Kilcarne Holdings Ltd v Targetfollow (Birmingham) Ltd & Anor

On 9th November 2004, in a long and careful judgment reserved after a ten day trial, Mr Justice Lewison dismissed an action brought by Kilcarne Holdings Ltd (“Kilcarne”) against Targetfollow (Birmingham) Ltd (“TBL”) and its holding company Targetfollow Group Ltd (“TGL”).

The subject-matter of the action was a 250 year lease of Baskerville House, Centenary Square, Birmingham, which the judge described as one of Birmingham’s great civic buildings. On 5th February 2002 completion took place of an agreement by Birmingham City Council to grant the lease to TBL. The amount required by TBL in order to complete the transaction was £2.5m, of which £1m was lent to it by Kilcarne in exchange for loan notes of the same value (“the Birmingham loan notes”) and as part of a composite transaction under which Kilcarne and an associated company called Rosedale Ltd (“Rosedale”) together lent £2.5m to TBL and another subsidiary of TGL.

Shortly stated, the primary question for decision by the judge was whether, on or before 5th February 2002 and in addition to the contractual rights and obligations of the parties under the instrument creating the Birmingham loan notes, there came into existence a legally enforceable oral agreement between Kilcarne and TBL for a joint venture for the development of Baskerville House. The judge decided that question in the negative and in favour of TBL, and no appeal has been brought against that part of his decision. In this court Kilcarne has relied mainly on its secondary claim before the judge, which can broadly be stated as one in constructive trust.

Although permission to appeal was later granted on a renewed application to this court (understandably in such a complicated case), both the judge and Lord Justice Jonathan Parker (on consideration of the documents) refused Kilcarne permission on the ground that the judge’s decision was essentially one of fact. After full argument, Mr Purle QC, for Kilcarne, has failed to satisfy me that they were wrong. Moreover, while the emphasis of the judge’s judgment was necessarily different, in rejecting Kilcarne’s primary claim he made findings which are just as much fatal to the claim in constructive trust. The appeal can therefore be disposed of relatively briefly and without an examination of the other elements of the composite transaction or the negotiations by which it came to take the form that it did.

The largest (though not the majority) shareholder in TGL was Mr Ardeshir Naghshineh, who was also a director of TGL and TBL, the latter having been set up specifically to acquire the lease of Baskerville House. The negotiations on behalf of TGL and TBL were conducted throughout by Mr Naghshineh.

The moving spirit on the Kilcarne side was Mr Malvinder Singh. His position was less clear cut than Mr Naghshineh’s. The judge said that Mr Singh’s and his family’s business interests were organised through off-shore trust arrangements, the principal trust being the Jadriya Trust, a discretionary trust established by Mr Singh of which he and his family were beneficiaries. At the time of the material events the trustee of that trust was Standard Chartered Grindlays Trust Company (“SCGTC”). It owned the share capital in a British Virgin Islands company called Daphne Caprice Co Inc. The shareholders in Kilcarne were two nominee companies bearing names associated with SCGTC. The judge added (para. 16):-

“It is said that Daphne Caprice is the ultimate owner of both Kilcarne and Rosedale; but the precise structure of ownership is obscure . . . Mr Singh is at pains to point out that he does not control Daphne Caprice and is not a director of or otherwise connected with Kilcarne or Rosedale. Although Kilcarne and Rosedale are incorporated in different places, they are administered from Jersey.”

Having said that Kilcarne’s articles of association provided for its business to be administered by the directors, and that its relevant directors at the time were Ms Justine Wilkinson (a manager with SCGTC) and Mr Clive Black (its managing director), the judge continued (paras. 18 and 19):-

“Mr Black did not attend any relevant board meetings. There was at least one other director but she plays no part in the story, apart from having attended two board meetings and having signed documents. The trusteeship of the Jadriya Trust has since passed to HSBC. This may explain why neither Ms Wilkinson nor anyone else from [SCGTC] gave evidence at the trial.

Mr Singh is, however, the managing director of Sitac Ltd, which, he says, acted for Kilcarne. Mr Singh is also the majority shareholder in Sitac. He describes Sitac as an adviser to companies in the Daphne Caprice group.”

