SPL Private Finance (PF2) IC Ltd & 5 Ors v Farrell

This is an application for permission to appeal the judgment of Mr Justice Paul Walker, delivered on 18 December 2014. By paragraph 1 of his order of that date, Mr Justice Walker ordered that Mr Robin Farrell (whom I shall call "Mr Farrell") and the company of which he had been chief executive, Arch Financial Products LLP (which I shall call "Arch"), should pay a total of approximately £24,358,169 including interest, divided between each of the six claimants.

Mr Justice Walker also ordered Mr Farrell to pay the claimants' indemnity costs and ordered a payment of £1.4 million on account of costs by 2 January 2015. The trial had lasted some 15 court days between 21 November 2013 and 13 February 2014. So the judgment took nearly a year to deliver. Without its lengthy appendices, the judgment ran to some 359 paragraphs.

Mr Justice Walker refused permission to appeal on the grounds that the intended appeal related to his findings of fact and that the only point of law concerned the alleged release and he had applied established principles to the facts that he had found. I stayed the orders for payment against Mr Farrell on 30 December 2015 pending this hearing before two Lord Justices of appeal.

The claimants are investors and Arch was their investment manager. Mr Farrell was, as I say, the chief executive officer of Arch, and Arch went into creditors' voluntary liquidation on 15 January 2015.

In the broadest of outline, the claimant sued Arch and Mr Farrell in two separate actions that were heard together by Mr Justice Walker. The core findings made by the judge were, first, that Arch's decision to invest the claimants' funds in October 2007 in the purchase of a student housing business known as "Club Easy" run by the Club Easy group of companies was driven by Arch's desire to obtain illegitimate payments of some £3 million rather than by the interests of the claimants and, secondly, that Mr Farrell had dishonestly assisted Arch in breaching its fiduciary duties to the claimants and in inducing its breaches of contract.

The complicated structure of OEICS (UK open-ended investment companies) and Guernsey cells, through which the investments were made, is not actually relevant to what we now have to consider. But it is important to note that the claimants' funds were actually invested in an Isle of Man company called Lonscale Ltd (which I shall call "Lonscale").

The sole question for us today is whether Mr Farrell, not Arch, which no longer seeks to appeal the judge's decision, has a real prospect of success in his proposed appeal. His grounds of appeal have not been succinctly stated in a separate document as they should have been, but broadly appear from his skeleton argument. Mr Farrell has submitted to us today that he only had two days to draft his grounds of appeal between the provision of a draft judgment by Mr Justice Walker and the handing down of that judgment on 18 December 2014. But, in my judgment, he could, and perhaps should, have refined and added, as he wished, to those grounds of appeal in the period allowed for appealing after the judgment was delivered. In fact, what has occurred is that Mr Farrell has produced only yesterday to the Court a list amounting to some 48 pages identifying alleged errors in the judgment which are not those that appear in his grounds of appeal for skeleton argument. That, I should say, is not an appropriate way to proceed. Moreover, it does not give the court a proper opportunity to consider the points that an appellant wishes to raise, particularly in a case of this importance. I shall return to those matters in due course.

I put my summary of Mr Farrell’s main grounds of appeal as contained in his original skeleton argument to him in the course of argument to seek his confirmation that they properly reflected the main points that he wished to argue. Mr Farrell was good enough to give the court that confirmation. Those main grounds of appeal were as follows under three main headings.

The first ground of appeal then is that the judge was wrong to find that Arch owed fiduciary duties to the claimants.

The second ground of appeal is that the judge ought not to have made findings of dishonest assistance against Mr Farrell on the basis of six main points as follows: (a) that the judgment lacked rigour and that the findings of dishonesty were vague and unspecific; (b) that the judgment ignored the extensive evidence of the commercial rationale for the transaction; (c) that the claimants expressly consented to the transaction; (d) that the evidence was insufficiently strong to meet the appropriate burden of proof for a fraud allegation; (e) that the judgment was delayed and the judge changed his mind in three specific areas; and (f) that the findings did not accord with the claimants' pleaded case. As will appear in a moment, grounds (b) and (c) under this heading were amplified in the course of argument by Mr Farrell's reference to the new 48-page document and by other oral submissions to which I shall refer.

The third heading of Mr Farrell's proposed appeal is that the judge was wrong to find that the waiver agreement, dated 22 October 2009, entered into by Arch and the claimants did not have the effect of barring the claim. This is partly a construction issue as to whether the waiver went further than waiving claims in relation only to what I shall call "cross investment fees".

