This proposition has only to be stated to be seen to be fallacious. There is no connection between the range of foreseeable deviation in a given forecast and the question of whether the forecast was properly prepared. Whether a forecast was negligent or not depends upon whether reasonable care was taken in preparing it. It is impossible to say in the abstract that a forecast of a given figure "would not have been negligent." It might have been or it might not have been, depending upon how it was done. Assume, for example, that the vendor had forecast $1.25m. and that the limits of foreseeable deviation would have been regarded as $50,000 either way. Assume that the forecast was unexceptionable in every respect but one: there had been a careless double counting of sales which, if noticed, would have reduced the estimate by $25,000. To that extent, the estimate has not been made with reasonable care. If on account of some compensating deviation the outcome is $1.25m. or more, the purchaser will have suffered no loss and the vendor will incur no liability. But if the outcome is less than $1.25m., their Lordships think that the purchaser is entitled to say that if the estimate had been made with reasonable care, the figure put forward by the vendor as the mean and upon which he relied in fixing the price, would have been $25,000 lower. To this extent, he has suffered loss by reason of the breach of warranty. It is nothing to the point that the outcome is still within what would have been predicted as the limits of foreseeable deviation. His complaint is that the whole range of possible outcomes would have been stated as $25,000 lower. The purchaser has accepted the risk of any deviation attributable to factors which were unforeseeable, unknown or incalculable at the time of the forecast. He has accepted the risk of such deviation whether its true extent would have been foreseeable at the time of the forecast or not. But he has not accepted the risk of any deviation which is attributable to lack of proper care in the preparation of the forecast. The only tolerable forecast is one which, on its facts, was prepared with reasonable care.---(Underlining added)
43. This passage, as it seems to me also focuses on the process of preparing the valuation or forecast, rather than the end result. Lord Hoffmann says explicitly that there is no connection between the range of foreseeable deviation in a forecast and the question whether it was properly prepared. He also says explicitly that whether a forecast was negligent or not depends upon whether reasonable care was taken in preparing it. Moreover, his example clearly shows that a forecaster (or valuer) may be negligent even though his final figure falls within the limits of foreseeable deviation (i.e. within the "margin of error"). Accepting, as one must, that in valuation cases many questions are matters of judgment, the client is in effect saying to his valuer: I will accept your judgment on all the questions that will arise in the course of preparing your valuation, provided that you exercise your judgment with reasonable skill and care". Although a decision of the Privy Council is only persuasive authority, the reasoning is, in my view, very persuasive indeed.
44. In South Australia Asset Management Corporation v. York Montagu  AC 191 (often referred to as SAAMCO or Banque Bruxelles Lambert) the House of Lords considered the measure of damages for negligent valuation. However Lord Hoffmann also considered the basis on which a valuer might be liable at all. He said:
"Before I come to the facts of the individual cases, I must notice an argument advanced by the defendants concerning the calculation of damages. They say that the damage falling within the scope of the duty should not be the loss which flows from the valuation having been in excess of the true value but should be limited to the excess over the highest valuation which would not have been negligent. This seems to me to confuse the standard of care with the question of the damage which falls within the scope of the duty. The valuer is not liable unless he is negligent. In deciding whether or not he has been negligent, the court must bear in mind that valuation is seldom an exact science and that within a band of figures valuers may differ without one of them being negligent. But once the valuer has been found to have been negligent, the loss for which he is responsible is that which has been caused by the valuation being wrong. For this purpose the court must form a view as to what a correct valuation would have been. This means the figure which it considers most likely that a reasonable valuer, using the information available at the relevant date, would have put forward as the amount which the property was most likely to fetch if sold upon the open market. While it is true that there would have been a range of figures which the reasonable valuer might have put forward, the figure most likely to have been put forward would have been the mean figure of that range. There is no basis for calculating damages upon the basis that it would have been a figure at one or other extreme of the range. Either of these would have been less likely than the mean: see Lion Nathan Ltd. v. C. C. Bottlers Ltd., The Times, 16 May 1996."
45. Although Lord Hoffmann recognises that within a band of figures valuers may differ without one of them being negligent, it does not seem to me that he was saying that the only way to establish negligence or breach of contract is to prove that the valuer's particular figure falls outside that band. If that is what he meant, his reference to the Lion Nathan case would surely have been qualified.
