Fairbriar Plc v Van Reyk & Anor

In this case I have to decide a preliminary issue as directed by Master Price in his order of 5^th March 2007 by consent as follows:-

“Whether the claim by the Claimant against the First Defendant has been compromised and released by an agreement entered into between the Claimant and the First Defendant and VR Development Limited on or about 11^th October 2004.”

The Claimant is the holding company of a group of companies which carry on the business of property development. Fairbriar Projects Limited (“FPL”) is a subsidiary of the Claimant. The First Defendant, Philip van Reyk (“Mr van Reyk”) was, in 1992, appointed a director of the Claimant. In 1997 he became the Claimant’s joint chief executive officer and in February 1999 he became the sole managing director of the Claimant. The Second Defendant, Robert Bourne (“Mr Bourne”), owned and controlled Robourne Limited (“Robourne”). Mr Bourne was the principal beneficiary of a pension trust known as the RAB Pension Trust (“the Pension Trust”). Robourne and the Pension Trust were the owners of two parts of a development site in Islington (“the Islington site”) comprising a theatre and other land suitable for commercial and residential development. On 8^th March 2000 the Claimant and FPL entered into two contracts with Robourne and the Pension Trust respectively (“the 2000 Agreements”) for the development of the Islington site. By clause 2 (1) of each of the 2000 Agreements Robourne and the Pension Trust Trustees (“the Trustees”)undertook to obtain “a viable planning permission” in respect of the Islington site. By clause 6 (3) of those agreements it was provided that either party might by written notice terminate the agreements if no resolution for the granting of planning permission had been obtained by 1^st December 2000. By clause 11 it was the responsibility of Robourne and the Trustees to obtain vacant possession of the Islington site. Upon completion of the development Robourne and the Trustees were to grant to FPL a long lease of the Islington site as developed. On 16^th October 2000 the planning authority resolved to grant planning permission in respect of the Islington site but subject to the developers entering into a Section 106 agreement the final terms of which had not been agreed.

On 29^th September 2000 Mr Bourne was appointed a director of the Claimant. At a board meeting of the Claimant on 6^th November 2001 Mr van Reyk presented to the board a written memorandum and investment appraisal in respect of the Islington site for approval by the board. Subsequently, new development agreements in respect of the Islington site (“the 2002 Agreements”) were approved at an extraordinary general meeting of the Claimant on 16^th May 2002 and executed on 24^th July 2002. The 2002 Agreements had three relevant effects: the first, an increase in the price payable by the Claimant from £3 million to £5.25 million: the second, the release of Robourne and the Trustees from their obligation to obtain vacant possession of the Islington site: and the third, the imposition of an obligation on the Claimant to pay rent (“the Penalty Rent”) to Robourne and the Trustees in the event that the leisure facilities comprised in the development were not completed on time, regardless of the cause of any delay causing that failure. These proposals were incorporated in new development agreements in respect of the Islington site (“the 2002 Agreements”) which were approved at an extraordinary general meeting of the Claimant on 16^th May 2002 and executed on 24^th July 2002.

It is the Claimant’s case in these proceedings that the provisions of the 2002 Agreements were recommended to the board of the Claimant by the Defendants without drawing their attention to the significantly more onerous terms placed upon the Claimant by them and on the basis that there was no other route for the Claimant to follow because the 2000 Agreements had been, effectively, terminated. It is the Claimant’s case that the Defendants were under a duty to draw the attention of the board to the fact that the 2000 Agreements had not been terminated and to what they alleged was the adverse effect upon the Claimant of entering into the 2002 Agreements which they failed to do. Accordingly they claim damages for breach of fiduciary duty.

