The Law Debenture Trust Corporation Plc v Elektrim SA & Anor (Rev 1)

This is a claim brought by Law Debenture Trust Corporation plc (“the Trustee”), in its capacity as trustee in relation to certain bonds under a Trust Deed in amended form dated 15 November 2002 (“the Trust Deed”). The Trustee is suing to vindicate the rights of the holders of those bonds. The Interested Party (“Concord”) appears as a representative bondholder.

The bonds in question were originally issued in 1999 by a company incorporated in the Netherlands called Elektrim Finance B.V. (“Elektrim Finance”), which was a subsidiary set up the First Defendant (“Elektrim”) as a vehicle for raising finance for Elektrim. Elektrim is a company incorporated in Poland with a range of business interests in Poland. The bonds were issued as convertible Eurobonds for a principal amount of the zloty (or PLN) equivalent of €440,000,000, bearing interest at 3.75% per annum. Elektrim assumed obligations as guarantor of the payment obligations of Elektrim Finance under the bonds.

In 2002, Elektrim and Elektrim Finance were in financial difficulties and could not go on meeting their obligations in respect of the bonds, as they then stood. Against that background, they renegotiated the terms of the bonds with the Trustee and the bondholders. The redemption or face value of the bonds was restated as €510,000,000 (to reflect sums then due in respect of the bonds) and the bondholders agreed to accept a lesser rate of interest, below the current market rates, which Elektrim and Elektrim Finance would be able to service. As a quid pro quo Elektrim agreed – subject to detailed terms set out in condition 6(k) of the renegotiated bond conditions appended to the Trust Deed (“the Conditions”) - to pay a “Contingent Payment” to the bondholders after the end of 2005, calculated by reference to the fair market value of Elektrim’s assets at that time. The basic arrangement, therefore, was that the bondholders would accept lower interest payments over a period of years, thereby assisting Elektrim to survive as a going concern, in return for participating in a share of the value of Elektrim’s assets at the end of that period. Accordingly, if Elektrim’s business interests prospered over that period, the bondholders would share in their growth in value. Under condition 6(k), the Contingent Payment was to be calculated as the result of application of a formula which depended on the assessment of the “Fair Market Value” of assets of Elektrim, as determined by two leading investment banks (one chosen and appointed by Elektrim and the other chosen by the Trustee and appointed by Elektrim at Elektrim’s expense).

In the event, in circumstances reviewed below, the principal and interest due under the bonds was fully paid off and the bonds were finally redeemed only on 25 April 2008. Elektrim did not implement the machinery in condition 6(k) for the calculation and payment of the Contingent Payment. No investment banks were appointed at the relevant time, there was no assessment of the Fair Market Value of the assets of Elektrim performed at the relevant time and no calculation of any Contingent Payment which might be due was carried out at the relevant time. Accordingly, the Trustee’s primary claim is that Elektrim is liable for breach of contract in failing to implement the machinery in condition 6(k) and is liable to pay the Trustee (for the bondholders) damages assessed by reference to the loss of a chance of what the bondholders might have received by way of a Contingent Payment had the machinery in condition 6(k) been operated and investment banks been appointed to make the relevant assessment of Fair Market Value of Elektrim’s assets at the proper time.

Elektrim’s principal response to this claim is to argue that there was no breach of contract, because on the proper construction of condition 6(k) a relevant pre-condition for triggering the requirement for operation of the machinery set out in that provision (namely, as Elektrim contends, that the bonds should in fact have been finally redeemed by the “Final Redemption Date” of 15 December 2005 at the latest) had not been fulfilled. If this defence of Elektrim is not accepted, the parties were agreed that the relevant date according to condition 6(k) at which the value of Elektrim’s assets should be determined and any Contingent Payment calculated (called “the Contingent Payment Determination Date” – “the CPDD”) was 11 July 2006. Elektrim also disputes the value which the Trustee contends investment bankers would have placed on the assets of Elektrim as at 11 July 2006 if the machinery in condition 6(k) had been implemented, and submits that no Contingent Payment would have been found to be payable as at that date according to the terms of condition 6(k).

In case it failed in its primary claim, by reason of Elektrim’s response based on the construction of condition 6(k), the Trustee also presented an alternative case. This was to the effect that Elektrim had contractual obligations under the bond conditions to pay out and redeem the bonds or ensure that they were paid out and redeemed by 15 December 2005, and that if those obligations had been met the alleged pre-condition for the operation of condition 6(k) would have been satisfied. On this argument, the Trustee contended that Elektrim breached those distinct contractual obligations and that it is again liable to pay damages assessed by reference to the loss of a chance of what the bondholders might have received by way of a Contingent Payment had the relevant payment obligations been met at the proper time (with the result that the machinery in condition 6(k) was brought into operation, and investment banks appointed to make the relevant assessment of Fair Market Value of Elektrim’s assets).

Elektrim had a distinct reply to this alternative claim. It contended that the Trustee had already sued it to a judgment dated 14 September 2005 given by Hart J in the English High Court (“the Hart J judgment”) in respect of breach of its obligations under the Conditions to pay out and redeem the bonds or ensure that they were paid out and redeemed, but in those proceedings the Trustee had not claimed damages in respect of non-payment of the Contingent Payment and was now precluded by the doctrine of res judicata from suing in later, separate proceedings for additional damages based on the same breach of those obligations. Elektrim’s contentions as to the low value of its assets as at 11 July 2006, such that no Contingent Payment would have been due at that time, are also relevant to determination of this alternative claim by the Trustee.

In the present proceedings, the parties agreed figures for the fair market value of a range of assets held by Elektrim as at 11 July 2006. Areas of dispute remained in relation to items under the following heads: (i) a holding of 226,079 shares in (about 48% - in fact 47.9998% - of the issued share capital of) Polska Telefonia Cyfrowa Sp. z o.o. (“PTC”), a leading company providing mobile telephone services in Poland (“the PTC shares”); (ii) a holding of 49% of the issued share capital of another Polish company, Elektrim Telekomunikacja Sp. z o.o. (“ET”); (iii) a substantial debt due from ET to Elektrim in the sum of PLN 216,421,000 (“the ET Receivable”); (iv) a further indirect holding of about 1.5% (in fact, 1.4648%) of the issued share capital in PTC, this being what was in substance Elektrim’s share of a holding of about 3% of PTC’s issued share capital owned by a company called Carcom Warszawa Sp. z o.o. (“Carcom”) of which Elektrim owned 49%; (v) a holding of about 43% of the issued share capital of another Polish company, called Zespol Elektrowni Patnow-Adamow-Konin S.A. (“PAK”), which carried on business operating three electricity generating plants (known as Patnow I, Adamow and Konin); (vi) an area of real estate in Warsaw called Port Praski, owned by Elektrim through a subsidiary holding company; and (vii) various miscellaneous receivables and investments owned by Elektrim. The values which investment banks, if instructed to carry out the valuation exercise contemplated by condition 6(k), might have attributed to these items as at 11 July 2006 is examined later in this judgment.

Wojciech Janczyk (“Mr Janczyk”) gave evidence about the negotiations which culminated in agreement on the terms of the Trust Deed. He had been the President of the Management Board of Elektrim at the time of the re-structuring in late 2002 of the bonds which had been issued by Elektrim Finance in 1999. He was appointed to that position on 16 September 2002, after the Management Board of Elektrim had filed a bankruptcy petition in respect of Elektrim with the Polish courts on 13 September 2002. His task was to seek to negotiate new terms with the bondholders to save Elektrim from bankruptcy. An earlier attempt to agree a restructuring of the bonds in June 2002 had broken down.

Mr Janczyk sought to negotiate for time for Elektrim to be able to sell off its main assets (its interests in PTC and ET and in PAK), which was expected would allow it to redeem the bonds in full. Elektrim agreed to rights of participation by the bondholders and Trustee in management decisions of Elektrim and to provide them with security over the assets of Elektrim. A lower rate of interest (2%) was negotiated. Finally, as additional compensation for the bondholders, the Contingent Payment provision was also agreed, which was linked to the value of Elektrim’s assets once the bonds had been fully redeemed. It was designed to enable the bondholders to share in the value created in Elektrim’s assets above a threshold of €160 million.

The parties to the Trust Deed are Elektrim Finance (as the issuer of the bonds), Elektrim (as guarantor of the bonds) and the Trustee. The Trust Deed and the Conditions are governed by English law. Under the Trust Deed, the Trustee assumes responsibility and authority to act to enforce the terms of the bonds to which it relates in favour of the bondholders from time to time. By clause 2.2 of the Trust Deed, Elektrim Finance covenanted with the Trustee that it would pay or procure to be paid the principal and interest due in respect of the bonds on the final maturity of the bonds provided for in the conditions (15 December 2005) or on such earlier date as the bonds might become due and payable under the terms set out in the conditions. Clause 2.3 provided, in relevant part, as follows:

“The Guarantor covenants with the Trustee that it will, in accordance with these presents, on the Contingent Payment Date pay or procure to be paid unconditionally to or to the order of the Trustee or to such account as the Trustee may direct in Euro in immediately available funds the Contingent Payment PROVIDED THAT:

(A)

every payment of the Contingent payment to or to the account of the Principal Paying and Transfer Agent in the manner provided in the Agency Agreement shall operate in satisfaction pro tanto of the relative covenant by the Guarantor in this Clause except to the extent that there is default in the subsequent payment thereof in accordance with the Conditions to the Bondholders;

(B)

in any case where payment of the Contingent Payment is not made to the Trustee or the Principal Paying and Transfer Agent on or before the Contingent Payment Date, interest shall start to accrue on the Contingent Payment (both before and after any judgment or other order of a court of competent jurisdiction) at the rate that was applicable to the Bonds immediately prior to their final redemption (or, if higher, the rate of interest on judgment debts for the time being provided by English law) up to and including the date which the Trustee determines to be the date on and after which payment is to be made to the Bondholders in respect thereof as stated in a notice given to the Bondholders in accordance with Condition 16 (such date to be not later than 30 days after the day on which the whole of the Contingent Payment, together with an amount equal to the interest which has accrued and is to accrue pursuant to this proviso up to and including that date, has been received by the Trustee or the Principal Paying and Transfer Agent); and

(C)

in any case where payment of the whole or any part of the Contingent Payment is improperly withheld or refused upon due presentation thereof (other than in circumstances contemplated by proviso (D) above) interest shall accrue on that part of the Contingent Payment, payment of which has been so withheld or refused (both before and after any judgment or other order of a court of competent jurisdiction) at the rate that was applicable to the Bonds immediately prior to their final redemption (or, if higher, the rate of interest on judgment debts for the time being provided by English law) from and including the date of such withholding or refusal up to and including the date on which, upon further presentation of the Bond, payment of the full amount (including interest as aforesaid) in Euro payable in respect of the Contingent Payment is made or (if earlier) the seventh day after notice is given to the Bondholder (either individually or in accordance with Condition 16) that the full amount (including interest as aforesaid) in Euro payable in respect of the Contingent Payment is available for payment, provided that, upon further presentation thereof being duly made, such payment is made.”

Clause 7.1 provided, in relevant part, as follows:

“The Guarantor hereby covenants with the Trustee that: …

(C)

it will procure the compliance by the Issuer with all the Issuer’s obligations under the Bonds and this Trust Deed;”

Clause 8.1 and 8.2 provided as follows:

“8.1

The Guarantor hereby irrevocably and unconditionally guarantees to the Trustee:

(A)

the due punctual payment in accordance with the provisions of these presents of the Principal of and premium and interest on the Bonds and of any other amounts payable by the Issuer under the Bonds or otherwise under these presents;

(B)

the due and punctual performance and observance by the Issuer of each of the other provisions of the presents on the Issuer’s part to be performed or observed.

8.2

If the Issuer fails for any reason whatsoever punctually to pay any such Principal, interest or other amount, the Guarantor shall cause each and every such payment to be made as if the Guarantor instead of the Issuer was expressed to be the primary obligor under these presents and not merely as surety (but without affecting the Issuer’s obligations) to the intent that the Bondholders will receive the same amounts in respect of Principle, premium, interest or such other amount as would have been receivable had such payment been made by the Issuer PROVIDED THAT:

(A)

where the Issuer is or would be required to deduct or withhold from such payment any amount for or on account of any withholding taxes, upon a call being made under this Clause, the Guarantor shall pay the full amount due to the Trustee as if no withholding or deduction was required to be made by the Insurer; and

(B)

where the Guarantor is required to deduct or withhold any amount for or on account of any withholding taxes, the Guarantor shall pay the amount due to the Trustee under deduction of any withholding taxes, together with such additional amounts as may be necessary to ensure that the Trustee receives a net amount equal to the full amount which it would have received had payment not been made subject to tax.”

Condition 6 of the conditions dealt with matters concerning redemption and purchase of the bonds. Condition 6(a) provided as follows:

“Unless previously purchased or redeemed as herein provided, the Bonds will be redeemed at the Adjusted Principle Amount together with accrued interest on December 15, 2005 (the “Repayment Maturity Date”). The Bonds may not be redeemed at the option of the Issuer or the Guarantor other than in accordance with this Condition 6. Although no further amounts of principle or interest will remain owing on the Bonds after redemption in full of the Bonds at the Adjusted Principle Amount together with accrued interest, the Bonds will remain in existence and retain a right to receive the Contingent Payment (if any) on the Contingent Payment Date in accordance with Condition 6(k).”

At the hearing, Elektrim and the Trustee agreed that the effect of this provision is that the “Repayment Maturity Date” is a fixed date, namely 15 December 2005. This is so, even though it was agreed under condition 12 that if an Event of Default occurred on the part of Elektrim Finance and Elektrim prior to that date, the Trustee could give a notice to them accelerating the time for repayment of the bonds and any interest then outstanding. In fact, as described below and as determined in the Hart J judgment, Events of Default did occur before 15 December 2005 and a valid notice was given by the Trustee accelerating the date for repayment of the bonds to 18 January 2005.

Condition 6(k) is central to the Trustee’s claims in the present proceedings. It provided as follows:

“The Guarantor will pay an amount equal to the Contingent Payment (if any) to the Bondholders on the Contingent Payment Date. The Contingent Payment will be distributed to the Bondholders pro rata to the principal amount outstanding of the bonds that they held immediately prior to the final redemption of the bonds on the Repayment Maturity Date in accordance with Condition 6(a) or, if earlier, immediately prior to the final redemption payment in respect of the Bonds (the “Final Date”).

Within five Business Days of the Contingent Payment Determination Date, the Guarantor shall give notice to the Bondholders (with a copy to Euroclear, Clearstream, Luxembourg, the Principal Paying and Transfer Agent and the Bond Trustee) of the size of the Contingent Payment (if any) and of the date fixed as the Contingent Payment Date.

The Bond Trustee shall be entitled to assume that no Contingent Payment is due under this Condition 6(k) unless and until expressly notified to the contrary in writing by the Guarantor and, if so notified, the Bond Trustee shall be entitled to rely absolutely on any certificate signed by any two directors of the Guarantor as to the amount of the Contingent Payment without being obliged to investigate or verify the accuracy thereof. Any such certificate will be binding on the Bond Trustee and the Bondholders in the absence of manifest error.

For the avoidance of doubt, the obligation to make the Contingent Payment under this Condition 6(k) is an obligation of the Guarantor and not of the Issuer. The Guarantor’s obligation to make the Contingent Payment is secured only by the security described in paragraph (vi) of Condition 8(a) below.

In this Condition 6(k):

“Contingent Payment” means an amount calculated by the Guarantor that is equal to the Relevant Portion of:

(i)

the Fair Market Value; minus

(ii)

(a) €160,000,000 less (x) any payments made by the Guarantor in respect of the purchases or redemptions of its own shares, and (y) the amount of any loans to the Guarantor’s shareholders made or acquired by the Guarantor, in each case before the Contingent Payment Determination Date; and

(b)

50 per cent of the costs incurred by the Guarantor of engaging the investment banks appointed to determine the Fair Market Value.

For the avoidance of doubt, no interest shall accrue on the Contingent Payment during the period between the Contingent Payment Determination Date and the Contingent Payment Date;

“Contingent Payment Date” means such date (being a Business Day) falling no later than 180 days after the Contingent Payment Determination Date as the Guarantor may select and notify as such to the Bondholders in accordance with this Condition 6(k);

“Contingent Payment Determination Date” means a date falling after, but no later than 20 Business Days after, the earlier of:

(i)

the date on which the Guarantor publishes its annual audited consolidated financial statements for the year ending December 31, 2005; and

(ii)

the date on which the Guarantor publishes its annual audited consolidated financial statements for the year ending on the December 31 immediately following the disposal of its interests in the ET Shares, the Carcom Shares and the PAK Shares,

provided that, in the event that the Bonds have been redeemed in full at the Adjusted Principal Amount together with accrued interest, the Guarantor may elect that the Contingent Payment Determination Date shall be the date on which the Guarantor publishes its annual audited consolidated financial statements for the year ending on the December 31 immediately following such redemption;

“Fair Market Value” means the fair market value of the assets of the Guarantor (including, without limitation, the Guarantor’s interest in any affiliates, but excluding the receivables from any loans to the Guarantor’s shareholders made by the Guarantor) after deduction of any debt (but excluding contingent liabilities or amounts due in respect of working capital) and assuming that the Guarantor has no obligations in respect of the Contingent Payment, as determined (by reference to the most recent annual audited consolidated financial statements of the Guarantor) on the Contingent Payment Determination Date by two leading investment banks of international repute, appointed by, and at the expense of, the Guarantor, one chosen by the Guarantor and one chosen by the Bond Trustee, on the basis that:

(i)

if the higher of the two valuations is less than 15 per cent greater than the lower valuation or the two valuations are the same, then the Fair Market Value shall be the arithmetical mean of the two valuations;

(ii)

if the higher of the two valuations is 15 per cent or more greater than the lower valuation, then the Guarantor shall, at the expense of the Guarantor, appoint a third investment bank chosen jointly by the Guarantor and the Bond Trustee to determine the Fair Market Value, which valuation must be no higher than the higher valuation and no lower than the lower valuation determined by the original two investment banks and which valuation shall be conclusive and binding on the Issuer, the Guarantor, the Bond Trustee and the Bondholders; and

(iii)

the investment banks shall act as experts and not as arbitrators, and their determination and findings shall be conclusive and binding on the Issuer, the Guarantor, the Bond Trustee and the Bondholders; and

“Relevant Portion” means:

(i)

in the event that the Final Date occurs in the year ending December 31, 2003, 10 per cent;

(ii)

in the event that the Final Date occurs on or after January 1, 2004 but on or before December 31, 2004, the sum of (A) 10 per cent, plus (B) the percentage rate obtained by multiplying 10 per cent by a fraction (i) the numerator of which is equal to the actual number of days from and including January 1, 2004 to but excluding the Final Date, and (ii) the denominator of which is 366; and

(iii)

in the event that the Final Date occurs on or after January 1, 2005 but on or before the Repayment Maturity Date, the sum of (A) 20 per cent, plus (B) the percentage rate obtained by multiplying 5 per cent by a fraction (i) the numerator of which is equal to the actual number of days from and including January 1, 2005 to but excluding the Final Date, and (ii) the denominator of which is 349. …”

It is convenient at this point to address a principal submission of Elektrim, to the effect that, on proper construction of the first paragraph of condition 6(k), no Contingent Payment would be payable if the bonds were not redeemed by 15 December 2005. Despite the Hart J judgment of 16 September 2005 that repayment of the bonds had been accelerated to 18 January 2005, the bonds were not in fact redeemed until 25 April 2008. Accordingly, Elektrim submits that, on the Trustee’s primary claim based on condition 6(k), no obligation to appoint investment bankers and operate the machinery in that condition arose.

I reject that submission. In my view, on proper construction of condition 6(k), the contractual requirement to operate that machinery to determine whether a Contingent Payment was due and (if it was) to pay it was not dependent upon any pre-condition that the bonds should in fact have been redeemed on or before 15 December 2005:

My decision on this point of construction of condition 6(k) means that I consider that the Trustee is entitled to proceed to claim damages based on the primary formulation of its claim in these proceedings (para. [4] above), and does not have to rely upon its alternative formulation (para. [6] above).

If I had come to a different conclusion on the interpretation of the first paragraph of condition 6(k), the Trustee submitted that I should hold that Elektrim was estopped from denying that the Trustee’s construction of that provision was the correct one or that the Trust Deed should be rectified so as to reflect that construction. For completeness, I should say that, if it had been necessary to do so, I would have accepted these alternative submissions of the Trustee. I deal with these issues at paragraphs [39] - [48] below. The effect of that would have been, again, that the Trustee would have been entitled to proceed to claim damages based on the primary formulation of its claim in these proceedings (para [4] above), and again would not have had to rely upon its alternative formulation (para. [6] above).

Furthermore, again for completeness, I should say that even had I come to conclusions adverse to the Trustee on the interpretation of the first paragraph of condition 6(k) and on the issues of estoppel and rectification, so that the Trustee was compelled to seek to rely upon its alternative formulation of its case (para. [6] above), I would not have accepted Elektrim’s contention that it has a good defence to that alternative claim by reason of the doctrine of res judicata (para. [7] above). I deal with that issue at paragraphs [49]-[52] below.

Reverting to the Trust Deed, the parties were in agreement in relation to certain other aspects of the interpretation of condition 6(k), as follows:

The point at (iii) above serves to emphasise that the Fair Market Value calculation was intended, in broad terms and subject to the detailed wording of condition 6(k), to determine the net value of Elektrim’s assets less its liabilities as at the CPDD. But, as submitted by Mr Miles QC for the Trustee, the provision required a structured approach, involving identification of assets and then, separately, identification of liabilities, without any process of netting off liabilities against assets within each of the categories of “assets” and “any debt [sc. liability]”.

The point at (iv) above is of particular significance in relation to the PTC shares. I will examine below the IAS and their effect upon condition 6(k) in greater detail when considering those shares. At this stage, however, it is convenient to refer to one aspect of the IAS which gave rise to a dispute between the parties on the proper construction of the definition of “Fair Market Value” in condition 6(k). The IAS draw a distinction between items which may constitute assets and liabilities according to the definitions given in the IAS (i.e. according to what I will call “the IAS definition standard”), on the one hand, and the circumstances in which such items are appropriate to be recognised in figures shown as line items in the financial statements of an entity (i.e. according to what I will call “the IAS recognition standard”), on the other. Put shortly, an entity may appear to own something (or have a liability) which might satisfy the definition of asset (or liability) according to the IAS definition standard, but according to the IAS recognition standard it may nonetheless be inappropriate – e.g. on grounds of uncertainty about whether the asset or liability really exists - for that entity to recognise or treat it as an asset (or liability) for inclusion in any quantified figure set out in the line items in its financial statements. Instead, reference might be made to it in notes to the financial statements. Thus, the IAS recognition standard sets out a more demanding test than the IAS definition standard.

The distinction between the IAS definition standard and the IAS recognition standard has a bearing on the proper construction of condition 6(k), and its effect in relation to the treatment of the PTC shares, because the Trustee submitted (with a view to maximising the items to be brought into account as assets in the “Fair Market Value” calculation) that the phrase, “the assets of the Guarantor”, in the definition of “Fair Market Value” is to be interpreted by reference to the less demanding IAS definition standard. Elektrim, on the other hand, submitted that it is to be interpreted by reference to the more demanding IAS recognition standard.

