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Daventry District Council v Daventry & District Housing Ltd

[2010] EWHC 1935 (Ch)

Case No: HC09C01840
Neutral Citation Number: [2010] EWHC 1935 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

Royal Courts of Justice

Strand, London, WC2A 2LL

Date: 30/07/2010

Before :

MR JUSTICE VOS

Between :

Daventry District Council

Claimant

- and -

Daventry & District Housing Limited

Defendant

Mr Ian Croxford Q.C. and Mr Jonathan Evans (instructed by Sharpe Pritchard) for the Claimant

Mr Nigel Jones Q.C. and Ms Alison Meacher (instructed by Wright Hassall LLP) for the Defendant

Hearing dates: 7-9, 12-15, 19-20 July 2010

Judgment

Mr Justice Vos:

Introduction

1.

The Claimant, Daventry District Council (“DDC”), is a local authority that owned some 3,000 council homes. On 5th November 2007, after many months of negotiation, DDC entered into a contract (the “Transfer Contract”) to transfer its stock of council housing and garages to Daventry & District Housing Limited (“DDH”), a specially-formed Registered Social Landlord or “RSL”, which had been incorporated on 10th April 2006, and was registered as a charity on 21st September 2007. Such a transaction is widely known as a Large Scale Voluntary Transfer or “LSVT”.

2.

In the run-up to the Transfer Contract, the newly formed DDH was managed by a board comprising 4 councillors from DDC, 4 independent directors, 3 tenants and one co-optee. Amber Valley Housing Limited (“AVHL”) was involved in the negotiation of the Transfer Contract, since several of its staff were acting for DDH at the relevant time. AVHL was a RSL operating in a different geographical area, the intention being that DDH and AVHL would become sister companies, each owned by a new parent RSL group, which was ultimately called Futures Housing Group (“FHG”) and was incorporated on 26th June 2007. Each of FHG, DDH, and AVHL is a company limited by guarantee.

3.

Alongside the transfer of DDC’s housing stock, DDC agreed also to transfer its housing department staff to DDH. The staff were members of the section of the Local Government Pension Scheme (“LGPS”) administered by Northamptonshire County Council (“NCC”). It was part of the arrangement between DDC and DDH that staff should remain members of the LGPS and that DDH should become a participating employer in that scheme. In common with many pension schemes, the part referable to the transferring employees was at that time under-funded. Actuarial estimates revealed that a payment of some £2.4 million was necessary to make up its deficit. It is common ground between the parties that DDC bore the primary responsibility to make up the deficit, and that it was envisaged that, going forward, DDH would be embarking upon its new activities with a fully funded pension scheme.

4.

Notwithstanding this understanding, the parties engaged in complicated negotiations concerning the calculation of the price that DDH would pay DDC. This calculation involved a number of elements, the most important of which, for present purposes were (a) the value of the rental stream to be obtained from the housing stock, (b) the costs of upgrading the housing stock to an agreed improved standard, (c) the set up costs to be incurred by DDH, (d) the costs of making good the pension deficit, and (e) a fund called the “VAT shelter” expected to amount to some £8.4 million that was to be produced from VAT concessions on the upgrading works that DDH would, in due course, undertake.

5.

In the broadest of outline, the parties signed a document entitled “Valuation Negotiations” dated 11th October 2007, containing a table that supposedly showed what had been agreed as to these calculations. I shall return to the precise terms of that document (the “Valuation”), which is acknowledged not to have been intended to be legally binding.

6.

Alongside the preparation of the Valuation, the parties and their solicitors were negotiating the complex and detailed Transfer Contract, which was obviously intended to be the definitive instrument containing the terms on which the housing stock would be transferred to DDH. When the Transfer Contract came to be executed on 5th November 2007, it contained the following simple clause 14.10.3 (which is accepted to be unambiguous) that had been added only a few days before on 1st November 2007 (“clause 14.10.3”):-

Without prejudice to the provisions of clause 14.10.2, in relation to the Transferring Employees the Council [DDC] shall make a payment of £2.4 million pounds (being the amount calculated by Mercers as representing the deficit in the funding of the Transferring Employees pension benefits up until the Completion Date) within five business days of the Completion Date”.

7.

In this action, DDC contends that clause 14.10.3 of the Transfer Contract should be rectified to read as follows:-

Without prejudice to the provisions of clause 14.10.2, in relation to the Transferring Employees the Council [DDC]Company [DDH] shall make a payment of £2.4 million pounds to the appropriate administering authority or the administrators of the Superannuation Scheme for immediate credit to the Scheme in respect of the liabilities for the benefits accrued by Transferring Employees (being the amount calculated by Mercers as representing the deficit in the funding of the Transferring Employees pension benefits up until the Completion Date) within 5 days of the Completion Date”.

8.

What makes this case somewhat unusual is that DDC does not deny that its solicitors and lead negotiator consented in emails to the inclusion of clause 14.10.3 on 1st November 2007. It says instead that it was mistaken in giving that consent, and that both parties intended that clause 14.10.3 should have provided for DDH, not DDC, to make the deficit reduction payment to NCC. In the alternative, DDC says that DDH knew that DDC so intended. In the result, DDC seeks rectification on the grounds of mutual, alternatively unilateral, mistake. In the final alternative, DDC seeks damages from DDH for breach of a duty of care allegedly owed to it whereby DDH would not seek to benefit from DDC’s misunderstanding or mistake in the process of finalising the contractual documentation.

Background to the conclusion of the Transfer Contract

9.

The conclusion of any LSVT is intended to be a collaborative exercise. The parties are generally well known to one another, and, in any event, are intending to forge a relationship whereby they will work closely together for 30 or more years in the future. Each side is generally advised by consultants and solicitors, and there is a funder financing the acquisition. In this case, DDH’s intended funder was the Royal Bank of Scotland plc (“RBS”).

10.

The main players for DDC in these negotiations were Mr Nigel Bruno (“Mr Bruno”) and Ms Judith Grgeory (“Ms Gregory”), and their advisers, Mr Mark Longhill (“Mr Longhill”) and Mr Keith Finch (“Mr Finch”) of Tribal Consulting (“Tribal Consulting”). DDC’s solicitors were Cobbetts, from whom Mr Philip Heath (“Mr Heath”) and Ms Elizabeth Hargreaves (“Ms Hargreaves”) played the leading roles.

11.

DDH had numerous representatives and board members, but Mr Brian Roebuck, AVHL’s director of finance (“Mr Roebuck”), was central amongst them. It is no exaggeration to say that his role was pivotal in DDH’s conclusion of the Transfer Contract. Alongside Mr Roebuck, acting on DDH’s behalf, was Ms Hayley Davies (“Ms Davies”), the manager of the Transfer Team, and, less conspicuously, Mr Mark Blyton (“Mr Blyton”), AVHL’s finance manager, and Mr Peter Deacon (“Mr Deacon”). DDH was also represented by its adviser, Mr Nigel Page (“Mr Page”) of PriceWaterhouseCoopers (“PwC”). There is a dispute as to Mr Page’s precise role: DDC contends that he was DDH’s “lead consultant”, and DDH says that he was only one, amongst several, advisers, providing help where necessary. I shall deal with this conflict of evidence in due course. DDH’s solicitors were Wright Hassall LLP, and Ms Carol Matthews (“Ms Matthews”) was the partner in charge.

12.

It is important to understand at the outset the shape of the negotiation. DDC and DDH needed to agree the valuation of the council homes and garages that were to be transferred before the deal could proceed. That valuation was, in the broadest terms, determined by subtracting the costs of upgrading the housing stock from the value of the rental stream to be derived from it. There were, however, numerous variables to be considered in evaluating each figure. The valuation is, therefore, also described as the ‘price’.

13.

In negotiating the valuation, DDH’s status has to be considered. DDH was a shell company limited by guarantee, and was constrained by Government regulation as a potential RSL, and by the requirements of its funders, RBS. Throughout the process, DDH was preparing a business plan to show what it would receive by way of funding and what it would spend. There were, it appears, numerous incarnations of the business plan, which was an evolving document as the negotiations continued. DDH never shared its business plan with DDC, but repeatedly asserted that the business plan could only support payments of particular amounts. Plainly, whatever DDH may have said about what its business plan could or could not support, DDH could only sensibly agree to make payments that it was funded to make. Thus, any payment it contracted for had either to be in its business plan, as being financed by its funders RBS, or had to be met from some other defined source. The only possible such source discussed in the negotiations was the VAT shelter, to which I have already referred. The intended VAT shelter was estimated to yield some £8.4 million over a period of some 10 years from the date of the intended contract, but that figure was only an estimate, and was known to be subject to risks, because the rate of VAT could change and Government regulations affecting VAT could also change. DDH maintained in this case that it was risk averse, and would anyway not have been allowed by its funders to take risks.

14.

From DDC’s viewpoint, the negotiation had a different perspective. DDC had obtained a valuation of its housing stock from Stevens Scanlan LLP in January 2006 of some £25.3 million, but that valuation seems never to have been signed off. Tribal Consulting advised DDC in March 2007 that the Stevens Scanlan report was not “fit for purpose”. Tribal Consulting recommended that a new survey was undertaken by Savills, the leading experts in the field. When Savills reported, their figures were lower than Stevens Scanlan’s figures, but the precise values appear to have been the subject of some debate. Suffice it to say that DDH argued that Savills had knocked between £8 million and £12 million off Stevens Scanlan’s valuation. DDC’s councillors, however, appear to have had somewhat intransigent ideas about how much DDC should receive for its housing stock, and it proved hard to shift them from aspirational figures approaching £25 million.

15.

It had been agreed early on in the Memorandum of Understanding between the parties (based on Stevens Scanlan’s valuation, of course) that the baseline valuation was £23.4 million. It had also been agreed in that document that, prima facie, the VAT shelter would be split 50/50 between DDC and DDH; so it was this fund that proved to be the most fertile negotiating territory when the parties sought to bridge what was a fairly large gap between their positions. When negotiations got under way, the parties introduced the simple concept of top slicing the VAT shelter, so that the first receipts would be paid out to DDC in order, put neutrally, to meet or reimburse particular items. If, for example, it had been agreed that, the VAT shelter would be top sliced to DDC by £2.4 million, it was common ground that that meant that:-

i)

The first £2.4 million received into the VAT shelter (which was to be collected by DDH as transferee) would be paid out to DDC.

ii)

The balance of the VAT shelter (expected to be £8.4 million less £2.4 million top slice = £6 million) would be split 50/50, so that £3 million would be paid to each of DDC and DDH.

16.

Also from DDC’s perspective, DDC thought that it had been agreed in the Memorandum of Understanding that DDH’s post-ballot set up costs (which were assessed somewhere between £1 million and £2.5 million at different stages) would be met by DDH and would not reduce DDC’s capital receipt. DDH, on the other hand, expected its set up costs to feature in its business plan, and thus to reduce the figure, by way of capital payment, that that plan could sustain or support.

17.

The final piece in the jigsaw is the one that eventually gave rise to this litigation, namely the pension deficit. Both parties knew that it had to be paid. It was not, however, clear, when or how it was to be paid. Several factors were in the mix: first, if DDC were not transferring its staff, it might well have made up the pension deficit over time by increasing its regular contributions, rather than by making payment of the entire actuarial estimate of the deficit in one hit. Actuarial estimates of pension deficits are just that, and can change (sometimes hugely) as economic factors change. Secondly, the payment of the £2.4 million would not abrogate DDC’s future liability for any subsequent deficit. Thirdly, there is some uncertainty over whether DDC could lawfully pay the pension deficit out of its capital receipt from DDH. A contribution to reduce a deficit is an income expense, and it was thought that it might only be properly payable from income receipts.

18.

This background gave rise to some difficulties in the negotiation, which for a period of several weeks in August and early September 2007 came to an almost complete halt. Ultimately, there were elements of horse-trading to get a deal done. But underlying that horse-trading was DDC’s desire to obtain a specific high level of capital receipt from the overall transaction, and DDH’s desire to ensure that any payments it agreed to make were supported by its business plan.

Issues

19.

It is useful to set out at this stage the issues that the parties have agreed arise for decision is this case as follows:-

i)

Issue 1: Was there ever a common intention that DDH would pay £2.4 million to NCC in respect of the pension deficit?

ii)

Issue 2: Did that common intention (if it ever existed) continue until execution of the Transfer Contract?

iii)

Issue 3: Would rectification of clause 14.10.3 alone result in the Transfer Contract reflecting the true agreement between the parties?

iv)

Issue 4: Alternatively, if DDC alone had this continuing intention, did DDH know that DDC believed and intended that DDH would make the deficit payment of £2.4 million, such that it would be unconscionable to refuse rectification?

v)

Issue 5: Do the circumstances give rise to the alleged duty of care?

vi)

Issue 6: If such a duty of care existed, did DDH breach it?

vii)

Issue 7: Would DDH have agreed to an amendment of clause 14.10.3 if DDC had sought it?

viii)

Issue 8: If DDC suffered loss as a result of DDH’s breach of duty, what damages represent that loss, and was the loss contributed to by DDC’s own negligence, and if so by what amount should damages be reduced?

The factual background

20.

