Riyad Bank & Ors v Ahli United Bank (UK) Plc

On 1^st March 2005 Moore-Bick J (as he then was) handed down a judgment dealing with liability (the duty aspect), and the principles to be applied in assessing damage (the valuation aspect). He granted permission to appeal on the duty aspect but refused it on the valuation aspect. Tuckey LJ then refused permission to appeal on the valuation aspect on paper.

On Monday 14^th November 2005 we had before us the renewed application for permission to appeal on the valuation aspect. That had however been joined by an application to put in fresh evidence, together with an application to amend the notice of appeal to add a further ground of attack on Moore-Bick J’s ruling on the valuation aspect. The two matters were listed for half a day. There were six lever-arch files, extensive skeletons, one of which relating to the admission of fresh evidence did not reach us until the midst of the hearing. That skeleton was received in the Civil Appeals Office on the 7^th November and unfortunately through some administrative error had not reached us by the start of the hearing.

We heard first argument from Mr Lyndon-Stanford QC in support of his application for permission to appeal in relation to the original grounds. Having read the skeleton arguments and the relevant parts of the judgment, plus substantial further documentation, we were already conscious of the fact that the arguments on valuation were complex. At the oral hearing it soon became obvious that to fairly assess the prospects of success at only a short hearing would be extremely difficult. Furthermore there was the fresh evidence application to be dealt with as well. We took the view in relation to the permission application that this was one of those cases where, since (1) a large amount of money was at stake and (2) debating arguability needed in fairness longer than can ordinarily be made available on a permission application, and because arguing arguability can at times become time wasted when an appeal may itself not last that much longer, the right course, particularly as an appeal was already coming to the court, was to grant permission.

We did however feel that we should try to deal with the application to put in fresh evidence in order to relieve the full court at least of that burden. In order to consider that application we must therefore set out in a little detail what the valuation aspect is about.

This is an action in which there are three claimants and one defendant (UBK). It concerns the purchase by the third claimant (the fund) of 198 equipment leases for just over US$100M. UBK advised on the appropriate value of the leases at the time they were purchased by the fund. The contractual structure under which they gave that advice gave rise to an argument as to whether they owed a duty of care directly to the fund. That is the duty aspect ruled on by Moore-Bick J. If they owed that duty, further issues in relation to breach and damage gave rise to the valuation issue. There is a helpful table set out in a recent judgment of Morison J, given on 29^th September 2005, which sets out the type of equipment, the subject of the leases, the number of leases, the cost to the fund and the sum now claimed by the fund as damages. The table shows that there are 18 equipment types and the total amount claimed, excluding interest, is US$18,176,738.

On the 20^th October 2004, Moore-Bick J had ordered a two-stage trial. The first stage “will deal with issues of fact, the law and the principles underlying the expert evidence, together with an assessment of the credibility and reliability of the witnesses” and “no final decision will be made during or following the first stage of the trial as to precise quantum of damages, if any.” It was further ordered that:-

“following judgment given at the first stage, the court will consider the future procedure in the action including deciding to what extent if any it would be necessary to hear further submissions and/or expert evidence prior to determining the precise quantum of damages (if any). This order is without prejudice to the parties’ rights to cross-examine witnesses generally during the first stage of the trial.”

The first stage of the trial took place between 18^th October and 2^nd December 2004. The main issue between the parties at the first stage was whether the defendants were liable to the third claimant in tort and whether the first and second claimants were entitled to compensation for payments to protect commercial reputation (which was dismissed). A judgment was handed down on 1^st March 2005 ruling that the defendants did owe a duty of care, despite the underlying contractual structure. From paragraph 93 onwards of the judgment Moore-Bick J considered on the evidence of the four experts the correct basis of the valuation of what is termed the ERV (the Estimated Residual Value) aspect of the price to be paid for the lease when being purchased by the fund.

