Fulham Leisure Holdings Ltd v Nicholson Graham & Jones (A Firm)

The appeal and cross-appeal are from an order made on 31 July 2006 by Mr Justice Mann in proceedings brought by Fulham Leisure Holdings Limited (“Holdings”) against Nicholson Graham & Jones (“NGJ”), a firm of solicitors. NGJ were retained by Holdings in connection with the acquisition, in 1997, of an interest in Fulham Football Club (“the Club”).

Holdings is a company registered in the British Virgin Islands. Its shares are said to have been held or controlled at all material times for the ultimate benefit of Mr Mohamed Al Fayed and his family. That appears to have been common ground in the proceedings. It was common ground, also, that Holdings was established for the purposes of the acquisition.

Prior to the acquisition the Club and its premises were owned by two companies, Fulham Football Club Limited and Fulham Football Club (1987) Limited (together “the FFC companies”). The FFC companies were controlled by Ruxley Holdings Limited (“Ruxley”). Ruxley was controlled by Mr Bill Muddyman and his son, Mr Andrew Muddyman, (together “the Muddymans”). Negotiations leading to the acquisition by Holdings of an interest in the Club were conducted, in practice, between Mr Al Fayed (through representatives) and the Muddymans.

The primary issue in the proceedings was whether NGJ were liable for breach of duty in failing to give effect to the parties’ intentions (and, in particular, to the intentions of Holdings and Mr Al Fayed) as to the extent to which Holdings or Mr Al Fayed would be entitled to subscribe for shares in the joint venture company which was to be the vehicle for the acquisition if such further subscription would have the effect of diluting the minority interest retained by the Muddymans. On that issue Holdings was successful. A secondary issue was as to the amount of the damages which Holdings had suffered as a result of that breach of duty. On that issue Holdings was unsuccessful: in that, on a claim for damages in excess of £7.75 million, it obtained judgment for no more than £6,750. Holdings appeals from the judge’s decision as to quantum. NGJ cross-appeal from the judge’s decision on liability. Permission to appeal and to cross-appeal was granted by this Court.

The circumstances leading to the acquisition by Holdings of an interest in Fulham Football Club are described by the judge at paragraphs [2], and [81] to [91] of his judgment, [2006] EWHC 2017 (Ch). They may be summarised as follows. At the beginning of April 1997 the Club was controlled by the Muddymans. Although the Club had been amongst the leading clubs in the Football League, it was then in the Third Division. Its ground at Craven Cottage was recognised as having development potential. A planning consent had been obtained; but this was under challenge in proceedings for judicial review. As the judge explained:

“[81] . . . The ground was in a poor state of repair, and the club's finances were in poor shape. Large sums of money would be required for any modernisation and the Muddymans did not have it. They were personally exposed in that they had guaranteed loans from Flemings to the tune of £3m. The ground was leased from the Royal Bank of Scotland but the Muddymans claimed to have an option to acquire the land for £7.5m, exercisable by 29^th May 1997 (at which point the price would go up). In short, the club needed rescuing and it needed the injection of large sums of money if it was to return to being a successful club.”

The Muddymans learnt that Mr Al Fayed might be interested in taking on the Club. By 16 April 1997 the parties had been put in touch with each other. There was a meeting on that day between the Muddymans and (on behalf of Mr Al Fayed) Mr Mark Collins and Mr Julian Cook (respectively the managing director and deputy managing director of Harrods Estates Limited). The judge explained that:

“[82] . . . From the outset there was an issue over control. The Muddymans were not prepared to transfer outright control at the outset. They regarded themselves as being guardians of football at Craven Cottage and were very concerned that the club should not be taken over by someone who would then be in a position to asset strip it.”

Nevertheless, the meeting on 16 April 1997 produced enough consensus for the matter to be taken forward. Solicitors were retained. Mr Ian Green of NGJ was to act for Mr Al Fayed and the Al Fayed interests: Mr Steven Sugar of Frere Cholmeley Bischoff, (“FCB”) was to act for the Muddymans.

Matters proceeded with a series of meetings between 16 April and 2 May 1997. Those meetings led to the final form of a letter of intent from Mr Al Fayed to the Muddymans, sent on 2 May 1997. The judge summarised what he saw as the main points in that letter:

“[91] . . .

(i)

It acknowledges the concern of the Muddymans to ensure that the ground was redeveloped and Fulham Football Club was protected and secured.

(ii)

It acknowledges the joint desire to see the club in the Premier League.

(iii)

Mr Al Fayed will make available a sum of at least £30m over the next three to four years, for the acquisition of the freehold, the redevelopment of the stadium, the running of the squad, the purchase of players, the development of commercial opportunities and the discharge of ‘certain existing liabilities’.

(iv)

Mr Al Fayed would acquire a 75% interest in the club, and the Muddymans would acquire the remaining 25% for £750,000.

(v)

The Flemings loan would be discharged out of the £30m.

(vi)

Rights of pre-emption would apply to Mr Al Fayed’s shares.

(vii)

The parties would work together to obtain a new planning permission for the redevelopment of the stadium, failing which they would implement the existing planning permission.

(viii)

The Al Fayed approach was to be kept confidential.”

For the purposes of the acquisition Mr Al Fayed (through Holdings) and the Muddymans (through Swinburn Limited (“Swinburn”), a company registered in Jersey which they controlled) were to subscribe for shares in a newly formed joint venture company, Fulham Football Leisure Limited (“Leisure”). Leisure was to acquire the FFC companies; and, through the FFC companies, control of the Club and its premises.

The authorised share capital of Leisure was divided into A Ordinary Shares of £1 each (75% in nominal value) and B Ordinary Shares of £1 each (25% in nominal value). Article 6 of the articles of association imposed important restrictions for the protection of the holders of the B Ordinary Shares, to which it will be necessary to refer in some detail. Article 10 provided that all unissued shares in the company should, before allotment or issue, be offered first on no less favourable terms to the existing members in proportion to the nominal value of the existing shares held by them. Save as expressly mentioned in the articles of association, the A Ordinary Shares and the B Ordinary Shares ranked pari passu in all respects.

The obligation to subscribe for shares in Leisure was imposed by a Shareholders’ Agreement made between Holdings, Swinburn, Mr Al Fayed, the Muddymans and Leisure. Clause 6.1.3 of the Shareholders’ Agreement provided for Holdings to subscribe for 2,249,998 A Ordinary Shares at par (which, together with the 2 shares already held, would bring its holding of A Ordinary Shares to 2,250,000); and for Swinburn to subscribe for 750,000 B Ordinary Shares at par. That gave effect to the intention of the parties that their holdings should be in the ratio 75/25.

Clause 8.1 of the Shareholders’ Agreement provided that Holdings would provide the finance from time to time required by Leisure to meet its obligations in respect of the matters described in clause 8.2: those included the purchase of the freehold and the redevelopment of the Craven Cottage Football Ground (described as “the Stadium”), the carrying on of business as a football club and the purchase of players. But the obligation to provide such finance was capped at £30 million (from which there was to be deducted the £2,249,998 subscribed by Holdings under clause 6 and any amounts provided by way of sponsorship): clause 8.3. The finance under clause 8.1 was to be provided by subscribing for interest free convertible unsecured loan notes 2017 (“Loan Notes”): clause 8.4. It is convenient to refer to the finance to be provided under clauses 6 and 8 of the Shareholders’ Agreement as “the first £30 million” or “the first tranche”.

Clauses 8.5 and 8.6 imposed restrictions on the redemption and disposal of those Loan Notes. The effect of those restrictions was that the Muddymans (through Swinburn) could prevent redemption of the Loan Notes unless and until Leisure was wound up. The restrictions protected valuable call options in respect of the Loan Notes conferred on the Muddymans by clauses 8.10 and 8.11.

Put shortly, the first of those call options (clause 8.10) enabled the Muddymans to acquire Loan Notes from Holdings (up to a maximum of 25% in nominal value of the notes in issue) for an aggregate consideration of £1. That option was exercisable on a flotation of the company or on the disposal by Holdings of any A Ordinary Shares to a person who was not a connected person within the provisions of the articles of association (an event described in the Shareholders’ Agreement as an “Exit”). The second of those call options (clause 8.11) was exercisable on a noteholder exercising conversion rights under the Loan Notes: in that event the Muddymans were entitled to acquire from that noteholder 25% of the shares allotted on conversion; again for an aggregate consideration of £1. The call options provided, in substance, deferred consideration for the purchase from the Muddymans of a majority interest in the Club, should Mr Al Fayed choose to exit from the joint venture in the future. They ceased to be exercisable if a resolution was passed or an order made for the winding up of Leisure.

Clause 11 of the Shareholders’ Agreement provided for the redevelopment of the Stadium. Leisure was to use reasonable endeavours to obtain as soon as reasonably possible planning consent (defined as “Satisfactory Permission”) for a development (defined as “Optimum Development”) to provide a stadium with a seating capacity of 25,000 seats at a building cost not exceeding £15 million. Once Satisfactory Permission had been obtained, Leisure was to complete the Optimum Development as soon as possible thereafter: clause 11.7. If Satisfactory Permission were not obtained by 30 November 2000, Leisure would redevelop in accordance with an existing planning consent (“Existing Planning Permission”) dated 15 August 1996. Unless the Muddymans agreed, there was to be no development or change of use in respect of the Stadium other than the Optimum Development or (after 30 November 2000) by implementation of the Existing Planning Permission.

Clause 12 of the Shareholders’ Agreement granted to the holders of the B Ordinary Shares a call option over the A Ordinary Shares. The option was exercisable on the happening of the events described in clause 12.1: in particular, on a breach by Holdings or Leisure of the provisions in clause 11 for the redevelopment of the Football Ground or if Holdings or Leisure commenced winding up. The price to be paid for the A Ordinary Shares was “the fair selling value” of those shares; to be determined under the complex provisions set out in clauses 12.8 to 12.14.

Clause 16 of the Shareholders’ Agreement provided for termination of that agreement on the happening of any of the events described in clause 16.1. Those events included the winding up of Leisure; and included the Muddymans ceasing to hold at least 10% in nominal value of the issued share capital of Leisure. Termination of the Shareholders’ Agreement did not affect the Muddymans’ accrued rights (if any) under the call options in respect of the Loan Notes, conferred by clauses 8.10 and 8.11.

Clause 9 of the Shareholders’ Agreement made provision for the further funding of Leisure by Mr Al Fayed. The clause applied after Leisure had received the first £30 million. Clause 9.2, read with clause 9.3, made provision for Holdings, or Mr Al Fayed, with the prior agreement of the Muddymans, to invest further up to a maximum of £30 million: that is to say, up to an amount which (taken with the finance to be provided under clauses 6 and 8) did not exceed £60 million in all. Investment finance under clause 9.3 was to be provided as to 92.5% by way of subscription for Loan Notes at par; and as to the remaining 7.5% by subscription at par for A Ordinary Shares. It is convenient to refer to finance provided under clauses 9.2 and 9.3 as “the second £30 million” or “the second tranche”.

Clause 9.6 of the Shareholders’ Agreement provided (inter alia) that, on the issue of shares to Holdings (or Mr Al Fayed) under clause 9.3, Swinburn would be entitled (but not obliged) to subscribe pro rata for B Ordinary Shares at par; reflecting its rights under article 10 of the articles of association. Clause 9.4 provided that, subject to Swinburn having exercised (to the full extent then permitted) its rights to subscribe for B Ordinary Shares under clause 9.6, the call options in respect of Loan Notes issued in connection with the first £30 million – conferred by clauses 8.10 and 8.11 – should apply mutatis mutandis to Loan Notes issued under clause 9.3 in connection with the second £30 million.