The drafting of the Transfer Contract took place in parallel with the negotiation of the commercial terms. Those responsible for the former were generally only peripherally involved with the latter and vice versa. I shall deal with the chronology of both negotiations together, as it is useful to see when developments in each negotiation came about.

21.

In October 2004, the Office of the Deputy Prime Minister published the “Housing Transfer Manual 2005 Programme” (the “Manual”). The Ministerial Foreword referred to the progress that had been made in reducing the number of council-owned homes that fell below the “Decent Homes Standard”, and said that Local Authorities had three options where they needed additional investment to achieve this objective. One of the options was to transfer their housing stock to an RSL. The Manual set out details of the ways in which such LSVTs could and should be undertaken. DDC places considerable reliance on a sentence at the end of paragraph 24 of Annex J of the Manual which provided that “Alternatively, both parties may agree that any shortfall [in the pension fund] is met by the new landlord and reflected in a reduced valuation, thereby reducing the capital receipt received by the local authority”.

22.

In July 2006, DDC and AVHL entered into their original Memorandum of Understanding. Its terms were later varied, and I shall set out the relevant terms of the amended version. It is accepted that neither version was intended to be legally binding.

23.

In December 2006, the result of a ballot of the tenants of DDC’s council homes became available. The tenants supported the proposed transfer by a substantial majority.

24.

In June 2007, Mr Heath sent the first draft of the Transfer Contract to Ms Matthews. It contained a draft clause 14.11.2 that provided for DDC to use “all reasonable endeavours to procure” that the accrued benefits of transferring employees are fully funded at the date of completion.

25.

The revised Memorandum of Understanding was signed by DDC and AVHL on 2nd July 2007. Its material terms included the following:-

… it is agreed that AVHL will work with [DDC] through active participation, contribution to an involvement in the development, implementation and operation of relevant policies and procedures …

It is recognised by [DCC] and AVHL that the best outcome will be achieved if all parties work within partnership principles, recognising that the ongoing relationship between all parties will also be conducted on a partnership basis.

The current understanding between the two parties, based on an indicative valuation of the stock provided by [DDC], is that the baseline Tenanted Market Value using the current assumptions is £23.4 million.

AVHL has confirmed that: …

Post ballot set up costs of DDH will ultimately be met by DDH and are to be included in the business plan and will not be defrayed against the capital receipt. AVHL has agreed to provide loan finance to meet the post-ballot/pre-transfer costs of DDH in accordance with the principles which were agreed by the Shadow Board of DDH on 22 February 2007 … The loan will be repaid to AVHL by DDH at the point of transfer. …

There will be further significant negotiations to take place that will make best endeavours to deliver a valuation of £23.4 million and a viable business plan for DDH. In reaching this conclusion, it has been assumed that: …

Should a VAT shelter exists [sic], that the VAT shelter savings will be based on a 50:50 sharing of any VAT shelter savings (although it is recognised that this is a starting principle and that the optimum sharing arrangement may be affected by other considerations);

Any pension under-funding will be met by the Council at the point of transfer, though this may be through a reduction in the price paid”.

26.

A negotiation meeting took place on 1st August 2007 between the representatives of DDC and DDH and their respective advisers. DDC was represented by Mr Bruno and Ms Gregory, and by its advisers, Mr Longhill and Mr Finch of Tribal Consulting. DDH was represented by Mr Roebuck and Ms Davies and by its adviser, Mr Page of PwC. At that meeting, Ms Gregory said that she still wanted £23 million, and Mr Page said that the new Savills’ stock condition survey had taken £12 million off that valuation. It was agreed that the parties would ask Tribal and PwC to meet to try to bridge the gap.

27.

An exchange of emails followed between Mr Finch and Mr Page in which figures were discussed in relation to many of the variables that affected the valuation, such as the cost of the refurbishment of the kitchens, the level of management costs, and the garage income. These emails reflected DDC’s position that the adjustments it could make resulted in a valuation of £19.4 million (excluding the VAT shelter, of course), and DDH’s position that a valuation of £17.5 million was appropriate (less £0.85 million in respect of a reduction attributable to garage rents) making a net £16.7 million. These emails did not mention the pension deficit.

28.

The period between 3rd August and 6th September 2007 was a period of stalemate, in which little if any progress was made.

29.

On 6th September 2007, Mr Page emailed Mr Roebuck and others on DDH’s side re-stating the current position. The bottom lines he referred to were that DDC had offered to accept £19.4 million, and DDH had offered to pay £16.7 million, the difference being accounted for by different management cost assumptions and kitchen costs.

30.

Having consulted Mr Page, Mr Roebuck spoke to Mr Bruno and emailed to him two proposals to “resolve the current impasse” on 7th September 2007. The two options were quite similar, the second being intended to allow DDC to make a saving on a 20% Government levy that it would be required to pay on any capital receipt that it obtained from a LSVT. Apart from that, “Option 1” and “Option 2” as they came to be known had the same financial effect. Mr Roebuck’s options used the monies that would have come to DDH (on a 50/50 basis) from the VAT shelter to bridge the gap between DDC’s expectation of £19.4 million and what he stated to be “DDH Business Plan can support a valuation/ payment to DDC of [£15.5 million]”, the gap being £3.9 million. Both Mr Roebuck’s Options made clear that “DDC also wants pension deficit (£2.4m) to be met by “top-slicing” VAT Shelter. Effectively DDH would be paying £1.2m towards DDC’s pension liability”, and showed an additional £1.2m “gross difference” between the parties’ positions arising from this issue (making £5.1 million in all). Mr Bruno told me (and I accept) that he was not aware that this proposal (i.e. to get DDH to contribute to the pension deficit by means of top-slicing) had been put to DDH, but that it had been discussed with him by Tribal Consulting at some earlier point.

31.

Mr Roebuck’s Options 1 and 2 then sought to bridge the £5.1 million gross difference by slightly different mechanisms:-

i)

Option 1 suggested “top-slicing the VAT Scheme by £2.4 million to pay pension deficit – effectively a payment of £1.2m to DDC”, and that DDC would then obtain 50% of the balance of £6 million in the VAT shelter, making £3 million, and DDH would “increase Initial payment by £0.9m (to £16.4m)”. These 3 figures were said to amount to the same £5.1 million gross difference (£1.2m + £3.0m + £0.9m), but this was purely presentational. In fact, the concessions that DDH was making were only the £1.2 million in respect of the pension deficit and the £0.9 million, the balance of the £3 million coming to DDC out of the VAT shelter was what it had always expected to receive. Again by way of presentation, Option 1 showed that total receipts by DDH would be £16.4 million on transfer (£15.5m supported by the business plan plus the extra £0.9 million), and the £3 million from the VAT shelter, said to total £19.4 million, which is what DDC had wanted back on 3rd August 2007. Option 1 then states that “In addition DDC’s pension liability would be eliminated” and “The Set-up costs are incorporated in DDH’s Business Plan”.

ii)

Option 2 is expressed to be a modification to Option 1 so as to reduce the levy by £240,000 (i.e. 20% of £1.2 million). The detailed presentation of Option 2 may not matter much, but the conclusion is that DDC’s receipts would be £15.2 million on transfer, plus £4.2 million in total from the VAT shelter, making the expected £19.4 million again. The pension deficit would again come from the VAT shelter as is made clear by the final words of Option 2: “DDH would receive £1.8m net from the VAT Shelter [£8.4m less £4.2m less £2.4m], after payment of the pension deficit”. The table in Option 2, however, included confusingly an entry showing nothing by way of bridging the gap alongside an entry reading: “Revised top-slicing the VAT Scheme by £2.4 million to pay pension deficit – effectively no payment to DDC”. What Mr Roebuck appears to have meant was that, whereas under Option 1, £16.4 million was paid up front, under Option 2, only £15.2 million was paid up front, the difference of £1.2 million being accounted for by the £0.9 million cash increase and the £0.3 million reduction from £15.5m to £15.2m). This allowed for the levy saving of £240,000, and there was effectively no payment to DDC when the entire pension deficit was paid from the VAT shelter, so no levy was payable on DDC’s element of that payment either. Again, Option 2 stated that “In addition DDC’s pension liability would be eliminated” and “The Set-up costs are incorporated in DDH’s Business Plan”.

32.

Not surprisingly, I think, Mr Bruno was confused. Later on 7th September 2007, he emailed Mr Roebuck indicating that he did not understand Option 2. He said: “Does this mean we start at 15.5 you increase the initial payment by 0.9 to 16.4 then we meet half the pension deficit from the capital receipt and receive a compensating increase from the VAT shelter? I didn’t think we were allowed to deduct the pension deficit before calculating the levy, or is that not how it would work?

33.

Mr Roebuck’s reply about an hour later on the 7th September 2007 said this: “My intention in Option 2 was simply to provide an additional benefit in terms of reduced levy. As regards the pension deficit, Option 2 effectively means that DDH sacrifices a substantial proportion of its share of the VAT Shelter proceeds, which is used instead to meet the entire pension deficit. Hence the pension deficit is effectively paid by DDH, rather than being a deduction from DDC’s capital receipt. DDC would then receive a greater proportion of the VAT Shelter to compensate for its reduced capital receipt”.

34.

On 10th September 2007, Ms Davies sent Mr Bruno two notes prepared by Mr Roebuck seeking to explain his Options 1 and 2 and the history that had given rise to them.

35.

Internally, Mr Bruno received Tribal Consulting’s estimates of what capital receipt DDC might hope to receive. These estimates had been prepared for another purpose. The figures are not easy to analyse, but Mr Bruno thought they showed that Mr Roebuck’s options fell within Tribal Consulting’s pessimistic range. Mr Bruno does, however, seem to have ignored the fact that the pension deficit would have been paid from the VAT shelter. Indeed, the use of the VAT shelter to improve the price paid was precisely responsible for the misunderstandings that later occurred, because Mr Bruno always regarded 50% of the VAT shelter as already belonging to DDC, whilst Mr Roebuck thought he could make free use of the VAT shelter to bridge the gap between the parties. The only sensible comparisons of net receipt figures have, in my view, to include the receipts from VAT shelter.

36.

On the 12th or 13th September 2007, Mr Bruno told Ms Davies that DDC rejected Mr Roebuck’s 7th September 2007 proposals in Options 1 and 2. This much is common ground.

37.

On 14th September 2007, DDC and DDH sent a joint letter to Tribal Consulting and PwC saying: “Both DDC and DDH are committed to ensuring that the best possible deal is achieved for both parties without causing any detriment to the other. Neither DDC nor DDH is interested in using standard negotiating tactics and ploys to try to squeeze the other party. We simply want a fair and equitable solution, as quickly as possible, for both parties that ensures a sustainable solution on both sides maximising the capital receipt for [DDC] within the constraint of securing a long-term viable business plan for DDH. We are therefore writing to ask you to work together creatively on the valuation to maximize the value for both parties without damaging the other”. This letter is at the heart of DDC’s case that DDH owed it a duty of care in relation to the negotiations.

38.

The events of the 20th September 2007 are probably most crucial. On that day, Mr Bruno prepared a counter-proposal from DDC to DDH in the form that has been referred to as “Version 1” of the “20th September proposal”. He obtained Ms Gregory’s approval for the document. Version 1 of the 20th September proposal included the following:-

i)

There were 5 numbered paragraphs under the heading “Context” as follows:-

1 DDH business plan has a valuation of 17.5M with outstanding issues:

£1.2M set-up costs

Kitchens at £3250

Management costs at £695

2 DDH has offered an additional £0.9M to be funded from efficiencies in the business plan.

3 DDC has a liability to cover £2.4M pensions deficit.

4

Both parties have a share in the VAT shelter proceeds.

5

DDC wishes any deal to be “levy-efficient””.

ii)

There were 3 numbered paragraphs under the heading “Proposal” as follows:-

1 DDC will accept management costs at £695 if DDH accepts kitchen costs at £3,000.

2 DDC will accept set-up costs netted off the valuation provided this is refunded as a top-slice from the VAT shelter.

3 DDC proposes that DDH pays the pension fund deficit by a reduction in the purchase price of £2.4M which is then refunded to DDC as a top-slice from the VAT shelter”.

iii)

The “DDC Capital receipt calculation” provided as follows:-

BP valuation +17.5

DDH additional money +0.9

Reduction in kitchen unit rate +0.9

Total valuation 19.3

DDH set-up costs -1.2

DDC pension deficit -2.4

Gross receipt 15.7

DDC set-up costs -1.5

Leviable receipt 14.2

CLG levy -2.84

Net capital receipt 11.36

iv)

The “VAT Shelter” provided as follows:-

Estimated income +8.4

DDH set-up costs top sliced to DDC -1.2

Pension deficit top-sliced to DDC -2.4

Net income to be split 50:50 4.8

v)

The “DDH Business Plan” provided as follows:-

Valuation allows management costs at £695 per dwelling and kitchens at £3000.

Set-up costs are allowed in full in the valuation with 50% refunded to DDC via top-slicing from the VAT shelter”.

39.