The experts all recognised that a number of different bases of valuation could be used when estimating the residual value of leased equipment. Moore-Bick J set them out in paragraph 93 of his judgment. He set them out in ascending order, starting with scrap value, forced liquidation value (FLV), orderly liquidation value in exchange (OLVIE), fair market value in exchange (FMVIE) and fair market value in place (FMVIP). The main contest between the experts at the trial was whether the appropriate basis was OLVIE or FMVIE. A further issue between the experts was the extent to which, in making the calculation as to value, the prospect of a lease being renewed should be taken into account. The judge ruled on those aspects in the following terms:-

“101.

It is necessary at this stage to say something about the significance to be attached to the prospects of renewals which pose difficulties of their own. At the time of entering into a lease there is little or no information that will enable the lessor to form a reliable view about whether the lessee will renew, and if so, for how long or on what terms. Much will depend on the circumstances in which the lessee finds himself at the end of the lease term and even lessees with a long history of renewing have been known to change policy abruptly. The difficulty of predicting the likelihood of renewal in any given case was acknowledged by both Mr Florenz and Mr Fry, neither of whom was able to support the renewal assumptions approved by UBK. It is true that Mr Florenz was prepared to suggest that there is a level at which the renewal rental is so low as to be compelling, which he put at 50% of the original, but I obtained the clear impression that that was little more than an attempt at an educated guess. Moreover, once rentals are reduced that far there is an increased risk that renewal will reduce rather than increase the amount ultimately realised by way of residual value. I think Mr Deane was right in saying that it is a mistake to place any reliance on the prospect of achieving a negotiated renewal on terms that are beneficial overall.

102.

Having heard the different approaches debated with the witnesses in cross-examination, I am satisfied that at the commercial level, as one would expect, there is no one single clearly defined approach in this market. Different lessors adopt different approaches to pricing and valuation based on a variety of commercial factors. Mr Deane’s preference for OLVIE as the basis of valuation, subject to a further 30% haircut, no doubt reflects the practice of many lessors, but I think it represents the conservative end of the scale. Similarly, I accept in the light of the evidence of Mr Fry and Mr Florenz that some leasing companies do adopt FMVIE as a basis of valuation, perhaps with a small haircut, or even no haircut at all, though I am unable to accept that that is the general practice. Certainly the quotation from the guide to leasing on which Mr Deane relied suggests that FMVIE is one recognised basis of valuation, although it probably reflects the more speculative end of the scale and would no doubt justify a substantial haircut.”

The judge also then in para 103 set out why he concluded that OLVIE, with no haircut, fairly represented the mid-point in market practice. He did so in the following terms:-

“103.

In my view the right approach is to take the basis of valuation that broadly reflects the mid-point in market practice and I think that OLVIE with no haircut fairly represents that for a number of reasons. First, in some leases the lessee is given the right to buy the equipment at the end of the term at FMVIE, which prevents the lessor from obtaining any premium that it might otherwise obtain as a result of selling the equipment in place. Such a term was included in some, though by no means all, of the leases held by the Fund. Secondly, the premium over FMVIE that the lessor can hope to obtain from a sale to the lessee of equipment that is not of a specialised kind or installed as part of an existing plant is likely to be small or even non-existent. Indeed, there is a serious risk that the lessor may not even obtain FMVIE in such cases. Thirdly, although the lessor can expect that on average lessees will renew in a significant number of cases, it is very difficult to predict with confidence whether any given lessee will do so and, if it does, for what period and at what rate. For these reasons, even if all the equipment were to remain with the lessees at the end of the term, it is doubtful whether the lessor would recover much, if anything, above FMVIE and there is a significant risk that it might recover less. In fact, however, it is likely that a significant proportion of the equipment will be returned, whether at the end of the original term or after a period of renewal, and if that happens there is likely to be some pressure on the lessor to dispose of it within a matter of months. Although some equipment lessors have established retail outlets, most have not and equipment that is not disposed of promptly will inevitably incur storage costs. All these factors mean that on average the lessor cannot expect to recover FMVIE and therefore when deciding how much to pay for a lease a purchaser will not usually be willing to place a residual value on the equipment based on an expectation of actually obtaining that level of return. Fourthly, it must be borne in mind that there will inevitably be some costs associated with the disposal of any equipment that is not sold to the lessee. Even if one assumes that over half the equipment will be disposed of in that way, the rest is likely to find its way back to the lessor eventually, even if at the end of a renewal period. Because of all the uncertainties involved it is not possible to place much reliance on rentals accruing from renewals. In some cases the renewal rent will be profitable to the lessor, but in others it may not be for the reasons explained earlier. Income from renewals, therefore, does not always provide a sufficient buffer against obtaining the price available at public auction from which the costs of sale have to be deducted. The experts agreed that renewals, whether formal or informal, should not be regarded as providing a source of additional income but as one way of realising the residual value of the equipment at the end of the original lease term. The right approach, therefore, is to establish the ERV at the end of the base term and ignore any income that may be derived from renewals. Finally, the risk of being forced to dispose of unwanted equipment at scrap value, possibly after a period in storage, cannot be ignored altogether.”

