Dennard & Ors v Pricewaterhousecoopers LLP

This is an application by the claimants in these proceedings for permission to appeal against the decision of Vos J awarding them the sum of ₤427,000 by way of damages for breach of contract.

The claimants are the former shareholders in Ryhurst Limited (“Ryhurst”) who sold their shares to Barclays European Infrastructure Fund (“BEIF”), a subsidiary of Barclays Bank, for ₤5,500 per share in January 2006. The claimants’ case at trial was that, in the negotiations with Barclays and in agreeing the sale price, they relied upon a valuation of Ryhurst by the defendants (“PwC”) carried out in May 2005, which put the value at ₤5,100 per share.

The claimants also had a controlling interest in the Rydon Group of Companies which was also sold in January 2006 for about ₤40 million in a management buy-out financed by HBOS. The sale of the Rydon Group resulted in Mr Dennard being paid some ₤12.6 million, Mr Turner some ₤12.7 million and Mr Gearon some ₤7.2 million. By comparison, the sale of the shares in Ryhurst produced ₤880,000 for Messrs Dennard, Turner and Gearon and some ₤495,000 for Dixon who sold only 90 of his 160 shares.

No part of the claim related to the sale of Rydon, but the alleged ability of Barclays Bank to have blocked that sale is said to have played a significant part in the claimants’ decision to dispose of their shares in Ryhurst at the time and at the price which they did. I will return to this point a little later in this judgment.

The value of the shares in Ryhurst was based on its 50% interest in Ryhurst Barclays Infrastructure Limited (“RBIL”) which was a joint venture company with another Barclays’ subsidiary called Intermediate Care Limited (“ICL”). RBIL was involved in eleven PFI projects, all in the care sector in various parts of England. The PwC valuation relates to the value of these projects. In December 2006 Barclays sold its interest in these projects at a price that would equate to ₤40,000 per share in Ryhurst. The claimants’ case at trial was that had PwC valued Ryhurst’s interest in RBIL at a figure in the region of ₤15-₤20 million (which they said it should have done) they would have held on to their shares and been able to sell them later at the price ultimately achieved by Barclays.

Subject to one important exception, there is no challenge to the judge’s findings on the valuation issue as part of this application for permission to appeal. Vos J had to decide whether the ₤5.5 million valuation was negligent. This involved a consideration of the discount rates applied by PwC and a number of other factors such as whether the fact that the January 2006 sale was of equity only whereas the December 2006 sale by Barclays was a mixture of equity and subordinated debt accounted for the difference between the valuation and the December 2006 price. PwC’s valuation was undoubtedly discounted on this basis. The judge’s conclusion was that PwC had been negligent and that the non-negligent valuation as of May 2005 would have been in the sum of ₤8.8 million. On the basis of that finding, he had to go on and consider three further issues: (1) what loss, if any, was caused by the defendant’s negligence; (2) what was the amount of that loss and (3) if in excess of ₤1 million, was the claim capped by a limitation of liability clause contained in a letter of engagement which PwC said also applied contractually to its instructions to value the Ryhurst shares. The letter of engagement dated 1^st November 2004 covered PwC’s original retainer which was to provide financial advisory services in connection with the disposal of Ryhurst. The engagement did not include the provision of a valuation as such but in March 2005 PwC was instructed by the claimants to carry out the valuation which lies at the heart of this claim. The question whether the limitation clause was included as a term of that retainer depends on the construction of two e-mails sent on 2^nd March 2005.

As an alternative to the claim in negligence, the claimants allege that PwC was affected by a conflict between its personal interests and its duties to the claimants on account of its long-standing relationship with Barclays and its desire to be first in line to advise Barclays on the re-financing project for the PFIs which was expected to follow the sale of the claimants’ shares to BEIF. It is not alleged that PwC consciously preferred the interests of Barclays in this process and deliberately reduced the valuation to that end. What is said is that PwC were in a position of conflict; ought not to have acted; and that had they not acted the claimants would have received an independent and competent valuation. This claim (which the judge rejected) was principally relied upon because it was said to be unaffected by the ₤1 million limitation of liability clause I have referred to even if that applied contractually to the valuation retainer.