In fact, so far as concerns the treatment of assets in the IAS, a three-fold classification is relevant: assets which fall to be recognised in financial statements; contingent assets, which do not fall to be recognised but instead fall to be made the subject of a note to the financial statements; and contingent assets which do not fall to be recognised and are not required to be made the subject of a note to the financial statements. A “contingent asset” is defined as “a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity” (paragraph 10 of IAS 37). Paragraphs 31 to 35 of IAS 37 provide:

“31.

An entity shall not recognise a contingent asset.

32

Contingent assets usually arise from unplanned or other unexpected events that give rise to the possibility of an inflow of economic benefits to the entity. An example is a claim that an entity is pursuing through legal processes, where the outcome is uncertain.

33

Contingent assets are not recognised in financial statements since this may result in the recognition of income that may never be realised. However, when the realisation of income is virtually certain, then the related asset is not a contingent asset and recognition is appropriate.

34

A contingent asset is disclosed, as required by paragraph 89, where an inflow of economic benefits is probable.

35

Contingent assets are assessed continually to ensure that developments are appropriately reflected in the financial statements. If it has become virtually certain that an inflow of economic benefits will arise, the asset and the related income are recognised in the financial statements of the period in which the change occurs. If an inflow of economic benefits has become probable, an entity discloses the contingent asset (see paragraph 89).”

On this issue of interpretation, I consider that the true construction of condition 6(k) lies between the submissions of Elektrim and the Trustee. The assets which are to be brought into account for the purpose of the “Fair Market Value” calculation in condition 6(k) are those which would properly fall to be recognised in Elektrim’s financial statements (i.e. where the realisation of any income associated with them is “virtually certain”: paragraph 33 of IAS 37) together with those which would be required to be disclosed by way of a note (i.e. “where an inflow of economic benefits is probable”: paragraph 34 of IAS 37). Where an asset is a contingent asset (and hence not to be recognised in the financial statements) and an inflow of economic benefits associated with it is improbable (so that no note is required), it does not qualify as an asset for the purposes of the definition of “Fair Market Value” in condition 6(k).

There are the following indicators in the definition of “Fair Market Value” that the parties contemplated that it would operate in this way so far as concerns the assets of Elektrim to be brought into account:

In the event, I concluded that even if one adopted the different constructions of condition 6(k) in this regard proposed by the Trustee and by Elektrim, it would not make a difference to the outcome of the claim.

There was an issue between the parties as to the period which any investment banks appointed under condition 6(k) would have in which to complete their valuation work. Mr Miles submitted, correctly, that there was no contractually stipulated start point for their appointment, so in theory they could be appointed before Elektrim published its 2005 accounts (perhaps, in the first phase, to work in parallel with the auditors working on those accounts and then to complete their work after those accounts in audited form had been published). Having said that, however, as a matter of impression, the provision for the CPDD to be 20 business days after the publication of the relevant accounts of Elektrim suggests that the parties contemplated that in practice the investment banks might well be instructed to do their valuations by reference to those accounts only once they were published. That impression is reinforced by the fact that the work to be carried out by the investment banks was required under condition 6(k) to be “by reference to the most recent annual consolidated financial statements of [Elektrim]”, which is clearly a reference to the relevant published accounts referred to in the definition of the “Contingent Payment Determination Date”.

Mr Miles also submitted that valuation work by investment banks could in theory continue for a period up to five business days after the CPDD. This is because this was the time stipulated in the second paragraph of condition 6(k) by which Elektrim had to publish the size of the Contingent Payment (calculated by reference to the relevant investment banks’ valuations) to the bondholders and others.

The position here is somewhat complicated, since any timetable for work by the original two investment banks appointed under condition 6(k) would have to allow for the possibility that their valuations might be so far apart that a third investment bank would have to be appointed to produce a final conclusive “Fair Market Value” assessment as set out in condition 6(k), which could then be used to calculate the Contingent Payment to be notified to the bondholders and third parties. This contractual framework suggests that final valuation reports would be required from the original two investment banks some time before the final date for notification of the Contingent Payment. Those first valuation reports could not be finalised before the CPDD (i.e. the date as at which the investment banks were required to value Elektrim’s assets). It would only be if those reports were too far apart that the requirement for appointment of a third investment bank would arise. The five business days between the CPDD and the requirement for Elektrim to publish the Contingent Payment to the bondholders and third parties appears in practice to have been built into the timetable to allow for appointment of a third investment bank if that proved necessary at the last minute. In practice, therefore, the contractual timetable contemplated that the original two investment banks should produce their valuations on or very shortly after (within perhaps a day of) the CPDD itself, and that they would probably be expected to have about 20 business days of time in which to do that.

The exercise in which the court has to engage is to assess the value of the loss of opportunity for the Trustee/bondholders to receive a Contingent Payment by reason of the failure of Elektrim to operate the machinery in condition 6(k). Very sensibly, the parties have presented evidence and made submissions to me regarding how a single notional investment bank would have valued the assets and liabilities of Elektrim in mid-2006. It would not practically be possible to assess whether two investment banks appointed under condition 6(k) might have arrived at valuations so far apart as to require the appointment of a third investment bank to produce a further binding valuation, and there is no evidence which would allow me to assess such a possibility as anything other than highly speculative and remote. This means that I consider that the relevant timetable by reference to which the loss of a chance should be assessed is that which would have been applicable for production of valuations by the notional original two investment banks, and that the cut off in terms of information available for that work would have been the CPDD itself (11 July 2006) or perhaps 12 July 2006. One event occurred in relation to the PTC shares between that time and the date five business days after the CPDD, which would not in practice have been taken into account on this approach (contrary to the submission of Mr Miles). However, in the general scheme of information applicable to the developing picture in respect of the PTC shares I do not consider that event to be of material significance, so I do not think that the choice between a cut off date of 11 July 2006 or a later cut off date within five business days makes any difference to the result in this case.

The issue about the timetable applicable upon notional operation of condition 6(k) in mid-2006 was related to another issue between the parties concerning the proper interpretation of that provision, namely whether (as Elektrim submitted) in carrying out the calculation of “Fair Market Value” in condition 6(k) the investment banks would be obliged to take the inventory of the assets of Elektrim to be valued in that calculation from Elektrim’s 2005 accounts or whether (as the Trustee contended) the investment banks would be entitled and, as necessary, required to look at the matter from a broader perspective, without being limited by what was set out in those accounts. This dispute was of particular significance in relation to the PTC shares, because in Elektrim’s 2005 accounts those shares were not shown in any line item in the accounts as an asset of Elektrim. Instead, by implication, they were reflected in the line item in the accounts which showed Elektrim’s shareholding in ET (i.e. on the footing that ET rather than Elektrim held those shares) – although, as set out in paras. [107] and [108] below, notes 39 and 40 to the accounts referred to the complex history of litigation which I review below and appeared to state that Elektrim was recognised in Poland as the owner of the PTC shares.

On this issue, I accept the submission of the Trustee. It is true that, as Mr Millett pointed out, the definition of “Fair Market Value” stated that it was to be “determined (by reference to the most recent annual consolidated financial statements of the Guarantor)”, which might be taken to suggest that the valuation exercise by the investment banks was to be conducted solely by reference to Elektrim’s relevant consolidated financial statements (i.e. for present purposes, Elektrim’s 2005 accounts). Mr Millett also submitted that the limited time which the parties contemplated that the investment banks might have available to conduct their valuations indicated that the parties intended that those banks should be strictly limited to valuing what was recorded as an asset or liability in Elektrim’s 2005 accounts, and should not make any wider assessment of their own of what might be an asset or liability of Elektrim. These points have some force, but are in my judgment clearly outweighed by the following considerations:

In the context of construction of the conditions, the following parts of the guidance provided by the IAS are of potential relevance for consideration of the treatment of the PTC shares under condition 6(k). The IAS Framework Guidance included the following:

“49.

The elements directly related to the measurement of financial position are assets, liabilities and equity. These are defined as follows:

(a)

An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.

(b)

A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

(c)

Equity is the residual interest in the assets of the entity after deducting all its liabilities.

50.

The definitions of an asset and a liability identify their essential features but do not attempt to specify the criteria that need to be met before they are recognised in the balance sheet. Thus, the definitions embrace items that are not recognised as assets or liabilities in the balance sheet because they do not satisfy the criteria for recognition discussed in paragraphs 82 to 98. In particular, the expectation that future economic benefits will flow to or from an entity must be sufficiently certain to meet the probability criterion in paragraph 83 before an asset or liability is recognised.

51 In assessing whether an item meets the definition of an asset, liability or equity, attention needs to be given to its underlying substance and economic reality and not merely its legal form. Thus, for example, in the case of finance leases, the substance and economic reality are that the lessee acquires the economic benefits of the use of the leased asset for the major part of its useful life in return for entering into an obligation to pay for that right an amount approximating to the fair value of the asset and the related finance charge. Hence, the finance lease gives rise to items that satisfy the definition of an asset and a liability and are recognised as such in the lessee’s balance sheet. …

Liabilities

60 An essential characteristic of a liability is that the entity has a present obligation…

61 A distinction needs to be drawn between a present obligation and a future commitment. A decision by the management of an entity to acquire assets in the future does not, of itself, give rise to a present obligation. An obligation normally arises only when the asset is delivered or the entity enters into an irrevocable agreement to acquire the asset. In the latter case, the irrevocable nature of the agreement means that the economic consequences of failing to honour the obligation, for example, because of the existence of a substantial penalty, leave the entity with little, if any, discretion to avoid the outflow of resources to another party. …

The probability of future economic benefit

85.

The concept of probability is used in the recognition criteria to refer to the degree of uncertainty that the future economic benefits associated with the item will flow to or from the entity. The concept is in keeping with the uncertainty that characterises the environment in which an entity operates. Assessments of the degree of uncertainty attaching to the flow of future economic benefits are made on the basis of the evidence available when the financial statements are prepared. For example, when it is probable that a receivable owed to an entity will be paid, it is then justifiable, in the absence of any evidence to the contrary, to recognise the receivable as an asset. For a large population of receivables, however, some degree of non-payment is normally considered probable; hence an expense representing the expected reduction in economic benefits is recognised.

Reliability of measurement

86.

The second criterion for the recognition of an item is that it possesses a cost or value that can be measured with reliability as discussed in paragraphs 31 to 38 of this Framework. In many cases, cost or value must be estimated; the use of reasonable estimates is an essential part of the preparation of financial statements and does not undermine their reliability. When, however, a reasonable estimate cannot be made the item is not recognised in the balance sheet or income statement. For example, the expected proceeds from a lawsuit may meet the definitions of both an asset and income as well as the probability criterion for recognition; however, if it is not possible for the claim to be measured reliably, it should not be recognised as an asset or as income; the existence of the claim, however, would be disclosed in the notes, explanatory material or supplementary schedules. …

88 An item that possesses the essential characteristics of an element but fails to meet the criteria for recognition may nonetheless warrant disclosure in the notes, explanatory material or in supplementary schedules. This is appropriate when knowledge of the item is considered to be relevant to the evaluation of the financial position, performance and changes in financial position of an entity by the users of financial statements.”

In addition to passages set out above, IAS 37, entitled “Provisions, Contingent Liabilities and Contingent Assets”, included the following:

“Definitions

10.

The following terms are used in this Standard with the meanings specified:

A provision is a liability of uncertain timing or amount.

A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. …

A contingent liability is:

(a)

a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity; or

(b)

a present obligation that arises from past events but is not recognised because:

(i)

it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or

(ii)

the amount of the obligation cannot be measured with sufficient reliability.

A contingent asset is a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity. …

Relationship between provisions and contingent liabilities

12.

In a general sense, all provisions are contingent because they are uncertain in timing or amount. However, within this Standard the term ‘contingent’ is used for liabilities and assets that are not recognised because their existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity. In addition, the term ‘contingent liability’ is used for liabilities that do not meet the recognition criteria.

13.

This Standard distinguishes between:

(a)

provisions – which are recognised as liabilities (assuming that a reliable estimate can be made) because they are present obligations and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligations; and

(b)

contingent liabilities – which are not recognised as liabilities because they are either:

(i)

possible obligations, as it has yet to be confirmed whether the entity has a present obligation that could lead to an outflow of resources embodying economic benefits; or

(ii)

present obligations that do not meet the recognition criteria in this Standard (because either it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation, or a sufficiently reliable estimate of the amount of the obligation cannot be made).

Recognition

Provisions

14.

A provision shall be recognised when:

(a)

an entity has a present obligation (legal or constructive) as a result of a past event;

(b)

it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and

(c)

a reliable estimate can be made of the amount of the obligation.

If these conditions are not met, no provision shall be recognised. …

16.

In almost all cases it will be clear whether a past event has given rise to a present obligation. In rare cases, for example in a law suit, it may be disputed either whether certain events have occurred or whether those events result in a present obligation. In such a case, an entity determines whether a present obligation exists at the balance sheet date by taking account of all available evidence, including, for example, the opinion of experts. The evidence considered includes any additional evidence provided by events after the balance sheet date. On the basis of such evidence:

(a)

where it is more likely than not that a present obligation exists at the balance sheet date, the entity recognises a provision (if the recognition criteria are met); and

(b)

where it is more likely that no present obligation exists at the balance sheet date, the entity discloses a contingent liability, unless the possibility of an outflow of resources embodying economic benefits is remote …

19.

It is only those obligations arising from past events existing independently of an entity’s future actions (ie the future conduct of its business) that are recognised as provisions. Examples of such obligations are penalties or clean-up costs for unlawful environmental damage, both of which would lead to an outflow of resources embodying economic benefits in settlement regardless of the future actions of the entity. Similarly, an entity recognises a provision for the decommissioning costs of an oil installation or a nuclear power station to the extent that the entity is obliged to rectify damage already caused. …

Probable outflow of resources embodying economic benefits

23.

For a liability to qualify for recognition there must be not only a present obligation but also the probability of an outflow of resources embodying economic benefits to settle that obligation. For the purpose of this Standard, an outflow of resources or other event is regarded as probable if the event is more likely than not to occur, ie the probability that the event will occur is greater than the probability that it will not. Where it is not probable that a present obligation exists, an entity discloses a contingent liability, unless the possibility of an outflow of resources embodying economic benefits is remote …

Reliable estimate of the obligation

25.

The use of estimates is an essential part of the preparation of financial statements and does not undermine their reliability. This is especially true in the case of provisions, which by their nature are more uncertain than most other balance sheet items. Except in extremely rare cases, an entity will be able to determine a range of possible outcomes and can therefore make an estimate of the obligation that is sufficiently reliable to use in recognising a provision.

26.

In the extremely rare case where no reliable estimate can be made, a liability exists that cannot be recognised. That liability is disclosed as a contingent liability (see paragraph 86).

Contingent liabilities

27.

An entity shall not recognise a contingent liability.

28.

A contingent liability is disclosed, as required by paragraph 86, unless the possibility of an outflow of resources embodying economic benefits is remote. …

30.

Contingent liabilities may develop in a way not initially expected. Therefore, they are assessed continually to determine whether an outflow of resources embodying economic benefits has become probable. If it becomes probable that an outflow of future economic benefits will be required for an item previously dealt with as a contingent liability, a provision is recognised in the financial statements of the period in which the change in probability occurs (except in the extremely rare circumstances where no reliable estimate can be made). …

Measurement

Best estimate

36.

The amount recognised as a provision shall be the best estimate of the expenditure required to settle the present obligation at the balance sheet date.

37.

The best estimate of the expenditure required to settle the present obligation is the amount that an entity would rationally pay to settle the obligation at the balance sheet date or to transfer it to a third party at that time. It will often be impossible or prohibitively expensive to settle or transfer an obligation at the balance sheet date. However, the estimate of the amount that an entity would rationally pay to settle or transfer the obligation gives the best estimate of the expenditure required to settle the present obligation at the balance sheet date.

38.

The estimates of outcome and financial effect are determined by the judgement of the management of the entity, supplemented by experience of similar transactions and, in some cases, reports from independent experts. The evidence considered includes any additional evidence provided by events after the balance sheet date.

39.

Uncertainties surrounding the amount to be recognised as a provision are dealt with by various means according to the circumstances. Where the provision being measured involves a large population of items, the obligation is estimated by weighting all possible outcomes by their associated probabilities. The name for this statistical method of estimation is ‘expected value’. The provision will therefore be different depending on whether the probability of a loss of a given amount is, for example, 60 per cent or 90 per cent. Where there is a continuous range of possible outcomes, and each point in that range is as likely as any other, the mid-point of the range is used. …

40.

Where a single obligation is being measured, the individual most likely outcome may be the best estimate of the liability. However, even in such a case, the entity considers other possible outcomes. Where other possible outcomes are either mostly higher or mostly lower than the most likely outcome, the best estimate will be a higher or lower amount. For example, if an entity has to rectify a serious fault in a major plant that it has constructed for a customer, the individual most likely outcome may be for the repair to succeed at the first attempt at a cost of 1,000, but a provision for a larger amount is made if there is a significant chance that further attempts will be necessary. …

Risks and uncertainties

42.

The risks and uncertainties that inevitably surround many events and circumstances shall be taken into account in reaching the best estimate of a provision.

43.

Risk describes variability of outcome. A risk adjustment may increase the amount at which a liability is measured. Caution is needed in making judgements under conditions of uncertainty, so that income or assets are not overstated and expenses or liabilities are not understated. However, uncertainty does not justify the creation of excessive provisions or a deliberate overstatement of liabilities. For example, if the projected costs of a particularly adverse outcome are estimated on a prudent basis, that outcome is not then deliberately treated as more probable than is realistically the case. Care is needed to avoid duplicating adjustments for risk and uncertainty with consequent overstatement of a provision. …

Future events

48.

Future events that may affect the amount required to settle an obligation shall be reflected in the amount of a provision where there is sufficient objective evidence that they will occur.

49.

Expected future events may be particularly important in measuring provisions. For example, an entity may believe that the cost of cleaning up a site at the end of its life will be reduced by future changes in technology. The amount recognised reflects a reasonable expectation of technically qualified, objective observers, taking account of all available evidence as to the technology that will be available at the time of the clean-up. Thus it is appropriate to include, for example, expected cost reductions associated with increased experience in applying existing technology or the expected cost of applying existing technology to a larger or more complex clean-up operation than has previously been carried out. However, an entity does not anticipate the development of a completely new technology for cleaning up unless it is supported by sufficient objective evidence. …

Expected disposal of assets

51.

Gains from the expected disposal of assets shall not be taken into account in measuring a provision.

52.

Gains on the expected disposal of assets are not taken into account in measuring a provision, even if the expected disposal is closely linked to the event giving rise to the provision. Instead, an entity recognises gains on expected disposals of assets at the time specified by the Standard dealing with the assets concerned. …

Disclosure

…

86.

Unless the possibility of any outflow in settlement is remote, an entity shall disclose for each class of contingent liability at the balance sheet date a brief description of the nature of the contingent liability and, where practicable:

(a)

an estimate of its financial effect, measured under paragraphs 36-52;

(b)

an indication of the uncertainties relating to the amount or timing of any outflow; and

(c)

the possibility of any reimbursement. …

89.

Where an inflow of economic benefits is probable, an entity shall disclose a brief description of the nature of the contingent assets at the balance sheet date, and, where practicable, an estimate of their financial effect, measured using the principles set out for provisions in paragraphs 36-52. …”

Mr Bezant, who is an experienced accountant, gave some evidence as to how these provisions of the IAS might be interpreted by an accountant. I will refer to this in greater detail below. However, the IAS are well drafted and the general guidance provided by them relevant to the construction of condition 6(k), as to the meaning of terms such as “asset”, “liability” and “contingent liability”, is reasonably clear on its face. It is for the court to interpret and apply condition 6(k), with reference as need be to the IAS. I do not consider that expert evidence is relevant to the interpretation of condition 6(k) and the relevant passages in the IAS. It is the terms of the IAS themselves which form the relevant background as an aid to construction of condition 6(k), rather than the view of any particular accountant how the IAS might be applied in any given context. The view of an expert witness as to how he considered condition 6(k) might be applied in the context of the particular circumstances which existed as at 11 July 2006 - which in any event in themselves were not and could not have been in the direct contemplation of the parties when the Trust Deed and conditions were entered into in 2002 - cannot control the proper interpretation of condition 6(k) and its proper application in that context.

The Trustee would only need to rely upon this alternative case if I were wrong to accept its primary submission as to the proper construction of the first paragraph of condition 6(k). Although I have accepted that primary submission, I should briefly deal with this alternative case and the evidence in relation to it.

When the Conditions were in the course of being negotiated in late 2002, a full draft of them and of a proposed notice to bondholders was circulated by Mr Tricot of Skadden, Arps, Slate, Meagher & Flom LLP (lawyers acting for Elektrim) to a range of addressees for consideration, including addressees at Simmons and Simmons (lawyers acting for the Trustee), at lawyers acting for the bondholders committee who were conducting the commercial negotiation with Elektrim on behalf of the bondholders and at lawyers acting for every other party with an interest in the transaction. The legal team at Simmons and Simmons dealing with the negotiation was headed by a partner, John Davies (“Mr Davies”). He was away on holiday when the draft conditions and notice were circulated, and two other members of his team, Mr Bresslaw (also a partner at Simmons and Simmons) and Mr McGladdery (an associate solicitor at the firm), dealt with the response.

Mr Bresslaw marked a number of comments in manuscript on these circulated draft documents. Against condition 6(a) as it appeared in the draft Conditions, he noted the following question in manuscript: “Is the Contingent Payment payable even if there is no full redemption [i.e. of the bonds] on final maturity – see 6(j) [?]”. The reference to “6(j)” was to draft condition 6(j), which became condition 6(k) in the final version of the Conditions. The first paragraph of draft condition 6(j) appeared under the heading “Contingent Payment” and was in materially equivalent terms to the first paragraph of condition 6(k) set out at para. [16] above. Against that draft provision, Mr Bresslaw noted a further question in manuscript: “Is this [i.e. the Contingent Payment] payable even if they [i.e. Elektrim and Elektrim Finance] default on the final maturity date?”. In relation to a reference to the Contingent Payment in the draft notice, Mr Bresslaw noted another question in manuscript: “Is the Contingent Payment due even if the bonds are not redeemed in full on the Final Maturity Date?”

Mr McGladdery then sent an email dated 11 October 2002 to Mr Tricot and the same set of addressees, attaching the copies of the draft notice to bondholders and the draft Conditions with Mr Bresslaw’s manuscript comments, and inviting their attention to those comments. In my view, the questions set out by Mr Bresslaw on the draft documents regarding the obligation for Elektrim to pay the Contingent Payment even if it transpired that the bonds were not fully redeemed by the Repayment Maturity Date of 15 December 2005 were very clear and directly to the point.

Mr Tricot replied by email later the same day, sent to the same set of addressees, referring to the manuscript comments by Mr Bresslaw. Mr Tricot responded to Mr Bresslaw’s questions about the Contingent Payment thus:

“The Contingent Payment is a separate payment obligation owed to Bondholders, separate from the obligation to repay principal [i.e. the obligation to redeem the bonds]. The Contingent Payment would technically be repayable even if the Issuer [i.e. Elektrim Finance] defaulted on the principal repayment.”