He also ruled on the correct approach to permissible range of estimated residual values. He ruled at para 128 that he was satisfied that estimates of residual value made by appraisers could vary by as much as 15% either side of the mid-point. That, he held, should represent the permissible range by reference to which the advice given by UBK in each case fell to be judged.

He furthermore ruled as to discount rates from paras 129 – 146.

As I have said, Moore-Bick J granted permission to appeal the duty aspect. On the valuation issue the appellant sought permission to challenge four aspects of the judgment. It is these four points on which we have now granted permission to appeal. The four points can be summarised in the following way. First, UBK assert that the judge erred in holding that OLVIE was the correct valuation benchmark and in not concluding that FMVIE was the correct valuation benchmark. (This is the most fundamental point taken by UBK). Secondly, UBK assert that the judge erred in concluding that no reliance should be placed on “renewals”. Third, the judge erred in his assessment as to the correct discount rate, particularly by applying a composite discount rate. Fourth, the judge erred in his assessment as to the appropriate range, which he assessed as 15% on either side of the base valuation. In this context, UBK assert that the judge failed to appreciate that it was the total acquisition price of each lease which had to fall within or outside the permissible range. The application to put in fresh evidence before the Court of Appeal is said to be necessary to support both the merits of the above grounds of appeal in relation to valuation and necessary to support a further aspect of the judge’s ruling on “matrices”. The appellants wish to amend their notice of appeal, to add a challenge to the judge’s ruling thereon.

The application came about in the following way. In the course of his judgment dealing with valuation the judge had to rule on various other matters, including whether the information on which valuation should be made should be current market prices for used equipment, the cost of new equipment or the income that could be derived from the use of the equipment over the course of its remaining economic life. It was common ground that valuation on an income basis was not appropriate. It was furthermore common ground that if sufficient and reliable information was available in relation to current market prices, that current market prices was the soundest basis for valuation.

Mr Dight and Mr Deane (called for the claimants) were of opinion that where there was not enough market data to provide a satisfactory basis for estimating residual value a balance should be struck between the market data and the cost of equipment approach, according to the information available to the appraiser. That was the course Mr Dight said he had taken in making his estimates of residual value based on OLVIE when he had market information. Mr Florenz and Mr Fry (called for UBK), on the other hand, considered that the cost approach should not be used in estimating residual value on any liquidation value basis unless there was no secondary market information available, so that to adopt the cost approach was effectively the only course open to the appraiser. The judge ruled that he was unable to accept that the adoption by Mr Dight of the hybrid approach invalidated his calculations, though he said (para 114):

“It may be necessary in due course to consider whether in any given case he has given too great or too little weight to the available sales information.”

It was in this context that UBK criticised Mr Dight for his use of “residual value matrices” in estimating the residual value of equipment. According to the judge:-

“residual value matrices are simply graphs or tables plotting the decline in value of equipment over time and showing the residual value year by year as a percentage of original cost. As such they reflect the methodology of the cost, rather than the market, approach to estimating residual value.”