On the afternoon of 20th September 2007, Mr Bruno called Ms Davies and asked to see her. They met together and Mr Bruno handed her a copy of Version 1. Mr Roebuck, Ms Davies, and Ms Williams have all told me that they only recollect seeing a one page document containing only items (iii), (iv) and (v) in paragraph 38 above from Version 1, rather than a 2-page document including the entire contents of Version 1. I am entirely satisfied that Mr Bruno handed Ms Davies a complete copy of Version 1 on 20th September 2007, and that she passed on complete copies to Mr Roebuck and Ms Williams. I will deal in due course with my reasons for so thinking. Insofar as Ms Davies and Ms Williams thought otherwise, I think their recollections were at fault, perhaps having been encouraged to reconstruct by Mr Roebuck’s dogged adherence to his suggestion that he only recalled receiving one page.

40.

After Mr Bruno had handed Ms Davies a copy of Version 1, he went through its contents with her. Ms Davies wrote some contemporaneous notes of what he said. Those notes show wrongly that Mr Bruno was suggesting compromising the kitchen costs at £3,250. But her error goes only to confirm that she saw the entire Version 1 document, since the figure of £3,250 for kitchens is not included in the 1-page version, but is included in the 2-page Version 1 that Ms Davies was actually looking at, as DDH’s figure for kitchens. As Ms Davies’ notes confirm, Mr Bruno told her that his starting point had been Mr Page’s valuation figure of £17.5 million, which had at that time been reduced by £0.85 million for garage costs. Ms Davies’s note on the pension deficit is also instructive. She wrote “Pensions Reduce Valuation by 2.4 use VAT money”. This was undoubtedly what she understood, and certainly what Mr Bruno would have said. I will return to the question of what Mr Bruno’s Version 1 objectively means, but I can say that I have no doubt that Mr Bruno understood it to mean that the pension deficit would be a deduction from the valuation, and would be paid by DDH to NCC, and that £2.4 million would be top-sliced from the VAT shelter to DDC to represent DDH’s share of the deficit. Whether or not he said that precisely to Ms Davies on 20th September 2007 is probably less important than the fact that she plainly did not understand that to have been what he said. As appears hereafter, I am sure that Ms Davies always thought that the pension deficit was, on this proposal, coming from the VAT shelter, and therefore not going to be paid by DDH. Mr Bruno always thought that his proposal meant that DDH would actually pay the £2.4 million to NCC and that the £2.4 million top-slicing would be in addition. I do not accept Ms Davies’s evidence that she said to Mr Bruno at the end of this meeting: “so this means that we pay £21.7 million?” and he agreed. Her note does not record any mention of £21.7 million, and I do not believe there was one. Ms Davies was not clued up financially as she freely admitted, and I think it was all she could do to listen to Mr Bruno’s explanation, make the best notes she could and transport the document back to Mr Roebuck. There is, I am afraid, no way in which I can accept that she performed her own instant calculations to test the acceptability of the offer by reference to the overall payment consequences for DDH. In any event, the offer did not mean that DDH paid £21.7 million. £21.7 million was what DDC would receive from the price and the VAT shelter combined, and everyone already assumed that the VAT shelter would be split 50/50, so Ms Davies’s enquiry makes no sense except in the context of the way in which Mr Roebuck subsequently interpreted the offer. Ms Davies has, I am afraid, allowed herself to reconstruct events, in this instance, inaccurately.

41.

Later on 20th September 2007, a DDH board meeting took place, which was attended by 10 directors and 10 advisers, the latter group including Ms Matthews, Mr Page, Ms Davies, and Ms Williams. Ms Davies handed Mr Roebuck a copy of Version 1 before the start of the meeting. He looked briefly at it, and told her that he did not think the numbers would work. This shows to my mind two things: first how quickly Mr Roebuck can absorb figures and proposals of this kind; and secondly how he immediately understood Version 1 to be saying that DDH would pay the pension deficit in addition to allowing a further £2.4 million by way of top slice to DDC.

42.

In the course of the 20th September 2007 DDH board meeting, Mr Roebuck worked on Version 1 in more detail. He prepared an important manuscript document comparing 4 things in 4 columns namely:-

i)

Mr Roebuck’s own Option 1;

ii)

Mr Bruno’s “Amended Proposal”;

iii)

Mr Bruno’s proposal with adjustments; and

iv)

Mr Roebuck’s Option 2.

43.

Mr Roebuck’s figures show accurately that DDC would have received by way of price and VAT shelter receipts, £21.8 million under his Option 1 and Option 2, £21.7 million under Mr Bruno’s proposal assuming that DDH does not pay the pension deficit, and £21.55 million under that proposal as adjusted to increase the assumed DDH set up costs from £1.2 million to £1.5 million. This document shows that Mr Roebuck decided during the 20th September 2007 DDH board meeting to construe Version 1 as meaning that DDH would not have to pay the pension deficit, notwithstanding what were perhaps somewhat ambiguous words in the third numbered proposal paragraph. He announced at the end of the meeting that he thought that Mr Bruno’s latest proposal was workable and never changed his position. Whenever Mr Roebuck explained the Version 1 proposal to his own side, he made it clear that all that DDC was receiving was the £21.7 million as shown in his note. Each of Ms Davies, Ms Williams, Ms Bradbury and Mr Flynn derived their understanding of the 20th September proposal from Mr Roebuck (Ms Davies not having properly understood what Mr Bruno explained to her). I do not know what Mr Deacon thought as he was not called to give evidence. Accordingly, those we know about all shared Mr Roebuck’s stated understanding. What matters more, however, is what the objective meaning of Version 1 actually was, and to that issue I shall return.

44.

Ms Davies’s manuscript notes of the DDH board meeting itself on 20th September 2007 include a line saying: “Board feel DDH has been far too generous”. As Mr Jones has cautioned, this cannot be elevated into Mr Roebuck’s entire motivation. But it does seem to me to confirm what is otherwise clear, namely that by 20th September 2007, the parties were in a tricky position. DDC, on the one hand, had high, perhaps even unrealistic, expectations of what they wanted to receive for the transfer, and DDH’s board thought that the offers that had been made (probably in the light of the new Savill’s report) were already over-generous. This juxtaposition may well have influenced Mr Roebuck’s treatment of the offer contained in Version 1.

45.

On 21st September 2007, Mr Bruno telephoned Ms Davies to ask what Mr Roebuck’s reaction had been to his Version 1 of the 20th September proposal. Ms Davies told Mr Bruno that Mr Roebuck thought that DDH might be able to agree the 20th September 2007 proposal, subject to some adjustment on set up costs (which he confirmed in an email to Mr Finch on 24th September 2007, forwarded to Ms Davies and Mr Page on that day). Mr Bruno, from that moment on, proceeded on the basis that an agreement in principle had been reached and that his proposal had been agreed. He was right to do so, since Mr Roebuck decided in due course not to press for his minor adjustment to the figure for set up costs, knowing that, on the analysis he had chosen to adopt, Mr Bruno’s offer was worth less than Mr Roebuck’s own Option 1 (by £100,000). I am in no doubt that Mr Roebuck knew from the 20th September 2007 onwards that Version 1 could be read two ways and that Mr Bruno had intended it to be read as requiring DDH to pay the pension deficit. His contemporaneous behaviour in saying at once that the proposal was not acceptable, and then changing his mind, when he had realised it could be read the other way, confirms this position.

46.

On 24th September 2007, Ms Davies emailed Mr Roebuck a complete copy of Version 1 of the 20th September proposal. Thus even if I were wrong in thinking that Mr Roebuck received the full version on 20th September 2007, he had anyway seen the full version 4 days later.

47.

Also on 24th September 2007, Mr Page emailed Mr Roebuck and Ms Davies his analysis of the Version 1 proposal. This email and its attached figures did not make clear that DDH was to pay the pension deficit, but did say: “I consider that it is fair to say that we always anticipated that DDC would look to the VAT shelter to pay the pension deficit”.

48.

On 3rd October 2007, there was a page turning session to go through the latest 4th draft of the Transfer Contract that had undergone significant amendment since the original draft of June 2007. That meeting was attended by, amongst others, Mr Bruno, Mr Longhill and DDC’s solicitors, Mr Heath and Ms Hargreaves, and by Ms Williams and DDH’s solicitor, Ms Matthews. The draft had, by that time, been commented upon by both parties and by Ms Snell, acting for RBS. There was a discussion about Ms Snell’s suggested amendments to clause 14.11. The details of the drafts discussed are not actually material. Suffice it to say, however, that Ms Snell had suggested that clause 14.11.2 (which ultimately became clause 14.10.2) should be further amended so as to provide expressly that DDC should “make payments” to NCC as were necessary to ensure that the pension fund for the transferring employees was fully funded up to the date of completion based on the actuarial valuation. A further provision was included in draft clause 14.11.2 to make clear that there should be no liability on DDH to make any contributions to the pension scheme in relation to accrued benefits for transferring employees up to the date of completion. Neither Mr Bruno nor Mr Heath objected to the inclusion of this provision. Having heard Mr Bruno give evidence, I have formed the clear view that he did not understand that this provision was, even possibly, inconsistent with his understanding of Version 1 of his 20th September proposal, even though he did think at that stage that that proposal had been agreed in principle by DDH. Mr Bruno was also involved on this occasion in a discussion about whether there should be a claw back of the pension deficit payment if it turned out that it was less than had been paid. Even this did not make Mr Bruno realise that the draft Transfer Contract envisaged that DDC would pay the deficit. His understanding was that DDH would be paying the deficit, even though the ‘liability’ for the deficit was DDC’s, and that the responsibility for it was being split 50/50 with DDH, which was why he did not think there needed to be a claw back mechanism. But whatever the reason, Mr Bruno was, in my judgment, oblivious to the reality, which was that most of the others present at this meeting thought DDC was to pay the deficit, and that was what the draft under discussion also made clear. Mr Longhill did not give evidence about this meeting and was not asked about it in cross-examination, so I do not know why he did not highlight the apparent inconsistencies.

49.

In the afternoon of the 3rd October 2007, a DDC transfer team meeting took place attended by Ms Gregory, Mr Bruno and Mr Longhill, and Mr Heath and Ms Hargreaves of Cobbetts. Mr Longhill went through Version 1 of the 20th September proposal. I accept that he mentioned, as Ms Gregory recorded, that DDH was to pay the pension deficit. It seems from future events, for reasons upon which I cannot speculate, that DDC’s solicitors never came to understand that this was the case.

50.

Also on 3rd October 2007, Ms Hargreaves emailed Mr Bruno the 5th draft Transfer Contract, which she had revised pursuant to the 3rd October 2007 page turning meeting. The draft included the draft 14.11.2 proposed by Ms Snell. Mr Bruno did not make any adverse comment on this drafting.

51.

On 5th October 2007, Mr Page sent Tribal Consulting an email (“Mr Page’s first 5th October email”) beginning: “With our respective clients having just about settled on a compromise for the valuation, I have been asked to drop you a note to try to start to tidy up the other (more minor) financial issues”. Mr Page then described the 20th September proposal as he understood it including: “3. Pension deficit: DDH is to pay £2.4 million to the pension fund to cover the deficit on transferring staff pensions. 4. VAT shelter: The position as I understand it is that the first £2.4 million is to be paid to DDC (to compensate it for the reduction in the valuation that allowed the pension deficit to be paid by DDH). The next £1.2 million will also be paid to DDC to cover the Council’s own transfer costs. The remaining proceeds from the VAT shelter (estimated in the region of £4.8 million) are to be split 50/50 as they are reclaimed …” (emphasis added).

52.

Mr Page also sent a copy of his first 5th October 2007 email to Mr Roebuck that same afternoon. He included a covering email to Mr Roebuck which said the following (“Mr Page’s second 5th October email”):-

As discussed, please see below the note sent to Tribal. Feel free to cut and paste it on to DDC, as you see fit. I have “tried it on a bit” with the NIF calculations. We’ll see what response I get.

You might notice that when I reminded myself of [DDC’s] proposal, I discovered that it was to reduce the valuation by £2.4 million for the pension deficit and then reimburse the Council for this from the VAT shelter. In other words, the risk really lies with [DDC]. This made me think a little more about the reconciliation that I had previously prepared for you and I attach a slightly modified version that I am now happier with.

Briefly, the DDH position as per my original e mail (but with all the garages) is shown at cell D11 (i.e. £15.5m plus £0.8m). You then offered the additional £0.9m and the Council suggested the compromise on kitchens giving a further £0.9m. This takes us to £18.1m payment. There is then the balancing in and out (for the pension). I think you had always accepted that the pension deficit and the Council’s set up costs would be the first calls on the VAT shelter and so DDH would get (estimated) £2.4 million, reducing the payment made from £18.1m to £15.7m – the figure in D31 on the attached”.

53.

The schedule attached to Mr Page’s second 5th October 2007 email included the figures mentioned in the email, and concluded with the following at cells 26-29:-

DDH (effectively) pays

Valuation (above) 15,700,000

Pension deficit 2,400,000 Omitted from first draft

Less 50% of remaining

£4.8m VAT shelter -2,400,000

15,700,000” (emphasis in original)

Mr Page’s two 5th October emails and the schedule that were all sent to Mr Roebuck on 5th October 2007 (and to Ms Davies) are referred to together as “Mr Page’s 5th October emails”.

54.