In my view, this was a direct and very clear answer to the questions which Mr Bresslaw had raised, to the effect that the Contingent Payment would still have to be paid even if it transpired that the bonds were not actually redeemed on or before the Redemption Maturity Date, 15 December 2005. Mr Millett submitted that the word “technically” qualified the reply in some way, and rendered Mr Tricot’s response ambiguous. I do not think that is a fair or tenable reading of the response. In context, in 2002, Mr Tricot’s use of the word “technically” was simply a reference to the expectation of everyone negotiating the conditions that the bonds would be redeemed on or before that date, so that the problem ought not to arise. But Mr Tricot was clear that, if the problem of late payment of the bonds did arise, the Contingent Payment would still be payable by Elektrim.

Mr Davies returned to work shortly after this exchange and, as team leader at Simmons and Simmons, he reviewed the file, including these documents. He was satisfied that Mr Tricot’s response to Mr Bresslaw’s questions fully answered those questions as his client, the Trustee, would wish, and that in the light of Mr Tricot’s response it was not necessary to raise the point with his client for any commercial decision nor to engage in any further round of drafting and negotiation about the terms of what became condition 6(k) in relation to this issue. On the basis of Mr Tricot’s response, Mr Davies’ view was that the draft Conditions relevant to the obligation to pay the Contingent Payment dealt with this point and could be left in the form in which they had been circulated by Mr Tricot, and so they were.

On the basis of these facts, the Trustee submitted that (if its primary submission as to the meaning of the first paragraph of condition 6(k) was wrong) Elektrim should be estopped from denying that the provision did have that meaning. The Trustee submitted that Mr Tricot made a clear and unambiguous representation that the provision would have that meaning; that it (as, for present purposes, the relevant contracting party seeking to sue in reliance on the Conditions) had relied on that representation, by accepting the terms as drafted and not seeking to enter into a debate about them to have them redrafted and clarified; and that it would be inequitable now to permit Elektrim to deny that the provision has the meaning represented by Mr Tricot.

Had it been necessary to do so, I would have accepted that submission. I agree with the Trustee that the representation by Mr Tricot was clear and unambiguous. I find that the Trustee did rely on that representation, by accepting the conditions as drafted on this point and not seeking to re-open the negotiation to clarify their terms. In my view, the Trustee had given Mr Davies authority to conduct the negotiation of the terms of the conditions on its behalf in relation to matters of legal drafting to reflect the commercial deal which had been negotiated between principals, and in considering Mr Tricot’s representation and deciding that it was sufficient to deal with the drafting point Mr Davies acted in reliance on that response for and on behalf of the Trustee. I also consider that it would be inequitable for Elektrim to go back on that representation. There was no good commercial reason why Elektrim should be relieved from having to pay the Contingent Payment if it and Elektrim Finance did not honour the bonds at the proper time, and it is highly likely that if Mr Tricot had not given a clear and satisfactory answer to Mr Bresslaw’s questions the terms of the draft conditions would have been re-drafted by agreement to make the position completely clear in the Trustee’s favour.

The Trustee also submitted on these facts that, if necessary, the terms of condition 6(k) should be rectified so as to make it clear that the Contingent Payment would be payable whether or not the bonds had been redeemed in full by the Redemption Maturity Date. Had it been necessary to do so, I would have accepted this submission as well. In my judgment, the exchange of emails on 11 October 2002, on an objective interpretation, manifested a clear agreement between the parties as to the intended meaning and effect of provisions to be included in the Conditions governing the circumstances in which the Contingent Payment should be paid. If, contrary to my ruling at para. [18] above, I had found that condition 6(k) on its proper interpretation did not accurately reflect the agreement made on 11 October 2002, I would have concluded that condition 6(k) should be rectified as submitted by the Trustee.

It was only necessary for the Trustee to rely on its alternative formulation of its claim for damages, relying on clause 8.1 of the Trust Deed, if it failed on its primary submission as to the proper interpretation of the first paragraph of condition 6(k) and on its submissions in respect of estoppel and rectification. Those submissions have in fact succeeded, so it is not necessary to spend a great deal of time dealing with this alternative formulation of the Trustee’s case.

Elektrim accepted that in principle there could be a valid claim for damages for loss of a chance of receiving the Contingent Payment based on breach of clause 8.1 of the Trust Deed, but submitted that it has a good answer to it, as follows: the claim brought by the Trustee in the proceedings against Elektrim Finance and Elektrim which culminated in the Hart J judgment included a claim for damages against Elektrim based on breach of clause 8.1 of the Trust Deed; the claim for damages based on that provision merged in the judgment given by Hart J in favour of the Trustee; and it is not now open to the Trustee to bring another claim for damages for breach of clause 8.1 of the Trust Deed, including as a new head of damage the loss of opportunity to have the machinery in condition 6(k) brought into operation and payment of a Contingent Payment: Conquer v Boot [1928] 2 KB 336 (CA), 342 (Sankey LJ).

Some parts of Elektrim’s case on this point I do accept. It seems to me that on a fair reading of the Trustee’s Points of Claim in those proceedings dated 24 March 2005, a claim for damages against Elektrim for breach of clause 8.1 of the Trust Deed was included. I refer, in particular, to paragraph 16 of those Points of Claim (in which clause 8.1 of the Trust Deed was pleaded) and paragraphs 34, 35 and 37 and the prayer for relief (which included a prayer for an order that Elektrim should pay the sums then outstanding in respect of the bonds). The nature of the claim for such relief based on the guarantee obligation in clause 8.1 of the Trust Deed was technically a claim for damages for breach of contract, even though the word “damages” and the phrase “breach of contract” was not used in the pleading: see Moschi v Lep Air Services Ltd [1973] AC 331, 352B-C and 356A-357F (Lord Simon of Glaisdale) and 348G-349H (Lord Diplock).

However, in my judgment the doctrine of res judicata and of merger of a claim in a judgment only applies in respect of claims which could in principle have been included in the claim leading to the judgment in question. So far as concerns the Trustee’s alternative formulation of its case as a claim for damages against Elektrim for breach of clause 8.1 of the Trust Deed in failing to repay or procure the repayment of the bonds on or before the Redemption Maturity Date (15 December 2005), as a result of which the Trustee/bondholders lost the opportunity to be paid the Contingent Payment, that condition is not fulfilled. The breaches of contract on the part of Elektrim Finance and Elektrim which were held to have occurred in the Hart J judgment involved non-repayment of the bonds on the accelerated date on which Hart J determined they had fallen due, namely 18 January 2005, and (by implication from the terms of the order made by him on 16 September 2005 requiring Elektrim Finance and Elektrim to pay the sums outstanding on the bonds and interest) down to that later date. But none of those breaches of contract were the basis for the Trustee’s claim for damages based on clause 8.1 in the present proceedings. It was open to Elektrim after 16 September 2005 to repay or procure repayment of the bonds before the Redemption Maturity Date, and if it had done so there would have been no breach of clause 8.1 on its part which could have founded a claim in damages by reference to condition 6(k) and the Contingent Payment. The proper analysis is that Elektrim committed successive breaches of clause 8.1 day by day while the bonds remained unredeemed, and that it was only by its breach of clause 8.1 in failing to repay or procure repayment of the bonds on 15 December 2005 (i.e. well after the Hart J judgment) that – if I am wrong in the interpretation I have given the first paragraph of condition 6(k) above – a cause of action arose in respect of breach of that clause which included any claim for loss of opportunity to receive a Contingent Payment. At the time the proceedings before Hart J were commenced, down to the time of the Hart J judgment and his order, no cause of action had arisen in relation to any claim for such loss of opportunity which could properly have been included in the claims made in those proceedings. Accordingly, if it were necessary to do so, I would reject this defence of Elektrim to the Trustee’s alternative claim based on clause 8.1 of the Trust Deed.

I turn to deal with further aspects of the factual background, focusing on the bonds and Trust Deed and matters affecting the PTC shares.

Certain of the agreements and proceedings to which I refer below were governed by foreign law (in particular, Polish law). In relation to the approach to the calculation of “Fair Market Value” in condition 6(k) in respect of the PTC shares it is obvious that the investment banks notionally appointed to do that calculation as at 11 July 2006 (“the notional investment banks”) would have had access to and taken into account legal advice regarding the claims by various parties in relation to those shares (“the notional legal advice”). I consider below what the sources and content of the notional legal advice would have been. The parties had permission under case management directions to adduce expert evidence of Polish law, but chose not to do so. It is therefore relevant to explain at the outset the approach which I have adopted to matters of foreign law, where issues have arisen regarding the notional legal advice which would have been given to the notional investment banks.

I have followed the usual approach where issues of foreign law arise for consideration by an English court, which is to apply English law (i.e. to assume that the foreign law and English law are the same) unless there is satisfactory evidence to show that foreign law is (and, in the present case, that advice about foreign law would have been) materially different: see Dicey, Morris & Collins, The Conflict of Laws, 14^th ed., Rule 18, pp. 255ff. Mr Millett and Mr Miles agreed that that was the appropriate approach for me to adopt. They both sought to rely on certain judgments in arbitration and court proceedings which were in evidence before me to submit that in relation to various issues there was sufficient evidence of relevant Polish law which would justify departure from a simple application of English law when assessing the likely notional legal advice. Mr Miles also submitted that there was sufficient evidence, by inference from Elektrim’s 2005 and 2006 accounts, of what legal advice had in fact been given in mid-2006 to Elektrim about the various legal claims and which would in fact have been available to the notional investment banks as to require me to assess the Trustee’s damages claim on the footing that the notional investment banks would have had regard to that actual advice, without it being necessary for the court to make its own assessment of the likely notional legal advice which would have been available. I consider these submissions in detail below.

In 1995, Elektrim entered into a joint venture with certain other companies, including DeTeMobil Deutsche Telekom MobilNet GmbH (I refer to this company and companies associated with it compendiously as “DT”), to set up a mobile telephone business in Poland. The joint venture vehicle, in which they all subscribed for shares, was PTC. Elektrim directly owned 32.5% of the share capital of PTC which after various acquisitions increased to 48% (represented by 226,080 shares) of the share capital. The parties entered into a shareholders agreement dated 21 December 1995 (“the PTC Shareholders Agreement”). By late 2000 it appears that DT had bought out the interests of the other principal joint venturers apart from Elektrim.

The PTC Shareholders Agreement was governed by Polish law. It contained the following provisions:

“Article 8.

The transfer, pledge and any other disposal of a share in the Company or a part thereof or other interest therein (herein after referred to as the “Transfer”) by a shareholder shall require the prior consent of the Supervisory Board. …

The Supervisory Board may establish procedures which require the Party intending to transfer the interest to first offer the interest to the remaining Parties. If such procedures have been established, the Supervisory Board may require the Party intending to transfer the interest to first comply with such procedure before granting the consent. …

Article 16: Call Option, Material Default, Damages

16.1

Each Party (each a “Grantor”) hereby irrevocably offers to the Operational Parties the right to purchase the shares in the Company owned by the Grantor (the “Option Shares”) at the price determined in accordance with Article 16 (3) hereof (the “Call Option”). The foregoing offer shall be subject to the condition that one of the following events has occurred:

(a)

A Grantor admits in writing, that it has materially defaulted, or

(b)

an arbitration court issues a declaratory award finding that such Grantor is in material default. …

16.3

The price to be paid to a Party for the Option Shares shall be (i) such Party’s proportional share in the net asset value of the Company (assets minus liabilities including loans granted by any of its shareholders but not including the share capital and any profit or loss carry forwards) as determined in the audited financial statements of the Company for the last completed fiscal year plus (ii) all of such Party’s capital contributions made after the date of such financial statements and not reflected therein. Payment becomes due 30 days after the Option Shares have been transferred.”

PTC was a successful business venture, and increased greatly in value. In 1999, Elektrim wished to raise money by selling rights of participation in the stake in PTC which it owned to Vivendi S.A. (another large company with mobile telephone interests in Europe which, together with associated companies, I will refer to compendiously as “Vivendi”). To that end, Elektrim set up ET as a wholly owned subsidiary. Elektrim then subscribed for shares in ET paid for by Elektrim agreeing to transfer 226,079 of the PTC shares which it owned to ET. Elektrim then sold 49% of the share capital in ET to Vivendi for about US$1.2 billion, which was paid initially by way of a loan which was then cancelled.

On 21 October 1999 the Supervisory Board of PTC purported to pass a resolution giving its consent to the transfer by Elektrim to ET of the PTC shares. However, the DT appointee to the Supervisory Board voted against that resolution. On 8 December 1999 Elektrim purported to transfer the PTC shares to ET.

DT objected to the transfer of the PTC shares by Elektrim to ET and on 7 December 2000 launched arbitration proceedings in Vienna claiming, amongst other things, that Elektrim had committed a material breach of article 8 of the PTC Shareholders Agreement by effecting the transfer to ET without obtaining the proper approval of the Supervisory Board of PTC (I will refer to these proceedings, together with a second set of arbitration proceedings commenced by DT, as “the Vienna Arbitration”). DT claimed that by reason of that breach the transfer of the PTC shares to ET was not effective and that it (DT) was entitled to exercise the call option to purchase the PTC shares as provided for in article 16 of the PTC Shareholders Agreement. Elektrim rejected DT’s claim.

Meanwhile, Elektrim continued to negotiate with Vivendi and ET with a view to raising more money for Elektrim, and entered into further agreements with them culminating in the Third Investment Agreement between Elektrim, ET Vivendi and Carcom, dated 3 September 2001 (“the TIA”). Before the making of the TIA Carcom was jointly owned half and half by Elektrim and Vivendi. Carcom was the direct or indirect owner of about 3% of the issued share capital of PTC. Under the TIA, ET agreed to purchase certain fixed line and internet companies owned by Elektrim for €491 million (funded by means of a loan from Vivendi to ET) and Vivendi purchased from Elektrim 2% of the share capital in ET and 1% of the share capital of Carcom for €100 million. The effect of the transaction, therefore, was that Vivendi became the majority shareholder in ET and in Carcom (in each case owning 51% as against 49% owned by Elektrim), ET became the owner of the fixed line and internet companies and Elektrim received a further €591 million directly or indirectly from Vivendi.

The TIA was governed by Polish law. The parties to the TIA were aware of the claims then being made by DT in the Vienna arbitration, and included provision in the form of clause 5.24 of the TIA to deal with what might happen to the PTC shares as a result of that arbitration, as follows:

“Outcome of Arbitrations

(i)

In the event that [ET] is required, as a result of any final enforceable order in the Arbitrations or in any proceedings in relation thereto, to transfer any PTC shares to Elektrim, then Elektrim agrees that to the extent that there is no further order in either of the Arbitrations requiring the transfer of any shares to DT, it will retransfer all PTC shares held by it back to [ET] at a price (whether nominal or otherwise) and in a manner and at a time to be determined by Vivendi in its absolute discretion. Until Elektrim has transferred its PTC shares to [ET] as required by Vivendi, Elektrim agrees to hold such PTC shares on trust for [ET] and further agrees (a) not to seek to sell, agree to sell, transfer, encumber, or otherwise dispose of or create any interest in the PTC shares, and (b) to exercise all voting and any other rights attached to the PTC shares (including making all appointments to PTC’s Supervisory and Management boards as well as any other PTC committees) strictly on [ET]’s instructions which shall be obtained before any such rights are exercised.

(ii)

In the event that [ET] is required, as a result of any final enforceable order in the Arbitrations or in any proceedings in relation thereto, to transfer any of its shares in PTC to DT and Elektrim receives consideration for such transfer either directly from DT or indirectly through the other Respondents named in the PTC arbitration any such consideration shall be paid directly and immediately to [ET].”

I pause here to examine the intended operation of this provision:

In relation to arbitration proceedings which later took place between Elektrim on the one hand and ET and Vivendi on the other, a document came into Elektrim’s possession on 8 June 2006 which Elektrim then alleged showed that the TIA had been entered into by Vivendi in bad faith (see para. [130] below). The document was a copy of a memorandum dated 29 August 2001 written by Mr Gibert of Vivendi (“the Gibert memorandum”), which suggested that at the time of negotiating the TIA Vivendi was also, unbeknownst to Elektrim, negotiating with DT promptly to sell on its shareholding in ET to DT, contrary to representations which Vivendi had made to Elektrim. I consider the significance of the Gibert memorandum in the context of the present proceedings below.

In 2002 Elektrim was in severe financial difficulties. As already set out above, it negotiated with the bondholders to restructure the terms of the bonds and agreed the terms of the Conditions and the Trust Deed with them and the Trustee. The parties to those instruments were aware of DT’s claims in the Vienna Arbitration and of the terms of the TIA.

Notwithstanding the accommodation reached with the bondholders, in June 2003 Elektrim suspended the member of its Management Board who had been nominated by the bondholders. This was the first of a series of events of default under the bonds which in the Hart J judgment were held to have the effect of accelerating the payment obligations under the bonds to 18 January 2005.

On 22 August 2003 Vivendi commenced arbitration proceedings under the TIA in the London Court of International Arbitration (“the LCIA Arbitration”), seeking declarations that various obligations under the TIA had not been triggered.

On 14 January 2004 Elektrim terminated the retainer of the solicitors (Watson Farley & Williams) who had been representing it in the Vienna Arbitration. Up to then, Elektrim and Vivendi had been cooperating to organise and agree Elektrim’s defence in that arbitration, including by using solicitors instructed by mutual agreement. The termination of the retainer represented a point of divergence of approach in relation to the Vienna Arbitration as between Elektrim and Vivendi. Elektrim’s and Vivendi’s interests were no longer in alignment, and since Vivendi had the controlling shareholding in ET that company also became hostile to Elektrim.

On 22 February 2004 Elektrim wrote to Vivendi asserting that Elektrim was entitled to and did avoid the TIA. This gave rise to issues which then had to be considered in the course of the LCIA Arbitration.

On 15 March 2004 Elektrim served a defence and counterclaim in the LCIA Arbitration claiming that the TIA was null and void for bad faith and non-disclosure by Vivendi.

On 29 September 2004 Elektrim revoked the appointment of three members of the PTC management board who were appointees of Vivendi.

On 26 November 2004 the Vienna Tribunal (which is the term which, for simplicity, I will use collectively for the differently constituted tribunals in the Vienna Arbitration) issued an award (“the November 2004 Vienna Award”). It held (i) the transfer of the PTC shares by Elektrim to ET was ineffective because it was not properly approved by the PTC Supervisory Board so that those shares remained the property of Elektrim at all material times; (ii) the attempted transfer by Elektrim of the PTC shares to ET did not itself constitute a material default under the PTC Shareholders’ Agreement, but that it would constitute a default if Elektrim were to fail to recover those shares from ET within two months of receipt of the award; (iii) the Vienna Tribunal had no jurisdiction over ET; and (iv) DT’s distinct economic impairment claim was dismissed and its damages claim was withdrawn.

On 10 December 2004 Elektrim issued notices of revocation of the appointment of four members of the PTC Supervisory Board who represented ET and Vivendi and informed PTC of such revocation. On the same day, Elektrim appointed its own nominees to the Supervisory Board in their place. This seems to have been done as part of an attempt by Elektrim to regain control of the PTC shares so as to “recover” them, as required by the Vienna Tribunal, and avoid being found in material default of the PTC Shareholders Agreement.

Also on 10 December 2004 ET commenced proceedings in the Polish courts to obtain a declaration that it was the owner of the PTC shares (“the Polish Title Proceedings”). This was the first in a series of steps taken in the Polish courts by which ET (controlled by Vivendi) on the one hand, and Elektrim and DT on the other, sought respectively to challenge or to uphold and enforce the November 2004 Vienna Award and to maintain respectively that ET or Elektrim was the owner of the PTC shares.

On 16 December 2004 Elektrim and DT filed a motion in the Warsaw Regional Court for recognition of the November 2004 Vienna Award in Poland (“the Polish Recognition Proceedings”).

On 17 December 2004 ET filed a motion with the Warsaw Regional Court in the Polish Title Proceedings for an interim injunction prohibiting any changes to the company share register of PTC in relation to registration of the PTC shares (i.e. so as to preserve the position of ET as registered owner of the PTC shares so far as that register was concerned). On 30 December 2004 the court granted ET an interim injunction in those proceedings restraining the PTC Management Board from making any changes to the company share register.

Meanwhile, on 21 December 2004 Elektrim filed an application with another Polish court to request it to order an entry to be made on the National Court Register (“the KRS Register”) to record in that register that Elektrim was the holder of the PTC shares (“the Polish KRS Registration Proceedings”). At this time the KRS Register in relation to PTC recorded ET as the holder of the PTC shares, reflecting the original transfer of the PTC shares by Elektrim to ET in 1999.

On 10 and 11 January 2005 Elektrim and DT filed applications in the Warsaw Court of Appeal to be joined in the Polish Title Proceedings and appealing for an order that the injunctive relief granted in those proceedings be set aside.

On 18 January 2005 the bondholders gave notice to Elektrim Finance and Elektrim to accelerate their payment obligations under the bonds.

On 2 February 2005, in the Polish Recognition Proceedings, the Warsaw Regional Court ordered that the November 2004 Vienna Award should be recognised as effective in the territory of Poland, including that the sale of the PTC shares to ET was ineffective and that they remained the property of Elektrim at all times.

Elektrim’s efforts to regain control of the PTC shares after November 2004 were not fully successful. A confused situation had arisen in which both Elektrim and Vivendi/ET were asserting rights of control over the PTC shares and of participation in the management of PTC, with neither side being completely dominant and in a position fully to control the PTC shares or the management of PTC.

Therefore, on 9 February 2005, after the expiry of the two month period allowed to Elektrim by the Vienna Tribunal to recover the PTC shares from ET, DT gave notice to Elektrim that Elektrim was in material default and that it (DT) was exercising its call option under article 16 of the PTC Shareholders Agreement to purchase the PTC shares from Elektrim.

On 10 February 2005, in the Polish KRS Registration Proceedings, on ET’s application the Warsaw Regional Court ordered that those proceedings brought by Elektrim be discontinued. This protected ET’s registration on the KRS register as owner of the PTC shares.

On 16 February 2005, in the Polish Recognition Proceedings, ET filed an appeal against the decision of the Warsaw Regional Court of 2 February 2005 recognising the November 2004 Vienna Award.

On 23 February 2005 the PTC Supervisory Board adopted resolutions dismissing certain members of the PTC Supervisory Board and appointing persons nominated by Elektrim and DT in their stead. The same day the PTC Management Board (the executive tier of management, operating below the Supervisory Board) applied to the Warsaw Regional Court requesting a change to the KRS Register regarding the identity of the owners of the PTC shares, from ET to Elektrim.

On 24 February 2005, in the Polish KRS Registration Proceedings, the Warsaw Regional Court ordered that ET be removed from the KRS Register as owner of the PTC shares and replaced by Elektrim. The court also ordered that certain members of the PTC Management and Supervisory Boards should be removed (i.e. those appointed by ET) and replaced by nominees put forward by Elektrim. The KRS Register was accordingly revised to record Elektrim as the registered shareholder of the PTC shares.

On 3 March 2005 the Trustee lodged a bankruptcy petition against Elektrim in the Warsaw Regional Court, seeking an order to put Elektrim into administration and to sequestrate the PTC shares. In response to this petition, the court later caused a Bankruptcy Valuation Report to be prepared in July and August 2006, valuing Elektrim’s assets (“the BVR”).