After the entry into the 2002 Agreements progress with the development of the Islington site was slow. The theatre specification could not be agreed and it took until July 2003 to obtain vacant possession of the site. It was decided that the management of the development should be reorganised. That reorganisation involved Mr van Reyk ceasing to be a director of the Claimant but continuing to manage the development through his company VR Developments Limited (“VRD”) entering into a Management Services Agreement with the Claimant and VRD and Mr Bourne personally entering into an Investment Agreement with the Claimant. The purpose of these agreements was to keep Mr van Reyk involved in the projects which he had been in charge of when a director of the Claimant and to give him a direct financial incentive to get the development finished successfully while, at the same time, removing him from the Claimant’s management. The Management Services Agreement (“the MSA”) and the Investment Agreement (“the IA”) were entered into on 30^th January 2004 and became effective upon shareholder consent being obtained on 6^th April 2004. Those agreements (“the 2004 Agreements”) conferred on Mr van Reyk various management functions in respect of the development and the opportunity to earn bonuses in the event that he met defined performance criteria.

Mr van Reyk and Mr Bourne resigned as directors of the Claimant on 6^th April and 9^th July 2004 respectively.

The new arrangements comprised in the 2004 Agreements did not have the results sought by the Claimants. It proved impossible for agreement to be reached with Mr Bourne, acting for Robourne and the Trustees, to agree a detailed specification in respect of the development. It was proposed by Mr Kevin McCabe (“Mr McCabe”) a director and the non-executive chairman of the Claimant that there should be a yet further management reorganisation, taking the form of a three-party joint venture in respect of the Islington development between the Claimant, VRD and Tullochs (a building contracting company). It proved impossible to arrive at agreed terms for such a joint venture and it was accordingly proposed that the 2004 Agreements be worked out and terminated under a yet further agreement known as the “Supplemental Agreement” which was dated 11^th October 2004.

The preliminary issue which I have to determine concerns the true construction of the Supplemental Agreement and, in particular, clause 8 of that Agreement. Under the heading “Rights and Claims” that clause provides as follows:-

“The parties hereto acknowledge that the terms of the Management Services Agreement and the Investment Agreement have been fully complied with by each party. The parties hereto further confirm that no party has any claim for any antecedent matter whatsoever against another party.”

This preliminary issue concerns the proper construction of the second sentence in clause 8 and whether it operates to release Mr van Reyk from the claims (“the Misfeasance Claim”) against him in these proceedings that, at a time when he was a director of the Claimant, he breached his fiduciary duties to the Claimant by failing to clearly draw to the attention of the Claimant’s board the additional burdens which the Claimant was undertaking by entering into the 2002 Agreements and by failing to advise them that the 2000 Agreements remained in effect and could provide the Claimant with a route out of the Islington site development without incurring the losses which the Claimant has incurred in pursuing that development under the 2002 and 2004 Agreements.

There is no substantial issue between the parties as to the relevant applicable law. The terms of written contracts fall to be construed in accordance with the natural meaning of the words used by the term in question when read together with the other terms of the agreement and against the matrix of fact which each of the parties to the agreement had in contemplation at the time the agreement was made see per Lord Hoffmann in the leading case of ICS Limited v West Bromwich Building Society1998 1WLR896 at page 912.

Mr van Reyk relies on the second sentence of clause 8 as an “exemption clause” exempting him from liability in respect of the misfeasance claim. In Chitty on Contracts (29^th edition) at paragraph 14-005, the following passage appears:-

“Exemption clauses must be expressed clearly and without ambiguity or they will be ineffective. The clause must clearly express what its intention is.”

Then referring to a decision at the Court of Appeal where it was said “if a person was under a legal liability and wished to get rid of it he could only do so by using clear words” the passage continues:-

“Exemption clauses will therefore be construed strictly, and the degree of strictness appropriate to their construction may properly depend upon the extent to which they involve departure from the implied obligations ordinarily accepted by the parties in entering into a contract of a particular kind and whether the clause purports entirely to exclude an obligation or liability or merely to limit the compensation recoverable from the party in default. However the rules of construction applicable to written contracts apply equally to exemption clauses to ascertain what meaning the words were intended to bear. If the clause is expressed clearly and unambiguously there is no justification for placing upon the language of the clause a strained and artificial meaning so as to avoid the exclusion or restriction of liability contained in it. … Each clause must be considered according to its actual wording, but it must clearly extend to the exact contingency or loss which has occurred if it is to protect the party relying on it.”