The judge, as I have said, held that PwC had been negligent in its valuation. The range of non-negligent values was determined by him to lie between ₤5.6 million and ₤11.8 million and a competent valuer would, he held, have produced a valuation of ₤8.8 million. On the basis of this figure, the claimants would not, the judge held, have declined to sell their shares and would at most have sought to obtain a higher price. Their loss was therefore limited to the chance of their having obtained such an increase. The judge held that there was a 75% chance that Barclays would have increased its offer by ₤1 million to ₤6.5 million. He therefore awarded them damages based on what would have been their share of the increased consideration.

The first ground of appeal is that the judge erred in fact in concluding that the appellants would have accepted an offer from Barclays for their shares in Ryhurst of ₤5.5 million if the respondent had valued the company at ₤8.8 million. The judge ought to have found on the evidence that the appellants would not have accepted a discount of 35% on the valuation that a reasonably competent valuer would have provided.

The judge’s analysis of the evidence was that the sale would have proceeded unless the valuation was double what Barclays had agreed to pay: i.e. over ₤11 million. He identified a number of factors which militated in favour of a sale. These included the fact that the claimants (with the exception of Mr Dixon) wished to retire; the fact that the business was strong in 2004 and 2005 but was perceived as being prone to go less well as time progressed; the fact that Barclays could in theory have prevented the sale of the Rydon Group going ahead; the fact that because of certain pre-emption and confidentiality rights, Barclays was in practice the only likely purchaser for the shares in RBIL held by Ryhurst; the fact that the claimants would have been unable to sell in the future at a time of their choosing if they walked away from the deal in 2005; and the fact that the HBOS offer for Rydon was already well above expectations and was likely to decrease as time progressed. He therefore concluded that, on the basis of a non-negligent valuation of ₤8.8 million rather than ₤11 million, the sale would have gone ahead.

The judge’s analysis proceeds on the basis that even if no increase in Barclays’ offer would have come about as a result of an ₤8.8 million valuation the claimants would still have been prepared to sell at a significant undervalue. Mr Downes submitted that the claimants’ evidence was that they would only have sold at an undervalue if Barclays were likely to have blocked the sale of the Rydon Group from going ahead. This point had been raised by the defendants as part of their case on causation. It seems to have been accepted that Barclays had the capacity, if they wished, to block the Rydon sale because the project management side of the Ryhurst business was to be sold to the same purchaser as Rydon itself and Barclays’ consent was required to any change of control in relation to the entity responsible for the ongoing management of the PFI projects. The defendant’s case was that the claimants would not have risked losing the entire transaction for the sake of a relatively small increase in the consideration for Ryhurst. In this context the comparative results of the Rydon and the Ryhurst sales that I mentioned earlier become relevant.

Mr Downes submits that the judge’s finding that a sale at ₤5,500 per share would have proceeded is inconsistent with his later finding in paragraph 203 of his judgment that Barclays would not in fact have blocked the sale of Rydon had they failed to agree a price for RBIL. But the real issue was not whether (with the benefit of hindsight) Barclays would in fact have blocked the sale of Rydon. It is whether the claimants would have been prepared to risk that by pushing Barclays in the negotiations over the sale of Ryhurst to the point when they might consider using that threat as a counter to the claimants’ own threat not to proceed with the sale of their shares. This ground of appeal therefore involves a direct challenge to the judge’s findings of fact based on his assessment of the claimants’ evidence.

The judge had to consider whether a sale at ₤5,500 would have gone ahead if the valuation had been ₤8.8 million rather than the ₤11 million contended for by the claimants. His conclusion that at a valuation of ₤8.8 million the sale would still have proceeded was clearly within the range of possible findings open to him on the evidence even without taking into account his view that Barclays would, in all probability, have increased their offer by a further ₤1 million had the valuation been a competent one. I therefore consider that an appeal against these findings of fact would have no real prospect of success on the assumption made by the judge that the valuation figure was ₤8.8 million.