47. However, there is a line of authority which focuses on the final figure, rather than the process by which the valuer reached the final figure. That line of authority begins with Singer & Friedlander v. John D Wood & Co  2 EGLR 84. In that case Watkins J said:
"The valuation of land by trained, competent and careful professional men is a task which rarely, if ever, admits of precise conclusion. Often beyond certain well-founded facts so many imponderables confront the valuer that he is obliged to proceed on the basis of assumptions. Therefore he cannot be faulted for achieving a result which does not admit of some degree of error. Thus, two able and experienced men, each confronted with the same task, might come to different conclusions without anyone being justified in saying that either of them has lacked competence and reasonable care, still less integrity, in doing his work. The permissible margin of error is said by Mr Dean, and agreed by Mr Ross, to be generally 10 per cent either side of a figure which can be said to be the right figure, i.e. so I am informed, not a figure which later, with hindsight, proves to be right, but which at the time of valuation is the figure which a competent, careful and experienced valuer arrives at after making all the necessary inquiries and paying proper regard to the then state of the market. In exceptional circumstances the permissible margin, they say, could be extended to about 15 per cent, or a little more, either way. Any valuation falling outside what I shall call the "bracket" brings into question the competence of the valuer and the sort of care he gave to the task of valuation."
48. This is, I think, the first mention, in a reported case, of the "margin of error". Watkins J, at least in this passage, treats a valuation of property which falls outside the margin of error merely as evidence of lack of care and competence. In the course of his lengthy and careful judgment he examined in detail the process by which the valuer in that case came to his final figure. The deficiencies he identified were deficiencies in the process of valuation, rather than simply a disparity between the final figure and what he called "the right figure". However, in a later passage in his judgment he said:
"Pinpoint accuracy in the result is not, therefore, to be expected by he who requests the valuation. There is, as I have said a permissible margin of error, the "bracket" as I have called it. What can properly be expected from a competent valuer using reasonable skill and care is that his valuation falls within this bracket."
49. This passage does, in my opinion, concentrate on the final figure rather than the process. Moreover, it uses the margin of error in another way, namely to provide the valuer with a defence to a claim of negligence if his figure falls within the bracket, no matter how he arrived at his figure.
50. In Mount Banking Corporation Ltd v. Brian Cooper & Co [19921 2 EGLR 142 the plaintiff submitted that where the final valuation figure is within the Bolam principle, an acceptable figure, albeit towards the top end, but where none the less the valuer has erred materially in reaching that figure, the plaintiff can succeed in his claim because of those negligent errors, even though the total valuation figure was not negligent. Mr Robin Stewart QC, sitting as a deputy judge of the Queen's Bench Division, rejected that submission. He said:
"If the valuation that has been reached cannot be impugned as a total, then, however, erroneous the method or its application by which the valuation has been reached, no loss has been sustained, because, within the Bolam principle, it was a proper valuation."
51. Plainly this passage focuses on the end result rather than the process by which the valuer reached the end result. In reaching his conclusion on the facts, Mr Stewart said:
"I conclude, therefore, on this section, that though there was a fault in the process of calculation, none the less a proper and acceptable process could properly have resulted in no, or no perceptible, difference to the end valuation; that is to say that the figure in fact reached by Mr Cohen was acceptable on the Bolam principle."
52. In Craneheath Securities v. York Montague Ltd  1 EGLR 130 at 132 Balcombe LJ (with whom Otton and Aldous LJJ agreed) said:
"Since Craneheath did not establish that the figure of £5.25m was wrong, then I agree with Mr Stow that Craneheath's action must fail. It would not be enough for Craneheath to show that there have been errors at some stage of the valuation unless they can also show that the final valuation was wrong. If authority be needed for so self-evident a proposition, it can be found in Mount Banking Corporation Ltd v. Brian Cooper & Co  2 EGLR 142 at pp. 144-5, 149."
53. These are the passages from Mr Stewart QC's judgment that I have just quoted, and in my view are direct approval of his approach by the Court of Appeal. In the same case Otton LJ said:
"In the light of this the plaintiffs faced a formidable task in discharging their burden of proving that the figure of £1.1 m as an assessment of current turnover was erroneous. Without such a finding there could be no finding of negligence."