The effect of those provisions was that (with the prior agreement of the Muddymans) a further 2,250,000 A Ordinary Shares could be issued to Holdings at par on provision of the second tranche of finance. If the Muddymans (through Swinburn) exercised their rights under clause 9.6 – or under article 10 of the articles of association - to subscribe pro rata for B Ordinary Shares at par, a further 750,000 B Ordinary Shares would be issued to Swinburn; and the Muddymans’ 25% interest would be maintained. If they chose not to subscribe for further B Ordinary Shares – or not to subscribe for their full pro rata entitlement - their proportionate interest could be reduced to 14.285%: that being the proportion of the aggregate of the 4,500,000 A Ordinary Shares and the 750,000 B Ordinary Shares then in issue represented by the 750,000 B Ordinary Shares.

Clause 9.5 of the Shareholders’ Agreement made provision for the possibility that further finance over and above the first and second tranches (together “the first £60 million”) might be provided by Mr Al Fayed. The clause was in these terms:

“9.5

Any additional finance (beyond that referred to in Clause 8.1 or 9.3) to be provided by way of subscription for share capital shall be provided by subscription at par for ‘A’ Ordinary Shares of £1 each in the capital of the Company, such ‘A’ Ordinary Shares to rank pari passu in all respects with the then existing ‘A’ Ordinary Shares of £1 each in the capital of the Company.”

Although the clause does not (in terms) so provide, it is probable that the parties contemplated that, if additional finance were provided, it would be provided by Mr Al Fayed (either in his own name or through Holdings). In any event, shares could not be issued to anyone else without first being offered to Holdings: article 10 of the articles of association.

Clause 9.6 provided that, on the issue of shares under clause 9.5 (as well as on the issue of shares under clause 9.3), Swinburn would be entitled (but not obliged) to subscribe pro rata for B Ordinary Shares at par. Again, as it seems to me, that would have been the effect of article 10 in any event.

At first sight (at least) the restriction in clause 9.4 – which required that the call options conferred (referentially) by that clause could not be exercised unless Swinburn had exercised to the full extent then permitted its rights under clause 9.6 – would apply as well if Swinburn did not take the opportunity to subscribe for B Ordinary Shares at the time of an issue of A Ordinary Shares under clause 9.5 as it would if Swinburn did not subscribe for B Ordinary Shares at the time of an issue of A Ordinary Shares under clause 9.3.

As I have said, article 6 of the articles of association imposed important restrictions for the benefit of the holders of the B Ordinary Shares. Article 6(1) provided that, during such time as the B Ordinary Shares represented at least 10% in nominal value of the issued share capital of Leisure, there were a number of steps which could not be taken without the prior written consent of the holders of a majority in nominal value of the issued B Ordinary Shares. Those steps included the increase or alteration in any way of the issued share or loan capital of the company (paragraph (a)); the variation of class rights (paragraph (c)); the purchase or redemption of any loan capital (paragraph (f)); the passing of a resolution to wind up (other than in circumstances in which the company was unable to pay its debts) (paragraph (h)); any sale or disposal of the Club’s Football Ground (paragraph (k)); and a decision that the Football Ground should cease to be used as the Club’s home ground (paragraph (l)).

The effect of article 6 of the articles of association (read alone) was that, for so long as Swinburn remained the holder of B Ordinary Shares representing at least 10% of the issued share capital of Leisure, the Muddymans could block, in important respects, the exercise by Mr Al Fayed of the control which his (or Holdings’) majority shareholding would otherwise have given him. In particular they could block decisions in relation to the future of the Stadium.

The special rights conferred on the holders of B Ordinary Shares by the restriction in article 6(1) of the articles of association were dependent, of course, upon the inability of Mr Al Fayed to dilute the proportion which the nominal value of the B Ordinary Shares bore to the nominal value of the aggregate of the issued shares in Leisure by the issue of further A Ordinary Shares; or, more precisely, upon his inability to dilute that proportion to a figure below 10%. Article 6(1), itself, contained its own protection in that respect: in that Leisure could not increase its issued share capital without the prior written consent of the holders of a majority in nominal value of the B Ordinary Shares for the time being. But article 6 had to be read with the Shareholders’ Agreement.

Clause 10 of the Shareholders’ Agreement was in these terms:

“10.

RESTRICTIONS

10.1

Notwithstanding the provisions of the New Company Articles or the articles of association of any subsidiary for the time being of the Company, Swinburn, as the holder of a majority in nominal value of the issued ‘B’ Ordinary Shares in the capital of the Company, hereby consents to any matter done pursuant to this Agreement . . .”

“The New Company Articles”, in that context, meant the articles of association of Leisure to which I have referred.

It has been common ground – and, if it were not, I would so hold - that the effect of clause 6.1.3 of the Shareholders’ Agreement (whether or not that clause is read with clause 10.1) was that no further consent was required, under article 6(1) of the articles of association, to the issue of the first 2,250,000 A Ordinary Shares. Holdings was obliged, under that clause, to subscribe for the 2,249,998 A Ordinary Shares which it did not own: and, given that Swinburn and the Muddymans were parties to the Shareholders’ Agreement, it could not be said that they had not given consent to the issue of those shares for the purposes of article 6(1). And, in any event, clause 10.1 puts the point beyond argument. Further, of course, the issue of the first 2,250,000 shares did not have the effect of diluting the proportion of the issued share capital represented by Swinburn’s holding of B Ordinary Shares: clause 6.1.3 obliged Swinburn to subscribe for 750,000 B Ordinary Shares. The effect was that, when the first tranche of finance had been provided, the parties held shares in the proportion 75/25, as had been intended.

The effect of clause 9.2 of the Shareholders’ Agreement was that the second 2,250,000 A Ordinary Shares could not be issued without the consent of the Muddymans. The clause provided that, before the second tranche of finance (or any part thereof) was provided by Holdings (or by Mr Al Fayed), there must be agreement with Swinburn or the Muddymans on the question whether such further finance should be provided by way of investment finance or by way of loan. If it were agreed that the second tranche was to be provided by way of investment finance, then clause 9.3.2 provided that 7.5% of that funding should be provided by subscription for A Ordinary Shares. Save in the unlikely event that the party whose written agreement under clause 9.3.2 enabled the second tranche to be provided by way of investment finance had not been authorised by Swinburn (as the holder of the majority in nominal value of the B Ordinary Shares then in issue), it could not be said that consent had not been given to the issue of the second tranche of A Ordinary Shares. And, in that event, clause 10.1 again puts the point beyond argument.

As I have said, if, on the issue of the second 2,250,000 A Ordinary Shares, the Muddymans (through Swinburn) exercised their rights under clause 9.6 – or under article 10 of the articles of association - to subscribe pro rata for B Ordinary Shares at par, a further 750,000 B Ordinary Shares would be issued to Swinburn; and the Muddymans’ 25% interest would be maintained. If they chose not to subscribe for further B Ordinary Shares – or not to subscribe for their full pro rata entitlement - their proportionate interest could be reduced to 14.285% cent. But that would still be above the 10% required for the Muddymans to retain the rights conferred by article 6(1).

What, then, if Mr Al Fayed sought to provide additional finance over and above the first £60 million? Clause 9.5 of the Shareholders’ Agreement provided that such additional finance “shall be provided by subscription at par for ‘A’ Ordinary Shares . . .”. But that invited the question whether those additional A Ordinary Shares could be issued without the prior written consent of Swinburn (as the holder of the majority in nominal value of the B Ordinary Shares then in issue): consent which, prima facie at least, was required under article 6(1) of the articles of association. The answer to that question turned on the effect of clause 10.1 of the Shareholders’ Agreement: in particular, on whether the effect of clause 9.5 was that provision of further finance over and above the first £60 million was that the issue of A Ordinary Shares pursuant to that clause was within the phrase “any matter done pursuant to this Agreement”. If so, then the effect of clause 10.1 was that Swinburn was to be treated as having given consent (“deemed consent”) for the purposes of article 6(1) of the articles of association to the issue of A Ordinary Shares pursuant to clause 9.5 notwithstanding that, until sufficient further A Ordinary Shares had been issued under that clause, the B Ordinary Shares represented at least 10% in nominal value of the issued capital of Leisure. If not, then the additional A Ordinary Shares could not be issued without the actual consent of Swinburn under article 6(1).

If, on the provision by Mr Al Fayed of further finance over and above the first £60 million, further A Ordinary Shares could be issued without the actual prior written consent of Swinburn under article 6(1) of the articles of association, then the Muddyman interests were liable to dilution – in the sense that their proportionate interest could be reduced to below 10% - and, in practice, were likely to be diluted. In that event, the protection of minority interests provided, in other respects, by article 6(1) – in particular, the right to prevent disposal of the Football Ground – would be lost.

Protection against dilution was, in principle, afforded by article 10 of the articles of association; which provided not only (at article 10(1)) that shares should, before allotment or issue, be offered first on no less favourable terms to the existing members in proportion to the nominal value of the existing shares held by them but also (at article 10(4)) that shares to be issued to the existing holders of B Ordinary Shares should, before issue, be designated, or redesignated, B Ordinary Shares. The effect of article 10 was that the Muddymans could prevent dilution by taking up B Ordinary Shares pro rata on any issue of A Ordinary Shares under clause 9.5 of the Shareholders’ Agreement. But that protection depended on the Muddymans having the resources to take up further B Ordinary Shares; and, given the perceived (or actual) disparity between the resources available to Mr Al Fayed on the one hand and the Muddymans on the other hand, the right to prevent dilution by the subscription pro rata for B Ordinary Shares was likely to afford little or no protection against dilution in practice.

The Shareholders’ Agreement was executed on 29 May 1997. On the previous day (28 May 1997) Mr Al Fayed wrote to Mr Bill Muddyman in these terms:

“I confirm that, in the event that I inject capital into Fulham (Football Leisure) Ltd in such amount as takes its share or loan capital introduced by way of permanent investment in the Company beyond sixty million pounds (£60,000,000), I do not intend to do so in any way which will result in a compulsory dilution of your 25% interest in the Company.

This letter is given without any legal liability or restriction on me, but is intended to give you comfort regarding my long term plans concerning both the Company and Fulham Football Club.”

Completion took place on 29 May 1997, immediately following the execution of the Shareholders’ Agreement and the other agreements required to implement the transaction. Some five and a half years later, in September 2002, Mr Al Fayed (through Holdings) bought out the interests of the holders of the B Ordinary Shares (in effect, the Muddymans) for a consideration of £7.75 million. The circumstances which led to the decision to buy out the Muddymans were examined by the judge, in detail, at paragraphs [190] to [259] of his judgment. At this stage a summary will, I think, be sufficient.

As I have said, clause 11 of the Shareholders’ Agreement provided for the redevelopment of the Football Ground at Craven Cottage (the Stadium). In the years immediately following Mr Al Fayed’s acquisition of an interest in the Club, plans for redevelopment on that site were pursued. The Existing Planning Permission, which had been under challenge in 1997, was set aside following a decision of the House of Lords in July 2000. In February 2001 outline planning consent was obtained for a new design (the Snell design) then costed at £82 million or thereabouts. The need for a new, all-seater, stadium became urgent with the Club’s promotion to the Premier League at the end of the 2000/2001 season. By the spring of 2002 projected costs had increased to £100 million: it had become apparent that the scheme would not be financially viable.

At a meeting of the board of directors of Leisure in April 2002, at which the Muddymans were present, it was agreed that proposals for a site at White City, then owned by Dairy Crest Plc, should be pursued. Discussions with Dairy Crest took place and an offer to purchase was made. Leisure did not emerge as the preferred bidder. Nevertheless Mr Cook (the deputy managing director of Harrods Estates Limited) continued in his attempts to secure the White City site by seeking to persuade planning officials to favour the Club’s proposals over those of Dairy Crest’s preferred bidder. In the event his efforts did not succeed: Dairy Crest exchanged contracts with its preferred bidder in October 2002.