I would therefore refuse permission on ground 1.

It is, however, necessary to consider whether the claim in damages based on there having been no sale of the Ryhurst shares in January 2006 remains arguable if the correct assumption is that the valuation should have been in the region of ₤11 million. This point arises under and as a consequence of ground 4 of the grounds of appeal which is that the judge erred in law in finding that a reasonably competent valuer would have discounted the valuation of the appellants’ shares by 2% to take account of the fact that the shares were being sold without the subordinated debt in circumstances where the valuation (on its true construction) was a valuation relevant to Barclays as the purchaser and where Barclays owned all the subordinated debt in any event.

The point which this ground of appeal raises is that PwC’s valuation contained a discount for the fact that the sale to BEIF was of equity only and not equity and subordinated debt. The claimants’ expert accepted that in an open market valuation it was reasonable to include such a discount because equity-only packages were less attractive to institutional investors. Mr Downes argued before the judge that the discount was inappropriate in this case because the purpose of the valuation was to give an indicative value of the asset to Barclays and Barclays would have been unconcerned about the absence of subordinate debt since they would be able to sell the PFI interests on with any combination of equity and subordinated debt they chose. If the discount for equity only had been removed from the valuation it would have increased it to something in the region of ₤11 million which, on the judge’s own findings, would have meant that the sale would not have proceeded. Damages in that event would have to be assessed on the basis that the claimants would have kept their shares.

The judge seems (in paragraph 167) to have accepted the logic of Mr Downes’ submission but held that the PwC valuation was not misleading because it was clear that a significant discount had been made for the equity only nature of the portfolio and the claimants’ negotiating team had read and understood this. Mr Downes submitted to us that his clients were not experts and were mainly concerned with the valuation figure itself. But that is an attempt to contradict the judge’s findings of fact which seem to me to be firmly based on the evidence. Ms Montague, Ryhurst’s managing director and a director of RBIL, who commissioned the valuation and was directly involved in the negotiations with Barclays, said in her witness statement that she had asked PwC to provide a proper market value and not a figure which reflected the fact that Barclays was the only likely purchaser. Therefore, although the absence of subordinated debt was not a problem for Barclays, it would not have been right for PwC to ignore the importance of this to any other notional purchaser in the open market. The judge was therefore entitled to find that the ₤8.8 million figure was what the competent valuer with the same instructions would have provided and that the claimants were not in any event disadvantaged by this in their negotiations with Barclays. Both sides knew what they were dealing with. I would therefore refuse permission to appeal on ground 4.

Grounds 2 and 3 concern the judge’s assessment of damages on the basis of loss of a chance. Ground 2 is in part based on what is said to be the judge’s erroneous finding of fact as to whether the sale would have gone ahead but I can ignore that criticism for the reasons I have given. The remaining point is that the judge adopted what is described as a novel two-stage approach to the assessment of a loss of chance by first finding that Barclays would, on the balance of probabilities, have paid an additional ₤1 million and then discounting it by 25%. The two are said to be inconsistent.

If that is what the judge did in fact do then the point is clearly arguable. Once a finding has been made that the third party would have paid more then damage in that sum is proved. The question of the loss of a chance does not arise: see e.g. Owners of the Ship “Front Ace” v Owners of the Ship “Vicky 1” [2008] EWCA Civ 101 at paragraph 72.

The real issue is whether this is what the judge actually did. He clearly had in mind the two-stage test set out in Allied Maples v Simmons because he sets it out at paragraph 200 in his judgment. At paragraph 203 he then says this:

“My clear inclination is to say, that whilst I think there was a good chance that Barclays would have gone up (and, of course, bearing in mind my finding that, if Barclays had not gone up, the Claimants would have done the deal at £5.5 million anyway), it would have been hard to push Barclays very far. Doing the best I can, I think Barclays would have been persuaded to go to £6.5 million (an increase of £1 million) on the basis of PwC's significantly higher valuation of £8.8 million (an increase of £2.8 million on what it in reality thought was PwC's valuation).”