In the course of oral argument, as I have indicated, Mr Farrell added four main First, he submitted that the alternative case advanced by the defendant was not properly considered by the judge. That alternative case was that the transaction in question under which Arch earned the £3 million fee was in fact a corporate finance transaction in which Arch could properly and reasonably have been expected to make a significant profit and not a transaction arising from the investment management agreement. The second point was that the judge made a blatant error in disregarding the base prospectus as having legal effect. The judge's judgment in this respect is to be found at paragraphs 195 to 198 and Mr Farrell submits that the base prospectus was a significant part of the disclosure package, that it was seen by the claimants, and that the judge was quite wrong to find that the document was not a final document despite the presence of square brackets. The third point that Mr Farrell made orally was that the judge had disregarded the document evidencing that Mr Barkman had made a capital gain rather than receiving a fee. That was an e-mail sent two weeks before the transaction took place. Mr Barkman paid Arch's fee eight days after the transaction, not in accordance with the fee instruction of 27 October 2007, but as part of that capital gain. The fourth point argued by Mr Farrell orally is to the effect that the judge failed to consider the question of whether proper disclosure had been made in the round as opposed to salami slicing (if I can use my own terminology) the appreciation of the events of disclosure. I shall return to those points too in due course.

It is impossible to summarise fairly a judgment of such length, but it is useful I think just to mark the sections of the judgment and the salient parts of it that affect the grounds of appeal as follows: first, the judge found that Mr Farrell's evidence could not be relied upon, and that whilst he had not made a personal gain from the transaction, he had knowingly misled the court about Arch's role in 2007 in relation to the suggestion that Mr Barkman paid a £3 million fee to Arch out of an alleged "£6 million capital gain made by Mr Barkman" and in saying that Arch had complied with the advice it had received about the fair management of conflicts of interests. The judge the dealt in detail with the evidence of the other witnesses and experts, but I do not need to summarise what he said here.

The judge expressly took account of the inequality of arms arising from the fact that Mr Farrell was, throughout the hearing, a litigant in person. He dealt with that in paragraphs 109 to 110 of his judgment. It is fair to say that Mr Farrell has not made much of that in his oral submissions before us.

The judge also made factual findings as regards both the events of 2007 and the alleged disclosure of the £3 million payment to the claimants at paragraphs 111 to 161 of his judgment. Thereafter, he dealt with Arch's duties and the exclusion of those duties by paragraphs 12, 13 and 18 of the Investment Management Agreements. The judge concluded that Arch retained an overriding duty to manage any conflict of interest fairly. He reached that conclusion on the true construction, as he saw it, of the Investment Management Agreements.

From paragraphs 182 to 199 of the judgment, the judge concluded that Arch had not fully and properly disclosed the circumstances of the £3 million payment to the claimants. That, as it turns out, is a part of the judgment upon which Mr Farrell has focused in his oral argument and to which again I shall return.

Between paragraphs 200 and 242, the judge dealt with Arch's breaches of duties to the claimants in October 2007 and subsequently. In paragraphs 243 to 264 of the judgment, the judge dealt with Arch's breaches of fiduciary duty and, in particular, its failure to manage the conflict of interest that existed between Arch and the claimants fairly. That was the content of the duty, as he found it to arise, as a result of the contractual provisions in the Investment Management Agreements.

Paragraphs 286 to 292 of the judgment conclude that Mr Farrell was liable for inducing the breaches of contract already found against Arch. Penultimately, as regards the alleged waiver, the judge concluded that it only related, on its proper construction, to claims relating to the cross investment fees and not to claims of the kind actually brought in these actions. Finally, in paragraphs 308 to 358, the judge dealt with causation, remedies and recoverability. These sections are not the subject of the intended appeal.

I shall now attempt to deal with each of the grounds of appeal in turn, taking into account the oral submissions that Mr Farrell has made to elaborate upon those grounds.

In my judgment, therefore, an appeal challenging the judge’s holding that such a duty was owed by Arch to the claimants has no real prospect of success. There is also, in my judgment, no basis on which the claimant can succeed in introducing the new evidence that he wishes to rely upon because that evidence was available before the trial so any application would fail under the first rule in Ladd v Marshall.

This heading, in some part at least, is really the core of Mr Farrell's intended appeal. His claim is that the judge's judgment was inadequate to support findings of dishonesty against him. If he were right in that submission, he would obviously be entitled to permission to appeal.

This, as I say, is the core of Mr Farrell's attack. He says that the judgment failed to explain properly why his evidence was rejected and why he had been dishonest. He draws attention to the seriousness of the allegations and to the fact that the findings will likely ruin his career in the financial services industry. I take all that very seriously into account, but, in my judgment, the attacks on the judge's judgment are broadly unrealistic.