58. I come now to Merivale Moore plc v. Strutt & Parker  2 EGLR 171. I find this a difficult case. This was a case in which the valuer was instructed to prepare an appraisal of a proposed purchase. The property was to be acquired for development. The valuer prepared an appraisal which attempted to value the completed investment, in order for the purchaser to decide whether a purchase at the asking price would be a sensible transaction. In order to prepare the valuation, the valuer had to estimate the cost of the development, the rent at which the completed development could be let, and the yield to be applied to that rent in order to arrive at a capital value of the completed development. The task was made more difficult by the fact that the interest on offer was a lease with an unexpired term of 46 years. The valuer took as his starting point a rent for the principal areas of £60 per square foot, and adopted a yield of 7.5 per cent. The trial judge found that taking a rent of £60 per square foot was negligent. He also found that although a yield of 7.5 per cent was 'too low' it was not, in itself, negligent. He made an express finding to that effect. However, he found that the yield should have been qualified by a warning about its reliability. The failure to append a qualification was negligent. The valuer appealed to the Court of Appeal. That court, by a majority, reversed the judge's finding of negligence on the question of the rental value. However, the valuer's appeal was dismissed, on the ground that the judge's finding that the yield should have been qualified was one which was open to him. The result of the appeal, therefore, was that although the valuer had adopted a rental value which was not negligent, and a yield which was, in itself, not negligent, he was still liable in negligence because of the failure to qualify the yield with a warning. Simply looking at the result, one might have thought that this was a case in which the process, rather than the end result in figures, was all-important. However, examination of the judgment of Buxton LJ shows that this may not be so.
59. Buxton LJ began by explaining the structure of the trial judge's inquiry. He said at page 173:
"In order to determine whether the advice contained in the 12 June assessment was negligent, that is to say, whether the figures set out in the assessment were negligently stated, it was necessary, or if not necessary almost inevitable, that the court should form a view as to what was the correct or true value of the property; that is what would have been the correct figures to include in the assessment. That step has to be taken because a necessary step in determining whether a particular valuation was negligent is to consider the extent to which the valuation diverged from what would have been a correct valuation, and the reasons for that divergence."
60. This passage suggests, first, that there is a "correct or true value" of a property, rather than simply a "bracket" and, second, that the court must decide that true value before embarking on the question whether the impugned valuation was negligent. In deciding that question the court must consider both the extent of the divergence from the true value, and the reasons for the divergence. Absent empirical proof of the "true value" of a property on a given day (e.g. an open market sale of that property on that day), the "true" value must mean the figure at which the court values the property, having heard expert evidence. However, if the acid test of liability is whether the impugned end result falls outside a bracket, it is not clear why the court must decide what the "true" value of the property was, rather than simply deciding the bracket. Buxton LJ then reviewed the evidence given to the trial judge. Before coming to his own conclusions, he set out "some indication of the guidance to be obtained from recent authority as to the correct approach to a complaint of negligence against a valuer."
61. At 176 Buxton LJ said:
"It has frequently been observed that the process of valuation does not admit of precise conclusions, and thus that the conclusions of competent and careful valuers may differ, perhaps by a substantial margin, without one of them being negligent: see for instance the often quoted judgment of Watkins J in Singer & Friedlander Ltd v. John D Wood & Co  2 EGLR 84 at p. 85G; and the House of Lords in Banque Bruxelles Lambert S.A. v. Eagle Star Insurance Co Ltd  A.C. 191 at p 221 F-G. That has led to the courts adopting a particular approach to claims of negligence on the part of valuers. In the general run of actions for negligence against professional men:
"it is not enough to show that another expert would have given a different answer. the issue is ... whether [the defendant] has acted in accordance with practices which are regarded as acceptable by a respectable body of opinion in his profession": Zubaida v. Hargreaves  1 EGLR 127 at p 128 A-B per Hoffmann LJ, citing the very well-known passage in Bolam v. Friern Hospital Management Committee  1 WLR 582 at p 587
However, where the complaint relates to the figures included in a valuation, there is an earlier stage that the court must be taken through before the need arises to address considerations of the Bolam type. Because the valuer cannot be faulted in any event for achieving a result that does not admit of some degree of error, the first question is whether the valuation, as a figure, falls outside the range permitted to a non-negligent valuer. As Watkin J put it in Singer & Friedlander at p 86A:
"There is, as I have said, a permissible margin of error, the "bracket" as I have called it. What can properly be expected from a competent valuer using reasonable skill and care is that his valuation falls within the bracket."
A valuation that falls outside the permissible margin of error calls into question the valuer's competence and the care with which he carried out his task. .. But not only if, but only if, the valuation falls outside the permissible margin does that inquiry arise. ...