Reading that passage as a whole it is, I think, fairly clear that all the judge was saying was that there was a good chance of Barclays being prepared to increase their offer to ₤6.5 million were the valuation to have been ₤8.8 million. He did not find on the balance of probabilities that they would have done so thereby making any reduction inappropriate. He then assessed the chance at 75%.

This is a conventional assessment of the loss of a chance and an appeal would have no real prospect of success. It is said that the judge should have made a finding that Barclays would have paid an extra ₤1 million (the equivalent of assessing the chance at 100%) but that was a matter for the judge on the evidence and there is no prospect in my view of this court interfering with his conclusions. A subsidiary argument was also raised (based on what the judge referred to in paragraph 200 of his judgment) that he should have assessed a range of possibilities and taken a mean figure. But he was not asked to do his calculation in this way and cannot be criticised now for adopting the conventional approach. I would therefore refuse permission to appeal on ground 2.

Ground 3 challenges the judge’s finding that an ₤8.8 million valuation would at most have produced an offer price of ₤6.5 million. The judge has found that Barclays went to ₤5.5 million against what they thought was PwC’s valuation of ₤6 million. This was because Ms Montague led them to believe the valuation was in this sum. What is said is that the judge forgot that the ₤5.5 million figure was made up of two elements: first an offer of ₤5 million as a result of negotiations based on the valuation; and secondly an extra ₤.5 million which took account of insurance savings and sinking fund benefits. He should therefore have compared the figure of ₤8.8 million with the ₤5 million figure and then added on the ₤.5 million figure to whatever revised offer Barclays would have made. Mr Downes submitted that using the ₤5 million figure it would have been reasonable to assume that Barclays would still have gone to ₤6.5 million, bringing a total of ₤7 million when the extra ₤.5 million was added in.

But this ignores the judge’s finding that Barclays would not have gone beyond ₤6.5 million in total even against a valuation of ₤8.8 million. The fact that part of that ₤6.5 million included the ₤.5 million not based on the valuation is, in my view, irrelevant. The judge had to concentrate on the price at which Barclays would have been prepared to do the deal. His reasoning is not vitiated by the inclusion in that global figure of the ₤.5 million. I would refuse permission on this ground.

Grounds 5 and 6 raise the construction issue about the 2^nd March 2005 e-mails and the question whether the limitation clause was reasonable. I consider both these grounds to be sufficiently arguable in themselves to justify the grant of permission to appeal but they only become relevant if the damages recoverable are likely to exceed ₤1 million, it being conceded that the inclusion of the clause in the valuation retainer imposes a ₤1 million liability ceiling for that retainer alone.

As permission has been refused on grounds 1 and 4, a decision on these grounds would be academic and, for that reason, I refuse permission to appeal. That leaves ground 7. The judge dismissed the conflict claim on an essentially factual basis and I think that an appeal would have no real prospect of success given that it is not suggested that PwC did actively favour Barclays over the claimants by deliberately undervaluing the claimants’ interests and that the judge found that PwC had not been given any indication by Barclays that they would necessarily benefit from the re-financing work following the acquisition.

But even if I am wrong about this, ground 7 adds nothing, given the refusal of permission to appeal on grounds 1 and 4. Even if the appeal on liability were to succeed, the causation consequences would be the same. A competent valuation in the sum of ₤8.8 million would not have led to the claimants retaining their shares and the damages will not therefore exceed ₤1 million. It does not therefore matter whether or not the limitation clause was reasonable or whether it covers a claim based on a conflict of interest and duty. I would therefore also refuse permission to appeal on grounds 5, 6 and 7.

I agree.