On 9 March 2005 ET filed a challenge to the November 2004 Vienna Award with the Vienna Commercial Court (“the Vienna Commercial Court Challenge”). The grounds for challenge included a complaint that the Vienna Tribunal had no jurisdiction over ET.

On 10 March 2005, in the Polish KRS Registration Proceedings, ET appealed to the Warsaw Regional Court against the decision of that court of 24 February 2005 ordering that the KRS Register be amended to record Elektrim as the owner of the PTC shares.

On 24 March 2005 the tribunal in the LCIA Arbitration (“the LCIA Tribunal”) issued a provisional freezing order (“the LCIA freezing order”) in favour of Vivendi and ET in relation to the PTC shares that Elektrim had recovered or might recover from ET (i) requiring Elektrim to ensure that the members of the PTC Supervisory Board appointed as a result of the rights attached to the PTC shares would be appointed by the management board of ET; (ii) requiring Elektrim to exercise all voting and any other rights attached to the PTC shares (including rights of appointment) strictly on ET’s instructions, which were to be obtained before any such rights were exercised; (iii) enjoining Elektrim from “voluntarily” seeking to sell, agree to sell, transfer, encumber, or otherwise dispose of or create any interest in the PTC shares; and (iv) until such time as the requirement in (i) was implemented, enjoining Elektrim from exercising any rights attached to the PTC shares not in the ordinary course of PTC’s business.

The use of the word “voluntarily” in (iii) is significant. It meant that if the Vienna Tribunal ordered Elektrim to sell or transfer the PTC shares to DT, the LCIA freezing order would not prevent that sale or transfer from taking effect. The LCIA freezing order thus reflected the principle in clause 5.24 of the TIA that the claims of DT to the PTC shares in the Vienna Arbitration should rank prior to the claims of ET/Vivendi in respect of those shares in the LCIA Arbitration, and that the claims of ET/Vivendi in respect of the PTC shares should rank prior to any claim that Elektrim might have to benefit from those shares. The LCIA Tribunal later made further orders extending the LCIA freezing order indefinitely. It was in place as at 11 July 2006, and as at that date would have been expected to be in place for the foreseeable future.

On 25 March 2005, in the LCIA Arbitration, Vivendi served an amended statement of case alleging various breaches of the TIA, including of clause 5.24(i). On 28 April 2005 Vivendi was given leave to serve this amended pleading.

On 4 July 2005 ET filed proceedings against Elektrim in Poland claiming damages of approximately PLN 8 billion, alternatively the transfer of the PTC shares by Elektrim to ET (“the ET Polish Contribution Claim”). This claim was predicated on the assumption that the order of 2 February 2005 for recognition of the November 2004 Vienna Award was valid and binding.

On 26 August 2005, in the Polish KRS Registration Proceedings, the Warsaw Regional Court revoked its previous decision of 24 February 2005 to record Elektrim as the owner of the PTC shares and ordered that the case be re-examined.

On 15 November 2005, in the Polish KRS Registration Proceedings, the Warsaw Regional Court ordered the reinstatement of ET as registered owner of the PTC shares in the KRS Register and ordered the reinstatement of the members of the PTC Supervisory and Management Boards who had been removed in February 2005 and removal of Elektrim’s replacement nominees. The KRS Register was amended accordingly.

On 20 December 2005, in the Vienna Commercial Court Proceedings, the Vienna Commercial Court set aside the part of the November 2004 Vienna Award which determined that Elektrim’s transfer of the PTC shares was ineffective and that title remained vested in Elektrim. The basis for this decision was that the Vienna Commercial Court considered that there was an inconsistency in the reasoning in the November 2004 Vienna Award, in that the Vienna Tribunal had correctly held that it had no jurisdiction over ET, but had produced an order which purported to have the effect that ET was deprived of its property (the PTC shares). Elektrim appealed.

On 4 January 2006, in the Polish Recognition Proceedings, the Warsaw Court of Appeal reopened those proceedings on the application of ET, in light of the Vienna Commercial Court decision of 20 December 2005.

In late March 2006 Elektrim, Vivendi and DT were in negotiation over a draft settlement agreement.

On 29 March 2006, in the re-opened Polish Recognition Proceedings, the Warsaw Court of Appeal dismissed ET’s appeal against the recognition decision of the Warsaw Regional Court of 2 February 2005 (“the March 2006 Judgment”). The Court of Appeal considered the suggestion (as reflected in the decision of the Vienna Commercial Court) that there was an inconsistency in the reasoning in the November 2004 Vienna Award, but rejected it. The Court of Appeal concluded that the award did not exceed the Vienna Tribunal’s jurisdiction under the relevant arbitration clause, and that it should be recognised as legally binding in Poland.

The March 2006 Judgment is of considerable importance when assessing the notional legal advice which would have been given to the notional investment banks on about 11 July 2006. The affirmation of the recognition order made on 2 February 2005 meant that the rulings in the November 2004 Vienna Award had binding effect in Polish law. Elektrim, ET and PTC were all Polish companies, so a ruling of the Polish courts on the question of the ownership of the PTC shares as between Elektrim and ET would in practice be determinative of that question, notwithstanding the decision of the Vienna Commercial Court. The fact that the judgment was given by the Warsaw Court of Appeal after full argument on the merits gave it considerable authoritative force in the Polish legal system. In my view, the notional legal advice would have been given on the basis that the March 2006 Judgment could in practice be regarded as determinative of the question of the ownership of the legal title to the PTC shares as at 11 July 2006. Although ET could be expected to try to appeal against the decision, its chances of doing so successfully would have appeared small. (In the event, ET did seek to appeal to the Polish Supreme Court; it was successful on certain procedural issues and the case was remitted to the Warsaw Regional Court for re-hearing; no re-hearing has yet taken place, but there is no evidence before me to suggest that the result on the merits is likely to be different from that arrived at in the March 2006 Judgment).

On 13 April 2006 Vivendi and ET commenced an arbitration before the ICC International Court of Arbitration in Paris seeking a declaration that a settlement agreement which it alleged had been made on 29 March 2006 with Elektrim and DT was binding and an order for specific performance. I was not provided with much information about these proceedings. It does not appear that they got very far, and it seems reasonable to suppose that they would not have been treated as significant by the notional investment banks.

On 22 May 2006 the LCIA Tribunal promulgated an award declaring that the TIA was and always had been valid (“the May 2006 LCIA Award”). It dismissed Elektrim’s claims to have the TIA set aside.

The May 2006 LCIA Award is, like the March 2006 Judgment, also of considerable importance when assessing the notional legal advice which would have been given to the notional investment banks on about 11 July 2006. It meant that the TIA, including clause 5.24, had been found authoritatively to be binding on Elektrim. Elektrim, therefore, could not expect to be entitled to enjoy use of the PTC shares for its own benefit (the LCIA freezing order, which remained in place, also tended to confirm this), and could not expect to keep any purchase price monies paid by DT for those shares for its own benefit. Those giving the notional legal advice would have appreciated that English law affords considerable respect to arbitration processes on well known principles, and allows only limited scope for seeking to have the results of an arbitration set aside. In my view, there was no material indication on the face of the May 2006 LCIA Award that the LCIA Tribunal had committed any error which might have supported an application by Elektrim to have the award set aside. That view is reinforced by the limited grounds on which Elektrim later did seek to challenge this award, and by the rejection of its challenge by Aikens J in a judgment delivered in January 2007 (see below).

In May and June 2006, in parallel with work for and at the hearing in the next phase of the Vienna Arbitration (which took place on 15-18 May 2006), Elektrim and DT were in negotiation to agree between themselves, so far as possible, in advance of the next Vienna award the amount which DT should pay Elektrim as the price for the PTC shares under the call option, if the Vienna Tribunal determined that the call option had been validly exercised by DT. A draft Master Agreement was drawn up by DT on 10 May 2006, setting out the terms DT was prepared to agree to (“the Master Agreement”). On 11 May 2006 DT put the Master Agreement to Elektrim, inviting its agreement by 28 May. The general object of the Master Agreement was to allow the ownership and control of PTC to be clarified as speedily as possible. The proposed terms did not purport to prevent Elektrim from seeking a higher price for the PTC shares if the Vienna Tribunal eventually made a higher award. The minimum price payable by DT for the PTC shares as contemplated by the Master Agreement was about €1.45 billion, payable in instalments at defined points in time: (a) €600 million after events including an award determining that DT had validly exercised the option, Elektrim had allowed DT to appoint members of the Management Board of DT in place of its own nominees, Elektrim had created security interests in favour of DT in case the price had later to be repaid (and had used the payment to redeem the bonds, in relation to which DT would stand in the shoes of the bondholders), all injunctions prohibiting the transfer of the shares to DT had been set aside or DT was satisfied they would be set aside (consideration in this regard would have to include the LCIA freezing order, but that did not prevent an involuntary transfer to DT, i.e. pursuant to a determination of the Vienna Tribunal that DT had validly exercised the option) and all other disputes between Elektrim and DT were settled; (b) €150 million after Elektrim finally accepted such an award by the Vienna Tribunal in DT’s favour, or it was recognised in Poland, and DT’s ownership of the PTC shares and its management nominees for PTC had been registered in the KRS Register; (c) €150 million when ET’s appeal against the March 2006 Judgment had been rejected and DT’s representation on the management of PTC consolidated; (d) a final payment of €200 million once DT’s ownership of the PTC shares was no longer disputed or had been finally determined by the Polish courts (with the possibility of a reduction of €100 million if DT was the party which effectively procured settlement with Vivendi and ET); and, in addition, (e) DT agreed to procure the declaration of a dividend by PTC for the benefit of Elektrim, as an addition to the price.

The overall value of this proposal was put at €1.45 billion in the evidence of Dr Jäckle, who acted for DT in the negotiations, and there was no significant dispute about that at the trial. He explained that for reputational reasons (since DT was a German company operating in Poland) DT was concerned to ensure that the Master Agreement set out what would be considered to be a fair price, as perceived by both lawyers and the Polish public at large.

On 28 May 2006 Elektrim sent a declaration to DT accepting the terms of the Master Agreement but qualified thus: “Elektrim’s supervisory board approval required”. It seems that Elektrim’s Management Board approved the terms of the Master Agreement, and that all that remained was for it also to be approved by the Supervisory Board. Elektrim’s Management Board also, therefore, appear to have regarded the terms of the Master Agreement as broadly fair. However, since there was no unqualified acceptance of the Master Agreement before the deadline imposed by DT, it did not come into effect as a binding contract. Nonetheless, I think that the notional investment banks would have been interested in the terms of the Master Agreement, as a good indication of the value which both parties to the Vienna Arbitration placed upon the likely outcome of that arbitration, in terms of the amount of the price which would ultimately be payable by DT under the option. Mr Millett emphasised that the Master Agreement was conditional on various matters, but in my view the principal conditions related to the resolution in favour of DT of its claim to the PTC shares as against ET and Vivendi, and since the TIA recognised that DT (if successful in the Vienna Arbitration in its claim for a transfer of those shares to it) would have a claim to those shares prior to the claims of ET and Vivendi, the conditional nature of the Master Agreement’s provisions would not significantly have detracted from it being a fair and reasonable indication for the notional investment banks of the approximate minimum amount of the price DT would be likely to have to pay Elektrim for the PTC shares under the option.

On 5 June 2006 Elektrim published its 2005 accounts. As explained above, in the line item figures in those accounts the PTC shares were implicitly treated as owned by ET, not Elektrim itself. However, note 39 to the accounts, headed “Contingent liabilities of companies consolidated with the Elektrim Group the size of which it is difficult to estimate”, contained a long account of the litigation surrounding the PTC shares. The May 2006 LCIA Award was referred to. Note 39 included the following:

“The Registration Court’s decision in the matter of PTC

On 2 February 2005 the Regional Court in Warsaw issued a decision on recognising the effectiveness of the [November 2004 Vienna Award].

On the basis of this decision, on 24 February 2005 the District Court for the Capital City of Warsaw 19^th Division of the National Court Register issued a decision on amending the commercial registry entry of the company Polska Telefonia Cyfrowa Sp. z o.o (PTC). The court’s decision included the following changes:

1.

deletion of [ET] and entry in its place of Elektrim S.A. as a significant shareholder in PTC possessing 226,080 shares in PTC;

2.

deletion of the following members of the Supervisory Board: Dariusz Oleszczuk, Michel Picot, Phillippe Houdouin and Jacek Nieweglowski and entry in their place of: Henryk Sobierajski, Dominik Libicki, Jozef Birka and Piotr Nurowski;

3.

deletion of the following members of the Management Board: Boguslaw Kulakowski, Ryszard Pospleszynski and Honathan Eastick and entry in their place of Tadeusz Kubiak, Tomasz Holec and Andrzej Sykulski.

Piotr Nurowski became Chairman of the Supervisory Board, Michael Gunther its Deputy Chairman and Dominik Libicki its Secretary.

The Management Board composed as follows became the only body authorised to represent PTC in accordance with the provisions of the law:

Tadeusz Kubiak – Director General

Wilhelm Stuckemann – Director for Network Exploitation

Martin Schneider – Director for Strategy, Marketing and Sales

Tomasz Holec- Administration Director

Andrzej Sykulski – Finance Director

Towards the end of August 2005 the Local Court in Warsaw annulled the decision of the Regional Court dated 24^th February 2005 and sent the case for renewed consideration.

On 15 November 2005 the Registration Court made new changes in the National Court Register, entering [ET] as a shareholder in place of Elektrim S.A.

In connection with the change in [PTC’s] entry in the National Court Register (KRS) Elektrim S.A. undertook legal action aimed at again having Elektrim S.A. entered in the KRS as the shareholder in PTC in accordance with the legally binding judgement of the Vienna Arbitration Court of 26 November 2004. This judgement is binding for all parties to the proceedings, including [ET]. In its judgement in the Arbitration Court unambiguous determined that Elektrim S.A. was and has remained at all proper times the owner of 48% of shares in PTC. That [ET] is bound by the judgement of the Vienna court has been confirmed by Polish courts, including the Appeal Court, which in its decision of 11 May 2005 stated that it has direct legal consequences for ET and affects directly ET’s ownership rights.

On 29^th March 2006 the Appeal Court in Warsaw rejected and dismissed [ET’s] appeal and the appeal of the Public Prosecutor against the Regional Court in Warsaw’s judgement of 2 February 2005. This means that the decision of the International Arbitration Court in Vienna of 26 November 2004 is effective in Poland. The Appeal Court’s judgment is legally binding.”

Note 40 stated:

“Significant events relating to past years which occurred after the balance sheet date and were not taken into consideration in the consolidated financial statements.

On 29 March 2006, the Appeal Court in Warsaw rejected and dismissed [ET’s] appeal and also that of the Public Prosecutor against the decision of the Regional Court in Warsaw of 2 February 2005 relating to the decision to recognise the effectiveness of the judgement of the Vienna Arbitration Court of November 2004. In its judgement the Arbitration Court stated that the sale of 48% of the shares in [PTC] to ET was ineffective and the shares in PTC, which were its subject, remained the property of Elektrim at every proper time.

The Appeal Court’s decision means that the judgement of the International Arbitration Court in Vienna of 26 November 2004 is effective in Poland. In view, however, of the complicated nature of all the matters connected to PTC these financial statements do not contain adjustments related to them.

The most important events after the balance sheet date were described in Notes 39 and 29.

The influence of events after the balance sheet date is difficult to assess. Apart from the above events and others described in these supplementary explanatory notes there were no events after the balance sheet date that were of significant importance and were not included in the financial statements.”

Ernst & Young declined to give an opinion on Elektrim’s 2005 accounts. In their report explaining their position, they referred, amongst other things, to the litigation affecting the PTC shares, as follows:

“In 2002-2003, the company board of directors underwent many changes and, as of the date of issue of the present report, we had not yet received the declarations of some former members of the board in connection with the audit of the group’s consolidated financial statements for previous periods. Accordingly, we cannot state whether as of the day of the present report the present members of the board are in possession of knowledge about all the major liabilities contracted, contingent liabilities, and transactions carried out by the company. In particular, for these reasons, the declaration of the company board of directors obtained during our audit in respect of the accuracy and integrity of the consolidated financial statement in the year ending on 31 December 2005 was modified significantly. In the event of existence of major undisclosed contracted liabilities, contingent liabilities, and transactions up to 31^st December 2005, their influence on the enclosed consolidated financial statement cannot be determined. At the same time, one of the law firms with which the company ceased working in 2005 did not respond to our question on the current status of the cases that the firm conducted for the company. Moreover, one of the law firms working for the company did not give us an update of its response as of the day of the present report. Accordingly, as of the day of the present report, we cannot comment on the subject of the possible consequences of the court cases and of their possible influence on the enclosed consolidated financial statement for the year ending 31 December 2005. Additionally, during the audit, the company did not release to us full minutes of the meetings of the company board of directors and supervisory board. In accordance with the declaration of the company board of directors, the board delivered to us all the documents and agreements in its possession regarding period audited, which are not subject to business confidentiality. In accordance with the declaration of the company board of directors, the documents that have not been released to us represent the company’s business secrets. Accordingly, as of the day of the present report, we cannot comment on the subject of the possible influence of our unresolved issues on the enclosed consolidated financial statement for the year ending on 31 December 2005. Moreover, on the basis of information obtained from the company, we could not affirm all the information included in the additional explanatory notes to the enclosed consolidated financial statement.”

Mr Miles submitted that Elektrim’s 2005 accounts have great importance in consideration of the Trustee’s claim for two reasons. First, he said that the notes to the accounts form part of the accounts themselves. The notes recorded the March 2006 Judgment and hence in substance acknowledged that Elektrim, not ET, was the owner of the PTC shares despite appearing to treat the PTC shares as an asset of ET in the line item figures in the accounts. Mr Bezant’s evidence was that he read the notes as indicating that the management of Elektrim accepted that they should have redrafted the line items in the accounts in light of the March 2006 Judgment, recording the PTC shares as an asset of Elektrim. This point would have had considerable significance had I decided (contrary to my ruling at para. [35] above) that the calculation of “Fair Market Value” was required to proceed solely by reference to the terms of Elektrim’s accounts. However, that is not the position, so the argument on this issue is less significant, since the notional investment banks would have been able to form their own view about whether the PTC shares constituted assets of Elektrim. In light of the uncertainty created by the contrast between the line item figures in the accounts and the notes to the accounts, and the decision of the auditors to withhold an audit opinion, there can be little doubt that that is what the notional investment banks would have done.

Secondly, Mr Miles submitted that in reaching their own view, the notional investment banks would have had access to the legal advice which the management of Elektrim must (so it was said) in all probability have obtained before 11 July 2006 about the litigation affecting the PTC shares (since the management would have required legal advice in order to make their own assessment of the likely outcome of that litigation in order to decide how to treat it in the accounts); that the notional investment banks would have carried out their valuations on the basis of that legal advice (since they would have been likely to accept that legal advice unless it was clearly suspect or doubtful in some way, and there was nothing to suggest that it would have appeared so); and that the court should draw inferences from the accounts about the legal advice the management of Elektrim had in fact obtained by 5 June 2006. He submitted that, if proper inferences were drawn from Elektrim’s 2005 accounts (supplemented if necessary by inferences drawn from its 2006 accounts prepared a year later) the court could make findings about what the legal advice which Elektrim had in fact obtained about the PTC shares by 11 July 2006 (“the actual July 2006 legal advice”) been, and should then approach the Trustee’s damages claim by reference to the actual July 2006 legal advice rather than by reference to the notional legal advice based on the court’s own attempt to assess what such advice would have been as at 11 July 2006.

I do not accept this submission, for the following reasons:

Accordingly, I consider that the proper approach for consideration of the Trustee’s damages claim in relation to the PTC shares is to make an assessment of the notional legal advice available to the notional investment banks on the picture as it presented itself as at 11 July 2006. I make that assessment below, after completing my account of the relevant facts.

On 6 June 2006 the Vienna Tribunal promulgated a further award in the Vienna Arbitration (“the June 2006 Vienna Award”). By this decision the Vienna Tribunal held that (i) DT had validly exercised the call option in article 16 of the PTC Shareholders Agreement in relation to the PTC shares; (ii) as a result, and subject to payment within 30 days of the price (which was to be determined at a future hearing), DT would acquire the shares in PTC and would be their owner; (iii) while DT argued that the price provided for by article 16(3) was the book value of the PTC shares (about €377 million), the limitation of the price to such a sum as compared to the fair market value of the PTC shares would constitute an illegitimate penalty, so the actual amount of the price to be paid remained to be determined by the Tribunal at a future hearing.

The Vienna Tribunal observed, at paragraph 70:

“Having found for [Elektrim on the relevant Polish law in relation to penalties], the Arbitral Tribunal is not yet in a position to determine how the reduction of the penalty which is included in Article 16 (3) of the Shareholders Agreement will affect the determination of the price. The tests that will guide the Arbitral Tribunal in examining that question for a further determination in the next substantive award are likely to be as follows:

* The common will and intent of the Parties at the time of entering into the contract which contains the penalty.

* The dolus directus of Elektrim when transferring control of PTC to Vivendi and a certain violation of the Shareholders Agreement when introducing a foreign partner as a controlling partner without DT’s consent.

* The exact or approximate damage which has been incurred by DT as a result of Elektrim’s conduct.

* The difference between the book value and the fair market value of the shares.”

The June 2006 Vienna Award is, along with the March 2006 Judgment and the May 2006 LCIA Award, the third of the most important parts of the legal background relevant to assessment of the notional legal advice on about 11 July 2006. The Vienna Tribunal held that DT had validly exercised its right under article 16 of the PTC Shareholders Agreement to call for the sale of the PTC shares to it. The price to be paid could not be less than the book value of about €377 million, but to limit it to this would constitute an unlawful penalty. Accordingly, the price to be paid by DT would be increased, the final amount to be determined at a further hearing of the Vienna Tribunal. The factors relevant to this determination would be those identified at paragraph 70 of the award.

The parties agreed that at 11 July 2006 the value of a holding of 49.4326% of PTC the PTC shares (i.e. slightly more than the 48% represented by the PTC shares), leaving aside the impact of legal disputes, was worth PLN 9,798,451,127 (approximately €2.4 billion).

Taking stock of the various proceedings at this stage, the three decisions which had particular importance were the March 2006 Judgment of the Warsaw Court of Appeal (confirming recognition of the Vienna November 2004 Award in Poland and so recognising Elektrim as owner of the PTC shares), the May 2006 LCIA Award (upholding the validity of the TIA contrary to the claims of Elektrim) and the June 2006 Vienna Award (confirming the validity of the exercise by DT of the call option under article 16 of the PTC Shareholders Agreement, which therefore established an obligation upon Elektrim to sell the PTC shares to DT at a price to be ruled upon by the Vienna Tribunal). So far as that price was concerned, (i) DT accepted that it would have to pay at least about €377m; (ii) the Vienna Tribunal had ruled that it would have to pay more than that to eliminate the element of penalty; (iii) Elektrim and DT had conducted a preliminary negotiation of the further sums to be paid, and under the Master Agreement, which had been accepted in principle by Elektrim although not formally agreed, a minimum overall price to be paid by DT of some €1.45 billion was contemplated; and (iv) there was never any serious doubt but that DT would be ready, able and willing to pay the purchase price under the call option whatever it might be determined to be by the Vienna Tribunal. In my view these were the key elements of the legal position which would have been available to any legal adviser providing the notional legal advice and to the notional investment banks.