In parallel with the attempts to secure the White City site, Leisure entered into negotiations to sell the Craven Cottage site to Mr Nick Sutton for residential development. The judge found, at paragraph [201] of his judgment, that it was the desire to enter into the agreement with Mr Sutton (“Project Wisley”) that “acted as a trigger for the deal which bought out the Muddymans”: as he put it, at paragraph [256], “the impetus for the deal with the Muddymans came from the perceived need to do the Project Wisley (Sutton) deal”. He said this, at paragraph [258]:

“[258] I find that the Fulham team had become extremely keen, if not desperate, to do the Sutton deal, by the time of the Claridges meeting [on 13 September 2002]. This was only partly to have a contract in the bag for the purposes of pursuing the new stadium. They were also very keen to have the cash that it would generate immediately. This was the main factor in the decision to buy out the Muddymans. The decision was obviously taken by Mr Al Fayed, and it was, like many of his decisions taken in this matter, one taken quickly and without a lot of business rationalisation.”

The terms of the buy-out were reached at a meeting on 16 September 2002: an agreement was signed two days later. Put shortly, the Muddymans were to sell 1,050,000 B Ordinary Shares; leaving them with a proportionate interest of less than 10% and so removing the need for their consent under article 6(1) of the articles of association. The consideration for that sale was £7.75 million, payable in four instalments. The parties were released from all obligations under the Shareholders’ Agreement: in particular, the Muddymans gave up the benefit of the call options in respect of the Loan Notes and the right to enforce a buy-out of the A Ordinary Shares in the event of insolvency.

By September 2002 Mr Al Fayed had provided finance to Leisure in an amount of £85 million or thereabouts. Finance over and above £60 million had been provided by way of loans. The question whether he had the right to subscribe for A Ordinary Shares without the consent of the holders of the B Ordinary Shares had been raised some eighteen months earlier. In May 2001 Mr Michael Fiddy, then managing director of Leisure, had been advised by Herbert Smith that the consent of Ruxley (which had replaced Swinburn as the Muddymans’ corporate vehicle in this respect) would be required for the issue of further A Ordinary Shares. In October 2001 Mr Stuart Benson (an external legal consultant retained by Harrods Limited and Mr Al Fayed), who had become involved in reporting to Mr Al Fayed on the proposed investment in the Club, had taken advice from leading counsel. That advice, while more favourable to the view that consent was not required, recognised the strength of the contrary view. The need for consent to the issue of further A Ordinary Shares – and so the need for consent before dilution could take place – was confirmed by advice obtained by Mr Jeffrey Byrne, the Director of Legal and Business Affairs of Harrods Limited, from a second leading counsel in consultation on 13 September 2002, immediately after the Claridges meeting to which the judge had referred at paragraph [258] of his judgment.

The position as at 16 September 2002 was that Mr Al Fayed and his advisers appreciated that (for so long as the B Ordinary Shares represented more than 10% of the share capital of Leisure – as they did) Leisure could not enter into an agreement with Mr Sutton for the disposal of the Craven Cottage site without first obtaining the consent of the Muddymans (through Ruxley); and that it could not be assumed that the need for that consent could be removed by the issue of further A Ordinary Shares (so diluting the proportion of the capital of Leisure represented by B Ordinary Shares) without litigation in which failure was a real possibility.

A further factor which (as the judge found) was known to Mr Al Fayed and his advisers by 16 September 2002 was that the effect of clause 12 of the Shareholders’ Agreement – absent the right to dilute – was to impose what was, in substance, a perpetual funding obligation on Mr Al Fayed. As I have said, under that clause, the holders of the B Ordinary Shares were granted a call option over the A Ordinary Shares exercisable (inter alia) if Leisure commenced winding up. As the judge put it (at paragraph [221] of his judgment) “if Mr Al Fayed ceased to fund the enterprise then Leisure would not be able to pay its debts, it would be insolvent within the meaning of clause 12 and the Muddymans would be able to buy Mr Al Fayed out”. Although they would have to pay “the fair selling value” for those shares, there were various adjustments to be made which would make a sale on those terms commercially unattractive to Mr Al Fayed. So, in order to avoid that consequence, Mr Al Fayed would be forced to continue funding. The judge found (at paragraph [257] of his judgment) that the effect of clause 12 of the Shareholders’ Agreement had been explained to Mr Al Fayed by Mr Benson in 1997; and, further, that the effect of the clause was appreciated by Mr Robert Fallowfield, the Financial Controller of the subsidiary and associate companies of the Harrods Holdings group, in April 2002 who drew it, again, to Mr Al Fayed’s attention.

The judge explained (at paragraph [241] of his judgment) that, once the buy-out agreement had been concluded, on 18 September 2002, “the conditional contract with Mr Sutton could be, and was, entered into . . .”. £15 million, the consideration under that contract, was received. He went on to say this:

“[241] It can therefore be concluded that the deal between the Muddymans was done in order to get control of the club, and in particular to permit the Sutton deal, rather than specifically to acquire the right to be able to inject further funds as share capital. The injection of funds in that way would have been a means to the same end, but it was not an objective in itself.”

After referring to the other factors which I have mentioned – the absence of any clear right to dilute and the effect of clause 12 of the Shareholders’ Agreement – the judge expressed a similar view at paragraph [259]:

“[259] These factors combined to lead Mr Al Fayed to make one of his quick decisions to authorise his officers to negotiate a buy-out of the Muddymans. He never liked having someone else in the club with a significant interest and powers to prevent him doing what he saw fit – it was not his style to have that situation. It was not a decision which was much debated or rationalised (though the idea had been gestating in various members of the team for many months). Nor was any valuation exercise done. At this point Mr Al Fayed wanted to get rid of the Muddymans’ potential to control and veto. The timing and pressure came from the Project Wisley deal and the need for cash in the business. Had it not been for that deal waiting in the wings, it is unlikely that the buy-out would have taken place then. It is not possible to work out when it would have happened if at all.”

Paragraph [260] of the judgment provides a convenient summary of Holdings’ claim in the proceedings:

“[260] The claimant puts its case quite simply. The claimant is entitled to the sum of money that would put it in the position it would have been in had it not sustained the wrong. Had the defendants not been negligent the Shareholders’ Agreement would have permitted Mr Al Fayed to dilute the Muddymans once he had put £60m into the club (if they had not chosen to match his investment pro rata). On the facts the right to dilute would have been invoked before September 2002. As it was it could not be invoked because Mr Al Fayed did not have it. In September 2002 what he did was in essence to put himself in an equivalent position to having the right by buying shares from the Muddymans (to reduce them below 10%) and expressly bringing the Shareholders' Agreement to an end. In doing so he acted reasonably. He is therefore allowed to recover that cost as the cost to himself of putting himself in the position he would have been in had the solicitors performed their duty. So far as relevant his loss is reasonably foreseeable and not too remote. The type of damage that is foreseeable in this case, and which occurred, is that Holdings would want to remove the Article 6 restrictions but would be unable to do so by dilution. . . . In addition to that substantial head of damages, Holdings also claims legal costs relating to consulting leading and junior counsel, and solicitors, in the last 3 or 4 months of 2001. ”

As I have said, the judge held that NGJ were negligent in relation to the drafting of the Shareholders’ Agreement. NGJ cross- appeal on that issue: the issue of liability. The judge rejected Holdings’ claim to damages based on what was said to be the cost of putting itself in the position in which it would have been but for that negligence. The judge allowed the claim for legal costs in respect of the (relatively) modest amount of £6,750: that is to say in the amount of the fees paid to the two leading counsel from whom advice was taken as to the effect of clause 10.1 in the Shareholders’ Agreement, in the circumstances which I have described. He rejected the claim for substantially greater legal fees incurred in instructing solicitors. Holdings appeals on those issues: the issues of quantum.

It is appropriate, first, to consider the cross-appeal on the issue of liability. If NGJ succeeds on that issue, the issues of quantum do not arise.

It has been common ground in these proceedings that clause 10 of the Shareholders’ Agreement did not give Holdings the right to invest in Leisure (over and above the first £60 million) by way of subscription at par for A Ordinary Shares; that is to say, it has been common ground that the effect of clause 10.1 of the Shareholders’ Agreement, when read with article 6(1) of the articles of association, was that (for so long as the B Ordinary Shares in issue represented not less than 10% of the issued share capital of Leisure) Holdings could not subscribe for A Ordinary Shares under clause 9.5 of the Shareholders’ Agreement without the prior written consent of the holder or holders of a majority in value of the B Ordinary Shares. The allegations to that effect, made in paragraphs 35 and 36 of the amended particulars of claim, are admitted – and, indeed, averred – at paragraphs 69 and 70 of the re-amended defence.

The allegation of breach of duty on the part of NGJ is pleaded at paragraph 54 of the amended particulars of claim under five heads. It is, I think, sufficient to refer only to one those heads: that NGJ failed to draft clauses 9 and 10 of the Shareholders’ Agreement so that they reflected accurately, clearly and unambiguously their instructions and understanding as to what had been agreed - “namely that Holdings should have the right to invest in Leisure beyond £60 million by way of subscription at par for ‘A’ Ordinary Shares so that, unless the Muddymans exercised their right to subscribe for ‘B’ Ordinary Shares pro rata, then their shareholding would be diluted”. That allegation is denied, at paragraph 91 of the re-amended defence: in particular, “It is denied that what was alleged to have been agreed was in fact agreed”.

In those circumstances the issue for the judge, on liability, was whether NGJ had been instructed (or had understood) that it had been agreed between Mr Al Fayed and the Muddymans that Holdings would have the right to invest in Leisure (over and above the first £60 million) by way of subscription at par for A Ordinary Shares.

The judge determined that issue in favour of Holdings. He reached that conclusion after a careful and detailed examination of the negotiations between the parties and of the various drafts of the documentation which had passed between their respective solicitors. In the course of that examination he identified, as the genesis of the provision that became clause 10 in the executed Shareholders’ Agreement, a clause (clause 9) in the third draft of that agreement. That draft had been prepared by Mr Green, at NGJ, following a meeting between the parties and their representatives on 14 May 1997. The judge recognised – correctly, in my view – that the issue which he had to determine turned on the circumstances in which significant provisions formerly in the draft clause came to be deleted some two weeks later, following a meeting on 27 May 1997, very shortly before the documents were executed. Before describing the course of negotiations it is, I think, helpful to set out the evolution of clause 10 from the earlier draft.

Clause 9 in the third draft of the shareholders’ agreement was in these terms:

“9.

RESTRICTIONS

9.1

Notwithstanding the provisions of the New Company Articles or the articles of association of any subsidiary for the time being of the Company, Belloc, as the holder of a majority in nominal value of the issued ‘B’ Ordinary Shares in the capital of the Company, hereby consents to the following:

9.1.1

any matter done pursuant to this Agreement, the Acquisition Agreement or the Property Agreement; and

9.1.2

an increase in the authorised and issued share capital of the Company and the issue of shares in the capital of the Company, in each case in accordance with the New Company Articles, at any time after Investco shall have provided finance pursuant to Clause 8.1 of an aggregate amount equal to at least the maximum amount of finance it is obliged to provide pursuant to Clause 8.3.

9.2

For the purposes of sub-clause 9.1.2, Investco shall be deemed to have provided finance pursuant to Clause 8.1 of an aggregate amount equal to at least the maximum amount of finance it is obliged to provide pursuant to Clause 8.3 notwithstanding any subsequent repayment of any such finance.”

In that context, “Belloc” is a reference to Belloc Limited, a Jersey company controlled by the Muddymans. Its role in the transaction was, shortly thereafter, taken by Swinburn. “The Company” and “Investco” were, respectively, Leisure and Holdings. Clauses 8.1 and 8.3 in the third draft were in the same terms (so far as material) as clauses 8.1 and 8.3 in the executed document: that is to say, when read with clause 8.4, they required Investco to provide the balance of the first £30 million by way of loan capital.