It is not seriously disputed that Mr Page’s 5th October emails made very clear his obvious understanding that Version 1 of the 20th September proposal envisaged that DDH would actually pay the £2.4 million pension deficit. Mr Roebuck gave some very unimpressive evidence about how he had dealt with Mr Page’s 5th October emails, which I shall deal with in due course. One thing, at least, is clear, Mr Roebuck should, from 5th October 2007 onwards have known, that his own adviser thought that the 20th September proposal envisaged that DDH would pay the pension deficit. Moreover, Tribal Consulting and Mr Bruno (to whom Mr Page’s first 5th October 2007 email was forwarded by Mr Finch on 8th October 2007) were, from that point forward justified in thinking that Mr Page, as DDH’s consultant, at least, shared their belief that DDH was to pay the pension deficit.

55.

On 9th October 2007, Ms Gregory reported to the corporate board of DCC that it had been agreed that the pension deficit would be deducted from the purchase price and that DDH would then make the payment to NCC.

56.

On 8th or 9th October 2007, Mr Bruno sent Ms Davies a copy of Mr Page’s first 5th October 2007 email.

57.

On 9th October 2007, Mr Bruno sent Ms Davies version 2 of the 20 September proposal (“Version 2”), and later a copy of Mr Page’s first email of 5th October 2007, so she had something to show the lenders that an agreement had been reached. Version 2 of the 20th September proposal was in substantially the same form as Version 1, save that by this time it was on DDC notepaper, was headed “Proposal on Valuation” and was prefaced by an introduction saying: “Given the current impasse over the valuation DDC wishes to propose the following compromise solution (subject to minor amendments between the current date and the point of transfer to reflect actual figures as opposed to the estimates set out below”.

58.

On 9th October 2007, Ms Davies sent Mr Roebuck (a) Version 2, (b) Mr Page’s first 5th October email, and (c) a report that had gone to DDC on 27th September 2007. Mr Roebuck seems to have asked Ms Davies to see if she could find for him evidence that the 20th September proposal had been agreed between the parties, because the funders apparently wanted to see such evidence. Ms Davies’s covering email to Mr Roebuck said the following:-

I have dredged up the attached. Unfortunately I had made the mistake of forgetting that the purpose of council reports is to say nothing!

Could you have a look and see if this is something we can provide as evidence. If not we may just have to cobble together a jointly signed statement letter confirming the valuation”.

It is, perhaps, worthy of note that nothing that Ms Davies sent did, in fact, evidence that the 20th September proposal had been agreed. This seems to me to be an indication that Ms Davies had not herself properly read, or at least properly understood, the documents that she was sending across to Mr Roebuck. One of the features of Ms Davies’s evidence, to which I shall return, was her faith in Mr Roebuck, and her obvious desire to leave financial considerations to him alone.

59.

On 10th October 2007, Mr Page presented some slides explaining the transaction to DDH’s board seminar. The slides had been approved by Mr Roebuck. They included the following:-

Valuation now includes

More investment in the homes

Your set up costs

The deficit on the pensions of transferring staff …

and

VAT shelter proceeds

The first £2.4 million from the VAT shelter is going to [DDC] to compensate for the valuation reduction when this was included (therefore effectively paying half each)

The next £1.2 million is going to [DDC] to cover its set up costs (note that your set up costs reduced the valuation) so pretty much equal shares again

The remaining (estimated) £4.8 million to be shared equally

It is common ground that neither Mr Page and Mr Roebuck had spotted that Mr Page’s reference to DDC’s set up costs in the second slide above was simply wrong. More importantly, however, DDC argued (at least initially) that these slides made clear that Mr Page’s understanding was that DDH was paying the pension deficit. I do not think so. It seems to me that the slides were unclear in this respect. It is true that the “Valuation” was said to include pension deficit, and that the £2.4 million top-slice from the VAT shelter was said to be going to compensate DDC for the valuation reduction. But this leaves it unclear who is actually paying the deficit. And indeed, I accept the evidence of those who attended the Board Seminar on 10th October 2007 (with the exception of Mr Roebuck) that they did not understand that the slides were saying that DDH was to pay the deficit. The expressions used by Mr Page in these slides highlight the problem that arose throughout the run up to the conclusion of the Transfer Contract.

i)

Ms Davies and others on the DDH team (except Mr Roebuck) thought that, because the entire £2.4 million top-slice from the VAT shelter was going to DDC, that would make DDC whole for the discharge of the £2.4 million pension deficit, which it (DDC) was paying.

ii)

Conversely, Mr Bruno and the DDC team understood that that arrangement would not make DDC whole, because the valuation had been reduced by £2.4 million in respect of the pension deficit. Thus, DDC assumed that the fact that £2.4 million had been knocked off the valuation (and the up-front payment due from DDH) meant that DDH would use that £2.4 million to pay the deficit to NCC, leaving the position as it would have been if DDH had paid the extra £2.4 million to DDC and DDC had used it to pay the deficit to NCC. The top-slice from the VAT shelter, in DDC’s eyes, only gave DDC a £1.2 million benefit, because the other £1.2 million was seen as its entitlement anyway on the basis that the Memorandum of Understanding had agreed that the VAT shelter should prima facie be split 50/50. Thus, from DDC’s viewpoint, if the true valuation was reduced by £2.4 million, DDC was entitled to have DDH pay the deficit and allow DDC the top-slice from the VAT shelter in addition. Only in that way did DDC genuinely split the pension deficit liability 50/50 with DDH.

60.

On 11th October 2007, Ms Davies secured the signatures of both parties to a further version of the 20th September proposal. This was the culmination of Mr Roebuck’s request that she obtain evidence that the 20th September proposal had been agreed. The version in question has been called “Version 5” and, as I have said, the “Valuation”, and was on a single sheet of joint notepaper of DDC and DDH. It was signed by Ms Gregory for DDC and by Ms Davies for DDH. It included only the tables and figures from Version 1, with the introductory words: “This confirms that [DDC] and [DDH] have agreed the following outline valuation” and concluded with this: “Both DDC and DDH are committed for both parties without causing any detriment to the other and will ask both PwC and Tribal to now work together creatively on this agreement to resolve the outstanding elements such as minor asset values and right to buy receipts”. The “Valuation” is, again as I have said, accepted by the parties as not having been intended to be legally binding.

61.

On 11th October 2007, Mr Roebuck presented a paper to the DDH board seeking the Board’s formal approval of the Valuation. He explained that the stock valuation was agreed at £15.7 million, and that the “VAT shelter is anticipated to produce £8.4 million of VAT savings. £3.6 million of the VAT shelter proceeds will be available to DDC to cover the pension deficit and the DDH set up costs which have reduced the valuation. Therefore DDH is contributing £1.8 million to the pension deficit and set up costs through the top slicing of the VAT scheme”. Mr Roebuck intended this to convey to the Board, as it in fact did, that DDH would not be paying the pension deficit. The DDH board duly agreed the £15.7 million valuation and the proposals relating to the VAT shelter set out in Mr Roebuck’s report.

62.

On 25th October 2007, Mr Bruno sent Mr Heath an email attaching Mr Page’s first 5th October email, although again there is no reason to suppose that he registered its contents.

63.

On 26th October 2007, Mr Page, Mr Roebuck, Ms Williams and Ms Matthews attended a DDH conference call. Mr Roebuck’s notes show that he was asked to do a spreadsheet calculation concerning the timing of the payment of the pension deficit, and interest that might be claimed by way of compensation. It was suggested by DDC that this was only consistent with DDH paying the deficit, but I am not so sure. It seems to me that it could be consistent with DDH’s or DDC’s understanding depending on who was likely to be claiming the interest compensation. Mr Roebuck did not, in the result, prepare any such spreadsheet.

64.

On 29th October 2007, Mr Page sent Mr Roebuck a revised draft note on outstanding issues suggesting that an adjustment might be necessary if the “Pension Scheme requires payment of the deficit before the VAT shelter proceeds (to meet it) are actually received by DDH”, again indicating Mr Page’s understanding that DDH would be paying the pension deficit. This note was also sent to Mr Bruno by Ms Davies on 29th October 2007.

65.

Also on 29th October 2007, Ms Hargreaves sent Mr Bruno a further draft of clause 14 of the Transfer Contract, showing substantially the same provisions in clause 14.10.2 as he had previously seen on 3rd and 5th October 2007. Ms Hargreaves specifically asked Mr Bruno to confirm that the clauses were satisfactory. Again, Mr Bruno does not seem to have understood that the clause was inconsistent with his understanding of the agreed Valuation and of the 20th September proposal.

66.

On 30th October 2007, a further page-turning telephone meeting took place between Ms Matthews, Mr Heath, Ms Williams and Ms Davies. Neither Mr Bruno nor Ms Gregory attended for DDC. But it appears that, once again, the draft of clause 14.10.2 was discussed and agreed by Mr Heath.

67.

On 31st October 2007, Ms Matthews and Mr Roebuck, together with Ms Snell and Mr Alex Gipson of RBS (“Mr Gipson”) spoke on the telephone. Mr Gipson suggesting the insertion of a new clause in the draft Transfer Contract requiring DDC to make the deficit payment to NCC on completion.

68.

Meanwhile, on 31st October 2007, Ms Sue Merrett of NCC (“Ms Merrett”) had emailed Mr Bruno and Mr Ian Gibbon of NCC (“Mr Gibbon”) saying that she had spoken to Wright Hassall about the liability of £2.4 million, and asking how it would be paid. Mr Bruno replied to Ms Merrett saying that “This is to be paid by [DDH]. As such I am not party to the detail in terms of how, when etc. Were Wright Hassall not able to furnish you with this information?”.

69.

On 1st November 2007, Ms Matthews, Mr Heath and Ms Snell spoke on the telephone and discussed the possibility of the inclusion of the new clause suggested by Mr Gipson. Mr Heath agreed that such a clause could go in, and, as a result, Ms Snell’s colleague drafted the clause that became clause 14.10.3, making it clear that DDC should pay the pension deficit within 5 days of completion.

70.

Ms Snell then, on 1st November 2007, emailed the draft clause 14.11 including the new clause 14.11.3 (which became clause 14.10.3) to Ms Hargreaves, Mr Heath, and copied it to Ms Matthews.

71.

Thereafter, on 1st November 2007, Ms Hargreaves of Cobbetts emailed Mr Bruno asking whether the enclosed tracked amendments to clause 14.11 (including the new draft clause 14.11.3) were acceptable, attaching the email from Ms Snell saying that she understood that DDC was to get a top slice of £2.4 million from the VAT shelter and that “the provisions in the pensions clause deal with the payment of that sum into the pension fund”.

72.

Under 2 hours later on 1st November 2007, Mr Bruno emailed Ms Hargreaves saying “[s]ubject to you or Philip [Heath] telling me any different, 14.11 looks OK to me”.

73.

Ms Hargreaves then returned the draft contract to Ms Matthews with the new clause 14.11.3 included.

74.

Also on 1st November 2007, Ms Patel emailed Mr Gibbon asking him to confirm that the “contribution rate based on transferring employees will be fully funded at completion”. On 2nd November 2007, Mr Gibbon replied by email to Ms Patel, copied to Mr Bruno and Ms Merrett, saying that he had been advised by DDC that “any under funding at the time of the commencement of the contract will be paid by [DDH]”. At some point on the same day, Ms Matthews wrote to Mr Gibbon saying that she had provided in the Transfer Contract that the estimated under-funding of £2.4 million is paid by DDC to NCC. And Mr Bruno forwarded Mr Gibbon’s email to Mr Heath and Ms Hargreaves on the same day. DDC’s solicitors seem, once again, not to have registered that DDC thought that DDH was paying the deficit, notwithstanding the clear terms of clause 14.10.3 to which they had just agreed.

75.

On the evening of 1st November 2007, a further DDH board meeting took place, this time attended by Mr Page and Ms Matthews. The Board was told by Ms Matthews that DDC would be paying the £2.4 million, and received a report from Grant Thornton validating DDH’s business plan (which obviously made no provision for the payment of the deficit by DDH).

76.

On 2nd November 2007, Ms Matthews and Ms Snell spoke again with Mr Heath, as a result of which additional words of clarification were added to clause 14.10.3.

77.

It appears that the inconsistencies in the above exchanges were never brought to light by Cobbetts or by Wright Hassall. The latter seem to have known both (a) that on 2nd November 2007, NCC was still saying that it had been told by DDC that DDH was paying the deficit, and (b) the draft contract had been approved by DDC and provided for DDC to pay the deficit. This aspect of the case was not the subject of any cross-examination by Mr Ian Croxford Q.C., counsel for DDC, who submitted that there was no evidence that the exchanges with NCC ever reached Mr Roebuck.

78.

The Transfer Contract was duly completed on 5th November 2007, but not before final price negotiations had taken place which resulted in DDH paying an additional £80,000 in respect of the Housing Revenue Account.

79.

At 11.16 on 29th November 2007, Ms Statham emailed Messrs Roebuck and Blyton, and Ms Williams and Ms Davies, copied to Mr Bruno and Ms Gregory highlighting the problem for the first time saying: “There appears to be some confusion with [Mr Roebuck] in so much as he is saying that DDH are not responsible for paying the pension deficit”. She attached Mr Page’s first 5th October email “just to clarify the valuation was netted off allowing for the £2.4 million for the pension deficit to be paid by DDH”.