Mr Singh claimed and Mr Naghshineh accepted that, after preliminary discussions, an agreement in principle was first reached between them on or about Tuesday 29th January 2002, at which point Mr Naghshineh stopped looking for alternative sources of finance. Each of them instructed solicitors on that date. Between then and Tuesday 5th February 2002 there were detailed negotiations between the two sides, during which there were proposals and counter-proposals and the form of the transaction varied from time to time. The negotiations were described by the judge in paras. 29–107 of his judgment. In para. 108, under the heading “the Bible”, the judge summarised the large number of documents which were completed on 5th February and in paras. 109–116 he referred to the detailed terms of some of those documents, including clause 8 of the instrument creating the Birmingham loan notes:-

“The Noteholders and the Company confirm that this Loan Note Instrument may be supplemented and/or replaced by an agreement in writing between both parties in relation to the proposed joint development of the Property” (emphasis added).

As part of the background to the material findings of the judge, it is also necessary to make particular reference to the following:

As it has been put by Mr Purle in this court, the constructive trust claim raises the following issues:

The essential requirement of a Gissing v Gissing constructive trust as applied to this case is that TBL and Kilcarne should, at or before the completion of the transaction on 5th February 2002, have shared a common intention (or understanding) that Kilcarne was to have a beneficial interest in the lease of Baskerville House. Mr Purle submits that such an intention was established by the evidence before the judge of discussions and communications between Mr Naghshineh and Mr Singh. However, it is clear that that submission cannot succeed in the light of the judge’s findings, in relation to the claim based on an alleged oral agreement, that Kilcarne did not have any such intention. In summary, he found that Kilcarne lent the £1m to TBL on the basis of the formal legal contracts negotiated between the parties as approved by formal resolution of their respective boards of directors.

I agree with Mr Nugee that, as the case has been put in this court, the key finding has become that made in para. 245 of the judgment, where the judge said:

“To put it positively, what Kilcarne relied on in entering into the transaction was the form of the written documents embodying the contractual arrangements (which it may not fully have understood), rather than any oral discussions between Mr Singh and Mr Naghshineh or Mr Singh’s emails recounting those discussions.”

Although the judge was there dealing specifically with the question of reliance in relation to a Pallant v Morgan constructive trust, it follows inevitably from his finding that, in relation to the £1m lent by Kilcarne to TBL, the parties intended that their rights and obligations should be governed simply by the instrument creating the Birmingham loan notes.

In support of his key finding, the judge made other findings which are equally unassailable. First, he twice stated (paras. 16 and 171) that Mr Singh was at pains to point out that he did not control Daphne Caprice and was not a director of or otherwise connected with Kilcarne or Rosedale. Secondly, he found (paras. 169–177) that Mr Singh did not have authority to bind Kilcarne to a joint venture. It follows that Kilcarne’s intention in relation to the transaction depended, not on any intention of Mr Singh, but on the intention of its directors as evidenced by the resolutions passed by them at their meeting in Jersey on 5th February (see para. 9(3) above).

As to that, the judge said (paras. 239–240):

“I begin by looking at Kilcarne’s understanding. Mr Singh’s recommendation to Ms Wilkinson of 1 February was expressed in terms of a secured loan. It said nothing about a joint venture agreement. . . Kilcarne’s board also approved the various documents, which included the Birmingham loan notes, containing clause 8. Clause 8 contained the confirmation that the loan notes ‘may’ be supplemented or replaced by a joint venture agreement. Otherwise the minutes of the board meeting say nothing about a joint venture.

These, surely, represent Kilcarne’s understanding of the transaction it was agreeing to undertake. In the absence of any evidence from Ms Wilkinson I am not prepared to infer that Kilcarne had any greater understanding. Indeed, I think it is likely that Mr Singh himself had the same understanding, although what is relevant is Kilcarne’s understanding rather than Mr Singh’s.”

Earlier, in para 176, the judge had reverted to the omission to call Ms Wilkinson and Mr Black. Although he repeated that the trusteeship of the Jadriya Trust had since passed from SCGTC to HSBC, he described the omission as “striking”.

The judge continued (para. 241):

“Broadly, I consider that Targetfollow’s understanding was the same as Kilcarne’s. But there is this difference. Assuming that Mr Singh did not read the side-letter attached to the email of 4th February, Targetfollow would, in my judgment, have been entitled to assume that he had.”