There was no provision in the third draft of the shareholders’ agreement which corresponded to that which became clause 9 (Further Finance) in the executed document: the third draft contained no provision for the second tranche of £30 million. When the new clause 9 (Further Finance) was introduced – in the fourth draft – the clause which had been clause 9 in the third draft became clause 10 (Restrictions). But – save for the substitution of Swinburn for Belloc (in clause 10.1) and of a reference to clause 9.3 in place of the reference to clause 8.3 (in clause 10.2) – the wording of the clause remained the same.

The judge noted (at paragraph [31] of his judgment) that it was common ground that had clause 10.1.2 remained in the form in which it was in the fourth draft of the shareholders’ agreement Mr Al Fayed would have had the right to provide additional finance (over and above the first £60 million) by way of subscription at par for A Ordinary Shares without the need for written consent under article 6(1) of the articles of association. Indeed, on the face of clause 10.1.2 as it stood in the fourth draft, he would have been entitled to do so after he had met his obligations under clause 8.1 in respect of the first £30 million; but that would have been inconsistent with the new clause 9 (Further Finance) – which made its own provision for the manner in which the second £30 million was to be provided.

The fourth draft had been prepared by Mr Richard Talbot, a partner in NGJ, over the weekend of 23 to 26 May 1997. Mr Talbot had taken over responsibility for the documentation from Mr Green a few days earlier. The fourth draft was then discussed at one or more meetings on 27 May 1997. Following that meeting or meetings, Mr Talbot made amendments to the fourth draft: in particular, he made amendments to clause 10. He struck out clause 10.1.2, and incorporated clause 10.1.1 into the body of clause 10.1. He struck out clause 10.2. For clarity, I set out the text of clause 10 (as it stood in the fourth draft) with those amendments shown:

“10

RESTRICTIONS

10.1

Notwithstanding the provisions of the New Company Articles or the articles of association of any subsidiary for the time being of the Company, Swinburn, as the holder of a majority in nominal value of the issued ‘B’ Ordinary Shares in the capital of the Company, hereby consents to the following:

10.1.1

any matter done pursuant to this Agreement, the Acquisition Agreement or the Property Agreement; and

10.1.2

an increase in the authorised and issued share capital of the Company and the issue of shares in the capital of the Company, in each case in accordance with the New Company Articles, at any time after Investco shall have provided finance pursuant to Clause 8.1 of an aggregate amount equal to at least the maximum amount of finance it is obliged to provide pursuant to Clause 8.3.

10.2

For the purposes of sub-clause 9.1.2, Investco shall be deemed to have provided finance pursuant to Clause 8.1 of an aggregate amount equal to at least the maximum amount of finance it is obliged to provide pursuant to Clause 9.3 notwithstanding any subsequent repayment of any such finance.”

The clause, as amended, became clause 10 in the Shareholders’ Agreement as executed. Clause 10.1 was not re-numbered, notwithstanding the deletion of clause 10.2.

The judge observed, at paragraph [142] of his judgment, that NGJ had advanced a positive case to explain the deletion of clause 10.1.2 from the fourth draft of the shareholders’ agreement. It was said that, at a meeting on 27 May 1997, the Muddymans requested the removal of Mr Al Fayed’s right (or, more accurately, his power) to dilute the holding of B Ordinary Shares in the event that he invested monies over and above the first £60 million; a right or power he was given by clause 10.1.2 of the fourth draft. That request, it was said, was acceptable to Mr Al Fayed; and, accordingly, clause 10.1.2 of the draft was deleted. There was, then, no consent in the Shareholders’ Agreement to the issue of A Ordinary Shares: there was nothing to prevent article 6(1)(a) of the articles of association having full effect.

The judge rejected NGJ’s case that clause 10.1.2 had been deleted from the fourth draft of the shareholders’ agreement at the request of the Muddymans. He held (at paragraph [189] of his judgment) that “the deletion of the crucial parts of clause 10 were done without a request from the Muddymans to remove the right to dilute, without an appreciation of the consequences, and without the instructions of Mr Al Fayed or his representatives. It was, in effect, an accident”.

NGJ challenge the reasoning which led the judge to that conclusion. In order to address that challenge, it is necessary to examine the course of the negotiations leading to the meeting or meetings on 27 May 1997; to examine the evidence as to what was (and was not) agreed at those meetings; and to examine the circumstances in which, following 27 May 1997, Mr Talbot made the amendments to the fourth draft that he did.

The judge made an important finding of fact as to what had been agreed at a meeting on 20 May 1997. In order to set that meeting in context it is necessary to refer to the events, following the letter of intent sent on 2 May 1997, which led up to that meeting. They are described by the judge at paragraphs [92] to [108] of his judgment and may be summarised shortly:

There was a further meeting between the parties’ representatives on 20 May 1997, attended (on behalf of Mr Al Fayed) by Mr Griffiths, Mr Benson and Miss Brankin. Mr Green was not able to be present. Miss Brankin and Mr Mossheim took notes. The judge found that, by the end of that meeting:

“[114] . . . the essence of the deal was that once £60m had been provided by Mr Al Fayed the normal company share issuing rules should apply so that if the Muddymans did not keep pace with him their shareholding would become diluted. . . . ”:

But he went on to say, at paragraph [117], that the focus of the meeting was “much more on the second £30m”. As he put it:

“[117] . . . What happened after that £60m was not, I find, the subject of a lot of deliberation. The thrust of the evidence was, and I find, that no-one at that stage anticipated with any great degree of seriousness that Mr Al Fayed would invest more than £60m. It was clearly referred to, because there had been a discussion about it between Mr Al Fayed and the Muddymans, but in reality it was way down the scale of likelihood. What was left in relation to that was effectively a default situation in which the parties reverted to the normal company law provisions governing the issue of shares, albeit tempered by what was ultimately the letter of intent.”

Mr Green gave effect to the consensus as to the second £30 million that had emerged by the end of the meeting on 20 May 1997 in a new draft clause 9 (Further Finance) of the proposed shareholders’ agreement. He sent that new clause to Mr Sugar on 21 May 1997. He also sent the new clause to Mr Griffiths on the same day, with an explanatory letter. After explaining the effect of the new draft clause, that letter went on:

“(d)

If finance in excess of £60 million is to be provided, then this can be done by way of a straight share issue and the Muddymans will be entitled to participate proportionately. In other words, in order to maintain the 75:25 [ratio] of Ordinary Shares, the Muddymans will have to put in £1 for every £3 put in by the Chairman.”

That would have been the effect of the new clause 9.4 (as it then was) – the clause which became clause 9.5 in the fourth draft and in the executed Shareholders’ Agreement - read with the existing clause 9 (Restrictions) in the third draft – the clause which became clause 10 in the fourth draft. The judge noted that was accepted by NGJ.

As I have said, on or about 21 May 1997 Mr Green handed over responsibility for the documentation to Mr Talbot. Mr Talbot attended a meeting of the parties on 22 May 1997. The judge found (at paragraph [124] of his judgment) that, by then, Mr Talbot had read into the transaction and appreciated that, on the documentation as it stood, Mr Al Fayed had the power to dilute the minority shareholding once the first £60 million had been provided. Mr Talbot attended a further meeting with Al Fayed representatives, on 23 May 1997, to discuss the most tax efficient way of introducing monies that were not to be introduced as share capital: the decision was to introduce those monies as convertible interest free loan stock: (paragraph [128] of the judgment).

Following those meetings, Mr Talbot prepared the fourth draft of the shareholders’ agreement and other documentation. He sent the new drafts to the parties and their advisers on 25 May 1997. The judge summarised the material changes at paragraph [129] of his judgment. Clause 8 provided for Mr Al Fayed to provide the first £30 million by way of Loan Notes (as defined): that was to give effect to the proposal discussed on 23 May 1997. The new clause 9.1 provided that clause 9 should apply after Newco should have received all finance provided for in clauses 6 and 8. Clauses 9.2 and 9.3 were in the terms, or substantially in the terms, of the corresponding clauses in the Shareholders’ Agreement as executed. Clause 9.5 was in much the same terms as sub-clause 9.4 in Mr Green’s draft of 21 May 1997.

“9.5

Any additional finance (beyond that referred to in clause 9.3) to be provided by way of subscription for share capital or to be capitalised shall be provided by subscription at par for or shall be capitalised at par into (as the case may be) ‘A’ Ordinary Shares of £1 each in the capital of the Company, . . .”

Clauses 9.6 to 9.8 contained provisions formerly in clauses 9.5 to 9.7 of the 21 May 1997 draft: these gave the Muddymans the opportunity to subscribe at par for B shares in the company (but without obliging them to do so) at the same time as any A shares were issued to the Al Fayed interests pursuant to clauses 9.3 and 9.5.

It is clear that there was a meeting on 27 May 1997 attended by the lawyers on both sides with their clients or the clients’ representatives. The judge found that there may have been a second “lawyers only” meeting: but nothing turns on that. He observed (at paragraph [134] of his judgment) that: “So far as the oral evidence of this meeting or these meetings went, no-one has any real or useful recollection of it”. In those circumstances, as he said (at paragraph [135]), the judge “had to rely on such documentary evidence as there is, and the probabilities, in order to work out what happened or did not happen.” He found some assistance in that task from subsequent events. At paragraphs [136] and [137] he summarised matters which were agreed at the meeting. It is not, I think, necessary to rehearse each of those matters in this judgment. It is enough to note that the judge was satisfied that “something was said” about what was then clause 10 (Restrictions) in the fourth draft.

Holdings’ case before the judge was that what was discussed on 27 May 1997 was the need to amend what was then clause 10 in order to take account of the provisions in clause 9 in respect of the second £30 million. As I have pointed out, clause 10.1.2, as it then stood, purported to give deemed consent to an increase in the authorised and issued share capital of Newco and the issue of shares in the capital of the Company at any time after Investco should have provided the first £30 million: that was inconsistent with the provisions in relation to the second £30 million which had been introduced in the new clauses 9.2 and 9.3. Clause 10.2 was ineptly drafted, in that clause 9.3 did not require Investco to provide the second £30 million; and was, in any event, inconsistent with clause 8.5, which provided that loans repaid (or Loan Notes redeemed) were to be deducted in determining whether the given amount of finance had been provided.

The case advanced by NGJ, as I have said, was that, at the meeting on 27 May 1997, the Muddymans had required the removal of Mr Al Fayed’s right to subscribe for A Ordinary Shares without consent on providing additional finance over and above the first £60 million; and that Mr Al Fayed was willing to accede to that requirement. As to that, the judge observed:

“[143] This positive case of the defendants is not supported by any direct oral evidence of any participant. Nor is it supported by any note made by anyone. . . . ”

He acknowledged that “those two points would normally be pretty fatal to such a positive case”; but went on to say this:

“[143] . . . but their effect is significantly attenuated in the present case by the fact that no-one I heard has any real recollection of any detail at all, including detail of important agreements that it is common ground were made, and it is apparent that other significant alterations which it is accepted were agreed are not reflected in any separate note. The effect of the fact that this was a very serious amendment with effects that have been seen to be extremely damaging, which might be thought to point away from such an amendment being made un-noted and un-remembered, is attenuated both by the matters that I have just referred and by the fact that at the time the prospects of Mr Al Fayed providing more than £60m of finance were not seen as particularly great, and it is quite possible that they were vested with sufficiently little significance that it makes it more explicable that the right to dilute was surrendered.”

Nevertheless, the judge reached the conclusion (first expressed at paragraph [144] of his judgment) that the amendments to clause 10 of the fourth draft of the shareholders’ agreement – in so far as they removed the power to dilute which had hitherto been provided for in the documents - were not made as a result of a requirement by the Muddymans at the meeting on 27 May 1997; and were not agreed between the parties at that meeting. It was more likely, he thought, that Mr Talbot had “accidentally” achieved that result by making the deletions that he did, following that meeting.