In BCCI v Ali [2002] 1AC page 251 the House of Lords was considering the words of an exemption clause contained in an agreement entered into by an employee of BCCI who, before the collapse into insolvency of that bank, was made redundant and entered into an agreement compromising his claims against BCCI which contained a provision whereby he agreed “to accept the terms set out in the documents attached in full and final settlement of all or any claims whether under statute, common law or in equity of whatsoever nature that exist or may exist and, in particular, all or any claims rights or applications of whatsoever nature that the applicant has or may have or has made or could make in or to the industrial tribunal, except the applicant’s rights under the bank’s pension scheme.” The employee sought to set off against the liquidator of the bank’s claim to recover the amounts of monies lent to him by the bank, a claim for damages for injury to his future employment prospects by having been associated with the malfeasance of BCCI. In the result the House of Lords concluded that the clause did not operate to release the bank from such a claim which neither the bank nor the employee could reasonably have had in contemplation at the time the agreement in question was made. In his speech at page 259 of the report Lord Bingham said this:-

“8 I consider first the proper construction of this release. In construing this provision, as any other contractual provision, the object of the court is to give effect to what the contracting parties intended. To ascertain the intention of the parties the court reads the terms of the contract as a whole giving the words used their natural and ordinary meaning in the context of the agreement, the parties’ relationship and all the relevant facts surrounding the transaction so far as is known to the parties. To ascertain the parties’ intentions the court does not of course enquire into the parties’ objective states of mind but makes an objective judgment based on the materials already identified. The general principle summarised by Lord Hoffmann in [the ICS case] apply in a case such as this.

9 A party may at any rate in a compromise agreement supported by valuable consideration agree to release claims or rights of which he is unaware and of which he could not be aware even claims which could not on the facts known to the parties have been imagined, if appropriate language is used to make plain that that was his intention.”

Lord Nicholls in his speech at page 265, having held that “there is no room for any special rules” for the interpretation of clauses giving a general release, continued:-

“The mere fact that the parties were unaware of the particular claim is not a reason for excluding it from the scope of the release. The risk that further claims might later emerge was a risk the person giving the release took upon himself. It was against this very risk that the release was intended to protect the person in whose favour the release was made. For instance a mutual general release on a settlement of final partnership accounts might well preclude an erstwhile partner from bringing a claim if it subsequently came to light that inadvertently his share of profits had been understated in the agreed accounts.

28 This approach however should not be pressed too far. It does not mean that once the possibility of further claims has been foreseen a newly emergent claim will always be regarded as caught by a general release, whatever the circumstances in which it arises and whatever its subject matter may be. However widely drawn the language, the circumstances in which the release was given may suggest, and frequently they do suggest, that the parties intended, or more precisely, the parties are reasonably to be taken to have intended, that the release should apply only to claims known or unknown, relating to a particular subject matter. The court has to consider therefore, what was the type of claim at which the release was directed, for instance, depending on the circumstances, a mutual general release on a settlement of final partnership accounts might properly be interpreted as confined to claims arising in connection with the partnership business. It could not reasonably be taken to preclude a claim if it later came to light that encroaching tree roots from one partner’s property had undermined the foundations of his neighbouring partner’s house. Echoing judicial language used in the past, that would be regarded as outside the “contemplation” of the parties at the time the release was entered into, not because it was an unknown claim, but because it related to a subject matter which was not “under consideration”.”

It will be seen, therefore, that an important consideration is to discover, from the words of the whole agreement, read in the context of the matrix of fact existing at the time it was entered into, the intentions of the parties in entering into it. For this purpose the recitals of the Supplemental Agreement are important and I will set them out in full:-

“WHEREAS:

(A)

Fairbriar and VRDL entered into a Management Services Agreement on 30^th January 2004 in terms of which VRDL agreed to provide services to Fairbriar and its subsidiaries in return for the fees and upon the terms set out therein (the “Management Services Agreement”);

(B)