80.

At 12.33 on 29th November 2007, Mr Roebuck responded saying there should be no confusion “because the terms of the stock transfer are clearly set out in the Transfer Agreement”. He said that he believed that clauses 14.10.2 and 14.10.3 were “quite clear and unambiguous”, and that DDC was liable to pay the deficit within 5 business days of the transfer (i.e. by 12th November 2007). At 12.38, Mr Roebuck emailed Ms Williams saying: “I enclose a copy of some bizarre correspondence this morning with [Ms Statham], who [apparently] thinks DDH is going to meet the pension deficit – twice!”.

81.

At about Noon that day, Ms Gregory took Mr Bruno and Ms Davies out for a celebratory lunch at the Countryman public house in Staverton. Ms Gregory first became aware of the problem when Ms Statham called her during the lunch to explain what Mr Roebuck had said in his email to her at 12.33. This cast something of a shadow over the lunch, and I accept Ms Davies’s evidence that all she wanted to do was to get back to the office to sort it out. Ms Gregory and Mr Bruno recalled that Ms Davies had agreed, when the problem was explained to her, that Mr Roebuck had simply made a mistake. I do not think the conversation was as clear as that. Having heard Ms Davies, I think she would have become flustered, not herself having a very clear idea of the financial terms of the arrangement in any event. Whilst she may well have given the impression she agreed with Ms Gregory and Mr Bruno that DDH was supposed to be paying the deficit, I do not think she really understood the ultimate liabilities and how they fitted in with what was being top-sliced from the VAT shelter. Accordingly, I have placed no reliance on the supposed admission made by Ms Davies at this lunch.

The terms of the Transfer Contract

82.

The ultimate scheme of the Transfer Contract was that the “Price” was defined as £66,165,971, with an obligation on DDC to undertake the upgrading “Qualifying Works”, sub-contracted to DDH under the terms of the “Development Agreement”, in return for a “Works Fee” payable by DDC to DDH of £50,614,456. Thus the net receipt by DDC for the housing stock, before adjustments, was £15,551,515.

83.

Clause 14.10 provided as follows:-

“14.10.1

[DDH] shall procure that those of the Transferring Employees who are members of the Superannuation Scheme as at the Completion Date …will be able: (a) to continue to be members of or eligible to be members of … the Superannuation Scheme by [DDH’s] gaining and maintaining admission body status of that scheme …

14.10.2

In relation to the Transferring Employees and the Support Service Employees [DDC] shall make payments to the appropriate administering authority or the administrators of the Superannuation Scheme for immediate credit to the Scheme as are necessary to ensure that all liabilities in respect of the benefits accrued by (1) the Transferring Employees upto the Completion Date and (2) the Support Services Employees upto the Transfer Date are fully funded based upon the actuarial assumptions used for the 2007 actuarial valuation. For the avoidance of doubt, this means funded to the extent necessary to ensure that there shall be no liability on [DDH] to make any contributions to the Superannuation Scheme in relation to the cost of funding the accrued benefits in relation to the period of time up to the Completion Date in respect of the Transferring Employees (and the Transfer Date in respect of the Support Services Employees) and until such payments are made by [DDC] shall indemnify [DDH] against all costs proceedings damages expenses and Support Services Employees’ liabilities and claims of whatever nature in respect of the Transferring Employees and the Support Service Employees said accrued benefits. [DDC] shall be responsible for corresponding with the Superannuation Scheme’s actuary in relation to the certification by the Superannuation Scheme’s actuary as is mentioned above and shall bear the costs incurred in relation to the obtaining of the said actuarial valuation.

14.10.3

Without prejudice to the provisions of clause 14.10.2, in relation to the Transferring Employees the Council [DDC] shall make a payment of £2.4 million pounds (being the amount calculated by Mercers as representing the deficit in the funding of the Transferring Employees pension benefits up until the Completion Date) within five business days of the Completion Date”.

Witnesses

84.

Before dealing with the witnesses in detail, it is as well to remind myself that the board members, councillors and negotiators in this case were mostly public servants operating in the public or charitable sector. Of course, they were advised by commercial consultants and solicitors, but they themselves were engaged in public service. They were not commercial men and women who had anything to gain from commercial shenanigans or sharp dealings. It is, therefore, to be expected that they would be fair and honest in their negotiations, having no reason to be otherwise.

85.

That said, the strange thing about this case is that, despite the close relationships between the people involved, the negotiations seem to have been conducted, at best, on an arm’s length basis, and at worst, in a climate of mistrust. This was never really explained in the evidence, but seems nonetheless to be common ground. There were 4 DDC councillors on the board of DDH, as I have already remarked, and Ms Davies had been seconded from DDC to work for DDH. The documents (particularly the 14th September 2007 joint letter to the consultants and the Valuation) expressly referred to the parties’ desire to reach the best possible deal for both parties. Despite all this, the climate of the negotiations was not as one would have expected. The solicitors did not get on very well with each other, and the negotiators did not apparently feel able to pick up the telephone to each other to resolve issues as they arose. Instead, the Transfer Contract and the Valuation were negotiated in an atmosphere of surprising formality and distance. This, in my view, has some significance to what eventually occurred.

DDC’s witnesses

86.

Mr Nigel Kenneth Bruno was the self-employed housing consultant who acted as the principal negotiator for DDC. He told me that in the 6 months leading up to the Transfer Contract, he worked pretty well full time on this project. I found Mr Bruno a careful witness, who did not exaggerate or prevaricate. He told me about his understanding of the negotiations, almost all of which I accept.

87.

But I think the problem that arose was, most unfortunately, created at least in a significant part, by Mr Bruno’s drafting of the 20th September proposal. In reality the words that he used in point 3 of the proposal could be read two ways. He said that “DDC proposes that DDH pays the pension fund deficit by a reduction in the purchase price of £2.4M which is then refunded to DDC as a top-slice from the VAT shelter”. But the concept of “DDH [paying] … by a reduction in the purchase price” was internally contradictory. That contradiction was compounded by the use of the word “refunded” which means “paid back”, and gave the impression that DDC was being paid back because it would have paid the deficit. The reality of what I entirely accept he meant could be deduced from one analysis of Version 1. He simply left unsaid what he thought was obvious, namely that DDH would pay the pension deficit. With that added in to the words he used, the meaning become clear. What he should have said was “DDC proposes that DDH pays the pension fund deficit to NCC, utilising a reduction in the purchase price of £2.4M. DDH’s half share of the deficit is then refunded to DDC as a top-slice from the VAT shelter”.

88.

When it came to approving clause 14.10 of the Transfer Contract, Mr Bruno’s evidence was clear as follows: “We had got an agreement that was signed as proof to DDH's funders that that was the agreement that had been reached. I had taken a similar document to our members for them to agree. So it was very clear in my head what the agreement between the two parties was. We had had no further communication on that in terms of DDH saying that they were no longer happy with what we had signed on 11th October, what our members had signed up to on 12th October and had agreed on at a meeting on 9th October. So in my mind there was a very clear agreement between the two parties as to what the deal was. This clause within the transfer contract, as I understood it at the time, and I say it again, because it was the case, I understood to be referring to the Council's liability”. In other words, Mr Bruno simply misunderstood what clause 14.10 was about, which was the responsibility for the payment of the pension deficit.

89.

Ms Judith Mary Gregory, executive director of DCC, was also a reliable witness, who seemed to have a clear recollection of the events that occurred in the lead up to the Transfer Contract. She had not, however, taken it upon herself to study the terms of the Transfer Contract, preferring to rely on Mr Bruno and Cobbetts, DCC’s solicitors. She was responsible instead for the broad strategic issues, leaving it to Mr Bruno to handle the details. When asked about clause 14.10, she said this:-

i)

My understanding at the time was that that [DDH’s supposed payment of the pension deficit to NCC] had been agreed as part of the valuation agreement with DDH when we had agreed the price and when we had made the agreement about how the pension deficit was going to be paid. That was all taken care of via that agreement and this was simply reciting whose liability the pension deficit was”.

ii)

I was just being asked to look at these clauses in isolation. I did not see the rest of the transfer contract. I looked at that. I had been asked specifically to look at 14.10.2, which I did, and I have explained what my understanding of it was at the time. I simply looked at that. That was my interpretation of it. I said, yes, that is the case. It is our liability”.

iii)

My understanding at the time was that the valuation agreement had taken care of that [DDH’s supposed payment of the pension deficit to NCC]. As I say, I recognise now that that was a mistake, but that was my understanding at the time”.

Ms Gregory was indeed mistaken, just as she told me.

90.

Ms Audra Statham, DDC’s accountancy manager, was a transparently straightforward witness. She was not challenged on her understanding of the arrangement between the parties, which was the same as that held by both Mr Bruno and Ms Gregory. Mr Nigel Jones QC, counsel for DDH, cross-examined Ms Statham on the basis that she must have known that DDC was getting a far better deal if DDH was to pay the pension deficit, than had been proposed at earlier stages in the negotiation. Ms Statham broadly accepted the figures but held to her understanding of the agreement that had been reached.

91.

Mr Keith Finch was a public sector management consultant and an accountant employed by Tribal Consulting, DDC’s lead consultants. Mr Finch was a clear and reliable witness. He gave evidence that Mr Nigel Page of PwC was Tribal Consulting’s opposite number on this transaction. He was challenged on the figures that he had produced by way of estimates of the capital receipts that DDC was likely to receive from the transaction, and asked to agree that the eventual deal was better than his top predicted estimate. His response was to say that things had moved on, and that the improvement was some £600,000 from DDH’s additional contribution to set-up costs and some £700,000 from the reduction in the levy.

92.

Mr Charles Mark Longhill, a managing consultant, was also employed by Tribal Consulting, and lead on this particular project for DDC. He was, however, away on holiday between 17th and 27th September 2007, which was obviously a vital period. His evidence was not, in my judgment, as reliable as Mr Finch’s. He seemed to be confused in his understanding of the deal that had been arranged. He did, however, say that Tribal Consulting was working in a background of very ambitious high expectations, and that they were trying to manage them down as they thought they were not achievable. But he thought that the pension deficit was, in effect going to come out of the VAT shelter by being paid out to DDH, rather than DDC, to compensate DDH for having paid it. This was nobody else’s understanding, and it may not matter much. But generally, I did not find Mr Longhill as helpful as Mr Finch.

93.

DDH did not wish to cross-examine DDC’s three Councillor witnesses, who were accordingly not called to give oral evidence:-

i)

Mr John Christopher Millar, a councillor on DCC and Leader of the DCC since August 1999.

ii)

Ms Elizabeth Anne Griffin, a councillor on DCC and Deputy Leader of the DCC since 2006.

iii)

Mr Stephen John Osborne, a councillor on DCC and the Portfolio Holder (for Housing and Health) on the DCC since 2006.

It was their understanding, when they approved the terms of the Valuation, that DDH would be paying the £2.4 million pension deficit to NCC. That evidence was not challenged and I accept it.

DDH’s witnesses

94.

Mr Mark Blyton, Head of Finance of AVHL until early 2008, gave evidence first for DDH. He has now left DDH and is working as a director of finance and operations at Bulwell Academy. I did not find Mr Blyton an entirely satisfactory witness. He came across as defensive and somewhat evasive. Ultimately, however, I do not think that he was untruthful. Undoubtedly, his understanding had been that the pension deficit was to be paid by DDC and reimbursed from the VAT shelter, and was not to be paid up front by DDH. Mr Blyton accepted, quite properly, that Mr Page was DDH’s lead consultant. Where he was most defensive was in relation to DDH’s business plan that he had prepared. It was clear from the documents put to him in cross-examination that there was significant head-room in the business plan, which could, in theory at least, have allowed DDH to pay the pension deficit. But Mr Blyton was not prepared to accept even the most obvious of points put to him in that regard. For example, he refused to accept that the estimate of £2.5 million for set up costs found in the business plan was conservative, when it was plainly higher than the eventual outcome of £1.2 million. Ultimately, I do not accept his evidence that the pension deficit could simply not have been paid from the business plan – plainly there would have had to have been amendments to achieve that result, and plainly there would have been resistance from the lenders, but Mr Blyton’s suggestion that it could not have been achieved, when he himself admitted that the business plan was put to the board as the “best guess of what would happen”, is really not credible.

95.