Completion took place at the end of a long meeting which commenced on 28 May 1997 and extended into the following day. The judge described the meeting (at paragraph [145] of his judgment) as one which “took on the character of a continuing negotiation”. He analysed, carefully and in detail, the matters which were agreed or conceded at that meeting. He did so in order to address the submission, made on behalf of NGJ, that there was a continuing pattern of concessions which pointed to the likelihood of Mr Al Fayed having conceded the power to dilute the minority shareholding which (on the basis of the fourth draft) he would otherwise have enjoyed after he had provided the first £60 million.

The judge accepted that submission in principle. He said this:

“[148] . . . What is significant for these purposes is that provisions were added which materially strengthened the hand of the Muddymans, and Mr Al Fayed was prepared to allow them.. . .”

And, further:

“[149] . . . What is significant, for the purposes of this action, is that the Muddymans were not taking whatever deal happened to be on offer – they were negotiating hard (contrary to the impression that Mr Al Fayed sought to give) and Mr Al Fayed was making concessions – he was not pressing that hard. I find that this demonstrates that he very much wanted the club and was prepared to make a lot of concessions to achieve that. He would not pay any price, but he was prepared to go a long way. This was clearly not a commercial transaction for him. That explains the concessions, and makes it more likely than it otherwise might have been that he would make the concession which the defendants say that he made about the right to dilute once £60m had been lent. I have borne that firmly in mind.”

But that did not, of itself, provide the answer to the question – posed by the judge at paragraph [158] of his judgment – “how did the right to dilute come about?”.

The judge gave his answer to that question at paragraph [186] of his judgment:

“[186] . . . I find that the deletion of the crucial parts of clause 10 were done without a request from the Muddymans to remove the right to dilute, without an appreciation of the consequences and without the instructions of Mr Al Fayed or his representatives. It was, in effect, an accident. It may be that Mr Talbot thought that clause 9.5 preserved the right to have shares once £60m was reached (though that is not his evidence now) but it is not possible to reconstruct his thought processes plausibly. Nor is it necessary. The right was there in the documentation until 27^th May; it was removed on that day and stayed removed; no reason exists for removing it, and no instructions were given to permit its removal. It was, as I have said, an accident. However, it was still negligent. The fact that it occurred should in no way be taken to detract from the conscientiousness and thoroughness of Mr Talbot. Such things happen, and in some ways are understandable in a fast-moving and complex transaction such as this, but it was negligent nonetheless. ”

I do not understand the judge – in referring to the deletion of words from clause 10 as it stood in the fourth draft as “an accident” - to mean that Mr Talbot did not intend to delete those words; or did not appreciate that those words had been deleted. The judge meant, I think, that the deletion of the words was an accident or mistake in the sense that, although Mr Talbot intended to delete the words which he did delete and did so knowingly, he did not appreciate what the effect of deleting those words would be: had he appreciated the effect that the deletion of clause 10.1.2 in the fourth draft would have on the rights of his clients, Mr Al Fayed and Holdings, he would not have made that deletion. But that, of course, was not Mr Talbot’s evidence; nor was it the case advanced on behalf of NGJ. Their case was that Mr Talbot knew what he was doing; knew the effect that the deletion of clause 10.1.2 would have; and did what he did on instructions.

It is pertinent, in that context, to note what the judge saw as the effect of the documents in the form in which they were executed. He said this:

“[157] . . . As [the executed documents] stand, once Mr Al Fayed had provided £60m of financing he could continue to lend by way of unsecured loan, but he could not acquire more share capital without the consent of the Muddymans. He therefore did not have the opportunity of increasing his proportionate shareholding by taking more shares in circumstances in which they did not wish to subscribe for a proportionate shareholding. He therefore did not have the opportunity of diluting their shareholding, and therefore lost the opportunity of reducing their shareholding to below 10% and removing their minority shareholder protections and bringing most of the consequences of the Shareholders’ Agreement to an end. The consequences of this are said to be more serious by virtue of the provisions of the buy-out provision (clause 12), because Mr Al Fayed was effectively locked in to continuing to fund on pain of losing his investment under clause 12 if he did not; and since he could not bring this position to an end by diluting the Muddymans so as to bring the Shareholders’ Agreement to an end he was locked in in perpetuity. . . .”

The judge set out the process of reasoning which led him to reach his decision on liability at paragraphs [161] to [185] of his judgment. He began by explaining why he found little or no assistance either in the oral evidence or in the nature of the transaction. He held that:

In the circumstances that neither the oral evidence of those at the meeting on 27 May 1997, nor the nature of the transaction itself, provided any help on the question whether the concession had been sought or agreed, the judge directed himself that the answer had to be found in an examination of the documents and in what he described as “the rest of the probabilities” (paragraph [165]). He reminded himself that the overall burden of proof lay on Holdings, as claimant. But, in the circumstances that the right to dilute was in the documentation up until the meeting of 27 May 1997, was removed by Mr Talbot after that meeting and should not have been removed without good reason, he held that it was for NGJ – who asserted that there was good reason for removing that right – to make good that assertion. As the judge put it:

“[165] . . . The ‘good reason’ is asserted by the defendants and they therefore effectively have to prove it on a balance of probabilities.”

The judge directed himself that the starting point, for the examination of the documents and the determination of probabilities, was that (as he found):

“[166] . . . the parties did indeed agree prior to 22^nd May that in the event of the financing reaching £60m then any further financing by Mr Al Fayed could, if he wished, be by way of taking further shares. There was to be no anti-dilution mechanism in respect of those shares, other than the Muddymans’ company law rights to keep pace if they wished and if they could afford it. Mr Green’s evidence was clear on this, and it is consistent with his letter of 19^th May. The terms which Mr Talbot then drafted gave effect to that by the consent in the consent provision. That was therefore the position at which the parties had arrived.”

The judge found that there was nothing in the documentation to support NGJ’s case that, on 27 May 1997, the Muddymans had sought to vary the consent provision (in clause 10.1.2 of the fourth draft of the shareholders’ agreement) so as to introduce protection against dilution after the first £60 million had been provided. In particular:

Assistance as to the understanding of the Muddymans and their advisers (none of whom gave evidence at the trial) could be obtained from a letter written by Mr Sugar to Mr Benson on 15 January 2001. After setting out the material parts of that letter (at paragraph [177]), the judge observed:

“[178] What is significant about this letter is what it does not say. It is a letter which is intended to put forward a case that his clients’ consent was required to alterations of the share capital. It makes a point on construction, but it also sets out some historical material. What it does not say is that there was a specific request to remove the right to dilute (achieved by reinstating the consent requirement) during the negotiations. If Mr Talbot’s reconstruction of events were right then the background would have included a specific request (acceded to) that the right to dilute be removed. Furthermore, since that was backtracking on what had previously been agreed, one might have thought that the Muddymans and/or Mr Sugar would have remembered it. Mr Sugar even refers to his own markings against clause 10. Yet he does not refer to any such request. That is significant evidence that the events did not occur. . . .”

But the judge acknowledged that the force of that point was reduced by the fact that that letter was written some three and a half years after the relevant events, “when details of this complex negotiation will have faded from the memory”. As an example of the frailty of memory he noted that (when that letter was written) both the Muddymans and Mr Sugar “seem to have forgotten about the letter of comfort”.

The judge found further support for the view that there had been no request for protection against dilution after the first £60 million in the treatment of clause 9.5. The genesis of that clause was clause 9.4 in the 21 May draft prepared by Mr Green. In that context, it governed the provision of finance (“additional finance”) over and above the first £60 million. It became clause 9.5 in the fourth draft; and, when read in conjunction with clause 10.1.2 in that draft, was capable of having effect without qualification. But clause 9.5 ceased to be apposite once clause 10.1.2 had been deleted: for the reason that, in the absence of the deemed consent for which clause 10.1.2 provided, additional finance over and above the first £60 million could not be provided by subscription at par for A Ordinary Shares without the actual consent of Swinburn or the Muddymans under article 6(1) of the articles of association. So, as the judge pointed out (at paragraph [184] of his judgment), “it made little sense to leave it there if the right to dilute had been removed”. The judge went on to say this:

“[184] . . . The natural way of achieving the removal would have been to have removed clause 9.5 (whether or not parts of clause 10 were also removed). Yet it was left in the document. The next day it was actually amended during the completion meeting. . . .”

The judge noted that Mr Talbot, in his oral evidence, had suggested that clause 9.5 continued to perform a useful purpose in the Shareholders’ Agreement as executed, notwithstanding the removal of the right to dilute: in that it defined the class of shares (A Ordinary Shares) which would be issued in the event that there was an issue of shares in respect of investment over and above the first £60 million. The judge did not find that suggestion a plausible explanation of Mr Talbot’s thought process at the time. As he put it:

“[184] . . . The clause is indeed something of a waif if there is to be no right to dilute, and was an obvious candidate for removal if the right to dilute were being removed.”

The retention of clause 9.5 in the Shareholders’ Agreement after Mr Talbot had deleted clause 10.1.2 from the fourth draft weighed against Mr Talbot’s case as to what had happened at the meeting on 27 May 1997.

The judge found little assistance in the letter of comfort. He acknowledged that, if there had been agreement, on 27 May 1997, to the effect that Mr Al Fayed was not to have power to dilute once the first £60 million had been provided, then the letter of comfort would have been otiose: Mr Al Fayed could not do that which, in that letter, he was assuring Mr Bill Muddyman he would not do. The judge observed:

“185] I do not find this a particularly compelling factor. It is not at all clear when the document was handed over. It was not referred to in the completion agenda (a point which might said to assist Mr Talbot's case) so it is unlikely that Miss Brankin asked for it. It might have been handed over at the meeting, as an additional document which was available, or it might have arrived later. Whichever it was, I can quite imagine circumstances in which, in this constantly evolving and urgent transaction, the logical necessity or redundancy of it would have been overlooked by Mr Talbot even if his case on dilution were correct. . . . The document is, of course, consistent with Holdings’ case, but it is not of any real probative weight in establishing it, in my view. ”

The judge accepted that Mr Talbot did not point out to Mr Benson or Mr Griffiths, on 28 May 1997, the effect of the amendments which he had made to clause 10 of the fourth draft. But that, in the judge’s view, was because Mr Talbot did not appreciate the effect of what he had done. Given that conclusion, the judge did not find it necessary to go on to consider what he described as “the consequences of an alternative possible finding, namely that Mr Talbot did the amendments deliberately but failed to explain the amendments to, and get instructions on, the amendments”. Again it is, I think, clear that the judge’s reference to amendments done, or not done “deliberately” is to be understood as a reference to Mr Talbot’s appreciation, or lack of appreciation, of the effect of the amendments. There was no suggestion, in the present case, that Mr Talbot did not know that the amendments had been made or that he did not intend to make them.

Holdings obtained permission to appeal on the issues of quantum on 22 December 2006. NGJ filed a respondents’ notice on or about 13 February 2007. In that notice NGJ appealed (by way of cross-appeal) from paragraph 1 of the order of 31 July 2006. Although the grounds of that appeal are set out in the respondents’ notice under six paragraphs, the skeleton argument filed with that notice makes it clear that they fall under two heads: (i) that the judge erred in holding, at paragraphs [160] and [165] of his judgment, that the burden was on NGJ to prove that the right to dilute (conferred by clause 10.1.2 in the fourth draft of the shareholders’ agreement) was deleted by Mr Talbot otherwise than by mistake; and (ii) that, on the basis of his findings of primary fact (and adopting a correct approach to the burden of proof), the judge should have held that Holdings had not established that NGJ were negligent or that Mr Talbot had deleted the right to dilute by accident.