Further reference is made to para. 241 below. At this stage it is enough to say that the question whether TBL would have been entitled to assume that Mr Singh had read the side letter is not one of importance. That is because the judge had already found (paras. 239 and 240) that Kilcarne’s understanding of the transaction was as set out in its board minutes. In any event, the side letter shows clearly that TBL’s understanding was that there were going to be “good faith negotiations in order to complete a joint venture agreement”, ie that it had no fixed intention to enter into such an agreement at that stage. In the circumstances, the side letter was evidence which supported the judge’s conclusion that the necessary common intention was lacking.

Mr Purle’s general submission was that there were critical elements in the evidence supporting Kilcarne’s case which the judge did not address in his judgment and to which, it is to be inferred, he paid no heed. He added that this evidence was unchallenged and, further, that the judge misunderstood the meaning of certain documents.

In regard to the Gissing v Gissing claim Mr Purle relied in particular on what he said was the unchallenged evidence of Mr Singh as to the assurances he was given by Mr Naghshineh that, if Kilcarne went ahead with the transaction on the basis of the Birmingham loan notes as an interim measure, a written joint venture agreement would be entered into after completion. Mr Purle added that Mr Naghshineh accepted in cross-examination that he had a discussion with Mr Singh to the effect that the Birmingham loan notes were not a satisfactory way of putting into effect the deal agreed; that he (Mr Naghshineh) would instruct his solicitors to include a term to the effect that they would be replaced by a written joint venture agreement; and that he had given instructions to his solicitors accordingly.

Even if these and other submissions of Mr Purle’s to the like effect are accepted at their full weight, they are not an adequate basis for overturning the judge’s finding that the necessary common intention was lacking. True it was that Mr Naghshineh wanted there to be a joint venture, since that would have enabled the costs and risks of the project to be shared with Kilcarne. The lawyers, however, advised that it would not be practicable for the terms to be agreed before the transaction had to be completed on 5th February. Thus it was that clause 8 of the instrument (see para. 8 above) came to be included. Moreover, while the judge found that the conversation between Mr Singh and Mr Naghshineh went beyond an agreement merely to “discuss” replacing the loan notes with a joint venture agreement, he continued (para. 52):

“I find that Mr Singh and Mr Naghshineh both positively intended that a joint venture agreement of some sort should be entered into, and both were confident that agreement on its terms would be reached. But I accept Mr Naghshineh’s evidence that further important details were left for future discussion and both he and Mr Singh envisaged that the joint venture agreement would be a written one.”

In summary, it is apparent that there was ample evidence on which it was open to the judge to come to the conclusion that TBL and Kilcarne did not, at or before the completion of the transaction on 5th February 2002, share the common intention necessary to establish a Gissing v Gissing constructive trust in relation to the lease of Baskerville House. On that footing, it is unnecessary to go into the question of reliance.

I turn to the Pallant v Morgan constructive trust, as to which the judge said (para. 219):

“Essentially the principle is that (i) if A and B agree that A will acquire some specific property for the joint benefit of A and B and (ii) B, in reliance on A’s agreement, refrains from attempting to acquire the property, then equity will not permit A, when he acquires the property, to keep it for his own benefit, to the exclusion of B.”

That formulation does not fit the facts of the present case because Kilcarne never intended to acquire the lease itself and cannot therefore be said to have refrained from attempting to do so. But it has not been suggested that that in itself is an objection to the application of the principle. Mr Nugee submitted that, when applied to this case, the principle required, first, that there be an arrangement or understanding between the parties that A will acquire the property and that if he does so B will obtain some interest in it; and, secondly, that B must act in reliance on that arrangement or understanding. I agree with that submission.

It follows that, however it is put, the case for a Pallant v Morgan constructive trust also fails at the first hurdle. There was never any agreement, arrangement or understanding between TBL and Kilcarne that the lease should be acquired for their joint benefit or that Kilcarne would obtain some interest in it.

The judge considered this question at some length, referring to authorities subsequent to Pallant v Morgan, in particular the recent decision of this court in Banner Homes Group Plc v Luff Developments Ltd [2000] Ch. 372. In para. 236 he concluded that the existence of the complex network of contracts between the protagonists precluded or rendered unnecessary the intervention of equity. However, in case he was wrong, he then proceeded to examine the elements of the suggested equity. In the second part of para. 241, having expressed the view that TBL would have been entitled to assume that Mr Singh had read the side letter attached to the email of 4th February, the judge said:

“This, I think, has an obvious bearing on whether it is unconscionable for TBL to set up its title to the lease of Baskerville House as representing its beneficial entitlement. If A claims against B that there is an understanding between them that [B] will acquire property for the joint benefit of both of them, and B has attempted to make it clear to A, before the acquisition, that the furthest he is prepared to go is to say that he will enter into good faith negotiations, why should B’s conscience be affected if, unknown to him, A does not read what he has sent?”