Mr Brian Roebuck is now Group Director of Finance and Support Services for FHG, of which DDH is a subsidiary. He was at the relevant time director of finance of AVHL and a member of the Chartered Institute of Public Finance and Accountancy. I am afraid to say that I found Mr Roebuck an unsatisfactory witness. It was plain to me that Mr Roebuck is a highly intelligent man. His conduct in relation to this transaction seems to me to have fallen short of proper professional standards. I am satisfied that he knew from very shortly after he received Version 1 of the 20th September proposal that Mr Bruno most probably intended by it that DDH should pay the pension deficit, but that, on one analysis of the document, it did not make that clear. I suspect that he persuaded himself during the course of the 20th September 2007 DDH board meeting, whilst he was studying Version 1, that his reading of it was sustainable, even correct. But that is not a justification for his conduct. He should at that stage or thereafter have raised the matter with Mr Bruno or Ms Gregory to ensure that the problem he had identified was resolved. Instead, Mr Roebuck decided that he would, in effect, say ‘snap’, arguing that the document meant that DDC, not DDH, would make the deficit payment, and intending to take advantage of the drafting mistake that Mr Roebuck knew that Mr Bruno had made. In evidence, Mr Roebuck gave himself away when cross examined about paragraph 3 of Mr Bruno’s Version 1. It was put to him that it was obvious that it meant that DDH would pay the pension deficit, and Mr Roebuck said that he did not know what it meant. He said “I read all of it and my expression at the time I recall very well was that it was gobbledegook”. That signalled loud and clear that he knew that Mr Bruno had not made his intentions clear. Moreover, Mr Roebuck’s own manuscript document comparing the figures on 20th September 2007 shows that he realised that, if DDH was not paying the pension deficit, the offer that Mr Bruno had made had reduced the cash payment that DDC would receive from his Option 1 by £100,000. Since Mr Bruno had rejected both Options 1 and 2, it was unlikely, as I am sure that Mr Roebuck understood, that Mr Bruno could have intended to make an offer that reduced the amount DDC would receive.

96.

Mr Roebuck was the origin of the idea that he had only been shown a 1-page document by Ms Davies on 20th September 2007. I regret to say that I do not believe he was telling the truth about this, as about certain other matters. His own contemporaneous manuscript note of 20th September 2007 has a heading describing Version 1 as “Amended Proposal”. Version 1 is itself headed “Amended proposal on valuation”, yet the 1-page version that Mr Roebuck says he received is not headed at all. When this was put to him, Mr Roebuck tried to argue that Mr Bruno’s response was an amended proposal, but in my judgment he only made matters worse for himself. Mr Roebuck may have started by mis-recollecting that he had only seen the tables and not the text of Version 1, but he must quickly have realised that that was very unlikely. But, as in other parts of his evidence, I regret to say he clung to his story through thick and thin, refusing to acknowledge even the possibility that he might be mistaken.

97.

Mr Roebuck also gave untruthful evidence about Mr Page’s 5th October emails, and Ms Davies’s email to him of the 9th October 2007, pretending not to have read them fully, or at some stages of his evidence, at all. The truth was, I am afraid, that Mr Roebuck read these emails with great care. It would have been wholly out of character for him to have done otherwise. Moreover, he knew very well that Mr Page understood the 20th September proposal, and what Mr Bruno had intended to convey by it. It is not clear why Mr Page seems to have stopped repeating his view of Version 1 so clearly after 5th October 2007, because Mr Page was not called. But it does not really matter because, by 5th October 2009, to Mr Roebuck’s knowledge, Mr Page’s email had passed to Tribal Consulting (and, therefore, obviously on to DDC). It was, therefore, up to Mr Roebuck to correct the view of Version 1 that Mr Page had expressed, and which Mr Roebuck knew coincided with what Mr Bruno intended.

98.

Mr Jones asked me to say that Mr Roebuck was a busy man and that it was unfair to place such a spotlight on one or two documents that must have been amongst many that arrived on his screen at this hectic time. Mr Jones said, therefore, that I should accept his evidence that he simply did not read Mr Page’s 5th October emails despite having two opportunities to do so – on both the 5th and 9th October 2007 (the latter opportunity only in relation to Mr Page’s first 5th October email). I have not done so for several reasons. Primary amongst them are, first, that everything in Mr Roebuck’s character shows him to be a careful and conscientious employee (and that was the evidence of both Ms Bradbury and Mr Flynn called by DDH). That was also how he struck me. Secondly, the way in which he gave his evidence about reading Mr Page’s 5th October emails was defensive, evasive and argumentative. It was evidence that I found simply unbelievable.

99.

Eventually, RBS’s solicitors required that the Transfer Contract should include an express provision about the payment of the deficit that Mr Roebuck had told them was to be made by DDC. They and DDH’s solicitors seem to have acted in good faith. But when they asked DDC to include clause 14.10.3, Mr Bruno made another mistake, approving the clause. The main issue in the case, then resolves itself into the effect of that mistake.

100.

Ms Lindsey Williams became the Chief Executive of FHG at about the time of the Transfer Contract. Prior to that, she had been the Chief Executive of AVHL. Ms Williams had placed great reliance on Mr Roebuck in relation to the negotiation of the Valuation and the Transfer Contract. I found her evidence mostly reliable. In some parts of it, however, she had undoubtedly persuaded herself to remember things that she did not really remember, because they accorded with Mr Roebuck’s account of events. Generally, though, I accept that Ms Williams did indeed think, from 20th September 2007 onwards, that DDC had agreed to pay the £2.4 million pension deficit, and that the deal was as Mr Roebuck described in his manuscript notes and in his evidence. She was not close enough to the detail to have had any inkling that DDC thought that DDH was paying the pension deficit, and I accept that she did not see Mr Page’s 5th October emails, or understand from what was said at the 11th October 2007 board meeting that there was a problem. I accept her evidence also that, had she known that DDC had a different understanding of the transaction, she would have wanted it raised with DDC to clarify the position.

101.

Ms Hayley Davies was employed by DDC for 10 years prior to the transaction. Prior to the successful ballot, Ms Davies was seconded by DDC onto the Transfer Team. She was interviewed for the position of executive director of DDH on 29th June 2007 and was offered the position informally. After some hesitation, she decided to accept the role, and was acting as part of the DDH negotiating team in the months leading up to the Transfer Contract, notwithstanding that, at that time, she remained employed by DDC until 5th November 2007. She was an extremely nervous witness, who was plainly intimidated by the experience of giving evidence in court. I could not help feeling that she felt aggrieved by having been put in the position in which her integrity was being questioned, when, as she saw matters, all she had been doing was her best to support Mr Roebuck’s efforts in the transfer process. I found her generally honest and reliable. The problem that arose was not of her making, and she was not, in my judgment alert to it at any time before the lunch at the Countryman public house on 29th November 2007. Mr Bruno explained his 20th September 2007 proposal to Ms Davies before the meeting on 20th September, but he failed to get across to her, what he undoubtedly understood by his proposal, namely that DDH would pay the deficit. Having seen Ms Davies in the witness box, and read her notes of this discussion, I am not surprised. Ms Davies was not a financial person, and did not fully understand the niceties of the negotiation. She undoubtedly saw Mr Page’s first 5th October email, and even wrote an email enclosing a copy of it to Mr Roebuck on 9th October 2007. But I accept that she never read it properly, and never understood, then or later, that Mr Page was saying that DDH were to pay the pension deficit. Had she done so, she would have alerted Mr Roebuck.

102.

Ms Carol Anne Matthews is a partner in Wright Hassall LLP, who act as DDH’s solicitors in this action. She did not, however, deal with the litigation, but prepared the Transfer Contract on behalf of DDH and advised in relation to it. Ms Matthews made three statements running to some 30 pages in all, notwithstanding that the legal negotiations were hardly controversial. When she started her testimony, however, she was in a highly agitated state. She seemed determined to repeat Mr Roebuck’s perspective of why DDH could not have agreed to pay the pension deficit, rather than answering counsel’s questions. Before long, her own agitation overcame her, and she broke down in tears, necessitating two short adjournments. The court was then told that Ms Matthews’ father had been taken ill the previous evening and that she was waiting for news of his condition. I decided to adjourn her cross-examination, and ultimately the parties agreed that she should not be re-called, but that either side should be permitted to make such submissions as were appropriate as to her written evidence. Whilst one has great sympathy for any witness who is giving evidence at a time of personal anxiety, I am not sure that Ms Matthews’ approach was entirely caused by that anxiety. It seems to me that she was very personally involved in this litigation, and was determined to justify what DDH, her firm and she herself had done in the course of the negotiations. That attitude was not helpful, and meant that I could not properly evaluate her evidence. Fortunately, however, as I have said, she did not deal with any crucially controversial factual issues that much affect my decision in the case.

103.

Ms Ruth Snell is a partner in Addleshaw Goddard LPP and the legal advisor to RBS, which funded DDH in relation to the transaction. Ms Snell was very keen to let me know of her vast experience of dealing with over 70 LSVTs for funders between 1995 and 2007. She was very unwilling to accept that the statement in the Housing Manual that “both parties may agree that any shortfall [in the pension fund] is met by the new landlord and reflected in a reduced valuation, thereby reducing the capital receipt received by the local authority” reflected common practice. Indeed, she said that, in her experience, such a course had never been adopted. Whilst I accept her evidence about this, the fact of the matter remains that, whatever the ultimate Transfer Contract may have provided for, the parties in this case did discuss adopting such an approach in both the Memorandum of Uunderstanding and in subsequent negotiations. Thus, Ms Snell’s resolute denial of the possibility was unrealistic and rather unhelpful. Like Ms Matthews, Ms Snell was determined, in her own minor way, to argue the case for DDH, and unwilling to contemplate that there might be another side to the story. Since she had not seen any of the documents on which DDC’s case was founded, her evidence was not of great importance to the outcome.

104.

Ms Elaine Bradbury is the chair and an independent director of the board of DDH. In common with all DDH’s witnesses, she repeated her understanding that DDH had not agreed to pay the pension deficit. This much I accept, even though she, like the previous witnesses, was keen to argue DDH’s case. Mr Croxford’s moderate cross-examination uncovered the fact that Ms Bradbury had no depth of understanding of the transaction at all. For example, she thought that the £1.2 million from the VAT shelter was indeed going to pay DDC’s own set up costs, as Mr Page’s 10th October 2007 slide says (even though he had obviously mistakenly referred to DDC’s set up costs instead of DDH’s set up costs). The partisan nature of her evidence was exposed by her reluctance to accept that her encomium for Mr Roebuck that she included in her statement might have been less justified had she known that it was his case that he had not bothered to read important documents such as Mr Page’s 5th October emails.

105.

Finally, Mr Mark Flynn, the chairman of the board of directors of FHG, and a chartered accountant, gave evidence for DDH. His evidence was somewhat less partisan than the other DDH witnesses. He genuinely shared their understanding of the transaction, but again he had not seen any of the documents on which DDC’s case was based.

The law

106.

The law on both common mistake and unilateral mistake is not much in dispute. This is a case about the application of the law to the facts, rather than a case in which the finer points of the legal principles have been argued.

107.

The requirements of rectification for common mistake were authoritatively stated by Peter Gibson LJ at paragraph 33 in Swainland Builders Ltd v. Freehold Properties Ltd [2002] 2 EGLR 71 at page 74 as follows:-

The party seeking rectification must show that:

(1)

the parties had a common continuing intention, whether or not amounting to an agreement, in respect of a particular matter in the instrument to be rectified;

(2)

there was an outward expression of accord;

(3)

the intention continued at the time of the execution of the instrument sought to be rectified;

(4)

by mistake, the instrument did not reflect that common intention”.

108.

In addition to these requirements, it is accepted on both sides that, for rectification to be appropriate, there must be convincing proof that the concluded instrument does not represent the common intention of the parties (see Crane v. Hegeman-Harris Co [1939] 1 All ER 662 at page 664 per Simonds J).

109.

Lord Hoffmann said in Chartbrook v. Persimmon [2009] 1 A.C. 1101 at paragraph 48 that Peter Gibson LJ’s summary “succinctly summarised” the requirements for rectification (see also Rix LJ at paragraph 64 in the Court of Appeal in Dunlop Haywards (DHL) Limited v. Erinaceous Commercial Property Services Limited [2009] EWCA Civ 354).

110.

Lord Hoffmann also considered in Chartbrook the important question of what is necessary for and relevant to establishing a continuing common intention and an outward expression of accord. He said this at paragraphs 60-65:-

60 Now that it has been established that rectification is also available when there was no binding antecedent agreement but the parties had a common continuing intention in respect of a particular matter in the instrument to be rectified, it would be anomalous if the "common continuing intention" were to be an objective fact if it amounted to an enforceable contract but a subjective belief if it did not.  On the contrary, the authorities suggest that in both cases the question is what an objective observer would have thought the intentions of the parties to be.  Perhaps the clearest statement is by Denning LJ in Frederick E Rose (London) Ltd v William H Pim Jnr & Co Ltd [1953] 2 QB 450, 461:

"Rectification is concerned with contracts and documents, not with intentions.  In order to get rectification it is necessary to show that the parties were in complete agreement on the terms of their contract, but by an error wrote them down wrongly; and in this regard, in order to ascertain the terms of their contract, you do not look into the inner minds of the parties- into their intentions- any more than you do in the formation of any other contract.  You look at their outward acts, that is, at what they said or wrote to one another in coming to their agreement, and then compare it with the document which they have signed.  If you can predicate with certainty what their contract was, and that it is, by a common mistake, wrongly expressed in the document, then you rectify the document; but nothing less will suffice."

61 Likewise in Etablissements Georges et Paul Levy v Adderley Navigation Co Panama SA (The Olympic Pride) [1980] 2 Lloyd's Rep 67, 72, Mustill J said:

"The prior transaction may consist either of a concluded agreement or of a continuing common intention.  In the latter event, the intention must have been objectively manifested.  It is the words and acts of the parties demonstrating their intention, not the inward thoughts of the parties, which matter."