I have already summarised the judge’s observations in paragraph [165] of his judgment; but, given the importance which NGJ attach to that paragraph, it is appropriate to set it out in full:

“[165] Since the direct oral evidence and the plausibility or implausibility of the deal itself are not directly helpful in this matter, I therefore have to turn to the documents and the rest of the probabilities in order to ascertain whether the defendants are right in their version of events. That is, in my view, the right way round of putting matters notwithstanding that technically the claimants have the overall burden of proof in this case. The rights were in the documentation up to the meeting of 27^th May, and they were then removed. Unless there is a good reason for that then they should not have been removed. The ‘good reason’ is asserted by the defendants and they therefore effectively have to prove it on a balance of probabilities.”

At paragraph [160] of his judgment the judge had said this:

“[160] There is no big point that has assisted me in determining this conflict. Rather, there are various points which cumulatively tend to point in favour of the claimant’s case rather than that of the defendants. Overall, for the reasons appearing below, I think that the defendants fail to establish the probabilities they rely on, and that the probabilities point the other way.”

It is said that, in those two paragraphs, the judge “expressly and wrongly reversed the burden of proof”.

It is not in dispute that the burden of proving its case – that NGJ (through Mr Talbot) acted negligently in failing to draft clauses 9 and 10 of the Shareholders’ Agreement so that they reflected accurately, clearly and unambiguously their instructions and understanding as to what had been agreed – lay on Holdings throughout the proceedings. Nor, as it seems to me, can it be said that the judge failed to appreciate that: he acknowledged, in terms, that “the claimants have the overall burden of proof in this case” (paragraph [165]). But, as NGJ point out, he prefaced that acknowledgment with the word “technically”. It is necessary to examine his reasoning with care in order to be satisfied that, in using that word, the judge did not intend some gloss upon the requirement that – when all the evidence had been weighed – he had to be satisfied, on the balance of probabilities, that Holdings had established the negligent conduct on the part of NGJ that it alleged.

In order to establish its case, Holdings needed to prove that, at the relevant time, NGJ (and, in particular, Mr Talbot) knew or understood that it had been agreed between Mr Al Fayed and the Muddymans that “Holdings should have the right to invest in Leisure beyond £60 million by way of subscription at par for ‘A’ Ordinary Shares so that, unless the Muddymans exercised their right to subscribe for ‘B’ Ordinary Shares pro rata, then their shareholding would be diluted”: paragraph 54(ii) of the Amended Particulars of Claim. The “relevant time”, in that context, was the time at which Mr Talbot amended the fourth draft of the shareholders’ agreement by deleting clause 10.1.2. If Holdings could establish that fact, on the balance of probabilities, then it was entitled to succeed on the issue of negligence: it being common ground that the effect of deleting clause 10.1.2 was that the Shareholders’ Agreement, as executed, did not give Holdings the right to invest in Leisure beyond £60 million by way of subscription at par for A Ordinary Shares without the consent of the Muddymans.

The judge was satisfied on the evidence – and, as he noted at paragraph [120] of his judgment, NGJ accepted – that, following the meeting on 20 May 1997 and Mr Green’s letter of 21 May 1997, NGJ (through Mr Green) understood that it was agreed that Mr Al Fayed would be entitled to invest in Leisure after the first £60 million by subscribing for A Ordinary Shares without the consent of the Muddymans; and so would be able to dilute the proportion of the share capital represented by B Ordinary Shares. He was also satisfied – and, as he noted at paragraph [126], Mr Talbot accepted in the course of his evidence – that that remained the position following the meeting on 22 May 1997. When Mr Talbot prepared the fourth draft of the shareholders’ agreement, on or about 25 May 1997, he retained the clause (clause 10.1.2) which gave Mr Al Fayed that right. There was nothing to suggest that clause 10.1.2 was included in the fourth draft of the shareholders’ agreement by mistake; or that anything had occurred, between the end of the meeting on 22 May 1997 and the preparation of the fourth draft, to alter Mr Talbot’s understanding (to which the retention of clause 10.1.2 gave effect) that Mr Al Fayed was to have the right to subscribe for A Ordinary Shares without the consent of the Muddymans after the first £60 million had been provided. All the evidence pointed to the conclusion that, immediately before the meeting on 27 May 1997, Mr Talbot’s understanding was that there was consensus between the parties as to Mr Al Fayed’s right to subscribe for A Ordinary Shares (without further consent) after the first £60 million.

In those circumstances, the question for the judge was whether – in the course of the meeting on 27 May 1997 or thereafter prior to the deletion of clause 10.1.2 of the fourth draft of the shareholders’ agreement – something happened to alter Mr Talbot’s understanding of the position: in particular, whether something happened to lead Mr Talbot to understand that his clients were content that, after the first £60 million had been provided, they would not have the right to subscribe for shares without the consent of the Muddymans. That question fell to be determined on the balance of probabilities. And, having in mind where the burden of proof lay, it was for Holdings to satisfy the judge that, on the balance of probabilities, the answer to that question was “No”. If, on a proper understanding of paragraphs [160] and [165] of his judgment, the judge directed himself that it was for NGJ to satisfy him that, on the balance of probabilities, the answer to that question was “Yes” then, in my view, he fell into error.

I am persuaded that there is force in the submission that the judge did fall into the error which I have just identified. At paragraph [159] the judge had said this:

“[159] The nature of the defendants’ case must be borne in mind. It can be fairly boiled down to this – the relevant right was removed from the documents by an apparently deliberate act of excision; a plausible explanation can be given for it; a plausible context can be provided for it; Mr Talbot is a careful man who would not have made a mistake about this matter; therefore, although he has no positive recollection of doing it, or for the reasons for it, I should find that the consequences were intended and were the result of a requirement of the Muddymans which was acceded to. . . . Their case is such that it invites me to draw inferences on the basis of probabilities, not just on the basis of their witnesses’ oral evidence or documentary records recording the facts. ”

It is clear from that paragraph that the judge took the view that he was being asked to find that there was a plausible explanation for the deletion of clause 10.1.2 from the fourth draft. On the basis that he was able to make that finding, he was invited to infer, on the balance of probabilities, that that explanation did, indeed, provide the reason for the deletion: because, unless there were a reason, Mr Talbot (being a careful solicitor), was not likely to have made the deletion.

At paragraph [164] of his judgment the judge said this:

“[164] It is plausible that the Muddymans would have been concerned about dilution on 27^th May. Since the prospects of getting up to £60m were not taken particularly seriously, and since Mr Al Fayed was prepared to make significant concessions to them, it is not implausible or improbable that, if they had asked, he would have conceded restrictions on his ability to have shares once the financing exceeded £60m.”

That, as it seems to me, enables NGJ to say that the judge did accept that there was a plausible explanation for the deletion of clause 10.1.2 from the fourth draft: at the least, he did not treat the explanation that the Muddymans had sought, and Mr Al Fayed had conceded, the removal of the right to subscribe for A Ordinary Shares after the first £60 million without consent as so implausible as to be disregarded.

With paragraphs [159] and [164] of his judgment in mind, it seems to me impossible to conclude that, when the judge referred, in paragraph [160], to NGJ having failed “to establish the probabilities they rely on”, he meant that NGJ had not established the premise on which their case rested. He cannot be taken to have meant that NGJ had not persuaded him that there was a plausible explanation on the basis of which he could go on to infer, on the balance of probabilities, that that explanation did provide the reason why Mr Talbot made the deletion which he did. He must have meant that, despite the existence of a plausible explanation, NGJ had not persuaded him that, on the balance of probabilities, he should go on to infer that that explanation was, indeed, the reason for the deletion of clause 10.1.2 from the fourth draft.

Reading paragraph [165] in that context, I find it impossible to avoid the conclusion that when the judge directed himself, in that paragraph, that he had to ascertain whether NGJ were right in their version of events on the basis of the documents “and the rest of the probabilities” - and then went on to observe that, because the “good reason” had been asserted by NGJ, “they therefore effectively have to prove it on a balance of probabilities” - he was returning to the point that he had made in paragraph [160]. He was directing himself that it was for NGJ to satisfy him, on the balance of probabilities, that the explanation which he had already found to be plausible did, indeed, provide the reason why Mr Talbot deleted clause 10.1.2 from the fourth draft.

That, in my view, was a wrong approach to the evidence. Once the judge had accepted that the explanation advanced by NGJ was plausible – or, as he put it at paragraph [164], “not improbable” - he ought to have approached his task on the basis that it was for Holdings to satisfy him that, nevertheless, that explanation ought to be rejected.

As I have said, as the second head of their grounds of appeal NGJ contend that, on the basis of his findings of primary fact (and adopting a correct approach to the burden of proof), the judge should have held that Holdings had not established that NGJ were negligent or that Mr Talbot had deleted the right to dilute by accident. It is said that this Court “is not only entitled but obliged to consider the primary facts as found by the Judge in order to decide whether or not Holdings proved that NG&J were negligent”.

At the risk of repetition it is, I think, helpful to summarise the judge’s findings of primary fact:

On the basis of those findings of fact, the task, as it seems to me, is to ask whether, on the balance of probabilities, the Court can be satisfied that Mr Talbot deleted clause 10.1.2 from the fourth draft without an understanding that there had been a change in the consensus as reflected in that clause.

It is important to keep in mind that, given the judge’s primary findings of fact, that task cannot be approached on the basis that it was improbable that Mr Al Fayed would have been willing to give up the power to dilute (after the first £60 million) that was conferred by that clause. I emphasise that point because, on first impression, it seems counter-intuitive: the effect of giving up the power to dilute – described by the judge, at paragraph [157] of his judgment, in the terms which I have already set out – can now be seen to have exposed Mr Al Fayed to an indefinite funding obligation from which he could not escape without the loss of his investment. But, in my view, this Court must accept the judge’s finding on that point; counter-intuitive as it may seem. Although Holdings suggests (at paragraph 28 of its skeleton argument in the cross-appeal) that the judge erred in that finding, it does not (as I understand paragraph 29 of that skeleton) contend that the finding can be re-opened on appeal.

As I have said, the case advanced on behalf of NGJ is that it is so unlikely that Mr Talbot, as a careful and conscientious solicitor knowing or understanding that, after the first £60 million, Mr Al Fayed was to be entitled to subscribe for A Ordinary Shares without further consent from the Muddymans, would have amended the fourth draft of the shareholders’ agreement as he did that that possibility must be rejected. If that possibility is rejected, then (it is said) the necessary conclusion is that Mr Talbot understood, by the time he amended the fourth draft, that the consensus between the parties had changed: Mr Al Fayed was not to be entitled, after the first £60 million, to subscribe for A Ordinary Shares without consent.

It is, I think, beyond argument that a careful and conscientious solicitor, acting as such, who did appreciate that the deletion of clause 10.1.2 would throw doubt on Mr Al Fayed’s right to subscribe, would not delete that clause unless he did understand that the earlier consensus between the parties had changed. In carrying out the task which I have identified the Court must seek, first, to evaluate the likelihood that a careful and conscientious solicitor would, indeed, fail to appreciate that (at the least) the deletion of that clause would throw doubt on Mr Al Fayed’s right (after the first £60 million) to subscribe for A Ordinary Shares without the consent of the Muddymans under article 6(1) of the articles of association. And, if satisfied that the probability is that a careful and conscientious solicitor would have appreciated that the deletion of clause 10.1.2 would have that effect, the Court must ask itself whether there is evidence to support the view that, in that respect, Mr Talbot (uncharacteristically) fell below the level of competence to be expected of a careful and conscientious solicitor.

The case advanced on behalf of Holdings is that even a careful and conscientious solicitor may make mistakes when working under pressure; and that a close examination of the amendments that were made (or not made) to the fourth draft of the shareholders’ agreement demonstrates that mistakes were made in this case. It is necessary, therefore, to examine the amendments that were made to the fourth draft – so far as relied upon by the parties - in some detail.