Various further considerations follow. First, the "bracket" is not to be determined in a mechanistic way, divorced from the facts of the instant case. ... Second, if it is shown even at the first stage that the valuer did adopt an unprofessional practice or approach, then that may be taken into account in considering whether his valuation contained an unacceptable degree of error. ... Third, where the valuation is shown to be outside the acceptable limit, that may be a strong indication that negligence has in fact occurred. ... Some caution at least has to be exercised in this respect, because the question must remain, in valuation as in any other professional negligence cases, whether the defendant has fallen foul of the Bolam principle. To find that his valuation fell outside the "bracket" is, as is held by this court in Craneheath and also, I consider, by the House of Lords in Banque Lambert, a necessary condition of liability, but it cannot in itself be sufficient." (Underlining added)
62. Buxton LJ contrasts the position in the "general run" of actions against professionals with the particular case of negligent valuers. Yet the passage he quotes to illustrate the test applicable in the "general run" of cases, as contrasted with the "particular approach" in negligent valuation cases, is itself taken from a valuation case. It may be that the "particular approach" in valuation cases is appropriate only where the complaint is a complaint about the "figures included in a valuation" rather than to the method of valuation. This would be consistent with the outcome of the appeal in that case, since the finding of negligence was upheld, not because the yield figure was negligent as a figure, but because it appeared unqualified by a warning. Nevertheless, the complaint in Zubaida was itself a complaint about the figures in the valuation. It is noticeable, moreover, that Lion Nathan was not mentioned in the judgment.
63. Be that as it may, it is clear that Buxton LJ holds that in cases where the figures are impugned as figures, it is a necessary precondition of liability that the impugned figures fall outside the "bracket". That being so, it is not easy to see why, at that stage of the inquiry, it matters whether the valuer has adopted an unprofessional practice or approach. Either his final figure falls within the "bracket", or it does not. If falling outside the "bracket" is a precondition of liability, why should it matter how the valuer arrived at his figure, as long as it is within the "bracket"? There is, I think, another problem. If the "bracket" is the end result, and the end result depends on a number of variables, should the bracket be assessed by arriving at a bracket for each of the variables, or only for those variables that are alleged to have been negligently assessed? Logically, in my opinion, the approach in Merivale Moore leads to the first possibility.
64. The passage quoted from the judgment of Buxton LJ is, in my view, part of the ratio of the majority of the court. It unequivocally emphasises the decisiveness of the end result, as opposed to the process by which the valuer reached the end result. It also interprets Balcombe LJs use of the word "wrong" as meaning "outside the margin of error", as opposed to "incorrect". However, it seems to me to be confined to a case where the complaint is about the figures as figures, rather than some other aspect of the valuation.
67. In Arab Bank plc v. John D Wood Commercial Ltd  1 W.L.R. 857 the Court of Appeal again considered the question whether it was a precondition of liability in negligence that a valuer's valuation should fall outside a margin of error. Counsel for the valuers conceded that normally, and on the facts of the actual case, there was such a precondition (para. 20). Mance LJ reviewed the authorities. He referred to the decision of the Court of Appeal in the Merivale Moore case (which I have already quoted). He continued at para 23:
"Where, as in the present case, criticism is addressed to factors such as rental value and yield which bear proportionately on the ultimately assigned value, the issues of the permissible range and of negligence are on any view inseparably linked. The value estimated results from the estimated rental values and yields. Where there is some discrete error, like that postulated in Lion Nathan Ltd v. C-C Bottlers  1 WLR 1438, it may be appropriate to examine more closely the nature of the valuer's engagement. Is it simply to produce an end result and to do so within the range of "reasonable foreseeable deviation?". Or may it be to exercise reasonable skill and care in the circumstances (including whatever instructions may have been given) both informing and in expressing an opinion on value? In Banque Bruxelles Lambert S.A. v. Eagle Star Insurance Co Ltd  Q.B. 375 when it was before this court the judgment given by Sir Thomas Bingham M.R. at pp. 403-404 lends some support to the latter analysis. On that basis, if, as a result of clearly identifiable negligence, a valuer arrives at a figure lower than he would otherwise have put forward, the line of reasoning indicated in the Lion Nathan case  1 WLR 1438 might still be applicable, although the end figure could not itself be said to fall outside the margin of legitimate valuation by valuers generally. It is however unnecessary to consider this point further on this appeal."