The criticism of Mr Dight before the judge was for making use of matrices in circumstances where it was said there was sufficient market information available. The judge, on the evidence before him, was of the view that Mr Dight had based his matrices on reports of sales and other information derived from the wider market, and thus that his matrices were not purely theoretical calculations. Ultimately the judge said at para 118:-

“As I indicated earlier, the value of a matrix of this kind depends very much on the quality of the information on which it is based and the way in which it is used. Accordingly, although I think that UBK is entitled to scrutinise the use that Mr Dight makes of matrices in this case, I do not think that the method that he adopted of estimating residual value invalidates his conclusions.”

This understanding of the judge can, as it seems, have been so only in relation to a limited number of items because in relation to 14 out of 18 items Mr Dight in his report expressly stated that he was aware of no market data, or made clear that no market data was used other than under the hybrid approach. What Mr Dight had said in his expert’s report was :-

“In order to determine the range of residual values on an OLV basis we had discussions with resellers of equipment who provided opinions of value from their viewpoints, consulted past articles from well-known leasing and equipment journals on industry and residual outlooks for the appropriate time periods, and relied on past experiences and knowledge of the particular type of equipment. In addition we referenced the following industry pricing publications for historical prices for computers, material handling equipment, construction equipment and rolling stock . . .” (see paragraph 77 of Mr Dight’s report, page 342 of the second bundle).

“Material handling equipment” includes, to a large degree, fork lift trucks. In other paragraphs of his report Mr Dight suggested that he had used actual auction sales prices of various fork lift trucks in developing his analysis (see paragraph 122 of his report). He was also saying that having established a new price by using the Green Guide he had applied that against “actual market sales prices” to derive residual percentage matrices.

Cross-examination was directed to certain aspects of Mr Dight’s report. The thrust of the cross-examination seemed to be that the most accurate basis of valuation was the market approach and with that Mr Dight did not disagree, provided the material was available. In that context he continued to assert that, where information was available of comparable sales, and he suggested that was so in relation to “fork lift, construction equipment, trucks and trailers”, the bulk of the information would be obtained from auctions (see day 13 page 24, 428 and also day 13 page 25 lines 10 to 15). Thus he was saying that in certain categories, where he had comparable sales data, he was using that material in that valuation and it was in that context that his valuation became known as hybrid, a mixture between the market approach and the cost approach. So he was saying, in relation to the categories mentioned:-

“For these categories I was able to find a fair level of comparable sales information that I could use to establish value. So in that respect I was able to use the market approach to the level that I could use those sales. With that in mind, the other categories, if you said there were seventeen, the other twelve categories in your example, what I would need to do is this, if I was not able to find sufficient comparable sales, just weight the other market data that I was able to get to help establish my residual value matrices.” (see day 13 page 31 line 18).

Following his judgment the judge made clear by his order that there was much that still was open for debate at stage 2, thus, by paragraph 3 of his order he ordered :-

“3.

For the purpose of calculating the true value of leases in this case, the following principles are to be applied:

(1)

In respect of every lease, the appropriate basis for calculating residual value is OLVIE at end of lease term, with no haircut;

(2)

The nature and quality of the market information available to the appraisers was not sufficient to justify relying on the market-based approach to estimating residual value to the exclusion of other methods (for the avoidance of doubt, this does not prevent the Defendant from arguing at stage 2 of the trial that for a particular equipment type the market-based approach should have been primarily or almost exclusively used); [my emphasis]

(3)

Matrices of the type constructed by Mr Dight are an appropriate tool to use for estimating residual value in this case, but the Defendant is entitled to enquire into the method by which Mr Dight created the matrix in each case, to challenge the individual figures within each matrix and to scrutinise the quality of information on which it was based and the use to which he put it and the way in which it was used; [again, my emphasis]

(4)

When identifying replacement cost new for the purposes of the cost-based approach, it is appropriate to take into account discounts from list price that are available to purchasers in general, but not special discounts that reflect bulk orders or other special commercial considerations;

(5)

The permissible range of estimates of residual value is 15% either side of the mid-point for individual items of equipment;

(6)

Separate account should not be taken of the possibility of renewals which should be treated simply as a means of realising residual value – that is, when calculating the true value of an individual lease no account should be taken of the prospect of renewals whatever the specific provisions in a lease may be;

(7)

Rental payments and residual values should both be discounted at the rate of 9% for all leases acquired in or before February 1999, and at the rate of 8% for all leases acquired in or after March 1999.”