On 12 June 2006, Elektrim held a press conference to discuss the latest Vienna Arbitration award. The award was not put into the public domain, but statements were made on behalf of Elektrim about it. Elektrim said that the effect of the award was that DT was the owner of the PTC shares. This was not an accurate reflection of the award. Nonetheless, Mr Millett submitted that the notional investment banks would have given weight to this statement in their assessment of the situation, and as a result would have regarded DT, not Elektrim, as owner of the PTC shares. I reject that submission. In the context of the battle which was going on between Elektrim and ET at the time to assert management control over PTC, it seems to me that the statement was probably a tactical manoeuvre by Elektrim to bolster its position in its arguments with ET, knowing that it was unlikely to weaken its position vis-à-vis DT in the Vienna Arbitration (in which the Vienna Tribunal would be guided by the legal arguments already being put before it). The statement was at odds with the actual ruling in the June 2006 Vienna Award (which made it clear that DT would only become owner of the PTC shares when it had paid the price due under the call option, which had not occurred by 12 June 2006) and at odds with the position adopted by Elektrim in the continuing Vienna Arbitration, in which it continued to argue that DT would not become owner of the PTC shares until the price for them was determined and paid. I do not consider that the notional investment banks and the notional legal advice would have attributed any significant weight to this statement.

On 14 June 2006, in the Polish KRS Registration Proceedings, the Warsaw Regional Court reversed the decision of that court of 11 November 2005 (which had reinstated ET as the holder of the PTC stake in the KRS Register) and remitted the decision on registration in the KRS Register to the Regional Court for review. This decision reflected the rulings in the Polish Recognition Proceedings.

In light of Elektrim’s statements about the June 2006 Vienna Award at the press conference on 12 June 2006 and information that the PTC Management Board controlled by Elektrim had convened a meeting of PTC’s shareholders for 28 June 2006 to vote on distribution of PTC’s retained profits (which were worth in the hundreds of millions of Euros) by way of a dividend, on 16 June 2006 Vivendi and ET applied to the LCIA Tribunal for further interim relief in respect of the PTC shares. The proposal for distribution of PTC’s retained profits represented an attempt by Elektrim to derive value for itself from the PTC shares, contrary to what was set out in the TIA. Vivendi and ET invited the Tribunal to reiterate and emphasise the terms of the LCIA freezing order enjoining Elektrim “from voluntarily seeking to sell [etc]” the PTC shares and enjoining Elektrim “from exercising any rights attached to the PTC shares not in the ordinary course of PTC’s business”, including by indicating in the latter case that Elektrim was enjoined “from participating in or voting at the … meeting of PTC shareholders in connection with the distribution of the ‘entire PTC profit’”. They also sought an order that Elektrim disclose the June 2006 Vienna Award.

On 20 June 2006, in the Polish Title Proceedings, the Warsaw Court of Appeal allowed appeals by Elektrim and DT against the injunction granted to ET on 30 December 2004 enjoining the PTC Management Board from making changes to the PTC share register to record Elektrim as owner of the PTC shares. This decision reflected and gave effect to the March 2006 Judgment, indicating the authoritative nature of that judgment within Poland.

On 23 June 2006 Elektrim wrote to PTC informing it that according to the June 2006 Vienna Award, DT had validly exercised its option under the PTC Shareholders Agreement on 15 February 2005 and that accordingly an agreement for the sale of the PTC shares to DT had been concluded by Elektrim. The letter stated, “Under the said agreement, title to these shares has passed to [DT]”. Elektrim sought to rely on this letter to show that it did not in fact own the PTC shares as at 11 July 2006, but called no evidence to explain why or in what circumstances it was written. In the light of the battle which was going on between Elektrim and ET at the time to assert management control over PTC, it seems to me that the letter (like Elektrim’s statement to the press on 12 June 2006) is likely to have been a tactical manoeuvre by Elektrim to bolster its position in its arguments with ET. I do not consider that the notional investment banks and the notional legal advice would have attributed any significant weight to this letter.

Also on 23 June 2006, Elektrim gave notice to the LCIA Tribunal that it was preparing an application to the High Court in England to challenge the May 2006 LCIA Award and requesting that the LCIA Tribunal refrain from making any other orders or directions until the outcome of that challenge was known.

Despite that, on 27 June 2006 the LCIA Tribunal acted on the application of 16 June 2006 by Vivendi and ET and issued a further interim injunction until 12 July 2006 (when a full hearing of the application would take place) enjoining Elektrim from participating in voting at the PTC shareholders meeting scheduled for 28 June 2006 or at any such meeting to be held prior to 12 July 2006 in connection with the distribution of retained profits by PTC (“the June 2006 LCIA injunction”).

Also on 27 June 2006 the Warsaw Regional Court issued a similar interim injunction on the application of ET, enjoining Elektrim from accepting any dividends from PTC until the hearing of ET’s claims, to take place within two weeks (“the June 2006 Polish injunction”).

The same day, DT requested the Vienna Tribunal to make an award on the mechanics of the transfer of legal title to and the payment for the PTC shares and the PTC Management Board wrote to shareholders of PTC listing Elektrim as holder of the PTC shares.

On 28 June 2006 a PTC shareholders’ meeting was held. Representatives of ET sought to attend the meeting but were told that ET was not on the list of shareholders in PTC, albeit the KRS Register in respect of PTC still recorded ET as the registered shareholder of the PTC shares.

On 3 July 2006 Vivendi and ET filed additional submissions on interim relief in the LCIA Arbitration, including a prayer for interim relief to prevent Elektrim from taking any measures which would further jeopardize ET’s rights to the PTC shares pending resolution of the issues in the LCIA Arbitration.

On 10 July 2006 Elektrim filed a skeleton argument in the LCIA Arbitration referring to an application shortly to be made in the English High Court under section 68 of the Arbitration Act 1996, to have the May 2006 LCIA Award set aside. The application was filed on 12 July, and was supported by a witness statement of a Mr Black dated 11 July which explained the basis for the challenge to the award. That witness statement referred to the Gibert memorandum and complained that Vivendi’s failure to disclose it in the course of the LCIA Arbitration amounted to fraud or was otherwise contrary to public policy (so as to entitle Elektrim to have the award set aside or remitted) and submitted that the letter gave rise to a new line of defence or ground for rescission of the TIA (to the effect that Vivendi had misled Elektrim as to its true intentions in respect of ET) and supported other arguments previously advanced by Elektrim to have the TIA set aside. Mr Black made the point that Vivendi had not provided an explanation why the Gibert memorandum had not been disclosed as it should have been in the course of the LCIA Arbitration. This material would have been available to the notional investment banks and legal advisers providing the notional legal advice.

In assessing the significance of the Gibert memorandum and Elektrim’s application to set aside the May 2006 LCIA Award and the notional legal advice to be given in light of them it is, in my view, relevant to have regard to the ruling and reasoning of Aikens J on that application in his judgment handed down on 19 January 2007: Elektrim SA v Vivendi Universal SA [2007] EWHC 11 (Comm). I consider that this judgment gives a clear indication of what assessment any legal adviser asked to provide the notional legal advice would have made of the Gibert memorandum and Elektrim’s application (a point reinforced by the fact that there was no appeal by Elektrim against his judgment).

Aikens J dismissed the application with full and careful reasons. His judgment was firmly grounded on principles governing the interpretation of the Arbitration Act 1996 set out by the House of Lords in Lesotho Developments v Impregilo SpA [2006] 1 AC 221: see the discussion by Aikens J at [75]-[77], where he emphasised that the established approach of English law under the Act is to afford considerable respect to the results of an arbitral process and to create only very limited powers for the courts to intervene to set aside such results. In my view, in light of the reasons given by Aikens J, the notional legal advice would have been to the effect that Elektrim’s application to set aside the May 2006 LCIA Award was very unlikely to succeed, and that there was still less prospect of success in actually ultimately achieving a different substantive result from that arrived at in that award (in which the LCIA Tribunal upheld the validity of the TIA). Accordingly, notwithstanding Elektrim’s application to the English High Court, the notional legal advice would have been framed by reference to the May 2006 LCIA Award and on the footing that the TIA was a valid agreement binding Elektrim. It would have been foolhardy for any legal adviser advising on the position as at 11 July 2006 to have taken any different view.

It is true that, by the time of the hearing before Aikens J, Vivendi had filed evidence to explain why it had not disclosed the Gibert memorandum in time for the hearing leading up to the making of the May 2006 LCIA Award. That evidence was not available on 11 July 2006, and so the detail of it could not have been taken into account in formulating the notional legal advice. However, in the context of the hard-fought litigation between Elektrim and Vivendi, I think the natural expectation (despite the argumentative point made by Mr Black in his witness statement) would have been that Vivendi would be bound to put forward some explanation why the Gibert memorandum had not been disclosed. The important point, as analysed by Aikens J, was that for Elektrim to succeed on its complaint that the award had been obtained by fraud or should be set aside on public policy grounds by reason of such non-disclosure, Elektrim had to show that the Gibert memorandum had been deliberately withheld by Vivendi in bad faith, knowing that it had an obligation to disclose it: see [88]-[107] of his judgment. Such an allegation of fraud would have to be proved to a high standard, and in Aikens J’s clear view there was no evidence to establish Elektrim’s case to such a standard. I do not think that there was any significant difference in that regard between the position after Vivendi had filed its evidence on the point and the position on 11 July 2006, before it had done so (at which point Elektrim’s case was necessarily speculative to a significant degree and the difficulties likely to arise in ultimately making out such a case to the satisfaction of a court would have been obvious to any legal adviser).

Aikens J also analysed, by means of detailed reference to the findings of the LCIA Tribunal in the May 2006 LCIA Award, why the Gibert memorandum would not have made any difference to the ruling of the Tribunal in that award upholding the validity of the TIA: see [108]-[113] (even assuming that the Gibert memorandum showed that evidence given by Mr Gibert to the Tribunal was false, it would have made no difference, since his evidence had in any event not been accepted for other reasons) and [114]-[120] (the Gibert memorandum, if available, would not have enabled Elektrim to establish any additional ground for setting aside the TIA, on the basis that it was induced to enter into it by any misrepresentation by Vivendi: the Tribunal had found that Elektrim was determined to enter into the TIA in order to meet its then desperate need to raise cash). Aikens J’s reasoning on these points is clear and compelling, and is based on materials which would have been available to a legal adviser providing the notional legal advice. There is no basis to suppose that such an adviser would have analysed the position any differently.

On 11 July 2006 Elektrim filed an appeal against the interim injunction obtained by ET and Vivendi from the Warsaw Regional Court on 27 June.

On 12 July 2006 there was a hearing before the LCIA Tribunal in respect of Vivendi’s application of 16 June 2006 for further interim relief.

On 13 July 2006 in the Polish KRS Registration Proceedings, the Warsaw Regional Court struck ET off the KRS register as the registered holder of the PTC stake and ordered that Elektrim be recorded as the holder of the PTC stake. By this means the court gave further effect to the March 2006 Judgment. The KRS Register was amended accordingly.

At this point in this lengthy chronology it should be recalled that, as set out above, the Contingent Payment Determination Date for the purposes of condition 6(k) was 11 July 2006, and that the work of the notional investment banks under that provision had to be completed by about that date (or, on the Trustee’s argument, by a few days after that). A good deal of activity continued on various legal fronts after this, but it is not necessary to go through it in great detail. A few salient matters should, however, be noted.

On 2 August 2006 the LCIA Tribunal acceded to the application of ET and Vivendi of 16 June 2006 and extended the LCIA freezing order. In my view, in light of the May 2006 LCIA Award upholding the validity of the TIA and the terms of the TIA itself, it was always very likely that the LCIA Tribunal would take this approach to that application, and this would have been appreciated by any legal adviser providing the notional legal advice.

On 5 August 2006, in the Polish Recognition Proceedings, ET lodged its appeal to the Polish Supreme Court against the March 2006 Judgment. It had been clear since that judgment was handed down that ET was likely to do this. However, I do not consider that the mere fact that such a move by ET was on the cards as at 11 July 2006 would have had a material effect upon the notional legal advice. The fact that the Polish courts at both first instance and in the Court of Appeal had, in carefully reasoned judgments, recognised the binding legal effect in Polish law of the November 2004 Vienna Award would have provided very powerful evidence for any legal adviser providing the notional legal advice as at 11 July 2006 of the correct legal position in Poland in relation to the PTC shares. The outcome of any such appeal would have been speculative, and in my view such a legal adviser would again have been foolhardy in advising at that time on any basis other than that the November 2004 Vienna Award was binding in Polish law. This view is reinforced by the fact that when, subsequently, the Polish Supreme Court heard the appeal, it was allowed on procedural grounds (which meant that the case and Elektrim’s and DT’s application for recognition of the November 2004 Vienna Award fell to be remitted for re-consideration by the lower courts) but not on the basis of any finding that the lower courts had gone wrong on the substantive merits in their decisions.

On 16 August 2006 the Warsaw Court of Appeal suspended the effectiveness of its March 2006 Judgment in the Polish Recognition Proceedings pending the hearing of the appeal filed by ET.

On 4 September 2006 the Master Agreement, as amended by an additional set of provisions, was entered into by Elektrim and DT, setting out their agreement as to how the November 2004 Vienna Award and the June 2006 Vienna Award were to be implemented (the amended, binding agreement was referred to at trial as “the Implementation Agreement”). The provisions for payment of the price by DT under the call option set out in the Master Agreement were confirmed in the Implementation Agreement. Accordingly, it appears that Elektrim’s Supervisory Board as well as its Management Board regarded the payment terms in the Master Agreement as a reasonably fair estimation of the price to be paid by DT (subject to any possible increase as a result of further proceedings in the Vienna Arbitration). This serves to reinforce the significance which the notional investment banks and any legal adviser would have been likely to attribute to the terms of the Master Agreement as at 11 July 2006 in evaluating the price payable by DT for the PTC shares, since if inquiry had been made at that time about the fairness of the terms in the Master Agreement the high probability is that the Elektrim management would have confirmed their view that they were fair.

Clause 2.4 of the Implementation Agreement referred to Elektrim’s letter of 23 June 2006 to the management of PTC (para. [123] above) in these terms:

“The Parties hereby clarify and confirm, that [DT] has validly exercised the Vienna Call Option for the Shares (as decided by the Second Vienna Tribunal). Elektrim confirmed in writing to the management board of PTC that [DT] has acquired title to the Shares and has provided [DT] with a copy thereof at the date of this Agreement which is attached hereto as Annex 2.4.”

The circumstances in which and purpose for which that letter had been written were not explained in the Implementation Agreement. The reference to it in clause 2.4 suggests that the writing of such a letter had been a matter of negotiation between DT and Elektrim, presumably because DT wished to bolster its claims to ownership of the PTC shares as against the rival contender for ownership, ET. The inclusion of clause 2.4 in the Implementation Agreement therefore tends to reinforce my conclusion (para. [123] above) that the letter of 23 June had been written by Elektrim as a tactic to improve its (and therefore DT’s) position as against ET, and hence reinforces my conclusion that the notional investment banks and any legal adviser providing the notional legal advice would not have attached significant weight to the letter as an indication of the correct legal position so far as concerned the current legal ownership of the PTC shares as at 11 July 2006.

On 5 September 2006 DT appointed its nominees as members of the PTC Supervisory Board.

On the same day, Vivendi filed a statement of claim in the next phase of the LCIA Arbitration relying on clause 5.24 of the TIA and claiming re-transfer of the PTC shares from Elektrim to ET (i.e. on the footing, contested by ET on other fronts, that the November 2004 Vienna Award had been effective to re-vest ownership of the shares in Elektrim) or alternatively the transfer to ET of any proceeds of the sale of the PTC shares to DT or, alternatively, damages in the amount of €1.994 billion (representing what Vivendi maintained was the value of its share of ET’s holding of the PTC shares, valued at their current market value, which Elektrim had failed to transfer to ET). In my view, the two main claims based on clause 5.24, for re-transfer of the PTC shares or payment of the proceeds of sale to ET, properly reflected the terms of clause 5.24 and the existence of such claims (on the footing that the November 2004 Vienna Award had indeed been effective to re-vest ownership of the shares in Elektrim, as had been confirmed by the March 2006 Judgment) and their validity would have been clear to any legal adviser providing the notional legal advice as at 11 July 2006.

On 2 October 2006 the Vienna Tribunal published a further award (“the October 2006 Vienna Award”) declaring that DT would acquire legal title to the PTC shares held by Elektrim on payment of the current book value of the PTC shares (about €643 million) and upon giving an irrevocable undertaking to pay any subsequent adjustment of the price later ordered by the Tribunal on the basis that the price stipulated in article 16(3) of the PTC Shareholders Agreement was a penalty and an uplift was required (the terms of the award made it clear that although Polish law included a doctrine whereby ownership of property could be retroactively treated as transferred at the time of contract once the price under a contract had been paid, DT would only acquire legal title to the PTC shares when it had paid the part of the price and given the undertaking in respect of the price to which the award referred). The Vienna Tribunal also ordered Elektrim to transfer full factual control of the PTC shares to DT, including by ensuring that DT would be listed as the owner of the shares in the KRS Register and that its nominees to PTC’s Supervisory and Management Boards would be listed in the KRS Register. The full amount of the price to be paid by DT under the call option remained to be determined at a later hearing.

The same day, DT filed a motion with the Warsaw Regional Court to allow DT to deposit with the court approximately €600 million payable to Elektrim as part of the purchase price of the PTC shares.

On 10 October 2006 the Higher Regional Court of Vienna accepted the appeals of Elektrim and DT against the Vienna Commercial Court decision of 20 December 2005, but on the basis that it reasoned that ET was not bound by the November 2004 Vienna Award because the Vienna Tribunal had held that it did not have jurisdiction over ET. On 18 December 2006 the Vienna Supreme Court confirmed the decision of the Higher Regional Court of Vienna and dismissed ET’s appeal. The reasoning of these courts, however, ignored the fact that the Polish courts had recognised that award (which recorded that Elektrim had at all material times remained the owner of the PTC shares) and had acted to give effect to it as set out above, by treating Elektrim as the owner of the shares and rectifying the KRS register and PTC’s company register to record that position.

Later in October 2006, DT paid sums to Elektrim and into the Warsaw Regional Court totalling about €643.667 million, as indicated in the October 2006 Vienna Award. Thereafter, Elektrim and DT treated DT as the owner of the PTC shares. DT paid that sum on the basis of an agreement with Elektrim that the main part of it would be used to pay the bondholders under the bonds, so as to prevent Elektrim from being made bankrupt. Elektrim made an application to the LCIA Tribunal (opposed by Vivendi and ET) for permission to use €600 million of the monies paid by DT for this purpose. On 23 October 2006, upon Elektrim undertaking to pay the balance of the sums paid by DT into an escrow account under the control of the LCIA Tribunal, the Tribunal issued an order permitting the major part of the sum paid by DT to Elektrim to be used to discharge Elektrim’s liability to the bondholders under the bonds. Although the greater part of the sums for principal and interest owing under the bonds were then repaid, there remained an issue whether sufficient monies had been paid in order to discharge in full the interest due according to the Hart J judgment. In the event, full repayment of the principal and interest payable in respect of the bonds was only achieved on 25 April 2008, leaving only the claim by the bondholders in respect of a Contingent Payment.

On 22 December 2006, since Elektrim did not honour its undertaking, the LCIA Tribunal ordered Elektrim to pay the balance of the price it had by then received from DT (about €118 million) into an escrow account under the control of the Tribunal. In effect, therefore, the price payable by DT was separated from Elektrim’s general assets and potentially treated as a fund held by Elektrim to satisfy claims made by ET and Vivendi.

On 18 January 2007, in the Polish Recognition Proceedings, the Polish Supreme Court allowed ET’s appeal against the March 2006 Judgment of the Warsaw Court of Appeal. I was informed that the appeal was allowed on a technical procedural basis, rather than on the substantive merits of the underlying legal dispute. The Supreme Court remitted the claim for recognition of the November 2004 Vienna Award to the Warsaw Regional Court. That claim remains pending down to the present time.

On 9 August 2007, the management of Elektrim filed a Bankruptcy Petition in respect of the company. On 21 August 2007 the Warsaw Regional Court declared that Elektrim was bankrupt.

On 19 March 2008 the LCIA Tribunal issued a further award dealing with issues of liability on the claims and counterclaims between Vivendi and ET on the one side and Elektrim on the other (“the March 2008 LCIA Award”). Elektrim had argued that Vivendi and ET were subject to an obligation to be implied into the TIA to co-operate with Elektrim in light of the November 2004 Vienna Award to transfer or confirm Elektrim’s full ownership of the PTC shares in order to preserve their value and allow Elektrim to take advantage of the two month opportunity afforded it by the Vienna Tribunal in that award to take steps to recover the shares and avoid being in material default of the PTC Shareholders Agreement (and hence avoid a sale at an under-value to DT). That argument was rejected by the LCIA Tribunal, on the basis that Vivendi and ET had been entitled to take steps to defend their own interests in circumstances in which Elektrim had been denying the validity of the TIA and had been seeking to manoeuvre to keep the PTC shares for itself (rather than to further any joint enterprise between it and Vivendi and ET) and Vivendi had acted reasonably and without fault in negotiations with Elektrim at the relevant time up to the exercise by DT in February 2005 of its call option under the PTC Shareholders Agreement. On the other hand, the Tribunal found that Elektrim at the relevant time had had no intention of complying with its obligations under clause 5.24 of the TIA and, in breach of its obligations, had sought to exploit the uncertainty created by the November 2004 Vienna Award in order to try to keep the PTC shares for itself.

In the March 2008 LCIA Award the LCIA Tribunal dealt with arguments put forward by the parties regarding the operation of clause 5.24 of the TIA. Mr Millett submitted that since, in the Award, the LCIA Tribunal was purporting to apply Polish law in interpreting the TIA, the Award represented valid evidence of Polish law in relation to the proper interpretation of the meaning and effect of clause 5.24 from which it could be inferred what advice on the interpretation of that clause would have been given by Polish lawyers in July 2006 for the purposes of the notional legal advice. Mr Millett said that the court should treat the March 2008 Award as compelling evidence of Polish law sufficient to dislodge assessment of the meaning and effect of clause 5.24 by reference to English law in line with the approach set out at para. [55] above.

I was not persuaded by that submission. Only one of the three members of the LCIA Tribunal was a Polish lawyer. It was not a body which was an authoritative exponent of Polish law for general purposes (although its rulings were obviously authoritative and binding for the parties to the arbitration; but they did not include DT or the Trustee). I have not seen the underlying evidence of Polish law which was presented to the Tribunal, and so am not in a position to evaluate that evidence or the Tribunal’s assessment of it. Moreover, the March 2008 LCIA Award did not address precisely the questions in relation to which interpretation of clause 5.24 of the TIA is relevant in the present proceedings (i.e. what advice might have been given by a Polish lawyer about its meaning and effect in the circumstances obtaining in July 2006). In addition, DT and the Trustee had no opportunity to play any part in the LCIA arbitration proceedings, by putting in evidence and submissions on the matters of Polish law on which the LCIA Tribunal had to form a view, and the Trustee has had no opportunity to explore with any expert on Polish law put forward by Elektrim in the present proceedings the proper interpretation of clause 5.24 and, indeed, of the March 2008 LCIA Award in light of Polish law. I therefore do not have confidence that I can take from the March 2008 LCIA Award a full and accurate picture of relevant Polish law bearing on the matters I have to decide, sufficient to displace assessment of those matters by reference to English law.