Fairbriar, VRDL and PVR [Mr van Reyk] entered into an Investment and Shareholder’s Deed on 30^th January 2004 for the regulation of their relationship as shareholders of VRDL (the “Investment Agreement”);

(C)

VRDL executed a loan stock instrument on 6^th April 2004 creating up to £295,000 Redeemable Secured Loan Stock (the “RSLS Instrument”), and on the same date Fairbriar subscribed for £295,000 in nominal value of such loan stock; and

(D)

The parties wish to enter into this Supplemental Agreement to record certain amendments to their respective relationships with effect from Friday 1^st October 2004 (the “effective date”).

it is hereby agreed as follows: ”

Clause 2 of the Supplemental Agreement amends the provisions of the MSA to provide for the continued payment of management fees by the Claimant to VRD until specified dates for the properties to which it relates after which such payments cease. The remainder of clause 2 deals with the termination of the MSA and what will happen to documents, furniture etc. used in its performance.

Clause 3 deals with the IA and with a loan stock instrument which acted as an adjunct to the IA. Under this clause the Claimant agreed to sell its interest in VRD to Mr van Reyk. By clause 3.2 the Claimant expressly waives its rights both present and future in relation to a particular part of the Investment Agreement relationship. Clause 3.4 provides:

“The parties hereby undertake and agree that [the Claimant] shall cease to have any rights or obligations under the Investment Agreement and/or the RSLS Instrument, and that the Investment Agreement and RSLS Instrument shall terminate with effect from the effective date as regards [the Claimant].”

Clauses 4, 5, 6 and 7 deal briefly with costs, counterparts of the Supplemental Agreement, third party rights and an “entire agreement” provision respectively. Clause 9 defines the governing law of the Supplemental Agreement.

It is Mr Trower’s submission on behalf of Mr van Reyk that the second sentence of clause 8 constitutes a general release given by the Claimant in the context of a final termination of the relations between Mr van Reyk and his business interests and those of the Claimant. It is common ground that Mr van Reyk and Mr McCabe had had a final falling out over the Islington development with Mr McCabe blaming Mr van Reyk for the Claimant’s losses resulting from it. It is certainly true that the words of the second sentence of clause 8, taken by themselves, are capable of constituting a general release by the Claimant of all claims against Mr van Reyk existing at the date that the Supplemental Agreement was entered into.

However in agreement with the submissions of Mr Snowden for the Claimant, the words of clause 8 when read with the provisions of Recital (D) lead me to the conclusion that the second sentence of clause 8 is to be read as being supplemental to the first sentence and thus confirming that the parties were waiving all possible claims against each other in respect of the performance of the 2004 Agreements existing at the date of the Supplemental Agreement, but without prejudice to any claims that might arise as a result of the working out of the 2004 Agreements under their provisions as amended by the Supplemental Agreement.

In my view it is not insignificant that the Supplemental Agreement is so called. The use of that description invites the question, “Supplemental to what?” It is plain that that question has to be answered “supplemental to the 2004 Agreements.” Recital (D) confirms that answer. It provides that the purpose of the Supplemental Agreement is to carry out “the parties’ wish to enter into this Supplemental Agreement to record certain amendments to their respective relationships ….” The purpose of the agreement is therefore simply to amend the 2004 Agreements, the only subsisting contractual relationships between them by this time. The next four pages of the Supplemental Agreement are entirely concerned with the amendments which Recital (D) envisaged to the 2004 Agreements to provide an orderly framework for bringing those Agreements to an end.

I cannot be satisfied that the parties, in agreeing to the second sentence of clause 8, had in contemplation that it covered claims for breach of duty by Mr van Reyk as a director of the Claimant dating from two years before the 2004 Agreements, to which the Supplemental Agreement was supplemental, and further again from the date of the Supplemental Agreement itself. I am not driven from this conclusion by the use of the word “whatsoever” in the second sentence of clause 8. That word does not require a contrary conclusion.

Finally it is not insignificant that the words of the second sentence of clause 8, though read separately are capable of constituting a general release of Mr van Reyk, do not follow the familiar wording used in such clauses. By contrast with the clause under examination in the BCCIv Alicase it does not appear that the drafter of clause 8 has worked very hard at covering all possible claims.