68. The decision of the Court of Appeal in the Arab Bank case may indicate that that court would reinstate the possibility of applying the approach displayed in the Lion Nathan case, if the valuer's engagement is to do more than merely produce a result within the range of reasonably foreseeable deviation. In that event, it would be necessary to explore and define more closely the distinction between an error that is discrete, and an error that is not. However, the fact remains that Merivale Moore is ratio while the passage I have cited from Arab Bank is clearly obiter. In my judgment, consistently with Currys Group, and whatever my own doubts about the coherence of the law on this question, I must follow the ratio of Merivale Moore.
69. Mr Howe goes on to argue that even if the distinction drawn by Mance LJ is right, this is a case in which all that Levy Gee were required to do was to produce an end result. He says, with force, that since in the normal case a valuer of shares will produce a "non-speaking" award, the reasoning process should not be subject to independent scrutiny. The inquiry should focus on the final figure. The practical difficulty with this submission is that both the experts arrived at their final figures by considering the component parts of the valuation separately. In order to reach a conclusion on the validity of the final figure, it seems to me that I must replicate that process."
Base case or mid-market discount rate
i) It is true that both experts and Messrs Cleal and Williams agreed that the market discount rates had fallen since 2004, and that PwC had themselves taken a rate of 10% when they valued for Innisfree in mid- 2004.
ii) But the mid-market rate that PwC took was a rather higher measure than the base case rate that the experts built up.
iii) The validity of the base rate depends on the way in which it is increased to take account of other risks. Thus, it would be perfectly reasonable to take a base rate of 10% if, for example, it was increased by a rather lesser amount for the risks of construction.
iv) There is no absolute rule that the experts have been able to point to requiring the use of a built up base case rather than a mid-market rate.
v) I have taken into account the rates indicated in the annual accounts to which the experts referred and in the PFI Infrastructure transaction in July 2004.
vi) Mr Neville did not think that PwC's 10% was unreasonable.
vii) PwC actually took the mid-market rate as being approximately 10% for "an equity portfolio sale", thus they may have been building in a small uplift for the nature of the asset at this stage. I will return to the validity of an equity uplift in due course.
Equity only premium in the discount rate
i) First, PwC said that "assuming the subordinated debt holder has rights senior to those of pure equity (as you would often expect) the discount rate would usually be higher to reflect the increased risk of payments to the equity holder being eroded".
ii) Secondly, PwC said about the return profile that "most, if not all, of the principal secondary market investors want a smooth profile of returns. Where equity flows are highly variable year on year, some investors will not be interested at all; those that are, are likely to materially increase their discount rate".
iii) Thirdly, PwC said that "All projects except Bexley have subordinated debt that (we believe) is serviced before pure equity. The resulting equity value is much smaller than the subordinated debt value. The subordinated debt is already owned by Barclays".
iv) Fourthly, PwC said that "the equity value in the portfolio is very back-ended. Dividend payments in 7 out of the 10 projects are not forecast to start until 2015 or later".
v) Finally, they explained the disparity between the discount rates taken for the various projects as follows:
a) "10% for Bexley, which has no subordinated debt and is operational";
b) "12% for Black Country, which is operational and has some subordinated debt but around equity value accounts for 75% of the total equity and subordinated debt value";
c) "14% for Redbridge, which like Black Country is operational but the equity proportion of value is lower at approximately 50%"; and
d) "18% for the remaining projects, all of which have low equity proportions of value and some of which are non operational".
Confidentiality and pre-emption rights
"Q. And the context, I think you have accepted this, is that what the shareholders, what Ryhurst needed was an idea of what this was worth on the open market to Barclays?
A. What it was worth on the open market full stop, yes.
Q. What I mean is without confidentiality and pre-emption provisions in there?
A. Oh, yes".
The overall discount rate
i) 0% for Bexley, since it had no subordinated debt.
ii) 2% for the remaining projects, notwithstanding the distinction between Black Country and Redbridge on the one hand, where the equity slice was thicker, and the other 8 projects where the equity slice was thinner.
i) For Bexley, the reasonably competent valuer would have used a base discount rate of 8%, but rates between 7 and 10% could have been justified.
ii) For the steady state projects in Black Country and Redbridge, the reasonably competent valuer would have used a base discount rate of 8%, and added 2% for the equity factor, making 10%, but rates between 8 and 12% could have been justified.
iii) For the steady state project in Essex Herts, the reasonably competent valuer would have used a base discount rate of 8% and added 2% for the equity factor, making 10%, but rates between 9 and 14% could have been justified.
iv) For ramp up projects (Hertford, Liskeard, South Essex and West Mendip), the reasonably competent valuer would have used a base discount rate of 8% and added 2% for the equity factor, and 1% for ramp-up, making 11%, but rates between 9% and 15% could have been justified.
v) For projects under construction (Avon & Wilts, Lymington and Epping), the reasonably competent valuer would have used a base discount rate of 8% and added 2% for the equity factor, and 2% for construction, making 12%, but rates between 10% and 16% could have been justified.