It is unnecessary to go further. On the facts of this case it is difficult, if not impossible, to discern any material difference between the application of the Gissing v Gissing and Pallant v Morgan principles. For myself, I would have thought that it was the former that fitted the case better than the latter. But whether that be right or wrong it is clear that, if the case is not covered by the former, it will not be covered by the latter.

Had Kilcarne’s claim in constructive trust succeeded on either basis, it would have been necessary to consider whether TBL owed it a duty to progress the development of Baskerville House, a question which the judge (paras. 256-270) considered and answered in the negative. In this court the argument on this question was deferred. Since it does not now arise, it is unnecessary to say anything about it.

Finally, it is necessary to consider Kilcarne’s alternative claim for a payment by way of quantum meruit. The judge (para. 271) said that the claim was put in two ways. First, it was claimed that Mr Singh, acting through Sitac at the request of TGL and TBL and for their benefit, rendered services connected with the development project on behalf of Kilcarne until December 2002. Alternatively, it was claimed that Kilcarne had incurred a liability to pay Sitac for work done on its behalf in relation to the development, that liability having been incurred in anticipation of a contract with TBL that did not materialise. On either basis, it was claimed that TGL and TBL must recompense Kilcarne. In para. 272 the judge said:

“It is important to stress that this is not a claim brought either by Mr Singh or by Sitac. Sitac was given the opportunity to be joined into the proceedings but declined.”

The judge continued (para. 273):

“So under the first way in which the case is advanced Kilcarne must establish that TBL or TGL requested Kilcarne (not Sitac or Mr Singh) to provide services. There is simply no evidence to this effect. It is not in dispute that Mr Singh did actively involve himself in the progress of the development . . . So far as the outside world is concerned, Mr Singh presented himself either as Mr Singh personally or as Sitac. He did not represent that he was performing any service on behalf of Kilcarne. There is no evidence of any communication between Mr Naghshineh and Kilcarne in Jersey relating to Mr Singh’s services; and no evidence that Mr Singh ever passed on to Jersey any request for the provision of his (or anyone else’s) services. On the one occasion when Mr Singh raised with Mr Naghshineh the question of payment for his services (following Frontier’s approach) it was a payment to Sitac (not Kilcarne) that was under consideration.”

Mr Purle relied on evidence which, he submitted, established that Mr Singh’s expectation and understanding were to be equated with those of Kilcarne. However, I agree with Mr Nugee that that evidence was insufficient to fill the gap identified by the judge, in particular to establish that TBL or TGL requested Kilcarne (not Sitac or Mr Singh) to provide services. Without such a request, the first way of putting the quantum meruit claim was bound to fail.

As to the alternative basis for the claim, the judge said (para. 276) that it depended on establishing that Kilcarne incurred the liability to pay Sitac in anticipation of a contract that did not materialise. He continued:-

“The obvious question is: what contract? Mr Purle’s answer is the joint venture agreement. But in my judgment Kilcarne (as opposed to Mr Singh) had no expectation that a joint venture agreement would materialise. It was merely a possibility for the future, if terms could be agreed. In the meantime, it was content to rely on its security and the possibility of a 50 per cent share in profit if the development were to be sold before 31st January 2007. That possibility, as I have said, explains its decision to incur a liability to Sitac and/or Mr Singh for monitoring the development.”

It is at this point that Mr Purle’s submission that Mr Singh’s expectation and understanding were to be equated with those of Kilcarne becomes relevant. His attack on the judge’s findings in para. 276 depends on the correctness of that submission. But not only has the judge clearly distinguished between the expectations of Kilcarne and Mr Singh; not to have done so would have been practically inconsistent with his finding (see para. 13 above) that Mr Singh did not have authority to bind Kilcarne to a joint venture; equally, he would have had no authority to bind Kilcarne in this respect either. It is impossible to fault the distinction made by the judge. I agree with Mr Nugee that there was no evidence of Kilcarne’s own state of mind on which he could properly have found otherwise than he did.

Kilcarne’s quantum meruit claim also fails. I would therefore dismiss this appeal.

I agree.

I also agree.