62 An example of the application of this objective ascertainment of the terms of the prior transaction is George Cohen Sons & Co Ltd v Docks and Inland Waterways Executive (1950) 84 Ll L Rep 97 in which a landlord negotiating a new lease proposed to the tenant that "the terms and conditions contained in the present lease to be embodied in the new lease where applicable".  The tenant accepted this offer, but the new lease as executed made the tenant liable for repairs which under the old lease had been the responsibility of the landlord.  In answer to a claim for rectification, the landlord said that the new lease was in accordance with what he had understood to be the effect of his offer. The Court of Appeal said that this was irrelevant.  What mattered was the objective meaning of what the landlord had written.  Evershed MR said, at p 107:

"If the defendants ... did misconstrue [the letter] that is unfortunate for them, but at least they cannot be heard to say that their letter was intended to mean anything other than that which the words convey to the reader as a piece of ordinary English."

63 As against these authorities, there are two cases upon which Mr Miles relied.  The first is Britoil plc v Hunt Overseas Oil Inc [1994] CLC 561, in which the Court of Appeal by a majority (Glidewell LJ and Hobhouse LJ, Hoffmann LJ dissenting) refused to rectify an agreement which was alleged not to be in accordance with what had previously been agreed in summary heads of agreement.  Hobhouse LJ, who gave the majority judgment, affirmed the decision of Saville J, who said that the defendants had failed to establish that there was a prior common agreement or intention in terms that the court could ascertain or (which is probably another way of saying the same thing) that the definitive agreement failed to reflect that prior agreement.  In other words, the language of the heads of agreement was too uncertain to satisfy the requirement stated by Denning LJ in Rose's case [1953] 2 QB 450, 461 that one should be able to "predicate with certainty what their contract was".  Hobhouse LJ noted, at p 571, that Saville J "did not base himself upon any consideration of the evidence as to the actual state of mind of the parties" and in my opinion the case lends no support to the view that a party must be mistaken as to whether the document reflects what he subjectively believes the agreement to have been.

64 The other case is the decision of Laddie J in Cambridge Antibody Technology Ltd v Abbott Biotechnology Ltd [2005] FSR 590, in which he rejected a submission that evidence of the subjective state of mind of one of the parties contained in statements which had not been communicated to the other party ("crossed the line") was inadmissible.  In my opinion, Laddie J was quite right not to exclude such evidence, but that is not inconsistent with an objective approach to what the terms of the prior consensus were.  Unless itself a binding contract, the prior consensus is, by definition, not contained in a document which the parties have agreed is to be the sole memorial of their agreement.  It may be oral or in writing and, even if the latter, subject to later variation.  In such a case, if I may quote what I said in Carmichael v National Power plc [1999] 1 WLR 2042, 2050-2051:

"The evidence of a party as to what terms he understood to conclude that the party misunderstood the effect of what was being said and done."

65 In a case in which the prior consensus was based wholly or in part on oral exchanges or conduct, such evidence may be significant.  A party may have had a clear understanding of what was agreed without necessarily being able to remember the precise conversation or action which gave rise to that belief.  Evidence of subsequent conduct may also have some evidential value.  On the other hand, where the prior consensus is expressed entirely in writing, (as in George Cohen Sons & Co Ltd v Docks and Inland Waterways Executive 84 Ll L Rep 97) such evidence is likely to carry very little weight.  But I do not think that it is inadmissible”.

111.

It is, therefore, now clear, and accepted on both sides in this case that, in looking for the common intention of the parties, one is mostly concerned with what, objectively, one would regard as that intention from the way the parties expressed themselves. Whilst the parties’ subjective intentions may in some cases be relevant to establishing what objectively the parties are to be taken as having intended, such evidence will be of lesser weight, as here, where the parties’ supposed prior consensus is contained in documents.

112.

The requirements of rectification for unilateral mistake were reiterated by the Court of Appeal in George Wimpey UK Ltd v. V I Construction Ltd [2005] EWCA Civ 77 at paragraph 38 (see paragraphs 36-39), approving the following statement of the principle by Buckley LJ in Thomas Bates Ltd v. Wyndham’s (Lingerie) Ltd [1981] 1 WLR 505 at page 515:-

“For this doctrine - that is to say the doctrine of  A. Roberts & Co. Ltd v. Leicestershire County Council  - to apply I think it must be shown: first, that one party A erroneously believed that the document sought to be rectified contained a particular term or provision, or possibly did not contain a particular term or provision which, mistakenly, it did contain; secondly, that the other party B was aware of the omission or the inclusion and that it was due to a mistake on the part of A; thirdly, that B has omitted to draw the mistake to the notice of A. And I think there must be a fourth element involved, namely, that the mistake must be one calculated to benefit B. If these requirements are satisfied, the court may regard it as inequitable to allow B to resist rectification to give effect to A's intention on the ground that the mistake was not, at the time of execution of the document, a mutual mistake”.

Issue 1: Was there ever a common intention that DDH would pay £2.4 million to NCC in respect of the pension deficit?

113.

Mr Croxford’s primary submission was that Version 1 of the 20th September proposal was accepted by DDH informally on 21st September 2007, and had been agreed by the time of Mr Page’s first 5th October 2007 email, and in any event by the time that the Valuation was signed on 11th October 2007. He submitted that, on the proper construction of both Version 1 and the Valuation, DDH was to pay the pension deficit.

114.

I will consider first the subjective views of the parties. I accept that Mr Bruno and DDC’s representatives always thought that Version 1 and the Valuation meant that DDH would pay the pension deficit to NCC. Moreover, they were reinforced in that understanding when they received Mr Page’s first 5th October email to Tribal Consulting confirming that position.

115.

As I have found above, however, none of DDH’s representatives (with the exception of Mr Page) thought that Version 1 of the 20th September proposal or the Valuation meant that DDH would have to pay £2.4 million to NCC towards the pension deficit. Mr Page was undoubtedly DDH’s most important consultant, but his intentions are not the intentions of the DDH board, and I am quite satisfied that DDH’s board never intended that DDH would pay the pension deficit. It could not have done so without having arranged funding to make the payment and without it being included in its business plan. The position of Mr Roebuck, whose knowledge is acknowledged to be that of DDH, is however more complex.

116.

Mr Roebuck, as I have found, was aware of the two possible ways of reading Version 1, and was aware that DDC thought it meant that DDH would pay the pension deficit. This was not just a timing issue as has been suggested. Mr Roebuck was fully aware from 20th September 2007, and anyway from 5th October 2007, that DDC understood Version 1 as requiring DDH actually to pay the pension deficit (just as Mr Page’s email told Tribal Consulting that it would). Mr Roebuck, nonetheless, proceeded to tell everyone on DDH’s side the reverse, namely that DDC would pay the pension deficit.

117.

Mr Croxford complains, with considerable force, that Mr Page was not called to give evidence for DDH, when he was and remains available to do so. He says that he could not risk doing so, but that Mr Page’s absence justifies the court in making the inference that Mr Roebuck somehow persuaded him to tone down the slides he prepared for the 10th October 2007 DDH board seminar, making them opaque. Mr Croxford asks rhetorically how it was that Mr Page could, so precisely identify the fact that DDH was paying the pension deficit in his 5th October emails, and yet fail to do so with equal clarity when explaining the deal to the DDH board only 5 days later.

118.

I cannot decide whether Mr Roebuck ‘nobbled’ Mr Page or not, since the point was not put in cross-examination. What I can say, however, is that Mr Roebuck engineered a situation in which DDH’s board and its solicitors were guided into thinking, from 10th October 2007 onwards, that the commercial deal agreed between the parties involved DDC, not DDH, paying the pension deficit. Mr Roebuck himself most probably thought that this interpretation of Version 1 and the Valuation was arguable or sustainable, even though he was fully aware of what others thought, and of the ambiguity. Mr Roebuck had, of course, himself read Version 1 both ways when he first saw it on 20th September 2007.

119.

Paragraph 5.11 of DDH’s amended Defence pleads that “Mr Roebuck’s status is such that his knowledge could be attributed to [DDH]”. Thus, it seems that his intention is accepted as being properly regarded as the intention of DDH, whatever its board may have thought. On this basis, subjectively viewed, the answer to issue 1 would be that there was not a common intention that DDH would pay £2.4 million to NCC in respect of the pension deficit, because Mr Roebuck knew of the ambiguity and did not intend that DDH should pay it.

120.

This determination of DDH’s subjective intent is not, however, the end of the story, because, as Chartbrook has made clear, what matters are “the words and acts of the parties demonstrating their intention, not the inward thoughts of the parties”. It is necessary, therefore to decide what the 20th September proposal and the Valuation actually meant.

121.

Moreover, in undertaking this exercise, I must bear in mind Mr Jones’s submission that the court should be looking for convincing proof of the existence of a common intention in respect of terms that one can predicate with certainty. Such a process, submitted Mr Jones, does not allow the court to go through the full gamut of construction procedures to construe an ambiguous document in order to find a common intention, when both sides obviously thought the document meant different things.

122.

Much debate was also directed towards what materials the court could employ in construing the objective intention of the parties from the documents they prepared. In the end, however, both sides agreed that this being a rectification claim, it was open to the court to have regard to anything that had a bearing on ascertaining the intentions of the parties, objectively viewed. That might include the documents themselves, the factual matrix, the negotiations and even the subjective intentions of the parties, though lesser weight would be accorded to matters that would not normally be used to construe an agreement.

123.

I have already explained the two possible ways of viewing the third proposal in the 20th September proposal. That proposal was, in my judgment, objectively construed, capable of both possible interpretations:-

i)

It could, quite sensibly, be construed as Mr Bruno intended it as saying “DDC proposes that DDH pays the pension fund deficit to NCC, utilising a reduction in the purchase price of £2.4M. DDH’s half share of the deficit is then refunded to DDC as a top-slice from the VAT shelter”

ii)

And it could also be construed as DDH understood it as saying that “DDC proposes that there is a reduction in the purchase price of £2.4M and that it will pay the pension fund deficit to NCC which is then refunded to DDC as a top-slice from the VAT shelter”.

124.

It seems to me, however, that DDC’s construction requires far less violence to the words used, and is the more natural construction. It is very hard to get over Mr Bruno’s use of the words “DDH pays the pension fund deficit …”, even acknowledging the ambiguity in the words which follow to which I have already drawn attention. Moreover, the table in Version 1 goes some way towards resolving the ambiguity by making clear that the total valuation is £19.3 million from which both the set up costs of £1.2 million and the pension deficit of £2.4 million is deducted. Whilst this is said to leave a “Gross Receipt” of £15.7 million – upon which Mr Roebuck placed all his emphasis – it seems to me that there was substance in Mr Croxford’s submission that the valuation was crucially equivalent to the purchase price, so that DDH ought to have understood that, out of the valuation of £19.3 million, it was paying first the set up costs of £1.2 million (which it accepts), and secondly the pension deficit of £2.4 million. DDC had to receive value for the £2.4 million reduction in the purchase price, and it would only be doing so if the pension deficit that the reduction represented was being paid by DDH.

125.

Mr Croxford submits that Mr Page’s first 5th October email can be used as an aid to construction. It seems to me that it is valuable in showing what, objectively viewed, the parties intended by their bargain, since it crossed the line, and was never contradicted by Mr Roebuck or anyone on DDH’s side. It entirely confirms the construction that I have anyway arrived at.

126.

There is, therefore, no need to go further and consider the state of negotiations in deciding how the intentions of the parties, objectively viewed, were to be understood. If one were to do so, however, further support would be obtained for DDC’s construction. As Mr Roebuck spotted in his first analysis of Version 1, Mr Bruno had reduced the overall offer, if DDH’s construction were right, from the £21.8 million that Mr Roebuck had suggested in Options 1 and 2 and Mr Bruno had rejected, to £21.7 million. Mr Roebuck must have known that that was inherently unlikely, particularly as the garages were also included (although Mr Roebcuck thought they had no real value). His suggestion that there were added advantages to DDC in the form of levy savings was unsustainable, as his own Option 2 had suggested a way of achieving the same levy saving. It is not as if the negotiations had proceeded smoothly, or as if much had changed since the stand off that had lasted several weeks in August and early September 2007. Although DDH argued that Version 1, as construed by DDC, was at the very top end of Tribal Consulting’s probabilities table, and therefore very advantageous to DDC, that was where DDC was positioned, and both sides knew that there was a significant gap to be bridged. DDH could not, looked at objectively, have expected that DDC would capitulate completely, and Mr Bruno could not sensibly be taken, against the factual background that existed on 20th September 2007, as having been intending to offer such an attractive deal to DDH.

127.

Mr Jones placed reliance on the fact that at the page-turning meeting on 3rd October 2007, Mr Bruno was present when draft clause 14.11.2 was discussed in terms that made clear that DDC would be responsible for the payment of the deficit. It is true that Mr Roebuck might have drawn a little comfort from this. But Mr Bruno’s understanding of contractual matters must have been so obviously limited, that I have no doubt that he did not actually participate in the discussion – or even properly understand it. And I am sure that Mr Roebuck was still fully aware that his own interpretation of Version 1 was still just that – his interpretation. If he was in any doubt, that doubt was put to rest when he read Mr Page’s 5th October emails 2 days later.