Following judgment, UBK, through its solicitors, wrote letters to Slaughter and May, representing the claimants, seeking to ascertain the information on which Mr Dight’s matrices had been produced.

Those representing UBK say that, from the information and answers now received as to the basis and methodology used to create the matrices, they can now demonstrate that Mr Dight had not in fact relied on numerous comparables, but had, in fact, created his matrices from his own experience and via his own expertise. Insofar as any comparables were used they say it now appears that Mr Dight says he only used them as a final “cross-check” to ensure the accuracy of the matrices, which he had already created. But those representing UBK say even that appears not to be so. Those representing UBK submit that the letters from Slaughter and May, acting for the claimants, were approved by Mr Dight and what they show (among other things) is (1) that market comparables were only used in relation to one of the items where Mr Dight said he had used comparables (i.e. computers) and that through an error, accepted by Mr Dight to have been made, not in fact the same comparables as used by Mr Dight in his report; (2) that in relation for example to fork lift trucks (which represented 21% of the fund) such comparables were not used at all, despite what he said in his report and what he had said in evidence.

UBK wish to put in evidence in the Court of Appeal the answers in the Slaughter and May letters. They wish to do so, it should be said, in an almost indigestible form, by simply placing before the Court of Appeal a copy of what they accept is some very “dense” correspondence, together with Mr Dight’s original report, skeleton arguments and transcripts of the evidence that he gave. Apart from the correspondence none of the material sought to be placed before the court seems to come within the concept of “fresh evidence”.

The real issue is whether answers obtained in what might be termed “the further cross-examination” of Mr Dight in correspondence should be admitted in the Court of Appeal.

UBK wish to put that evidence in for the following purposes. First to demonstrate, as they would suggest, that the evidence of a change of story by Mr Dight might show that matrices are not an appropriate tool for calculating ERVs. This would be a new ground of appeal; (2) that the evidence might show that Mr Dight is not a credible witness and should not have been relied on by the judge in concluding that OLVIE was the appropriate benchmark.

By CPR Rule 52.11(2) the Appeal Court will not receive fresh evidence “unless it orders otherwise”. Under the previous rules of the Supreme Court there had to be “special grounds” and the principles were defined in Ladd v Marshall [1954] 1 WLR 1489. Those principles were (1) that the evidence could not have been obtained with reasonable diligence for use at the trial; (2) the evidence must be such that if given it would probably have an important influence on the result of the case, though it need not be decisive; (3) the evidence must be such as is presumably to be believed; it must be apparently credible though it need not be incontrovertible.

So far as the new CPR is concerned, very much the same approach must be taken. Lord Phillips, MR, in Hamilton v Al Fayed, The Times October 13^th 2000, put it this way:-

“We consider that under the new, as under the old, procedure special grounds must be shown to justify by the introduction of fresh evidence on appeal. . . . . The old cases will . . . remain powerful persuasive authority for they illustrate the attempts of the courts to strike a fair balance between the need for concluded litigation to be determinative of disputes and a desirability that the judicial process should achieve the right result. The task is one which accords with the overriding objective.”

It seems to me that the Court of Appeal should be particularly cautious where what is intended is to put in, in effect, further cross-examination of a witness, including an expert, where that expert or witness has been cross-examined at a trial. It was intended that cross-examination going to reliability should take place at stage 1, as the original order of the court made clear. As a matter of principle the court should be cautious about admitting evidence of further questions and answers following a trial by which it is sought to persuade the Court of Appeal to reverse a judge’s assessment of credibility or reliability, or to order a new trial. Thus, it seems to me, it is right to test the fresh evidence, i.e. the answers from Slaughter and May, by reference to the principles in Ladd v Marshall. First, to what extent would the evidence affect points on which permission has been given or to what extent would the evidence support the new ground?