This can be illustrated by reference to the specific criticisms that Mr Farrell made in his original submissions. He said, for example, that it was unchallenged that "there was no element of concealment, suppression or secrecy". But that, in my judgment, completely ignores the thrust of the judge's judgment, which was that there was no adequate disclosure of the fact that the £3 million fee would be financed almost entirely by the claimants.

Mr Farrell says also that it was unchallenged that "the portfolio managers and Investment Committee made the decisions on behalf of the claimants". But the judge found that there was no evidence of any involvement from the portfolio managers and Investment Committee. Mr Farrell alleges that the judge accepted what he "thought" as true, but he did not. He rejected Mr Farrell's account of the transaction, if I can put it in a colloquial manner, lock, stock and barrel. Mr Farrell says that he genuinely believed that disclosure had been made, but the judge rejected that contention.

Next, in this connection, Mr Farrell submits that it was unchallenged that "there was a legitimate commercial rationale for the Lonscale investment", but the judge did not accept that at all, as we see for the reasons he gives at paragraphs 112 to 139 and paragraphs 200 to 233 of the judgment.

Likewise, Mr Farrell says that it was not mentioned in the judgment that the claimants made initial gains and further healthy gains when they sold some of their notes in November and December 2007, but that in fact was mentioned at paragraph 43 of the judgment.

In addition, in relation to the question of whether the findings of dishonesty were vague and unspecific, it is worth mentioning Mr Farrell's main oral submission to the effect that this was a corporate finance transaction in which Arch could expect to make profits. That does not seem to be the way the case was put at the trial but, nonetheless, it is worthy of consideration. Of course it is right that corporate finance transactions do often attract large fees; that is very well-known. But the relationship between Arch and these claimants was not of corporate financier and client but of investment manager and client, and that was the nature of the agreement between them. Thus, that point and the point about Mr Barkman's capital gain do not really assist Mr Farrell and Arch in showing that the judge misunderstood the transaction or was wrong, even possibly, in his characterisation of it and his rejection of Mr Farrell's evidence about it. In my judgment, therefore, this aspect of the attack on the finding of dishonest assistance in a breach of fiduciary duty has no real prospect of success.

This of course is very much the other side of the same coin that I have already dealt with. The judge considered and rejected the suggestion that there was a commercial rationale for the £3 million payment and therefore for the investment. In my judgment, there is no basis upon which Mr Farrell can submit that it is likely that the Court of Appeal could or would find that the judge had no proper basis for doing so. In these circumstances, this ground too has no real prospect of success.

This is another cornerstone of Mr Farrell's argument. He somewhat glosses over the fact that significant sections of the judgment, at paragraphs 140 and following and 182 to 199, explain in full detail why the judge found that there was no adequate disclosure of the payment and no consent by the claimants to it. The judge concluded at paragraph 264 that, had the claimants been informed that they would be funding almost the entirety of the £3 million payment, "I am sure they would have objected in the strongest possible terms."

In oral argument, it became clear, as I have said, that Mr Farrell's main contention was that one should look at the disclosure in the round and that the base prospectus at least was sufficient to make a proper disclosure of the payment. In my judgment, however, the judge considered this properly and carefully at paragraphs 195 and 198 and considered, first, that the base prospectus was only a draft but that, even if it was not, it was not sufficient to amount to full, frank and proper disclosure of the payment. Indeed, Mr Farrell came close to accepting that that was not done when he said that the disclosure had been made back in August 2007, some three months before the transaction and its mechanism was finally concluded in October 2007, and had only been on the basis that there would be a seven figure fee, to which the executive directors replied that that would be normal. As I pointed out in oral argument, there is a very large difference between a seven figure sum beginning with a one and a seven figure fee beginning with a nine. It is hard to say that there is fully informed consent given when the directors in question did not know and were not told the amount of the fee in question or its precise origins.

In my judgment, therefore, it is not possible for Mr Farrell to demonstrate that he has a real prospect of showing that the judge was wrong not to hold that the claimants had expressly consented to the transaction involving the payment of a £3 million fee, mostly taken from the funds invested by the claimants.

The judge correctly directed himself as to the civil standard of proof where allegations of fraud are made. There can be no proper appeal, therefore, against his findings on the basis that he did not apply what he fully understood to be the correct approach. Indeed, I should note that Mr Farrell has not majored on that point in the course of his oral argument.