Project PwC rate RCV RCV RCV RCV
Rate Range Value £000 Range: £000
Avon & Wilts 18% 12% 10-16% 1089 1628-533
Bexley 10% 8% 7-10% 2482 3052-1724
Black Country 12% 10% 8-12% 1030 1494-751
Epping 18% 12% 10-16% 332 485-168
Essex Herts 18% 10% 9-14% 384 478-166
Hertford 18% 11% 9-15% 224 341-99
Liskeard 18% 11% 9-15% 196 302-86
Lymington 18% 12% 10-16% 576 838-301
Redbridge 14% 10% 8-12% 596 860-419
South Essex 18% 11% 9-15% 250 351-134
West Mendip 18% 11% 9-15% 219 321-105
Totals 7378 10150-4486
Issue 6: Was PwC negligent in preparing the valuation in failing to attribute appropriate value to (a) gains from possible refinancing, (b) the sinking fund upside, and (c) residual value upsides?
i) The assumption of 70-90 basis point margin seems to me far more sensible than the 50 basis points assumed by PwC. But PwC's assumption was on the basis that other aspects did not change, so cannot really be compared with the more technical exercise undertaken by the experts.
ii) I do not think that Mr White was justified in assuming that the average debt service cover ratio (ADSCR) could be reduced from 1.20:1. In this regard, I accept Mr Neville's evidence.
iii) Likewise, I do not think that it was reasonable to think that the debt could be increased by some £20 million. Again, I accept Mr Neville's evidence that there was significant resistance to increasing liabilities.
iv) As for the dates of the assumed refinancing, both Mr White and Mr Neville took different dates for different projects. That would have made a portfolio refinancing impossible. I would have preferred a single date after the completion of all the projects in December 2006, probably the 31st March 2007.
v) I would have assumed that it was too costly to break the existing swaps.
vi) It was surprising that Mr Neville assumed only 30% sharing with the public sector across the board, whereas in reality some of the more recent projects would have to have been shared at 50%. It seems to me that the real sharing rates should have been assumed.
vii) It seems to me that the appropriate discount rate for the assumed refinancing should have been the same as I have found they should have been above.
Issue 7: Was PwC negligent in preparing the valuation in failing to revise its valuation in or before January 2006?
Issue 8: What value would the Defendant non-negligently have ascribed to the RBIL Portfolio (a) as at May 2005 (b) as at January 2006?
Issue 9: Would the sale to BEIF have proceeded in the event that PwC had given a non-negligent valuation?
i) The fact that the Claimants (except Mr Dixon) wished to retire.
ii) The business was strong in 2004 and 2005, but was perceived as being prone to go less well as time progressed.
iii) Barclays could, in theory, have prevented the sale of the Rydon Group going ahead.
iv) Since Barclays held pre-emption and confidentiality rights, it was, in practice, the only likely purchaser for the shares in RBIL held by Ryhurst.
v) The Claimants would have been unable to sell in the future at a time of their choosing, if they walked away from the deal in 2005.
vi) The HBOS offer for Rydon was already well above expectations, and was being chipped away as time progressed.
i) First, as a matter of causation, the Claimants must show that they had a real or substantial chance as opposed to a speculative one, that Barclays would have paid an increased price; and
ii) Secondly, as part of the assessment of quantum, the court must assess the percentage chance that such a price would have been achieved.
I will, of course, also need to assess what increased price would be likely to have been achieved if the first stage is surmounted. Logically, it seems to me that this latter question might be regarded as one of assessment of quantum rather than causation, yet it seems to me to be important to consider it alongside the causation question. I say this because, on the facts of this case, there might (in theory) be a real and substantial chance of Barclays increasing its offer by £100,000, but no such chance (in theory) of Barclays increasing its offer by £3 million. No argument was addressed on this point, and I have not been able to find much help in the authorities (see paragraphs 8-031 to 8-092 in McGregor on Damages 18th edition 2009, and, for example, John D Wood (Residential & Agricultural) v. Knatchbull  1 EGLR 33, where the point seems to have been rather skated over).