Clause 9.5 of the fourth draft provided that any additional finance (beyond that referred to in clause 9.3) to be provided by way of subscription for share capital “shall be provided by subscription at par for or shall be capitalised at par into (as the case may be) A Ordinary Shares of £1 each . . . such A Ordinary Shares to rank pari passu in all respects with the then existing A Ordinary Shares”. That clause survived, unamended, into a fifth draft. It was amended at the completion meeting on 28/29 May 1997 in two respects, (i) to add a reference to clause 8.1 (immediately before the reference to clause 9.3) and (ii) to remove the reference to capitalisation; but, in substance, it was retained in the Shareholders’ Agreement as executed. The judge described it, in the context of the agreement as executed, as “something of a waif”: paragraph [184] of his judgment. By that he meant that, in the context of an agreement which did not give Mr Al Fayed the right to subscribe for A Ordinary Shares (after the first £60 million) without the consent of the Muddymans, the clause could serve no purpose. It was “an obvious candidate for removal” if Mr Talbot had, indeed, understood that the earlier consensus that Mr Al Fayed should have such a right had been reversed on 27 May 1997.

For my part, I find it impossible to take the view that the retention of clause 9.5 is indicative of some lack of care (or mistake) in the drafting process. It is important to have in mind that article 10(4) of the articles of association provided that shares which were to be issued to a person who was not already the holder (or a permitted transferee) of B Ordinary Shares would be designated A Ordinary Shares. It may be said that clause 9.5 added little or nothing to article 10(4). But the same could be said of clause 9.6 which provided that, simultaneously with the issue of shares pursuant to clause 9.5, Swinburn should be entitled to subscribe for B Ordinary Shares pro rata “as if such issue had taken place in accordance with Article 10”. And the same could be said as well in the context of the fourth draft (which contained clause 10.1.2) as in the context of the Shareholders’ Agreement as executed (which did not). It is, to my mind, clear that the draftsman was concerned to emphasise – both in the fourth draft and in the agreement as executed – that a further issue of shares, if any, after the first £60 million would be in accordance with article 10 of the articles of association. That would be so whether deemed consent to that further issue was given by clause 10.1.2 in the Shareholders’ Agreement or actual consent was required under article 6(1)(a). On one view it may not have been necessary to emphasise, in the Shareholders’ Agreement, the requirements of article 10. But it cannot be said, as it seems to me, that to do so was indicative of some lack of care: in particular, given that the point had been emphasised in the fourth draft, it would have been surprising if the provisions in clauses 9.5 and 9.6 had not been retained in the agreement as executed. Nor can it be said, as it seems to me, that the decision to retain those provisions in the agreement as executed throws any light on the question whether Mr Talbot did, or did not, understand (when he amended the fourth draft) that the earlier consensus that Mr Al Fayed should have the right (after the first £60 million) to subscribe for A Ordinary Shares had been reversed on 27 May 1997.

Clause 16.2 of the Shareholders’ Agreement as executed was in neither the fourth nor the fifth draft. It was introduced (as the judge found) at the completion meeting on 28/29 May 1997. The clause was in these terms:

“16.2

The termination of this Agreement referred to in clause 16.1 shall not affect the continuance in force of the provisions of Clauses 8.10, 8.11, 8.12, 8.13, 8.14 or 9.4”

Clause 16.1 provided for the agreement to terminate on the occurrence of a number of specified events: including, in particular, the winding up of Leisure, Mr Al Fayed ceasing to hold any shares in Leisure and Mr Bill Muddyman ceasing to hold at least 10% in nominal value of its issued share capital. As I have explained earlier in this judgment, clause 8.10 provided for the holders of the B Ordinary Shares to have a call option over the Loan Notes; and clause 8.11 conferred on the holders of the B Ordinary Shares the right to purchase shares issued on conversion of the Loan Notes. Clauses 8.12 and 8.14 were ancillary to clause 8.10. Clause 9.4 extended clauses 8.10 and 8.11 to Loan Notes issued under clause 9.3.1 (in respect of the second £30 million). Clause 8.13 provided that, on winding up, clauses 8.10, 8.11 and 9.4 should cease to have effect “as regards exercise thereafter”.

It cannot be said that the introduction of clause 16.2 was indicative of some lack of care: rather, as it seems to me, it was indicative of careful draftmanship. It made clear, for the benefit of the Muddymans, that accrued rights under the call options conferred by clauses 8.10 and 8.11 were preserved in the event that the Shareholders’ Agreement was terminated under clause 16.1. The judge held (at paragraph [176] of his judgment) that clause 16.2 was introduced in order “to make sure that the call options would survive dilution of the Muddymans below 10%”. Plainly the clause had that effect. But that was not the only event in which clause 16.2 would apply: there were other events within clause 16.1 on the happening of which the agreement would terminate. And it was always possible that the proportionate interest of the Muddymans might be diluted below 10%; because it was always possible that they might agree to the issue of A Ordinary Shares under article 6(1)(a) of the articles of association. It is, I think, impossible to say that the introduction clause 16.2 in the Shareholders’ Agreement as executed was inconsistent with an understanding that Mr Al Fayed was not to have the right (after the first £60 million) to subscribe for A Ordinary Shares. In my view the introduction of clause 16.2 (like the retention of clauses 9.5 and 9.6) throws no light on the question whether Mr Talbot did, or did not, understand that the earlier consensus that Mr Al Fayed should have that right had been reversed on 27 May 1997.

In the present context the crucial amendment to the fourth draft of the shareholders’ agreement was, of course, the amendment to clause 10. The judge found (at paragraph [138] of his judgment) that the amendment (which I have set out earlier in this judgment) was made by Mr Talbot following the meeting on 27 May 1997. The clause, as amended, appears in the comparite version of the fifth draft. There is nothing to suggest that there was any further amendment of the clause at the completion meeting on 28/29 May 1997.

There can be no doubt that, whether or not the earlier consensus that Mr Al Fayed should have the right (after the first £60 million) to subscribe for A Ordinary Shares had been reversed on 27 May 1997, some amendment to clause 10 of the fourth draft was required. Clause 10.1.2 provided deemed consent to the issue of shares in the Company (Leisure) “at any time after Investco shall have provided finance pursuant to Clause 8.1 of an aggregate amount equal to at least the maximum amount of finance it is obliged to provide pursuant to clause 8.3”. The reference to clauses 8.1 and 8.3 in clause 10.1.2 of the fourth draft had been carried through from the third draft without a proper appreciation of the change in the scheme that had been made by the new clause 9 (Further Finance). Clause 8.1 of the third draft was, itself, carried through to the fourth draft without amendment. It obliged Investco (Holdings) to provide the finance needed to enable the Company and its subsidiaries to meet their obligations in relation to the matters referred to in clause 8.2 as and when they fell due. Clause 8.3 of the third draft (also carried through to the fourth draft unaltered, save in an immaterial respect) capped Investco’s obligation to provide finance under clause 8.1 at £30 million (the first £30 million). The new clause 9 (Further Finance) – drafted by Mr Green after the meeting on 20 May 1997 and introduced into the fourth draft – made provision for further investment “after the Company shall have received all finance provided for in Clauses 6 and 8”. Clause 9.2 enabled Mr Al Fayed to elect to provide “investment finance” under clause 9.3: in particular, investment finance under that clause could (as to 7.5%) take the form of subscription for A Ordinary Shares: clause 9.3.2. But clause 9.3 of the fourth draft contained a further cap of £30 million on the provision of investment finance under that clause (the second £30 million). In those circumstances, the provision in clause 10.1.2 of the fourth draft was inept in that (i) it was unnecessary to provide deemed consent (in that clause) in respect of the issue of shares under clause 9.3.2 (as part of the second £30 million) because that was a “matter done pursuant to the Shareholders’ Agreement” and so within clause 10.1.1 and (ii) the deemed consent provided by clause 10.1.2 (in respect of the issue of shares at any time after the first £30 million had been provided) was inconsistent with the restriction (applicable to the second £30 million) imposed by clause 9.3.2.

Notwithstanding the fact that clause 10.1.2 of the fourth draft was inept for the reasons which I have just explained, it did provide deemed consent in respect of the issue of A Ordinary Shares in the event that additional finance (beyond the second £30 million to which clause 9.3 applied) was provided, as contemplated by clause 9.5. And it was needed for that purpose: the issue of A Ordinary Shares on the provision of additional finance (beyond the second £30 million) would not have been a matter done pursuant to the Shareholders’ Agreement and so would not have been within clause 10.1.1. Clause 9.5 did not require or authorise the provision of additional finance by way of subscription for share capital: it provided only that, if additional finance were provided by way of subscription for share capital, that provision should take the form of subscription at par for A Ordinary Shares, to rank pari passu with the existing A Ordinary Shares. Clause 9.5 (read with clause 10.1.1) did not avoid the need for consent to the issue of shares under article 6(1)(a) of the articles of association.

As I have said, clause 10.1.2 in the fourth draft took the form that it did because the provisions formerly in clause 9.1.2 of the third draft were carried through from the third to the fourth draft without a proper appreciation of the change in the scheme that had been made by the new clause 9 (Further Finance). Had the change in the scheme been properly appreciated by Mr Talbot when he prepared the fourth draft on or about 25 May 1997, clause 10.1.2 could have been expected to take a different form. Given the consensus (which then existed) as to the right of Mr Al Fayed to subscribe for A Ordinary Shares (after the first £60 million) without the consent of the Muddymans, clause 10.1.2 would have achieved its purpose if, in place of the words “at any time after Investco shall have provided finance pursuant to Clause 8.1 of an aggregate amount equal to at least the maximum amount of finance it is obliged to provide pursuant to Clause 8.3”, there had been substituted the words “at any time after Investco shall have provided investment finance of amount equal at least to the maximum amount permitted under clause 9.3”.

In that context it is pertinent to note that, when clause 9.2 of the third draft was carried though to the fourth draft (and became clause 10.2) the reference to clause 8.3 (which had appeared in clause 9.2 of the third draft) was replaced by a reference to clause 9.3 (in clause 10.2 of the fourth draft). Curiously, the reference to clause 8.3 (which had also appeared in clause 9.1.2 of the third draft) was left unaltered when clause 9.1.2 was carried through and became clause 10.1.2 of the fourth draft. Internal consistency required that, if the reference to clause 8.3 were replaced by a reference to clause 9.3 in clause 10.2, the same amendment should have been made in clause 10.1.2. Properly understood, clause 10.2 was ancillary to clause 10.1.2: in that clause 10.2 gave a special (or deemed) meaning to the phrase, in clause 10.1.2, “Investco shall have provided finance pursuant to clause 8.1 of an aggregate amount equal to at least the maximum amount of finance it is obliged to provide pursuant to clause [8.3/9.3]”. I have said “properly understood” because clause 10.2, as it appeared in the fourth draft, contained not only the internal inconsistency to which I have just referred but also an obvious error. The opening words were “For the purposes of clause 9.1.2”. The reference to clause 9.1.2 had been carried through from the third draft by mistake. Clause 9.1.2 of the third draft had become clause 10.1.2 in the fourth draft. The reference should have been amended accordingly when the fourth draft was prepared.

The circumstances in which the reference to clause 8.3 (which had appeared in clause 9.2 of the third draft) was replaced by a reference to clause 9.3 (in clause 10.2 of the fourth draft) were set out by the judge at paragraphs [122](i), [125](iv) and [129](vi) of his judgment. Put shortly, he found that the alteration reflected discussion, on 21 and 22 May 1997, to the effect that clause 10.2 should apply after the second £30 million had been provided. On a proper appreciation, of course, the replacement of clause 8.3 by clause 9.3 in the context of the phrase “the maximum amount of finance it is obliged to provide pursuant to Clause 8.3” is inept: because clause 9.3 imposed no obligation to provide finance. But the fact that the alteration was made would be of some importance if it provided support for the view that, when the fourth draft was prepared, Mr Talbot was aware that clause 10.2 (and so, necessarily, clause 10.1.2) was directed to the position after the second £30 million had been provided.