I confess to having found the judge's clerk's email of 7 November 2014 unusual. It was perhaps unwise for the judge to have descended to particularity as to the development of his judgment, but I cannot see that the fact that he did so renders his judgment unsafe or indeed obviously unsatisfactory. He never said what parts of the judgment he was reconsidering. A judge is entitled to consider and reconsider his judgment. Indeed, he should do so in order to ensure that he is entirely satisfied with its contents before releasing it to the parties. In my judgment, therefore, there is no prospect of a successful appeal based on the email alone.

I should say, however, that the judgment was very long delayed. The case itself had been repeatedly adjourned, for reasons we have not been given, over more than a year. That fact alone should have led the judge to prioritise his judgment and ensure that it was released quickly. The fact that he took nearly a year to deliver his judgment is an unsatisfactory delay. I quite understand the case was a long and difficult one but, nonetheless, that is an area of concern. It is not, however, an area which, in my judgment, gives rise to a freestanding basis for an appeal.

I have looked at the claimant's pleaded case and I have looked at the findings of the judge. On analysis, I am quite satisfied that this is a bad point. As the respondents’ helpful written submissions explain, the essence of what the judge found was indeed pleaded. The judge decided the case properly, in my judgment, on the evidence before him. Indeed, the case was not, in the end, as complicated as it might at first have appeared. As far as Mr Farrell was concerned, it was a question of whether he had acted dishonestly within the test in Barlow Clowes or not: the judge found that he had.

This, I confess, is the ground of appeal that has given me the most pause for thought. Mr Farrell argues that the judge misconstrued the waiver agreement because the formulation of the waiver contained in the letter dated 22 October 2009 is different from the confirmation of the waiver at the end of that letter that was signed on behalf of the claimants. It is perhaps worthwhile indicating in outline terms what that difference was. It was in paragraph 2 of the letter that the claimants were asked to agree “to provide to us a full release in respect of any claims, the fund or any one or each of them may have against [Arch], whether past, present or future, actual or contingent, known or unknown, suspected or unsuspected, and whether in the contemplation of the funds or any one or each of them, at the time of entering into the said full release, in relation to the trust investment fees or not [emphasis added]." The release signed on behalf of the claimants is in similar terms but different in that it omits the words "or not". I will not read out the precise terms in order not to lengthen what is already too long a judgment.

Mr Farrell submits that in his judgment the judge ignored this discrepancy and also ignored the context of the waiver agreement, which he submits would make no commercial sense if it were only in relation to the cross investment fees. First, it must be understood that waivers of this kind must be strictly construed, particularly where it is alleged that they are waiving claims for fraud, and even more so if they are said to waive claims for a fraud about which the claimants were unaware at the time that they signed the agreement. But Mr Farrell is also wrong to say that the judge did not deal with the matter. He dealt with it at paragraph 303 of his judgment where he described the "or not" point as obviously false. He said:

I might say, in Mr Farrell's favour, that the release does start, "We hereby confirm our agreement to the terms of this letter", but where the precise terms of the release actually signed and the release sought are inconsistent, it seems to me that the terms of the signed release must govern. Moreover, it seems to me that it would be very difficult, if not impossible, to successfully argue that the claims for fraud were released by such terms. In those circumstances, it seems to me that this ground of appeal also has no real prospect of success.

For the reasons that I have given, I would dismiss the application for permission to appeal. I should not leave this judgment, however, without paying credit to the courteous manner in which Mr Farrell presented his arguments before us. I also would like to make it clear that his arguments have been carefully considered outside court on the basis of his written documentation. Although Mr Farrell will undoubtedly regard the decision as harsh, it is sometimes properly to be regarded as a blessing not to be put through an appeal that you are going to lose rather than having to argue it at great length and great expense, in emotional terms even if you argue it yourself, just in order to fail when it comes on for hearing. I, for one, am quite satisfied, having considered all that Mr Farrell has put before the court, that he has no real prospect of succeeding in this appeal. In those circumstances, I will dismiss his application.

It is impossible to underestimate the seriousness of the impact of this judgment if it stands against Mr Farrell. I, like my Lord, have therefore looked very carefully at the factors that he raises in this case.

However, for the reasons that my Lord has given, I too agree that there is no reasonable prospect of success. I associate myself particularly with the remarks that my Lord has made in conclusion: we would not be doing Mr Farrell a favour to give him permission on this appeal which has no real prospect of success.

I would, in addition to the detailed points my Lord makes, simply say this: at the core of the judge's findings is the finding about dishonesty. Looking at that, it seems to me that, for the reasons that the judge has given, it is a completely unassailable finding on appeal. There could be no basis upon which this court could hold that that finding was outside the band of decisions open to the judge on the evidence as he found it to be.

For the reasons that my Lord has given, and with those additional observations, I too would refuse permission to appeal.