Issue 10: Can the Claimants claim their valuation losses by reference to the subsequent sale in December 2006 to SMIF, or, if not, what losses can they claim?
Issue 11: If PwC is liable, were the Claimants' valuation losses caused by their own negligence and if so to what extent?
Issue 12: Was PwC affected by an unresolved conflict of interest that meant they should not have accepted the valuation retainer, and did the Claimants give their informed consent to, or waive, the conflict?
"Further or alternatively [PwC] was in breach of the Engagement and/or the FSA Rules by not informing the Claimants and each of them that they had a conflict of interests in valuing Ryhurst's interests in the RBIL Portfolio and by continuing to act without the express informed consent of the Claimants and each of them. The conflict arose because in January 2005 BEIF had asked [PwC] to put forward proposals for the refinancing of the subordinated debt within the RBIL Portfolio and maximising value for the shareholders of RBIL. On 22nd February 2005 Barclays instructed [PwC] that it would not go ahead with the refinancing until after it had acquired full control of RBIL, thus meaning that Barclays intended to obtain the full benefit of any refinancing for itself and not to share it with the Claimants. In the premises as from 22nd February 2005, at all material times, it was in the direct financial interests of [PwC] (in the form of anticipated fee income) to produce a valuation that was at or below the price that they perceived BEIF would pay for control of RBIL; and it was in the indirect interests of [PwC] to assist BEIF (as a prospective client in relation to the refinancing) to acquire Ryhurst's interests in the RBIL Portfolio at as low a price as possible and within any valuation to attribute as low a figure for refinancing gains as possible".
i) It was in PwC's financial interests to value at a low price that it thought Barclays would pay, so it could obtain the future refinancing work.
ii) It was in PwC's indirect financial interests (a) to help Barclays acquire the RBIL Portfolio at a low price, and (b) to attribute a low value to refinancing gains, so it could obtain the future refinancing work.
i) That it was in PwC's personal interests to see the deal with Barclays go through, because PwC was more likely, as a result, to obtain the refinancing project that Barclays was then expected to pursue.
ii) That PwC had a "long track record" of working for Barclays in the past. In fact, PwC and its predecessor firms have been Barclays' auditors for many years. But this is public knowledge and cannot be relevant to the issues that arise here.
Issue 13: If there was an unresolved conflict, are the Claimants entitled to damages for PwC's breach of duty in acting for them when affected by an unresolved conflict of interest, and, if so, on what basis, and how much?
Issue 14: If the terms of the Engagement Letter apply to the valuation retainer, does the time limitation and/or the limitation of liability satisfy the requirement of reasonableness, and, if so, are they applicable to any or all of the Claimants' claims?
"(1) A person cannot by reference to any contract term or to a notice given to persons generally or to particular persons exclude or restrict his liability for death or personal injury resulting from negligence.
(2) In the case of other loss or damage, a person cannot so exclude or restrict his liability for negligence except in so far as the term or notice satisfies the requirement of reasonableness.
(3) Where a contract term or notice purports to exclude or restrict liability for negligence a person's agreement to or awareness of it is not of itself to be taken as indicating his voluntary acceptance of any risk".
i) The parties in this case were not of equal bargaining position. PwC was in the strongest position, but the Claimants were powerful and experienced business people, and their companies had considerable commercial influence. The Claimants were fully aware of the possibility of going elsewhere for their valuation advice and even contacted DWPF before deciding to instruct PwC. The Claimants were not in any sense presented with a fait accompli. They chose to use PwC, knowing that it employed limitation clauses, because they thought that it would be useful to them to have that firm undertaking the valuation they needed for a variety of reasons.
ii) The Claimants either knew or ought reasonably to have known of the limitation of liability term. Ms Montague was acting for them, and could very easily have considered the matter and realised that what was being offered was an extension to the Engagement Letter, which she knew contained the limitation on liability. The Claimants are not to be regarded as innocents abroad. They were entirely capable of protecting their own interests. They knew and understood that accountancy firms customarily limited their liability by clauses of this kind, but chose not to discuss or negotiate the limitation.
Issue 15: What damages are the Claimants entitled to for each breach of contract and/or duty relied upon?