However, I have had regard to the March 2008 LCIA Award as a cross-check on the reasonableness of the views I have formed about the meaning and effect of clause 5.24 of the TIA and my assessment of the notional legal advice which would have been given in July 2006. The LCIA Tribunal was composed of experienced commercial arbitrators, who had examined the relationship between Elektrim, Vivendi and ET and the TIA in great detail and could be expected to have a sound grasp of the basic commercial reality underlying the TIA and what the parties to it may reasonably have been expected to have intended by its terms.

At paragraphs 458ff of the Award the LCIA Tribunal considered the operation of clause 5.24. At paragraphs 469 to 471 (in particular) the Tribunal identified that the object of the parties in that clause was to preserve their respective stakes in ET/PTC and their original investments, and that that objective was reflected in the two alternative outcomes contemplated in clause 5.24, namely that as a result of the Vienna Arbitration either the PTC shares should be transferred to ET via Elektrim (clause 5.24(i)) or the consideration that DT would have to pay for such shares should be paid to ET (clause 5.24(ii)): “In other words, the Parties’ objective was (i) either to re-instate [ET’s] shareholding in PTC or (ii) to transfer to [ET] the consideration for the PTC shares to be paid by DT.” At paragraph 476 (in particular), the Tribunal identified that the parties to the TIA intended to comply with any final enforceable award made in the Vienna Arbitration, and that this coloured the interpretation of their rights and obligations under the TIA (in other words, the Tribunal considered that the TIA recognised the priority of DT’s possible rights to be determined in the Vienna Arbitration in respect of the PTC shares as against the rights of ET or Elektrim, but that as between ET and Elektrim ET would have the prior entitlement to those shares). At paragraphs 468 and 531 (in particular) the Tribunal gave its assessment of the basic commercial position, that the parties to the TIA did not intend that Elektrim could keep the PTC shares (or the proceeds of sale of those shares to DT) for itself as well as keeping the benefit of the consideration previously given by ET and Vivendi for participating in ownership of those shares (which the Tribunal valued at about €1.8 billion: cf paras. [58] and [61] above). At paragraphs 489, 490, 500, 641 and 672 (in particular) the Tribunal emphasised that the intention of the parties under clause 5.24(i) was that Elektrim should hold the PTC shares on trust for ET, if it (Elektrim) was to be treated as having legal title to those shares.

In light of this, I draw a degree of confirmation from the reasoning in the March 2008 LCIA Award in relation to my own views regarding the proper meaning and effect of clause 5.24 of the TIA, so far as that provision is relevant to the determination of the issues which arise in the present proceedings.

On 12 February 2009 the LCIA Tribunal issued a further award, dealing with the quantum of damages payable by Elektrim to Vivendi for breach of the TIA.

The Trustee’s claim is for damages for loss of a chance, being the chance to have the machinery in condition 6(k) operated in mid-2006 and a Contingent Payment determined by reference to a CPDD as at 11 July 2006 and paid in favour of the Trustee and bondholders. It is said by the Trustee that if the machinery in condition 6(k) had been operated in mid-July 2006, the notional investment banks would have assessed the “Fair Market Value” of Elektrim’s relevant assets less relevant liabilities at an amount which would have produced an obligation on the part of Elektrim to pay a substantial Contingency Payment.

In a claim based on loss of a chance of a third party (here, the notional investment banks) acting in a particular way in certain circumstances so as to produce a benefit for the claimant, the claimant is not required to prove the hypothetical action of the third party on a balance of probabilities. As submitted by Mr Miles, the claimant only has to prove that in the absence of a breach of duty there was a real or substantial chance (as opposed to a speculative one) that the third party’s action would have yielded a benefit: Allied Maples Group Ltd v Simmons & Simmons [1995] 1 WLR 1602, 1614C per Stuart-Smith LJ. It is for the court then to assess the probability of such action being taken in the absence of such breach of duty and to apply that probability to the outcome in question.

Where the court concludes that it is clear that the third party would have acted in a given way, there is no need to apply any discount to the amount of the benefit the claimant would have derived from that outcome: Harrison v Bloom Camallin [2001] PNLR 195, [86]-[88] per Neuberger J.

The proper approach to a claim for damages in respect of an opportunity lost as a result of breach of duty by the defendant was set out by Simon Brown LJ (with whom Ward LJ agreed) in Mount v Baker Austin [1998] PNLR 493. The claimant complained that the defendant solicitors, who had acted for him in respect of a claim he wished to bring against a bank, had by their negligence caused that claim to be dismissed for want of prosecution. He claimed damages for the loss of opportunity to succeed in his claim against the bank. The judge at first instance dismissed the claim on the basis that the claimant’s action against the bank had no reasonable prospect of success. The claimant’s appeal was dismissed by the Court of Appeal. Simon Brown LJ summarised the relevant principles at 510D-511C:

“1.

The legal burden lies on the plaintiff to prove that in losing the opportunity to pursue his claim he has lost something of value, i.e. that his claim…had a real and substantial rather than a merely negligible prospect of success.

2.

The evidential burden lies on the defendants to show that despite their having acted for the plaintiff in the litigation and charged for their services, that litigation was of no value to their client, plainly the burden is heavier in a case where the solicitors have failed to advise their client of the hopelessness of his position. If, of course, the solicitors have advised their client with regard to the merits of his claim such advice is likely to be highly relevant.

3.

If and in so far as the court may now have greater difficulty in discerning the strength of the plaintiff’s original claim…than it would have had at the time of the original action, such difficulty should not count against him, but rather against his negligent solicitors.

4.

If and when the court decides that the plaintiff’s chances in the original action were more than merely negligible, it will then have to evaluate them. That requires the court to make a realistic assessment of what would have been the plaintiff’s prospects of success had the original litigation been fought out. Generally speaking one would expect the court to tend towards a generous assessment given that it was the defendants’ negligence which lost the plaintiff the opportunity.”

This statement of principle takes account of the old authority of Armory v Delamirie (1722) 1 Stra 505 regarding the proper approach to issues of evidence where a party has by his own act created the factual uncertainty which the court has to resolve. The Court of Appeal considered that authority in the similar context of a claim in respect of solicitors’ negligence in Browning v Brachers [2005] EWCA Civ 753, at [204]-[213]. Having referred to Mount and other authority, Jonathan Parker LJ concluded at [210] that the principle in Armory v Delamirie “raises an evidential (i.e. rebuttable) presumption in favour of the claimant which gives him the benefit of any reasonable doubt. The practical effect of that is to give the claimant a fair wind in establishing the value of what he has lost.”

A court’s assessment of the value of a lost chance of a beneficial outcome for the claimant is not a precise science, but is rather an exercise in which it may well be appropriate for the court to weigh a range of factors with a view to forming a broad view of the value of what has been lost: see e.g. Sharif v Garrett [2002] 1 WLR 3118, [22] (Tuckey LJ).

Harrison v Bloom Camallin concerned a damages claim brought by a client against the firm of solicitors acting for him in relation to a claim, where due to the solicitors’ negligence the proceedings necessary to assert the claim were not issued in time, with the result that the client lost the opportunity of having his claim adjudicated upon by a court (the relevant third party). Neuberger J said this at [88]:

“… it may be that the court [i.e. the court considering the claimant’s loss of opportunity damages claim] would not think it right to assess the likely level of damages which would be awarded and then apply a single fraction to those damages. The court may think that, although there is only one cause of action, the claimant would, if successful, stand a very good chance of recovering, say, one of the two heads of damages which he seeks, but a significantly poorer prospect of recovering the other head of damages. In such a case, I would have thought that the court would think it right to apply a higher discount to the second head of damages than to the first.”

Other authority indicates that where there is a real prospect of one outcome (outcome A) and also a real prospect of another outcome occurring (outcome B), or indeed real prospects of a number of other outcomes occurring (outcomes B, C and so on) it may be relevant for the court to assess the probability of each such outcome occurring in order to arrive at a composite figure representing the overall value of the chance which has been lost: see eg Blue Circle Industries Plc v Ministry of Defence 1998] Ch 289 (CA), esp. at 314E-316D. This approach is also implicit in the many cases which indicate that a discount is applicable in evaluating the ultimate benefits which the claimant has lost when he suffers a loss of a chance: the discount is to take account of the possibility (or, depending on the case, the probability) that some less valuable outcome for the claimant might have resulted. The discount therefore has to take into account what that less valuable outcome might have been.

In relation to the value of the loss of the opportunity to receive a Contingent Payment under condition 6(k), the Trustee submitted that for certain elements included in the relevant calculation (in particular, Elektrim’s interests in PAK and Port Praski) the proper approach was for the court to assess, on the basis of the materials which would have been available to the notional investment banks in July 2006, the probable valuation which would have been given to each such element. I agree and have adopted this approach.

However, the Trustee submitted that in relation to the valuation of the PTC shares a more complex approach was required: the court should assess the value the notional investment banks would have given to those shares by reference to a number of different assumptions as to what the notional legal advice and operation of the relevant IAS rules might have been, then calculate for each such assumed set of facts the probability that it would have arisen, then in each case multiply the value of the PTC shares on the assumed set of facts by the probability that it would have arisen and aggregate the resulting figures so as to arrive at an overall valuation of the lost opportunity under condition 6(k) in respect of the PTC shares.

In the circumstances of this case, I do not consider that this is the appropriate approach in relation to assessment of the Trustee’s claim in respect of the PTC shares. As was clear from the expert evidence, and was in any event obvious, the notional investment banks would have required legal advice in relation to the ownership of and claims in respect of the PTC shares in order to carry out their valuation task under condition 6(k), including by reference to the IAS. The application of the definitions in the IAS and the operation of condition 6(k) would critically have depended on, and been determined by, the notional legal advice received. In the course of setting out the factual chronology above I have set out what I consider the sensible and appropriate notional legal advice would have been in analysing the overall legal picture which the notional investment banks would have had to take into account. In doing so, I have already implicitly taken into account (and dismissed as unrealistic) possible different legal opinions which might have been expressed if legal advice had been sought in July 2006. I do not think it would be right to attempt to value the Trustee’s loss of a chance claim by reference to the possibility that some legal adviser might have given advice which, on the view I have formed, would have been less than sensible and inappropriate.

The Trustee’s claim is for a single loss of an opportunity, based on what is essentially a unified set of contingencies (where one has to assess the appropriate notional legal advice as part of that set - the notional investment banks required the notional legal advice to inform them of the best overall view of the legal position, and then they would know how to carry out the calculation in condition 6(k)), rather than for loss of a combination of different opportunities, each dependent on a different set of contingencies (which was the type of situation contemplated in both Blue Circle Industries v Ministry of Defence - where the claimant lost both the opportunity to sell property to a specific purchaser at a particularly high price and a fall-back opportunity, if that specific sale had not occurred, to sell the property at its lower general market price - and in Harrison v Bloom Camillin at [88], in which Neuberger J considered a situation in which a distinct part of the loss claimed might be subject to a discrete set of contingencies). Yet the Trustee’s submission seeks (incorrectly, in my view) to characterise its loss of opportunity in respect of the PTC shares as falling within this latter class of case. The submission amounts to saying that the Trustee should be compensated by reference to a range of possibilities that poor and inappropriate legal advice (excessively optimistic or excessively pessimistic, depending on one’s point of view) might have been given in relation to the PTC shares. This does not strike me as realistic or fair.

I also consider that the approach I have adopted is supported by authority. Since the valuation exercise by the notional investment banks in respect of the PTC shares would have depended critically on the notional legal advice (in effect, a view of the legal merits of the various claims) the situation is analogous to that in cases such as Kitchen v Royal Air Forces Association [1958] 1 WLR 563, Mount v Baker Austin, Sharif v Garrett and Harrison v Bloom Camillin. Those cases deal with the situation where a legal claim is lost through being struck out or by reason of limitation, as a result of negligence on the part of defendant solicitors, so that the claimant loses the opportunity to present that case for judgment on the merits by a court. In this type of case, the court hearing the negligence claim usually makes a single broad assessment of the value of the opportunity which has been lost, assessing the legal merits for itself and allowing an appropriate discount to take account of contingencies which might have affected the claimants’ prospects of winning at trial. The court does not usually try to assess a range of different possible judgments on the legal merits which might have been given by the notional trial court, and then produce a table of probabilities in respect of the possibilities in that range and aggregate the resulting values. Rather, the court draws on its own legal knowledge and expertise to produce the best assessment it can of the legal merits, with a discount primarily to take account of contingencies and uncertainties in relation to the evidence which might have been called in the case. On the legal merits to be reflected in the notional legal advice in the present case, that is in substance what I have sought to do.

Neuberger J in Harrison v Bloom Camillin considered the proper approach to assessment of legal arguments in a loss of opportunity case concerning a legal claim lost through the negligence of solicitors in some detail at [100]-[103]. He said:

“100.

Before leaving this topic, I should like to discuss how the court should deal with a pure question of law which might have arisen in the action. For instance, in a case such as the present, assuming that the claimants establish that, on the balance of probabilities, they would have maintained the action against Touche Ross, and that there was a real chance of recovering substantial damages from Touche Ross in the action, the question whether a certain head of damage would have been recoverable from Touche Ross may well turn on whether, as a matter of law (if all the relevant facts are clear) a certain head of damage would have been recoverable. Should the court assessing the damages for loss of the chance resolve that issue of law or, provided that it is satisfied that there is a real argument both ways on the issue, should the court award something for loss of this particular head of damage, but, because there was a prospect of the head of damage failing in law, should a further discount be applied to that head of damage?

101.

In my judgment, the proper approach to the court to an issue of law which would have arisen in the action, which the claimant has been deprived of the opportunity to bring, is the same as in relation to an issue of fact or opinion which the claimant would have established in the action. However, at least in general, the court should in my judgment be far more ready to determine that the claimant would have failed or succeeded on a point of law than to determine that the claimant would have failed or succeeded on a point of fact or, even, opinion. That conclusion appears to me fair and practical, as well as consistent with the approach of the Court of Appeal in the three cases to which I have referred (albeit that they are not, as I have mentioned, determinative of this issue).

102.

Indeed, where the defendant to a loss of a chance claim raises a point of law which, if correct, would have defeated the action, interesting issues can arise. For instance, a Judge at first instance determining a claim for repayment of money paid under a mistake of law prior to the decision of the House of Lords in Kleinwort Benson v Lincoln City Council [1998] 4 All E.R. 513, would have been bound to dismiss the claim. However, I do not think that it follows that, faced with a claimant contending that, through the defendant’s negligence he had been deprived of the opportunity to pursue an action for the recovery of money paid under a mistake of law, such a judge would have been constrained to dismiss the claim. However, I do not think that it follows that, faced with a claimant contending that, through the defendant’s negligence, he had been deprived of the opportunity to pursue an action for the recovery of money paid under a mistake of law, such a judge would have been constrained to dismiss the claim: he would have been entitled to take into account the prospect of the House of Lords entertaining an appeal in the action and changing the law (as in fact it did in Kleinwort Benson). Because the issue did not arise, there is little assistance on this point in any of the cases to which I have referred. It is true that in Mount, the claim failed because the court formed the view that the claimant would have failed in his action as a matter of law, but, as I read the judgments, the court would have reached that conclusion on either approach (bearing in mind that, even if the court was considering the issue on the loss of a chance basis, it was of the view that the claimant’s prospects of success were so poor that, in that event, he did not lose anything of value).

103.

However, it is, I think, arguably implicit in the third and fourth numbered principles in the judgment of Simon Brown LJ in Mount that, at least in an appropriate case, it is right to assess damages on the loss of a chance basis even where the issue in the action would be one of law. At the end of his third numbered paragraph, Simon Brown LJ said that the assessment of the claimant’s claim may not be more difficult than in the action itself where the original claim turned on questions of law or the interpretation of documents; his fourth numbered paragraph … seems to apply to all types of case encompassed within the previous paragraph. However, it would be wrong for me to place much weight on that, because, as I have mentioned, it does not seem to me that the Court of Appeal in Mount has to consider the aspect which I am now discussing.”

In the present case, I consider that it is appropriate to follow the general approach identified by Neuberger J at [101]. The law to be applied is English law, subject to the approach set out in para. [55] above where rights were established by July 2006 in the various arbitration and court proceedings or there was some authoritative view of relevant Polish law which I ought to apply (of which the March 2006 Judgment is the main example). This court can therefore have confidence in forming its own view about the likely form of the notional legal advice. There was no dimension of doctrinal uncertainty in the law which corresponded to the Kleinwort Benson example given by Neuberger J which might call for a different approach to be adopted.

In addition to the general approach to be adopted in assessing the value of a lost opportunity set out by Simon Brown LJ in Mount and Jonathan Parker LJ in Brachers (para. [164] and [165] above), there are aspects of the present case in which a more stringent evidential principle comes into play. Where a party elects not to call available witnesses to give evidence on a relevant matter, the court may draw inferences of fact against that party: Wisniewski v Central Manchester Health Authority [1998] Lloyds Rep Med 223, 240; Herrington v British Railways Board [1972] AC 877, 930G-H (Lord Diplock). Armory v Delamirie supports such an approach where evidence is available to be produced by a party, but he does not produce it. In that case, the defendant goldsmith had retained a jewel given to him by the claimant (a chimney-sweeper’s boy who had found the jewel and had taken it to the defendant to find out what it was worth) and would not produce it for it to be valued for the purposes of the damages claim brought against him in trover; the Chief Justice’s direction to the jury was that “unless the defendant produce the jewel and show it not to be of the finest water, they should presume the strongest against him, and make the value of the best jewels the measure of their damages”.

This principle does not apply in relation to the question of the legal advice actually available to Elektrim in July 2006 in respect of the PTC shares, because Elektrim would have a good justification (legal professional privilege) to decline to disclose the content of any legal advice it had in fact obtained. However, it is relevant to my assessment of other aspects of the evidence, especially in relation to the valuation of PAK. It was common ground that it was appropriate for the valuation of PAK and the shares in it to be carried out by means of a discounted cash-flow method. However, in relation to the application of that method, it is necessary to consider what should be taken as a suitable set of cash-flow forecasts available to the notional investment banks in July 2006.

There were a number of budgets for costs, forecasts of income and cash-flow models in relation to PAK in existence in July 2006, which I consider in detail below. These were disclosed by Elektrim. Although the documents were disclosed by Elektrim, Elektrim called no witnesses of fact at the trial in relation to them. The basis on which these budgets, forecasts and models had been prepared and precisely who prepared them and whose views were reflected in them (e.g. those of the management of PAK, or external consultants or a combination of the two) were by no means clear from the documents themselves. Nonetheless, in the absence of any witnesses from Elektrim to explain the documents, Mr Bezant (the expert witness for the Trustee on the question of the valuation of PAK) and Mr Zielinski (the expert witness for Elektrim on this issue) were forced to seek to draw inferences about these matters from the documents, in order to decide which data should be taken from them as representing the best source of information in July 2006 to conduct a valuation of PAK using the discounted cash-flow method.

There was nothing to suggest that Elektrim did not have available to it personnel who (as would naturally have been expected) could have explained the basis on which and the persons by whom these budgets, forecasts and models were prepared. Accordingly, where there was significant doubt about the information available for inclusion in the notional cash-flow forecasts which the notional investment banks would have used in July 2006 to value PAK, which was not clearly resolved by consideration of the documents disclosed by Elektrim, I have drawn inferences of fact in favour of the Trustee and against Elektrim.

The approach of the notional investment bankers to the application of condition 6(k) in respect of the PTC shares would have depended critically upon the notional legal advice they would have received about the position by 11 July 2006. For reasons set out above, the notional legal advice would have been to the effect that:

On the basis of notional legal advice to this effect, the notional investment banks would not have treated the PTC shares as “assets of the Guarantor [Elektrim]” falling within the meaning of condition 6(k), since the definition of an asset in paragraph 49 of the IAS Framework Guidance would preclude this. Mr Bezant, who gave evidence as an expert accountant on this part of the case, confirmed that property held on trust for another person does not qualify as an asset of the trustee for the purposes of the IAS. Here, Elektrim held the PTC shares subject to a constructive trust in favour of DT, based on the availability of specific performance as a remedy for DT, and (more importantly) until the transfer of the shares to DT Elektrim held them on trust for ET. It was clear from the pattern of rights which existed in July 2006 in relation to the PTC shares that Elektrim itself had no good claim to enjoy beneficial ownership of the shares such as to allow them to be treated as its assets.

Elektrim had a right in law to receive the price for the PTC shares from DT. As to about €377 million the amount to be paid for the shares was “virtually certain” in July 2006 within the meaning of paragraph 33 of IAS 37 and hence was capable of being recognised as an asset in financial statements (rather than being treated merely as a contingent asset, not for recognition in financial statements). Above €377 million up to €1.45 billion, the amount to be paid for the shares was “probable” within the meaning of paragraph 34 of IAS 37, such that the additional obligation in respect of such sum would be capable of being regarded as a contingent asset, and noted as such, in financial statements. Any addition to the amount to be paid for the shares above €1.45 billion would, in my view, have been speculative and the additional obligation in respect of it would not have fallen to be disclosed even as a contingent asset in financial statements.

However, any sale proceeds Elektrim might receive would have to be held by it on trust for ET and in any event would fall to be paid immediately to ET. Therefore, Elektrim’s right in law to receive the price for the PTC shares from DT would not give rise to the possibility of an inflow of economic benefits to Elektrim and would not have been regarded as “a resource controlled by the entity [Elektrim] … from which future economic benefits are expected to flow to the entity” (the definition of an asset in paragraph 49 of the IAS Framework Guidance) so as to qualify as an asset of Elektrim. Even if, contrary to this analysis, the right to receive the price for the PTC shares from DT were regarded as an asset of Elektrim, Elektrim would then also have to bring into account its liability to ET to pay any sum received in respect of the price to ET. As to the amount of the price up to €1.45 billion, there would be a sufficiently reliable estimate of Elektrim’s obligation to be recognised by way of a provision rather than treated as a mere contingent liability (paragraphs 14, 25 and 36 to 40 of IAS 37), and it would qualify as a “debt” to be deducted in the calculation of “Fair Market Value” in condition 6(k). It would thus cancel out Elektrim’s notional asset in that calculation, and the net result under condition 6(k) would be the same as if Elektrim were treated as not having an asset in the form of a right to receive the price from DT.

In substance, looking at the position in mid-July 2006, it was ET which was to have the benefit of the price for the PTC shares to be paid by DT. This would have had an impact on the value of ET, and hence on the value of the shares in ET which Elektrim owned. On the footing that ET was insolvent in mid-July 2006 (i.e. leaving aside the possibility of receiving monies from DT, via Elektrim, in respect of the PTC shares), the parties agreed that no value would have been given to Elektrim’s assets in the form of the shares in ET which it owned. If, however, the position was (as I consider it was) that ET would receive the sums payable by DT by way of price for the PTC shares, then the value of ET would have been treated as increased by those sums, to the extent that they were greater than any liabilities ET had at the time. ET was a holding company for the PTC shares in the context of a joint venture between Elektrim and Vivendi. It did not have a substantive business of its own, and once the position in relation to the PTC shares had been resolved (with ET not owning those shares, but owning the proceeds of their sale) it is likely that, after paying its outstanding debts, ET would simply have distributed what remained of those proceeds to its shareholders. Therefore, it is in my view clear that the notional investment banks would have valued ET on a net asset basis and that they would have valued the 49% holding of ET’s shares owned by Elektrim by reference to 49% of ET’s net asset value.