Mr Snowden further contended that, at the time the Supplemental Agreement was entered into, although there is evidence that Mr McCabe was investigating the possibility of bringing proceedings to compel Mr Bourne to agree a detailed specification for the Islington development and, from time to time, Mr van Reyk was mentioned as a possible defendant, Mr van Reyk was not justified in concluding at any material time that he was threatened by a claim for breach of duty as a director of the Claimant in respect of his carrying out those functions in 2002 so as to support the contention that clause 8 was drafted with the possibility of claims, outside the ambit of the 2004 Agreements, in view.

In his skeleton argument Mr Trower pointed to a series of documents or groups of documents, 26 in number, which, he contended, supported a finding that Mr van Reyk was entitled at the material time to feel himself threatened in this way. In addition both Mr van Reyk and Mr McCabe gave evidence supported by witness statements upon which they were cross-examined. Mr Di Ciacca, a lawyer advising Mr McCabe, also gave evidence on the Claimant’s behalf.

I am in no position, of course, to come to any view on the strength or otherwise of the Misfeasance Claim. I am, however, unconvinced by the evidence of Mr van Reyk, that at the time the Supplemental Agreement was entered into, he had any serious anxiety that claims of the kind of the Misfeasance Claim would be brought against him, or that the Claimant (and, in particular, Mr McCabe) was, at that time, contemplating making such a claim, that is, a claim for breach of duty by Mr van Reyk in respect of his conduct of the Claimant’s affairs in early 2002.

This is to be contrasted with possible claims against Mr van Reyk (and Mr Bourne and his companies) arising from their parts in the attempt to develop the Islington site pursuant to the 2004 Agreements. There is ample evidence from the documents in the case that Mr McCabe, frustrated by the inability of the Claimant and the Bourne interests to agree a detailed specification for the development, was searching for a cause of action leading to litigation which would break the apparent impasse in obtaining such agreement. Claims of this type are plainly covered by clause 8.

Cross-examination of the witnesses on either side concentrated on the 26 documents or groups of documents set out in Mr Trower’s skeleton argument. For the sake of brevity and because the parties’ submissions with relation to them are clearly summarised in their written submissions, I will not set the documents out in this judgment. I will simply say that in my judgment documents 1 to 8, 10 to 12, 23, 24 and 25 relate to complaints by the Claimant about the failure to move on the development of the Islington site with resulting losses to the Claimant undermining the profit forecasts which had been made when the 2002 Agreements were entered into. Most of these documents concern the failure to agree a detailed specification for the development. This was an issue between the Claimant, for which Mr van Reyk’s company VRD was acting as managing agent, on one side, and Robourne and the Trustees and Mr Bourne on the other. Mr McCabe’s solution to obtaining agreement on the specification was to give the Bourne interests an incentive to co-operate by involving them in a joint venture in which profits from a successful development would be shared: see document 19. I accept Mr Snowden’s submission that the litigation, the possibilities of which Mr McCabe can be seen to be investigating, was designed either to compel the Bourne interests to co-operate or to nudge them into joining his proposed joint venture which they were resisting, but which would have given them an incentive to co-operate.

In respect of some of the threats of litigation I was unable to determine who actually the Claimant had in mind to sue and/or what the nature of the claim would be: see documents, 13, 20 and 21. In addition, the majority of the threats to litigate which involved Mr van Reyk were contained in documents which were not communicated to him but were internal communications between Mr McCabe and his colleagues and advisors with the result that they cannot be taken as evidence that Mr van Reyk was aware from them that he was threatened with litigation. See documents 15, 18, 22 and 26.

I also accept Mr Snowden’s submission that it is significant that there is no evidence that Mr van Reyk ever protested to Mr McCabe or the Claimant about the threats to sue him, which he now suggests were being made, or any other threat to sue him in respect of his conduct as a director of the Claimant in early 2002.

For these reasons in my judgment this preliminary issue must be determined in favour of the Claimant.