I take the new ground first. It is quite clear from the judge’s judgment that he has left it open to UBK, the appellants, to attack the actual “matrices” used at stage 2. Furthermore, there is no question of the judge who tries stage 2 being bound by Moore-Bick J’s finding of reliability in relation to such an attack. All the judge, as it seems to me, has held is that in general matrices are a permissible tool. Whether the matrices have been used or compiled on a sound basis in relation to the valuation of the ERV of the subject matter of any particular lease is for stage 2, and in my view the “fresh evidence” does not support any new ground of appeal. That being the finding of the judge, I do not think that the new ground is even arguable and I would refuse permission to amend to challenge the use of matrices.

What about the grounds upon which permission has been given? What Mr Lyndon-Stanford submits is that, when arguing about the appropriate basis for valuation, he does not want to be met by the argument:-

“The judge heard the evidence, assessed the experts, found Mr Dight reliable and that formed the basis of his choice between the bases of valuation.”

Mr Lyndon-Stanford would wish to put in the solicitor correspondence so as to challenge the judge’s view as to Mr Dight’s reliability.

I am very doubtful whether the “reliability” of Mr Dight, in the areas where he is now challenged, would ever have affected the judge’s assessment in the four areas on which permission to appeal has been granted. Mr Dight’s evidence was certainly not decisive, but I doubt whether it even had “an important influence on the result”. But in any event Mr Brindle QC has made a concession on which he accepts UBK should be entitled to rely. He concedes that in relation to fork lift trucks, which represented 21% of the fund, Mr Dight did not rely on comparables in the way he had originally asserted in his report. He used them only as a cross check. Furthermore, he is prepared to concede that it is arguable that the same is true of other items named in his report (other than computers), which represent a further 9% of the fund. Of course Mr Brindle in making that concession is stressing that in relation to 14 out of 18 items of equipment Mr Dight was not relying on comparables at all and making clear that he was not.

Despite that concession Mr Lyndon-Stanford still pressed to be entitled to put in the correspondence so as to emphasise “the total change in Mr Dight’s story” as he put it. He wishes to show that comparables were not even used as a cross check. He further submitted that the third aspect of the Ladd v Marshall test, i.e. that the evidence should be credible, is clearly met, since the answers are contained in letters from Slaughter and May, as approved by Mr Dight.

The principles from Ladd v Marshall are good guides to what ultimately is the question. Does fairness in the circumstances of this case require the principle of finality in litigation to be overridden and if so to what extent? It is that balancing exercise which we have to conduct. In my view, particularly on the basis of Mr Brindle’s concession, the evidence should not be permitted to go before the Court of Appeal. I say that because (1) the concession provides a clear answer on which reliance can be placed by UBK to answer the submission identified in paragraph 30 above; (2) to allow the correspondence to go before the Court of Appeal would be inviting the examination of lengthy and dense correspondence to explore whether something should be added to the concession that has been made which is not directly material to the points being argued; (3) it would not be right to impose on the Court of Appeal the task of deciding precisely what further conclusions should be drawn from the bundle of correspondence where the point the appellant wishes to make is at best of marginal relevance, particularly in the light of the concession; (4) to allow this bundle to go before the Court of Appeal would be to get this aspect out of proportion to the arguments that actually arise on the merits.

In my view Mr Dight’s reliability is only of marginal relevance. First the point arises only on a limited number of items. Secondly, the main point which arises on the appeal on valuation is “the basis of valuation” and it seems to me that when one reads the paragraphs which I have quoted in this judgment, the decision of the judge is by a process of his own logic. In paragraph 102 he seems to rely on Mr Deane not Mr Dight. In paragraph 104 (which I have not quoted) it is fair to say he is following Mr Dight, but because, in his view, Mr Dight “is correct”.

Thus I would refuse permission to amend the grounds of appeal and refuse permission for fresh evidence to be admitted in relation to those points for which permission has been granted.