In valuing ET and Elektrim’s holding in ET, I consider that the notional investment banks would have brought into account that element of the price to be received from DT which was likely to be payable, and would have left out of account any additional element which was only speculative. Therefore, ET’s net asset value would have been treated as increased by €1.45 billion. Against that, they would have set off ET’s liabilities at the time, including its liability in respect of the ET receivable. On the basis of the figures for ET’s liabilities agreed between the parties, therefore, the net asset value of ET in mid-July 2006 would have been PLN 3,057.9 million. Hence, the fair market value which the notional investment banks would have assessed for Elektrim’s 49% shareholding in ET would have been PLN 1,423.452 million. This is the sum by which the fair market value of Elektrim’s assets would have been assessed to have been affected (indirectly) in respect of the PTC shares.

This assessment of the position which the notional investment banks would have arrived at follows from the notional legal advice in combination with the proper construction of the definition of “Fair Market Value” in condition 6(k), as informed by the definitions contained in the IAS. In my view, this assessment strongly accords with the underlying commercial merits. Elektrim had been paid a sum by Vivendi and ET equivalent to about US$ 1.2 billion for ET to acquire the PTC shares. As against DT, Elektrim had committed a material breach of the PTC Shareholders Agreement as a result of which DT was entitled to acquire the PTC shares. Vivendi, ET and Elektrim had agreed in the TIA that, subject only to DT’s rights, ET should have the benefit of the PTC shares, and if DT paid the relevant price to acquire those shares then ET should have the benefit of the monies. Under these arrangements, Elektrim was not intended to have the benefit of the PTC shares or their proceeds - ET was. Therefore, it seems contrary to the expectations of Elektrim and the bondholders under condition 6(k) that the fair market value of Elektrim’s assets should include the value of the PTC shares (as the Trustee submitted) or that the price to be received from DT in respect of those shares should altogether drop out of the calculation of “Fair Market Value” (as Elektrim submitted).

It follows from the above that I did not accept the analysis of the operation of condition 6(k) in relation to the PTC shares proposed by Mr Bezant in his evidence, and supported by Mr Miles in his submissions. That analysis was to the effect that the PTC shares should be treated as an asset of Elektrim (to be valued at their fair market value); that as to Elektrim’s liability to transfer the PTC shares to DT, that fell to be left out of account as a contingent liability save to the extent that a provision ought to be made in respect of it; and the proper way to measure that provision was by assessing the amount by which the fair market value of the PTC shares should be reduced by the amount to which the price payable by DT might ultimately be held to be less than that fair market value (and hence depended on the extent to which the Vienna Tribunal might hold that what was to be paid by DT below the full market price would constitute a penalty, which DT was not entitled to insist upon). Since in July 2006 the amount of the price payable by DT for the PTC shares was uncertain beyond about €377 million (which was the minimum payable by DT on DT’s own case), and the amount of the penalty element was unknown, Mr Bezant suggested and Mr Miles submitted as the Trustee’s primary case that the proper operation of the calculation of “Fair Market Value” should be to treat the PTC shares as Elektrim’s assets at their full fair market value (€2,429.946 million), and that should be reduced by deduction of “debt [sc. liability]” to DT only in the amount of €377 million (since beyond that amount the penalty element in respect of the price payable by DT was uncertain, and so fell to be treated as a “contingent liability” rather than a provision, with the result that the possible balance of the price payable by DT was simply to be left out of the calculation). The net effect of this analysis was massively to increase the amount arising from the “Fair Market Value” calculation, for the benefit of the Trustee, contrary to the underlying commercial reality - which was that Elektrim in fact had extremely weak, if any, claims to be entitled to have the full beneficial value of the PTC shares treated as part of its assets. The analysis did not take the notional legal advice into account, and left out the operation of the TIA. Even to the extent that the Trustee’s case was that the TIA should be treated as an agreement which could be set aside, the Trustee did not bring into account the sum of about €1.8 billion which one might have expected that Elektrim would then have had to return to Vivendi and ET; rather, the Trustee’s position was that the “Fair Market Value” calculation should treat Elektrim as, in effect, the beneficial owner of the PTC shares and of the price which Vivendi and Elektrim had paid for them.

Moreover, even if one were to focus only on the position as between Elektrim and DT, whatever the merits of this proposed analysis as a possible method of presenting notional financial statements (presumably as amplified by a careful disclosure note to explain what lay behind the figures presented in such statements), I do not think that it would represent a proper application of condition 6(k) as a matter of law. If, contrary to the conclusion I have arrived at, the PTC shares were to be treated as “assets of [Elektrim]” for the purposes of the calculation of “Fair Market Value” in condition 6(k), then the question would arise what “debt [sc. liability]” would fall to be deducted in respect of them at the next stage in the calculation. The June 2006 Vienna Award made it clear that DT had a right to have the PTC shares transferred to it, upon payment of a price still finally to be determined; and there was no significant doubt but that DT would be ready, willing and able to pay that price whatever it was determined to be. DT was entitled to claim specific performance of Elektrim’s obligation to transfer the PTC shares to it (DT) (this would mean that in a certain sense Elektrim would be regarded as a constructive trustee of the PTC shares for DT, but probably that would not in itself be a form of trusteeship which would disqualify the PTC shares altogether from being treated as assets of Elektrim). In mid-July 2006 Elektrim had an established, present obligation by virtue of which it was probable (indeed, practically certain) that “an outflow of resources embodying economic benefits [would] be required to settle the obligation” (paragraphs 14 and 23 of IAS 37) and “a reliable estimate [could] be made of the amount of the obligation” (paragraphs 14 and 25 of IAS 37). Since Elektrim was subject to a specifically enforceable obligation to transfer the PTC shares to DT, the “amount of the obligation” was the value of those shares. Therefore, Elektrim’s liability to transfer the PTC shares to DT was not a mere “contingent liability” for the purposes of condition 6(k), and fell to be deducted as a “debt [sc. liability]” in the calculation of “Fair Market Value”.

The corollary of this would be that Elektrim’s right to receive the price from DT would count as a further asset of Elektrim to be brought into account in the calculation of “Fair Market Value” in accordance with the proper construction of condition 6(k) (see para. [27] above): beyond Elektrim’s right to receive €377 million it would be a contingent asset, but one in relation to which an inflow of economic benefits would be probable. The probable inflow of economic benefits would be about €1.45 billion.

This analysis of the position, focusing (as I again emphasise) purely on the position of Elektrim and DT and leaving the TIA out of the picture, is supported by the following:

Accordingly, in my judgment, even if one left out of account the operation of the TIA, the proper analysis would be very different from that suggested by Mr Bezant and submitted by Mr Miles.

As a result of working out the position in relation to the PTC shares, the notional investment banks would have come to the conclusion that by virtue of clause 5.24 of the TIA ET was the beneficiary of the price payable by DT for those shares, which was likely to be about €1.45 billion. Accordingly, despite substantial debts which ET owed totalling PLN 2,829,894,000 the notional investment banks would have concluded that after setting off those debts against the sum which ET was due to receive in respect of the price to be paid by DT for the PTC shares (worth of the order of about PLN 5.8 billion, since in 2006 the exchange rate PLN:Euros was about 4:1) and other assets recognised in ET’s balance sheet of PLN 37,044,000 ET was a company with substantial value of PLN 3,057,900,000. I look to the parties to agree in due course a precise figure for ET’s value, by reference to the particular PLN:Euro exchange rate as at 11 July 2006.

The notional investment banks would also have assessed that since ET had a substantial surplus of assets in July 2006, it was able to repay that part of its debts which was owed to Elektrim in the form of the ET Receivable (PLN 216,421,000). Therefore, the “Fair Market Value” in respect of the assets of Elektrim as at 11 July 2006 for the purposes of condition 6(k) would have included the ET Receivable at its full value.

The assets of Elektrim as at 11 July 2006 also included 49% of the issued shares in ET. Under condition 6(k) the notional investment banks would have had to assess the fair market value of Elektrim’s 49% stake in ET, in circumstances where the value of ET was roughly PLN 3,057,900,000 and where the remaining 51% of ET was controlled by Vivendi.

Mr Bezant, the expert witness for the Trustee on this issue, acknowledged that a non-controlling interest in a private company such as ET where there is one other shareholder with a controlling interest is liable to be valued at less than the pro rata share of the value of the whole of the issued share capital. The discount to be applied reflects a risk that the non-controlling shareholder’s interests may be prejudiced to some extent by the actions of the controlling shareholder. However, having regard to the value of Elektrim’s stake in ET (which made it likely that the owner of such a stake would be willing to bear the costs of monitoring for prejudicial behaviour and enforcing legal rights) and the substantial rights under the TIA associated with the ET shares held by Elektrim (in particular, clause 3.8 of the TIA, which imposed a duty on the shareholders in ET to procure the distribution of ET’s profits in each year), Mr Bezant’s view was that the discount applicable in respect of Elektrim’s 49% holding in ET would have been a relatively small one of 5%. I accept that evidence.

Therefore, the “Fair Market Value” calculation in condition 6(k) would have included assets of Elektrim in the form of its 49% shareholding in ET valued at 49% of roughly PLN 3,007,180,000 less a discount of 5%. The precise figure remains to be agreed between the parties.

In addition to the PTC shares (about 48% of PTC) which were the subject of disputes between Elektrim, DT, Vivendi and ET as described above, Elektrim in substance owned indirectly an additional stake of about 1.5% of PTC. This represents Elektrim’s interest in a stake of about 3% of PTC owned directly or indirectly by Carcom on 11 July 2006. At that date Elektrim owned 49% of the issued share capital of Carcom. There was common ground on the pleadings that Elektrim’s asset in the form of its stake in Carcom should be valued for the purposes of condition 6(k) as if it were an asset held by Elektrim in the form of a shareholding of about 1.5% of PTC (“the additional PTC shares”).

The additional PTC shares were not affected by the disputes between Elektrim, DT, Vivendi and ET. The notional investment banks would have treated the additional PTC shares as assets of Elektrim which fell to be valued and included in the calculation of “Fair Market Value” in condition 6(k).

The parties agreed that the fair market value as at the CPDD (11 July 2006) of an interest in a notional 49.4326% of the issued share capital of PTC was PLN 9,798,451,127 (ignoring the impact of the disputes referred to). Taking that figure as a fixed reference point, it is possible to work out the fair market value at 11 July 2006 of the additional PTC shares.

Dr Ciepal, the expert witness for Elektrim on this part of the case, suggested that the fair market value of the additional PTC shares should be nil, since that shareholding in PTC was so small. I regard that evidence as incredible and reject it. The additional PTC shares carried valuable rights in relation to a mobile telephone business which was successful and very valuable. It is not possible that a willing buyer and willing seller, according to the fair market value standard, would have agreed that the additional PTC shares should be transferred for nothing.

In my view, the evidence of Mr Bezant on the issue of the valuation of the additional PTC shares was better reasoned and persuasive. In his reports he valued the additional PTC shares pro rata by reference to the agreed value of a notional 49.4326% stake in PTC. However, in giving his evidence orally he said that a stake as small as about 1.5% in PTC should be valued as subject to a greater discount than the much larger 48% stake represented by the PTC shares. He assessed the appropriate discount in respect of the additional PTC shares from the pro rata value he had originally given them to be about 15% to 20%. I think that a discount at the upper end of that range (i.e. 20%) is correct. The parties should agree the precise figure to be included in respect of the additional PTC shares in the “Fair Market Value” calculation in condition 6(k) on this basis.

PAK is a company which operates three coal-fired electricity generating plants in Poland at Adamow, Konin and Patnow I. The plants are located close to mines for brown coal, or lignite, which is what the plants burn. The plants were constructed in the 1960s and 1970s and are ageing. In 2006 Elektrim owned 43.3939% of the issued share capital in PAK.

The parties agreed that the notional investment banks would have valued PAK using the discounted cashflow method. This would have involved constructing detailed cashflow forecasts over the years from 2006 to 2025 (together with an estimate of residual value based on cashflows until 2031), by reference to forecasts available at the time of the costs of operating the plants (such as the cost of lignite, employment costs, maintenance and improvement costs and the like) and forecasts available at the time of the income generated by the plants from, in particular, sales of electricity and heat.

The expert evidence for the Trustee on the issue of the valuation of PAK was given by Mr Bezant. Mr Bezant is an accountant with extensive experience of providing valuations of businesses, including by use of the discounted cashflow method. He has had considerable experience of working in conjunction with investment banks. His experience of valuing businesses involved in the energy sector was limited, but this was of less significance in the context of this case, since the task which he had to perform was to replicate the assessment which would have been made by the notional investment banks on the basis of materials which would have been available to them at the relevant time, including forecasts available to PAK and Elektrim from consultants and the views of the management of PAK. In my view, Mr Bezant was well qualified to assimilate and analyse such information, and to apply the discounted cashflow methodology in light of it. Accordingly, he was well qualified to give evidence on the issue of the valuation of PAK. Mr Bezant valued the entirety of PAK at PLN 4,071 million. Since it was common ground that the value of Elektrim’s shares in PAK would have been given pro rata by reference to the total value of PAK, this figure yields a value of PLN 1,767 million for Elektrim’s holding of about 43% of PAK.

The expert evidence for Elektrim on that issue was given by Mr Zielinski. Mr Zielinski’s training was as an engineer, and he has not had extensive training in the use of the discounted cashflow methodology. However, he has had considerable experience of being involved in the provision of valuations of businesses involved in the Polish electricity sector, and appeared familiar with the use of the discounted cashflow methodology in practice. Overall, Mr Bezant demonstrated a better understanding of the methodology and the implications of that methodology. Mr Zielinski valued the entirety of PAK at between PLN 784 million and PLN 769 million, giving a value of between PLN 340 million and PLN 334 million for Elektrim’s holding of about 43% of PAK.

The principal potential sources of figures from which cashflow forecasts would have been compiled by the notional investment banks in about mid-July 2006 were the following:

These materials were provided by Elektrim on disclosure, but no witnesses of fact were called to give evidence to explain their provenance, the assumptions on which they were based and who exactly had made those assumptions. This left the expert witnesses on both sides in a position where they were forced to make assessments as to these matters, rather than being provided with information about them by the parties and invited to give their opinions on the basis of such information. It is in the context of drawing conclusions of fact about the provenance of these documents, the assumptions on which they were based and who exactly made those assumptions that the principles of law referred to in paras. [164]-[165] and [176]-[179] are particularly important. In light of those principles, I have reached conclusions on the basis of reasonable inferences to be made contrary to Elektrim’s interest. Such conclusions have an impact upon assessment of the expert valuation evidence in relation to PAK.

In particular, disputes arose about the significance of the Caminus model and its various elements. The Caminus model had especial importance, because it was a very complex, sophisticated and detailed financial model which formed the basis for later financial modelling of PAK’s business in the PwC model, reports such as the Taurus report, the Inwestexpert report and the Moore Stephens report and by PAK management in the PAK Strategic Plan. It was clearly regarded by PAK’s and Elektrim’s management and those who had dealings with them as a particularly authoritative financial model. But despite this, and despite the absence of any explanatory text in the model itself, none of PAK’s or Elektrim’s management gave evidence to explain the Caminus model.

The most likely explanation for the provenance of the Caminus model is that it was work commissioned by Elektrim or PAK from a well-regarded financial consultancy with particular expertise in the Polish electricity market called Caminus, and compiled by Caminus from a combination of their own forecasts about likely movements in Polish electricity prices in the Polish electricity market generally and their review of detailed information provided by PAK’s management regarding PAK’s likely future costs. On both the revenue and costs side of the model, therefore, the Caminus model reflected input and assessment by Caminus itself. Mr Zielinski, the expert witness for Elektrim in relation to the valuation of PAK, gave evidence that he had encountered the Caminus model previously in his work valuing power stations. I find that the model he had encountered was a general Caminus model of forecasts for Polish electricity prices, rather than the detailed Caminus model specific to PAK with which I was concerned in this case. The fact that Mr Zielinski had encountered a general Caminus model forecasting movements in Polish electricity prices when conducting work valuing a range of power stations reinforced the impression that Caminus was a well-regarded independent consultancy familiar with Poland’s electricity industry and that Caminus’ projections of price movements were regarded as particularly authoritative within the Polish electricity industry at this time. Accordingly, it is very likely that the notional investment banks would have given particular weight to figures based on the Caminus model. This is what Mr Bezant did. I also think that the notional investment banks would have regarded the updated electricity price forecasts in the PwC model, based on the Caminus model as updated by PAK management for the purposes of presentation to potential investors, as a sound basis for the valuation of PAK, in the way that Mr Bezant did.

Mr Zielinski suggested that the most appropriate forecast of revenue for PAK as at 11 July 2006 would have been the Caminus low case. Mr Bezant, on the other hand, suggested that it would have been the Caminus base case, as adjusted in the PwC model. In my view, it is likely that it would have been explained to the notional investment banks that the Caminus base case represented Caminus’ own view in about 2003/4 as to the likely revenue of PAK in future. The base case was pitched between the Caminus low case and the Caminus high case, giving the strong impression that it represented Caminus’ own view of the future, while at the same time giving the user of the model a sense of the possible variations on the high side and on the low side. The use of the term, “base case”, also suggests that it was used by Caminus to express their basic view about future revenues. The explanation for the assumptions underlying the Caminus base case given in the Taurus report (that it assumed a continuation of existing trends) also supports that view (since there was no significant indication that the existing upward trend in electricity prices would not continue). Already in 2005 the Caminus low case in relation to electricity prices was underperforming the market, so that upward adjustments had to be made to it in the Inwestexpert and Moore Stephens reports – this again suggests that the Caminus base case represented Caminus’ own best view of the movement of electricity prices. In his expert report, Mr Bezant gave reasons for inferring that the Caminus base case would have been regarded by the notional investment banks as representing the view of Caminus and hence as being most appropriate model to use. Elektrim called no witness of fact to dispute those reasons. The reasons given by Mr Bezant were plausible and cogent, and the absence of evidence from witnesses for Elektrim to explain how or why he was wrong also leads to an inference that he is right. I accept Mr Bezant’s evidence and view on this matter.

There was also an issue whether the Caminus price forecasts included a sum for transmission charges. Mr Bezant inferred that they did not, and included a separate revenue stream from this source drawn from the 2006 PAK budget (on the footing that the notional investment banks would have spoken to PAK’s management and obtained such an indication) and increasing with inflation. Mr Zielinski suggested that the Caminus price forecasts included transmission charges. This is an area where the position is unclear. The reasons given by Mr Bezant for inferring that they did not (that transmission services seem distinct from the price for electricity, and did not seem to be treated as rolled into electricity prices in the Taurus report and the PAK budgets) appear reasonable. Elektrim called no witness of fact to explain that the position was not as Mr Bezant assumed it to be. In corrected spreadsheets produced by Mr Zielinski in the course of the trial, he inserted transmission charges as a distinct income line, thereby appearing to accept to some degree that Mr Bezant had been correct to treat them distinctly (albeit Mr Zielinski’s reasons for doing so, and how his figures were arrived at, were not explained). Taking all this into account, I consider that Mr Bezant’s approach on this issue was correct.

Both Mr Bezant and Mr Zielinski constructed very detailed and elaborate cashflow models from the materials available to them, in order to produce a valuation of PAK according to the discounted cashflow method. These models each reflected a large number of assumptions, changes in any of which could have impacts upon the figures in the models at a number of different points. By way of example, the cashflow forecasts compiled by Mr Bezant showed significant expenditure to upgrade the plants over a period of years, which was then assumed to reduce the costs of operating the plants in future years by reducing environmental charges and improving efficiency of the plants.

There were significant differences between the cashflow models of Mr Bezant and Mr Zielinski and between the valuations given by each of them for PAK. In light of the complexity of the cashflow models they had constructed, Mr Miles, for the Trustee, submitted that the proper approach for the court was to decide on the basis of a general assessment of their evidence whose model appeared generally to be most reliable and to give the best picture of the model likely to be constructed by the notional investment banks, and then to make specific findings regarding any particular parts of the model so chosen which the court considered were not properly justified and in respect of which the model required adjustment. He suggested that having completed this exercise the court should leave it to the experts and the parties to work through and seek to agree the impact of any such finding upon the chosen cashflow model and in relation to the valuation of PAK given by such model. Mr Miles submitted that the court should not attempt to construct de novo a completely distinct cashflow model of its own, drawing on and blending aspects of the models of Mr Bezant and Mr Zielinski, since it would be extremely difficult for the court itself to construct in this way a model with the necessary degree of detail and complexity, and very likely that the court would fall into error by failing to take properly into account the various impacts throughout the model of changes to the assumptions made. Also, he submitted that it is important to use data which are consistent and which, where possible, come from the same source – since there would be a serious danger in trying to combine items of information from different sources that they may be based on different assumptions and hence in fact inconsistent with each other.

Having gained some insight into the elaborate detail contained in the competing cashflow models through listening to the evidence of Mr Bezant and Mr Zielinski, I consider that there is considerable force in the submission of Mr Miles as to the proper approach for the court in relation to evaluation of the evidence on the value of PAK. I accept his submission and I follow the approach proposed by him.

The first stage is to decide which of Mr Bezant’s and Mr Zielinski’s cashflow models appears, in general terms, to reflect most reliably the information which would have been available to the notional investment banks and to present the most likely cashflow scenario which would have been adopted by the notional investment banks as the basis for their valuation of PAK. On that question, I have no doubt that Mr Bezant’s model provides the best starting point for assessment of the value of PAK:

By contrast, Mr Zielinski’s evidence did not appear nearly so well thought through and reliable:

The broader picture in relation to the Polish electricity market according to indicators which would have been available to the notional investment banks in mid-2006 also strongly supports the general picture of PAK’s likely financial performance set out by Mr Bezant:

Having identified Mr Bezant’s cashflow model as the most appropriate starting point for assessment of the valuation of PAK which would have been arrived at by the notional investment banks, I turn to consider whether any adjustments are required in respect of that model. Adjustments may be required in relation to any item which Mr Bezant accepted in his evidence should be changed. There were not many instances where Mr Bezant did accept that a change was required, and I expect the parties to be able to agree them. If there is any dispute, the matter can be referred back to the court for a decision. The parties will need to consider whether adjustments are required in respect of, in particular, the following matters:

There was a dispute about the treatment of PAK’s subsidiaries in the valuations by the experts, which depended upon whether their values were already taken into account in the valuation of PAK. If they were not so taken into account, they should be valued separately and added to that valuation. Mr Zielinski’s view was that none of the subsidiaries should be added to the valuation of PAK. Mr Bezant accepted that one subsidiary (PAK Odsiarczanie), a company carrying out flue gas desulphurisation work, had been taken into account in that valuation, for particular reasons explained by him. But his evidence was that on his cashflow model the values of the other subsidiaries had not been brought into account. The subsidiaries provided services to PAK and charged PAK for those services. Those costs had been reflected in the PAK cashflows in his model, i.e. the subsidiaries had been treated as businesses distinct from PAK’s business, and their revenues should be treated as creating value in assets (the subsidiaries) distinct from PAK and not covered by the discounted cashflow valuation of PAK. The value of those subsidiaries ought properly, therefore, to be added to the valuation of PAK. In my view, Mr Bezant’s reasoning on this issue is sound, and the values he assessed for the subsidiaries should be added to the valuation of PAK in accordance with his evidence.