The change from a reference to clause 8.3 (in clause 9.2 of the third draft) to a reference to clause 9.3 (in clause 10.2 of the fourth draft) appears on the comparite version of the fourth draft (dated 25 May 1997). When preparing a draft of this judgment for distribution to and consideration by counsel (in accordance with the usual practice), I took the view that Mr Talbot had been responsible for that change. On receipt of that draft judgment counsel for Holdings took the opportunity to point out that that view was mistaken. He referred the Court to a passage in the transcript of Mr Talbot’s evidence on 17 November 2006 (Day 17, pages 117-118) to which we had not previously been taken:

“Q Somebody has changed, in clause 10.2, in the last line, from ‘8’ to ‘9’ in clause 9.3?

A Yes

Q Did you make that change?

A I do not believe I did. I have seen a suggestion with which I would agree.

Q A word processor operator?

A A word processor operator, and I think I am reinforced in that view from my note, 30 not 60 – you may my Lord recollect that a line was drawn from that note and a circle was written around that clause reference and so, when I deleted the note on the Sunday, it may well be that the person typing the changes for me misconstrued the fact that the circle should have gone as well, if you see what I mean, and made that clause change because he or she believed that it was a consequential change.”

The note “30 not 60” to which Mr Talbot referred in that passage was the note which he had made at the meeting on 22 May 1997 on an annotated copy of the third draft; in the circumstances described by the judge at paragraph [125](iv) of his judgment.

It is said on behalf of Holdings, first, that it would be wrong to hold, in the light of that evidence, that the substitution of a reference to clause 9.3 in place of the reference to clause 8.3 provided any support for the view that for the view that, when the fourth draft was prepared, Mr Talbot was aware that clause 10.2 (and so, necessarily, clause 10.1.2) was directed to the position after the second £30 million had been provided; and, second, that, on a true understanding of the position, it should be held that Mr Talbot did not, in fact address his mind to the changes (if any) that needed to be made to clause 9 of the third draft at the time when he took that clause through to the fourth draft (as clause 10) . Further, it is said, not only did he not address his mind to the changes that needed to be made to clause 9 of the third draft, his deletion of (and failure to act upon) his note “30 not 60” should lead to the conclusion that he had shown a lack of understanding of the significance of clause 9 of the third draft at that time.

The relevant question, in this context, of course, is whether the evidence – and, particular, Mr Talbot’s notes on the annotated copy of the third draft of the shareholders’ agreement – provides support for the view that Mr Talbot did or did not appreciate, at the time when he prepared the fourth draft, that clause 10.2 (and so, necessarily, clause 10.1.2) was directed to the position after the second £30 million had been provided. It is clear that the alteration that was made to clause 10.2 (by replacing the reference to clause 8.3 by a reference to clause 9.3) does not, of itself, suggest an answer to that question. But closer study of Mr Talbot’s notes on the annotated copy does support the conclusion that he did appreciate the role of clauses 10.1.2 and 10.2 in the fourth draft.

It is important to keep in mind the judge’s finding, at paragraph [125](iv) of his judgment, that there was discussion about clause 9 of the third draft (Restrictions) at the meeting on 22 May 1997: as the judge observed “It was recognised that it was going to have to be revised to reflect the fact that the agreement was dealing with a possible second £30m of investment”. Mr Talbot’s note “30 not 60” plainly reflects an understanding, at that stage, that “the maximum amount of finance which [Holdings] was obliged to provide pursuant to Clause 8.3” was £30 million not £60 million; and an appreciation that it might be necessary to make some drafting amendment to take account of the possibility that a second £30 million would be invested under the provisions of the new draft clause 9 (Further Finance) which Mr Green had prepared and sent to the parties in advance of that meeting. But, as I have pointed out, the replacement of the reference to clause 8.3 by a reference to clause 9.3 was not the appropriate amendment for that purpose: clause 9.3 imposed no obligation to provide finance. The choice facing the draftsman was either to leave the reference to clause 8.3 as it was (in both clauses 10.1.2 and 10.2); or (as I have explained at paragraph [104] of this judgment) to make a more extensive amendment linking those clauses to the actual provision of the second £30 million (if Mr Al Fayed chose to do so) under the new clause 9 (Further Finance).

I have already expressed the view (at paragraph [104]) that it might have been expected that a draftsman having a proper appreciation of the change in the scheme that had been made by the new clause 9 (Further Finance) would have chosen to make the more extensive amendment. But it cannot be said that to choose the less burdensome course of leaving the reference to clause 8.3 as it was demonstrates that the draftsman did not appreciate the role of clauses 10.1.2 and 10.2 in the fourth draft. Leaving the reference to clause 8.3 as it was had the effect that clauses 10.1.2 and 10.2 would be engaged only after the second £30 million had been provided; for the reason that (as I have explained earlier in this judgment, at paragraph [52]) those clauses had to be read with the new clause 9, which made its own provision for the manner in which the second £30 million was to be provided. That has been common ground. And, as it seems to me, the annotated copy of the third draft – on which Mr Talbot’s note “30 not 60” has been crossed through with a red line – supports Mr Talbot’s evidence (Day 17, pages 149-150) that he did appreciate that there was a choice to be made. He chose to leave the reference to clause 8.3 as it was.

I have examined the provisions in clause 10 of the fourth draft in some detail because they provide the context in which the Court must seek to evaluate the likelihood that Mr Talbot would have decided to delete those provisions if he did not understand that the earlier consensus that Mr Al Fayed should have the right (after the first £60 million) to subscribe for A Ordinary Shares had been reversed on 27 May 1997. I draw the following conclusions from that examination:

The position, therefore, as it seems to me, is that the decision to delete clause 10.1.2 of the fourth draft cannot be explained on the basis that a competent draftsman could have thought (albeit mistakenly) that to do so would not have the effect of depriving Mr Al Fayed of the right to subscribe for A Ordinary Shares (after the first £60 million) without the consent of the Muddymans. This is not a case in which it is possible to identify a process of reasoning (albeit mistaken reasoning) which could have led a competent draftsman, who understood that the earlier consensus had continued, to decide to delete clause 10.1.2: it is not possible to see how a competent draftsman could have made such a mistake.

As I have said, in preparing the fourth draft Mr Talbot did not display the skill to be expected of a competent draftsman. But the judge did not find him generally incompetent: he described Mr Talbot (at paragraph [58] of his judgment) as a careful and conscientious man, who obviously went about his work in a methodical way. And there is some indication – in the notes which he made on the annotated copy of the third draft – that Mr Talbot was alive to the fact that clause 10.2 (and so clause 10.1.2, to which clause 10.2 was ancillary) was of importance in relation to subscription for shares after the first £60 million. Given that Mr Talbot is entitled to be treated as a careful, competent and conscientious draftsman, I find it impossible to avoid the conclusion that, if Mr Talbot did not understand that the earlier consensus had been reversed, his decision to strike out clause 10.1.2 must be characterised as wholly inexplicable.

That conclusion, as it seems to me, leads to the further conclusion that it is very unlikely that Mr Talbot would have decided to delete those provisions if he did not understand that the earlier consensus that Mr Al Fayed should have the right (after the first £60 million) to subscribe for A Ordinary Shares had been reversed on 27 May 1997.

On the basis of the judge’s primary findings of fact, there are two matters which, it is said, should lead the Court to hold that there is no escape from the conclusion that, however unlikely, Mr Talbot did decide to delete clause 10.1.2 notwithstanding that he did not think there had been a change in the earlier consensus. Those matters are (i) the improbability that a change in the position as previously agreed would have gone unrecorded in any contemporary note or record and (ii) the improbability that the Muddymans and their advisers (and, in particular, Mr Sugar) would not have remembered that the change had been made at a time (in 2001) when they had reason to rely upon it.

The judge explained, at paragraph [179] of his judgment, why it was necessary to be cautious before giving much weight to the second of those matters. And there was no direct evidence from the Muddymans or from Mr Sugar to assist him. But, on first impression, the absence of any contemporary note or record of what, as can now be seen, was an important concession by Mr Al Fayed which has had serious consequences is striking.

The judge explained, at paragraph [176] of his judgment, why it was to be expected that Mr Sugar’s contemporary notes and records would contain some reference to the concession:

“[176] . . . The defendants’ case involves the Muddymans objecting to the right to dilute, that objection being acknowledged and Mr Talbot deciding to achieve that by deleting the relevant consent on the consent provision. That deletion would be one way of going about it. However, if it was discussed with Mr Sugar then one would have expected him to reflect the same amendment on his draft – that is to say one would have expected him to strike out the same words. There are a number of occasions where his draft has deletions marked by striking through the words in question (matching Mr Talbot’s striking through). Yet in this case he has not struck anything through. He put a single line by the side of some of the lines of clause 10.1.2, with a cross to the left. In the absence of evidence from him one does not necessarily know what he meant, but it rather looks as though he intended to mark this as something requiring attention. On his draft he has put a double line with a cross to the left of clause 8.6.4, which one can see from Mr Talbot’s draft has had some words added to it as a result of the negotiations; that supports my view of what his mark is more likely to mean against clause 10.1.2. Against 10.2 Mr Sugar has put the cross with an arrow on it. Again, this might be thought to denote something that requires attention at the same time that 10.1.2 is being addressed (hence the arrow). There is a certain amount of intelligent guesswork about this, but at the very least it can be said that Mr Sugar’s marking does not support Mr Talbot's case and if anything tends to point away from it. It is, of course, true that clause 10.1.2 requires attention because the cross-reference is wrong, and clause 10.2 requires attention because it is inconsistent with clause 8.5. But at the end of the day if the parties had agreed the removal of the right to dilute, and if the solicitors had agreed that the way of achieving that was to delete the consent in clause 10.1.2 then it would have been more natural for Mr Sugar to mark that accordingly. He did not do so. . . .”

But that passage must be read with the earlier passage at paragraph [143] of his judgment, which I have already set out. For convenience I will set out an extract of that earlier passage:

“[143] . . . it is apparent that other significant alterations which it is accepted were agreed are not reflected in any separate note. The effect of the fact that this was a very serious amendment with effects that have been seen to be extremely damaging, which might be thought to point away from such an amendment being made un-noted . . . is attenuated . . . by the fact that at the time the prospects of Mr Al Fayed providing more than £60m of finance were not seen as particularly great, and it is quite possible that they were vested with . . . little significance . . .”

It is important to keep in mind that the Court’s task is not to balance improbabilities: as Lord Brandon of Oakbrook explained in Rhesa Shipping Co S.A. v Edmunds [1985] 1 WLR 948, 955F-956F. He pointed out (ibid, 956E) that a court is not compelled to choose between two theories, both of which are extremely improbable: if a judge concludes that the occurrence of an event is extremely improbable, a finding that it is, nevertheless, more likely to have occurred than not does not accord with common sense. In the present case it is for Holdings to satisfy the Court that Mr Talbot acted in a manner which (if he did not understand that the earlier consensus had changed) is wholly inexplicable. As I have said, it must be regarded as very unlikely – indeed, extremely improbable - that that is what happened. It does not become more likely because it can be said to be remarkable – and so improbable - that a change in the position as previously agreed would have gone unrecorded in any contemporary note or record, or that the Muddymans and their advisers would not have remembered (in 2001) that the change had been made. In my view Holdings has not discharged the burden imposed by the law on a claimant: it has not proved its case.

For those reasons I would allow the cross appeal. It follows that it is unnecessary to address the issues of quantum raised by the appeal. Interesting as those issues are, I am satisfied that no useful purpose would be served by doing so. It is enough that this Court should set aside paragraph 1 of the order of 31 July 2006.

I agree.

I also agree.