There was a dispute about the treatment of a receivable owed to PAK by a company called Elektrim Megadex. Mr Bezant included that at its full value in his valuation of PAK. Elektrim submitted that it should have been written down, since Elektrim Megadex was a company in financial distress. In my view, Mr Bezant’s approach on this issue was correct. In PAK’s audited accounts for 2005 and 2006 the receivable appeared at its full value – it was not written down. It is likely that the notional investment banks would have had regard to the treatment of the receivable by PAK in its 2005 accounts, and would have checked with PAK management that it was recoverable (and, as PAK’s 2006 accounts indicate, they would have said that it was). Elektrim has not adduced any clear evidence to suggest that the notional investment banks would have been given, or compelled to reach, any different view on that.

The assessment by the notional investment banks of the fair market value of the assets of Elektrim consisting of the share capital of its subsidiary which owned Port Praski would have been carried out by valuing that subsidiary’s assets (in particular, the real estate it owned at Port Praski) and deducting from that the amount required to settle its liabilities. The dispute between the parties on this aspect of the case concerned the value of Port Praski. (There were also some small discrepancies between the relevant experts’ views as regards other assets and liabilities of Elektrim’s subsidiary; Mr Bezant for the Trustee was not challenged in relation to these points and I accept his evidence on them).

Port Praski is an area of Warsaw of about 38 hectares situated on the east bank of the Vistula river, directly opposite the central business district of Warsaw located on the west bank of the river. Port Praski is a large undeveloped area consisting of old river docks, woodland and a few dilapidated buildings. Part of the wooded area on the site is protected as Green Belt. The site is bounded on the river side by a strip of woodland (which is subject to protection as a bird sanctuary as part of the European Union’s Natura project) and a busy road. It is bounded to the north and east by a relatively under-developed and run down area of Warsaw known as Praga North. It is bounded to the south by a busy railway line. At both the northern and southern ends of Port Praski there are bridges across the Vistula to the central business district.

The part of the Port Praski site closest to the Vistula is 1.5 km due east of the prestigious “Royal Route” at the heart of the central business district (on and around which are located the most valuable commercial properties in Warsaw) and 2 km due east of Warsaw’s main north to south central trunk route, Marszalkowska Street. Port Praski is serviced by public transport in the form of bus routes and a local railway station (Warszawa Station). In mid-July 2006 it was known that the Warsaw city authorities had earmarked a location by Port Praski for construction of a new Metro Station on a proposed new Metro line to be constructed at some point in the future.

In mid-2006, Warsaw was attracting investment and property prices there were rising strongly and had been for some time. The value of Port Praski was bound up with its potential as a site for development.

The Warsaw city authorities had identified Port Praski as an area for development in their Development Strategy issued in November 2005. Operating aim 5.5 in the Development Strategy was “To revitalise run-down areas”, which was to include as Program 5.5.3 “The use of Port Praski land for residential and office development”. The Development Strategy stated:

“A renewed right bank of central Warsaw will come nearer to the Vistula river particularly in the area of Port Praski. The system of canals and locks in this area will be modernised. A new district of offices, apartments and shops will arise. The canals, proximity to the river and green areas will determine its unique attractiveness.”

Obviously, this had a strongly aspirational flavour. The Warsaw city authorities did not propose to dedicate resources to carrying out such development of Port Praski themselves. Nonetheless, as at 11 July 2006 it was clear that any developer who could present detailed proposals to develop the Port Praski site into a residential and office area would have a fair wind from the Warsaw planning authorities.

On about 29 March 2006 the Warsaw city authorities put a draft “Study on the Limitations and Directions for the Spatial Development of the City of Warsaw” (“the Study”) out for public consultation. The Study contained detailed zoning proposals for planning development in Warsaw, including in relation to Port Praski. The main areas within Port Praski were designated for permitted development of buildings up to 30m in height, with a permitted optimum development density of 3.5:1 (i.e. the building could have an overall floor area on all floors of 3.5 times the area of the plot on which it was built). Part of Port Praski was designated for more limited development of buildings up to 12m in height with an optimum density of 2:1.

The Study was eventually adopted, with some modifications not relevant for present purposes, in October 2006 (i.e. after the CPDD). However, it is likely that anyone looking to assess the development potential of Port Praski as at the CPDD would have had regard to the Study, which was a detailed and considered document fully in line with the Development Strategy.

The Trustee adduced expert evidence in relation to the issue of the fair market value of Port Praski from Mr Christopher Grzesik (a valuation surveyor and property consultant) and Mr Jonathan Steer (a chartered quantity surveyor). Mr Grzesik gave evidence about the property market in Warsaw, the development potential of Port Praski, the land prices and rental incomes which could be achieved from development of the Port Praski site and the overall fair market value of the site as at 11 July 2006. Mr Grzesik’s evidence recognised that for a development of Port Praski to take place works would have to be carried out to ensure that the site was fit for building on. Mr Steer gave evidence about the cost of carrying out such works, including works to control water levels when the Vistula is in flood and to repair the docks which form part of the site. Mr Steer has had extensive experience of providing consultancy services for development projects in Poland and for development projects involving river side and flood protection works. Taking account of Mr Steer’s evidence, Mr Grzesik gave PLN 770 million as the fair market value of Port Praski.

The Trustee’s case was that, in order to assess the fair market value of Elektrim’s asset in the form of its interest in Port Praski, the notional investment banks would have had recourse to expert assessments from persons with the expertise represented by Mr Grzesik and Mr Steer. I agree with this. It is therefore appropriate to assess the fair market value of Port Praski by reference to expert evidence of this kind.

Elektrim adduced expert evidence from Dr Ciepal on this aspect of the case. Dr Ciepal is an experienced court expert for the Warsaw Regional Court. He particularly contested the valuation placed on Port Praski by Mr Grzesik. Dr Ciepal gave PLN 102,505,280 and 149,223,685 as alternative fair market values for Port Praski.

Dr Ciepal and Elektrim did not dispute in any substantial way the evidence of Mr Steer, estimating the sum required for unusual development works at the site as PLN 38,155,000. Dr Ciepal said he thought the figure should be higher, but had no expertise in such matters nor any properly reasoned explanation why. Mr Steer’s reports were carefully reasoned. I accept his evidence.

Mr Grzesik has had some 30 years experience as a chartered surveyor in the United Kingdom and Poland. He has had some 18 years experience in the property market in Warsaw. His knowledge of that market and command of the detail of rents and sale prices was impressive. He gave his evidence in a careful and measured way. In the event, on much of the detail of Mr Grzesik’s evidence, when drawing comparisons with particular sites in Warsaw (and in particular in relation to the important Table of Comparison annexed to Mr Grzesik’s first report), Dr Ciepal broadly agreed with Mr Grzesik. I consider that Mr Grzesik’s evidence and assessment of the development potential of Port Praski, the likely rents and property values which could be achieved there and the overall market value of the site is entitled to great weight.

By contrast, I was not impressed by the qualifications or reasoning of Dr Ciepal in relation to the valuation of Port Praski:

The primary method used by Mr Grzesik to produce a valuation of Port Praski was referred to as the pairs comparison method. Mr Grzesik assessed the market value of Port Praski if sold as a single large site to a large development company or consortium, which would carry out the works set out and costed by Mr Steer and then proceed to build mixed office and residential units on the site in accordance with the Development Strategy and the Study. Mr Grzesik compared the type of building which could be built on the site with similar types of buildings constructed at certain other sites in Warsaw which provided suitable comparables, and compared what had been paid by developers to purchase and develop those comparable sites in late 2005 and 2006 to arrive at an estimate of the amount that a developer would have paid for the development site at Port Praski.

In my judgment, the pairs comparison method of valuation adopted by Mr Grzesik as the primary basis for valuing Port Praski is clearly the most appropriate method for valuing the site. The notional investment banks would have required such a method to be adopted for the purposes of the “Fair Market Value” calculation in condition 6(k), since it would provide the best indication of the fair market value of Port Praski. Any commercial developer who might be a prospective purchaser of the site would be bound to assess the price which should be offered by comparing what was actually being paid in the market at the time for appropriate comparable development sites.

In selecting the sites which he regarded as suitable comparators, Mr Grzesik carried out a survey of transactions in Warsaw to identify those involving development sites of 1 hectare or more. This was on the basis that it was only transactions of this size and above which would be likely to attract interest from the sort of large developer who would be interested in developing the large Port Praski site as a unit. In my view, this was an appropriate first stage to adopt in the selection of relevant comparable sites.

The reasons for selecting comparable sites according to this criterion supply a sound basis for rejecting another building (Kepna 2B) put forward as a relevant comparator site late in the day by Dr Ciepal in his third report. The site at Kepna 2B has an area of 3895 square metres, far less than the hectare size which would be likely to attract interest from large scale developers. Further, the building at Kepna 2B was developed on its own as a small scale development squeezed between the currently dilapidated area of Port Praski (which, moreover, is an area which may well be developed in accordance with the Study in a manner which eventually shuts Kepna 2B off from any view of greenery and water) and the run-down area of Praga North. It is not on a scale which could transform the area and set apart its location from Praga North, by contrast with the much bigger development scheme contemplated for Port Praski by Mr Grzesik. I accept Mr Grzesik’s evidence that Kepna 2B does not provide a good comparator for the purposes of valuation of Port Praski.

Having selected a range of potential comparator transactions by reference to the one hectare criterion, Mr Grzesik then made an evaluative assessment of which transactions involved sites which were appropriate comparables for the development which could take place on the Port Praski site. He came up with five relevant comparator development sites: Grzybowska 4 (site purchased on 21 December 2005), Inflancka 3 (site purchased on 29 December 2005), Elektryczna 2a (site purchased on 4 January 2006), Grzybowska 58 (site purchased on 4 November 2005) and Grzybowska 77 (site purchased on 5 July 2006). He established the sale price in PLN per square metre, and then adjusted that price to take account of the nature of the interest acquired (freehold or some lesser tenure), the location of the comparator site (the closer to the centre of the business district, the greater the discount applied to arrive at a suitable adjusted comparative price for Port Praski), the superior environmental quality of the development in Port Praski (which to a considerable extent would be located in the midst of greenery and water, with potential for views across the river), the difference in size between the comparator plot and Port Praski and the difference in development density between the comparator plot and Port Praski. He also adjusted the price to take account of the strong increase in property values in Warsaw between the dates of the comparator transactions and 11 July 2006. By this method Mr Grzesik arrived at an average adjusted price of PLN 4,129 per square metre, which he applied to the developable area within Port Praski to arrive at his assessment of its fair market value. It is worth noting that the adjusted price in respect of Elektryczna 2a was PLN 4,205 per square metre.

Mr Grzesik’s evidence in explaining how he arrived at the relevant comparative figures via this table to work out the fair market value of Port Praski was careful, thorough and persuasive. Under cross-examination, Dr Ciepal for the most part agreed with the adjustments made by Mr Grzesik in the Table of Comparison compiled by him. In particular, Dr Ciepal agreed – subject to two main caveats - that the site at Elektryczna 2a (which is located close to the Vistula, on the west bank opposite Port Praski) provided a good comparator with the Port Praski site (if the development contemplated by Mr Grzesik took place there), and agreed that the adjustments made by Mr Grzesik in respect of that site were appropriate. Therefore, subject to consideration of Dr Ciepal’s caveats, I accept Mr Grzesik’s evidence as to the appropriate comparator sites, as to the adjusted price of PLN per square metre to be derived from consideration of those comparator sites and as to the overall fair market value of Port Praski.

The first main caveat by Dr Ciepal, taking his evidence as a whole, was that Port Praski was outside the central business district of Warsaw and that property values in Port Praski should be assessed by comparison with the much lower values in the run down area of Praga North. He put in issue a central part of Mr Grzesik’s evidence, which was to the effect that by coherent and up-market development of the Port Praski site it could be made into an extension of the central business district of Warsaw, so that property prices and rents could be compared with those achievable within the central business district.

I found Mr Grzesik’s evidence on this issue persuasive. The Port Praski site is physically close to the central business district, to which there is ready access across two bridges. Unified and coherent development of the site with high grade buildings would be likely to result in a practical extension of the central business district into what would be a pleasant environment in Port Praski amidst greenery and water, physically distinct from the run down areas in Praga North. The converse contemplated by Dr Ciepal, that the development of Port Praski would be regarded more as an extension of Praga North than of the central business district, would be much less likely if the development of Port Praski were undertaken with care. Indeed, there would be a good chance that a good quality development of Port Praski would tend to lead to improvements in neighbouring Praga North, rather than that Praga North would drag down Port Praski.

The second principal caveat by Dr Ciepal was to doubt whether such an extensive and high grade development of Port Praski as was contemplated by Mr Grzesik would happen at all. He suggested that inertia on the part of the Warsaw city authorities would slow the process of development down very considerably, and reduce the attractiveness of the site to developers. Mr Grzesik, on the other hand, said in his evidence that he had no doubt at all that the development of Port Praski mapped out by him could and would take place.

Notwithstanding the attractiveness of the case for development of Port Praski as set out by Mr Grzesik, the cogency of and weight generally to be attached to his evidence and the planning indication in favour of development given in the Warsaw Strategic Plan and the Study, I think that Mr Grzesik somewhat overstated the strength of the assessment that a willing seller and willing purchaser of Port Praski would be likely to make that a development of the kind contemplated by him would in fact take place within a reasonable period and would in fact achieve the full integration of Port Praski into the central business district of Warsaw of which he was so confident. In my view, Dr Ciepal’s caveats cannot be completely brushed aside. There were significant risks in relation to these matters, which were magnified by the size of the investment required on the part of a single developer or consortium. I think the notional investment banks and any property consultant advising them would have been bound to assess that a willing seller and willing buyer of Port Praski would make some discount to the price to take account of the risks attendant upon development of such a large site, located next to Praga North and on the other side of the Vistula from the established central business district. There would be other risks too: e.g. the structural works required to protect against flooding and to repair the docks might prove to be more expensive than what had been estimated and the construction of so many new offices and apartments in Port Praski, increasing the general supply on top of other developments taking place in Warsaw, might tend to drive property prices and rents down to some degree below what Mr Grzesik thought could be achieved.

In my judgment, an appropriate discount from the fair market value estimated by Mr Grzesik to take account of these not inconsiderable risk factors would be 20%. Accordingly, I assess the fair market value of Port Praski to be 80% of PLN 770 million, i.e. PLN 616 million.

Before leaving the subject of the value of Port Praski, there is one final matter which I have to deal with. In his closing submissions, Mr Millett sought to rely on a valuation report dated 16 January 2009 prepared by Malgorzata Skapska and Grazyna Wojciechowska in respect of the value of Port Praski as at 31 December 2008 (“the 2009 valuation report”). This valued Port Praski at PLN 163,260,000. Mr Miles objected to this attempt by Mr Millett to rely on the 2009 valuation report as expert evidence in the case.

In my judgment, Mr Miles’ objection was soundly based. Well before trial, the court had given directions including permission to serve expert reports to be relied on in the case. Elektrim at no stage sought to serve the 2009 valuation report in accordance with those directions as expert evidence on which it proposed to rely. The 2009 valuation report was referred to in passing by Mr Bezant in one of his expert reports, but it was clear that he did not purport to rely on it. He did not adopt it as part of the expert evidence set out in his report. Mr Millett put parts of the 2009 valuation report to Mr Grzesik in cross-examination, as he was entitled to do. But Mr Grzesik made it clear that he disagreed with the report. The report did not, by virtue of this use of it by Mr Millett, become admissible expert evidence in the case on which Elektrim was entitled to rely.

The procedure governing the introduction of expert evidence in a case is set out in CPR Part 35. Part 35.4(1) provides: “No party may call an expert or put in evidence an expert’s report without the court’s permission”.

The court has not given permission to Elektrim to rely on the 2009 valuation report as an expert’s report in the case. Therefore Elektrim is not entitled to seek to rely upon it as expert evidence, as Mr Millett sought to do.

Further, unsurprisingly - since it was not prepared for the purpose of providing expert evidence in these proceedings - the January 2009 valuation report does not purport to comply with the requirements of the Practice Direction under CPR Part 35 nor with the further requirements in CPR Part 35.10. The valuation in the report is as at a date (31 December 2008) which is not relevant in the context of the present proceedings. The authors of the report did not attend court. Mr Miles had no opportunity to cross-examine them and I had no opportunity to hear their evidence or to ask them questions.

For all these reasons, Elektrim was not entitled to seek to rely upon the January 2009 valuation report as expert evidence in these proceedings.

Long Term Assets

There were disputes about two items under this heading: (a) the fair market value of a receivable of PLN 133 million owed to Elektrim by PAK (“the PAK receivable”) and (b) whether to include a sum in respect of a receivable of PLN 34 million owed to Elektrim by one of its subsidiaries called Energia Nova (“the Energia Nova receivable”).

As to the PAK receivable, I accept the evidence of Mr Bezant that it should be included in the calculation of “Fair Market Value” under condition 6(k) at its face value. The reasons given by Dr Ciepal for writing it down in that calculation by 95% are unsustainable. He said it should be written down because of PAK’s troubled financial history and because it was deferred until 2020 and was subordinated to bank loans. However, even Mr Zielinski for Elektrim assessed the shares in PAK to have considerable value for their owners, who (as Mr Bezant explained) could only take the benefit of such value on the assumption that PAK would first meet its obligations to its creditors. Therefore, it was implicit in the approach adopted by Elektrim to the valuation of the shares in PAK (still more so on the findings I have made about the value of shares in PAK) that the PAK receivable would be paid by PAK. Interest was payable in respect of the PAK loan, and that would compensate for its deferred repayment.

In addition, in relation to Mr Bezant’s valuation of the shares in PAK owned by Elektrim, he calculated the net debt for PAK, including in that calculation the full value of the PAK receivable (which had the effect of reducing the value of those shares). Elektrim eventually agreed Mr Bezant’s figure for PAK’s net debt for that purpose. It is inconsistent for Elektrim now to seek to exclude the full value of the PAK loan as a distinct asset in its hands.

The evidential position in relation to the Energia Nova receivable is murky. It had been included in Elektrim’s balance sheet as at 31 December 2005. It was not identified as a specific item in Elektrim’s balance sheet as at 30 June 2006, but in that balance sheet there was another item for loans to unspecified subsidiaries which was large enough to include the Energia Nova receivable. On that basis, Mr Bezant included the Energia Nova receivable in the calculation of “Fair Market Value” for the purposes of condition 6(k).

In his expert reports, Dr Ciepal said that he thought it was fair to assume that the Energia Nova receivable had been sold before 30 June 2006, since he had seen no evidence that it was included in the loans to subsidiaries item at that date (he did not explain what was included in that item); he also said that no third party would pay the face value of the Energia Nova receivable. Under cross-examination, Dr Ciepal gave the remarkable evidence (not previously adverted to by him) that he had in fact been told by the finance department at Elektrim that the Energia Nova receivable had been sold before 30 June 2006. He still did not explain what was included in the loans to subsidiaries item at that date.

After completion of the evidence, on 29 May 2009 Elektrim provided a document which purports to record the sale of the Energia Nova receivable to an entity called “Sky Service” (a vehicle for the chairman of Elektrim, Mr Solorz-Zak) for some PLN 14.5 million in May 2006. Elektrim has not provided any surrounding material (such as accounting entries in Elektrim’s books to record the sale), nor any witness evidence to explain the transaction and (if it was completed) what happened to the proceeds of sale (which, if received, might themselves have constituted an asset of Elektrim as at 11 July 2006 to be brought into account in the calculation under condition 6(k)), nor any evidence to explain what was included in the loans to subsidiaries item at 30 June 2006.

Elektrim was on clear notice of the approach being adopted by Mr Bezant and the Trustee in relation to the Energia Nova receivable. Mr Bezant gave what were, on the face of it, good reasons for including the Energia Nova receivable in the condition 6(k) calculation. Dr Ciepal did not give good reasons in his expert reports to displace the inference that Mr Bezant was correct to do this. Moreover, if Elektrim wished to dispute what Mr Bezant said as a matter of fact it was incumbent on it to bring forward full evidence to explain clearly what had happened. It had ample opportunity to do this, but failed to do so, even by the assertions by Dr Ciepal under cross-examination or by the late disclosure of the “Sky Service” document without further explanation. This is most unsatisfactory. It is by Elektrim’s default in relation to its disclosure obligations and by its failure to explain matters within its own knowledge that the court has been left to deal with this obscure situation.

In my judgment, in these circumstances, out of fairness to the Trustee and by application of the principles set out in paras. [164]-[165] and [176]-[179] above, the proper course is to draw the inference that Mr Bezant’s inclusion of the Energia Nova receivable in the condition 6(k) calculation as at 11 July 2006 is correct.

I also consider that Mr Bezant was right to include the receivable in that calculation at its full value. Dr Ciepal’s suggestion that it should be written down because it was not certain it would be repaid is unsustainable, for reasons similar to those in para. [253] above. The parties are agreed that as at 11 July 2006 the share capital of Energia Nova had a value of PLN 4.253 million; it is implicit in this that it would have been capable of repaying the Energia Nova receivable in full.

Short Term Receivables

There was a dispute under this heading as to the inclusion of two receivables in the condition 6(k) calculation: (a) a receivable of PLN 6.854 million from Carcom and (b) a receivable of PLN 32,000 from a company called IDM Warsaw. Mr Bezant said they should be included. Dr Ciepal originally suggested they should not. Dr Ciepal did not give good reasons for his approach, and the weakness of the reasons he did offer was exposed in cross-examination. In my view, there is no reason to exclude these items. Neither Carcom nor IDM Warsaw were insolvent.

Short Term Investments

Mr Bezant placed a value of PLN 49.1 million on Elektrim’s Short Term Investments. Dr Ciepal gave them a nil value. The dispute here relates to the treatment of a receivable of PLN 119.4 million owed to Elektrim by another of its subsidiaries, called Enelka (“the Enelka receivable”). It was common ground that the Enelka receivable should not be included in the calculation under condition 6(k), on its proper construction. Unfortunately, the figures pleaded by the Trustee in Schedule 1 to the Amended Particulars of Claim mistakenly deducted the Enelka receivable twice, as was explained by Mr Bezant in his first expert report. He therefore added a sum of PLN 119.4 million back into the figure for Short Term Investments, to correct that mistake and ensure that the Enelka receivable was only deducted once. I accept the Trustee’s explanation that this was a legitimate addition by Mr Bezant to correct an error in the calculation. Accordingly, I accept the value of PLN 49.1 million for Short Term Investments given by Mr Bezant.

On the basis of this judgment, the Trustee is entitled to be paid substantial damages by Elektrim in respect of the Trustee’s loss of the chance to receive a significant Contingent Payment under condition 6(k). The parties were agreed that, after judgment was handed down, they should revisit the figures to be included in the “Fair Market Value” calculation under condition 6(k) as at 11 July 2006 to see if those figures and that calculation can now be agreed. If agreement proves not to be possible, any outstanding dispute between the parties can be referred back to the court for resolution. Once the calculation is settled, the amount of damages payable can be finally determined.