128.

I return then to the question of whether there is sufficiently convincing proof that, objectively viewed, the parties had a common intention that DDH would pay £2.4 million to NCC in respect of the pension deficit from the time when DDH accepted DDC’s 20th September proposal. I have concluded that they did. This is not as difficult a question of construction as Mr Jones would have had it. It would have been pretty obvious to an informed observer what Mr Bruno meant by Version 1 and the Valuation, and the only people who ever studied the offer reached that conclusion. Even Mr Roebuck did so at first. The opposite conclusion was only reached by those that had the document explained to them by Mr Roebuck after he had made up his mind that Version 1 could be construed the way he wanted to construe it.

129.

The date on which DDH accepted the Version 1 offer is not precisely clear, but it occurred at the latest on the morning of the 11th October 2007 when Ms Gregory and Ms Davies signed the Valuation. Thus the parties’ intention at that time, was in my judgment, clear. I turn now to consider whether that intention continued until the execution of the Transfer Contract on 5th November 2007.

Issue 2: Did that common intention (if it ever existed) continue until execution of the Transfer Contract?

130.

When Mr Croxford opened the case, he argued that both DDC and DDH had always intended and agreed that DDH would pay the pension deficit – from the acceptance of the 20th September proposal to the 5th November 2007, when the Transfer Contract was signed. He submitted that the solicitors had drafted clause 14.10.3 on 1st November 2007 to say that ‘DDC should pay the deficit’ in error. They had meant to say that ‘DDH should pay the deficit’. After the evidence of Ms Snell and Ms Matthews, this contention was no longer open to Mr Croxford, and he did not pursue it in closing.

131.

Instead, Mr Croxford’s primary contention was that nothing changed, once the parties had objectively agreed the commercial deal. The fact that DDH’s board may have been misled by Mr Roebuck, and may have thought wrongly that Version 1 meant that DDC would pay the pension deficit was irrelevant, because its subjective views on what had been agreed did not matter. What mattered was that objectively viewed:-

i)

Version 1 and the Valuation meant that DDH would pay the pension deficit;

ii)

Mr Page’s first 5th October 2007 email to Tribal Consulting crossed the line and described what DDH understood the agreement to have been, namely that DDH was paying the deficit;

iii)

DDH’s negotiators (being for this purpose Mr Roebuck and Ms Davies) never told DDC that they had any intention other than that DDH should pay the pension deficit.

iv)

Even when clause 14.10.3 was drafted and suggested, no mistake was pointed out, so that the commercial negotiators for DDC were not alerted to any change in the previous agreed position. In short, the inclusion of clause 14.10.3 was simply an extension of clause 14.10.2 dealing with liability for the deficit, and could not be taken to have changed the parties’ mutual, objectively viewed intention, that had been negotiated between 20th September and 11th October 2007.

132.

The question under this issue is, therefore, in a nutshell, whether the exchange of emails concerning the introduction of clause 14.10.3 was enough to change the common intention of the parties that DDH was to pay the pension deficit.

133.

As it seems to me, Mr Croxford’s argument, forensically attractive as it is, is wrong for one simple reason. The common intention of the parties is, as Lord Hoffmann has reminded us, to be determined objectively. Objectively viewed, the exchange of emails made it perfectly clear that the parties had agreed that DDC, and not DDH, was to pay the pension deficit – not only at some stage – possibly from the VAT shelter, but within 5 days of the completion of the Transfer Contract. Mr Croxford may be right in saying that, subjectively, there was no reason to think that either of their intentions had changed – as I have described them above. The commercial negotiators were not involved directly in the debate, and the reason for the new clause was purely to give the funders comfort, and was not intended to effect a change in the deal. But the parties are bound by the actions of their properly authorised solicitors. They cannot be heard to say that they did not properly instruct them. Objectively viewed, once Cobbetts had approved clause 14.10.3, they had changed DDC’s objectively viewed intentions, whatever DDC might itself have thought. I should say that I have no doubt that Mr Bruno and DDC’s other representatives did not, subjectively, understand that DDC’s intention had changed. They simply made a mistake in failing properly to read and understand the new provision. Mr Heath and Ms Hargreaves may have understood it, but it appears that DDC may have failed to get through to them the commercial deal as DDC understood it to be. Thus the normal safeguards that are in place in such a situation were defective, because DDC’s solicitors were seemingly out of the commercial negotiation loop.

134.

It is true that DDH did not point out to DDC that the deal was changing, but for the purpose of ascertaining continuing common intention, that does not matter. Nobody looking objectively at the exchange of emails on 1st November 2007 could possibly reach any conclusion, other than that the parties had by their solicitors then agreed that DDC would be paying the pension deficit.

135.

For this reason, in my judgment, the claim to rectify the Transfer Contract on the grounds of common mistake must fail, since the crucial ingredient is missing. The common intention of the parties did not continue beyond the 1st November 2007. By the date of the Transfer Contract, the parties are to be taken as having intended to include clause 14.10.3 which unambiguously provides that DDC should pay the pension deficit to NCC.

Issue 3: Would rectification of clause 14.10.3 alone result in the Transfer Contract reflecting the true agreement between the parties?

136.

This issue is now less important. But I will, in any event, say what I think about it. Mr Croxford argues that clause 14.10.2 is entirely consistent with clause 14.10.3 as he would wish it to be rectified, because clause 14.10.2 is addressing the continuing liability for deficit, which is and remains with DDC. Clause 14.10.3, on the other hand, is simply providing for what he says had been commercially agreed, namely that DDH should pay a specifically agreed sum representing the present estimated actuarial deficit, without prejudice to any future changes in that estimated deficit.

137.

Clause 14.10.2 makes essentially 3 substantive provisions as follows:-

i)

That “[DDC] shall make payments to [NCC] for immediate credit to the Scheme as are necessary to ensure that all liabilities in respect of the benefits accrued by [relevant Employees] upto the Completion Date are fully funded based upon the actuarial assumptions used for the 2007 actuarial valuation”.

ii)

That: “For the avoidance of doubt, this means funded to the extent necessary to ensure that there shall be no liability on [DDH] to make any contributions …in relation to the period of time up to the Completion Date …”.

iii)

That “until such payments are made by [DDC, DDC] shall indemnify [DDH] against all costs … and … liabilities … in respect of the … said accrued benefits”.

138.

These provisions are, as it seems to me, entirely at odds with clause 14.10.3 which would, as rectified, provide that “in relation to the Transferring Employees [DDH] shall make a payment of £2.4 million pounds (being the amount calculated by Mercers as representing the deficit in the funding of the Transferring Employees pension benefits up until the Completion Date) within five business days of the Completion Date”.

139.

In short, clause 14.10.2 says that DDC, and not DDH, shall make all payments to ensure the scheme is fully funded up to the Completion Date, and clause 14.10.3 would say that DDH shall make that very same payment in a specific sum. The saving words “[w]ithout prejudice to the provisions of clause 14.10.2” are not enough to deal with this contradiction. And the argument that clause 14.10.2 is providing only for the continuing liability is contradicted by its own words, which talk about DDC making sure that the scheme is fully funded up to the date of the transfer.

140.

I would, therefore, answer this issue by saying that rectification of clause 14.10.3 alone would not result in the Transfer Contract reflecting the true agreement between the parties, even had I found the necessary continuing common intention to justify common mistake rectification.

Issue 4: Alternatively, if DDC alone had this continuing intention, did DDH know that DDC believed and intended that DDH would make the deficit payment of £2.4 million, such that it would be unconscionable to refuse rectification?

141.

This, as it seems to me, is the crucial issue in the case.

142.

The position thus far is that Mr Roebuck knew that there was a problem from 20th September 2007 onwards, and anyway from 5th October 2007. To backtrack for a moment, it seems to me most likely that Mr Roebuck took the course he did on the 20th September 2007 without expecting to practice any deceit, but in the reckless hope that it would somehow unblock the logjam of the negotiations. As I have said, he probably persuaded himself that his construction of Version 1 was sustainable, and thought that proceeding with the deal on that basis would somehow work out or, like Mr Micawber, that something would turn up. Accordingly, he let Ms Williams and others on DDH’s side know what he thought Version 1 meant, and was, almost at once, committed to that view. By 24th September 2007, DDC was clearly informed that DDH thought there was a deal subject to tweaking on set up costs that was never pursued. Mr Roebuck was locked in.

143.

By the 5th October 2007, however, Mr Roebuck knew for certain that his view of Version 1 was not shared by Mr Page, and the lack of response to Mr Page’s 5th October email coming from Tribal Consulting and DDC would have made it clear to him shortly thereafter that he had been right to think that Mr Bruno intended that DDH would pay the deficit. This must have been a trying time for Mr Roebuck. He may have drawn some comfort from the fact that the draft Transfer Contract discussed on 3rd October 2007, with which he was fully familiar, provided for DDC to pay, and nobody had raised a query about it.

144.

For reasons that have not been explained, Mr Page’s slides for the board seminar on 10th October 2007 did not highlight the point, and were opaque. Thus, whilst I accept that the DDH board was given the impression that DDC was paying the deficit, the evidence does not explain why Mr Page sat by whilst that occurred. It is not likely that it was because he had realised he was wrong, because otherwise, as a respectable director of PwC, he would have raised the matter with Tribal Consulting to disabuse them of the misunderstanding that his first 5th October email would obviously have engendered in them and DDC. In any event, his 29th October 2007 note to Mr Roebuck does not indicate any about turn.

145.

Whatever may be the reasons, in the second half of October 2007, attention shifted from the consultants to the lawyers. All the while, Mr Roebuck must have known that he was sitting on a powder keg, however hard he may have tried to suppress that knowledge, even to himself.

146.

When Mr Gipson raised the need for an express provision requiring DDC to pay the deficit on completion, Mr Roebuck simply allowed the proposal to go forward. He was not cross-examined on his approach to what occurred on 31st October and 1st November 2007, but he must have seen the development as getting him off the hook. The proposal of the new clause 14.10.3 would expose once for all whether his understanding of Version 1 and the Valuation was accepted by DDC. Again he was not cross-examined on this, but he must have been very pleased when he heard that DDC had accepted the new clause. He would have assumed (correctly as it turns out) that DDC, probably through Mr Bruno or Ms Gregory, had instructed its solicitors to accept the new clause, and he must have seen the development as most welcome, to say the least.

147.

The question in this issue is whether, in the face of DDC’s agreement to clause 14.10.3, it can maintain its case in unilateral mistake. Four of the five requirements for unilateral mistake (set out above) are thrown into question by the events of 1st November 2007:-

i)

The first requirement is that DDC erroneously believed that the Transfer Contract provided for DDH to pay the pension deficit. DDC’s agreement to clause 14.10.3 (let alone 14.10.2), at the very least, puts this in serious doubt.

ii)

The second requirement is that DDH was aware that DDC thought that the Transfer Contract provided for DDH to pay the pension deficit, and that that was due to DDC’s mistake. Again, DDC’s agreement to clause 14.10.3 puts this in doubt.

iii)

The third requirement is that DDH has omitted to draw the mistake to the notice of DDC. This is also in doubt because DDH argues that the act of asking for a new clause 14.10.3 had the effect of drawing the mistake to the attention of DDC.

iv)

The fourth requirement is that the mistake must be one calculated to benefit DDH. This requirement would be satisfied if the others were satisfied.

v)

The fifth requirement is that it would be inequitable (or as the parties have agreed the issue, unconscionable) to allow DDH to resist rectification to give effect to DDC’s intention on the ground that the mistake was not, at the time of execution of the Transfer Contract, a mutual mistake. This has been seen by the parties as the crucial question, though in reality, it is only reached if DDC succeeds in establishing the first, second and third requirements.

148.

It is hard to see how DDC can actually show that it erroneously believed that the Transfer Contract provided for DDH to pay the pension deficit, when it had just agreed, through its solicitors, to clause 14.10.3 which provided precisely the opposite. I propose to assume, however, that this requirement could be satisfied, because no specific argument was addressed to it. Moreover, I accept that Mr Bruno and Ms Gregory did think, both up to and after the 5th November 2007, that DDH would be obliged under the Transfer Contract to pay the pension deficit (as did the relevant Councillors), notwithstanding that it would have been obvious had they read the document properly (or, one might say, at all) that this was not the case. I can see an argument for the proposition that DDC’s belief was not sufficient for unilateral mistake rectification, because DDC believed, not that the Transfer Contract provided that DDH would pay the deficit, but that DDH had agreed to pay the deficit before the Transfer Contract was prepared. Since rectification concerns mistakes contained in written contracts, such a belief might not be enough, but I leave that point for a case in which proper argument is addressed to it.

149.

It is the second and third requirements that are, in any event, most problematic in this case. In the broadest terms, DDC needs to show that DDH was aware of DDC’s mistake, and that it omitted to draw that mistake to DDC’s attention. As I have held above, objectively viewed, the exchange of emails on 1st November 2007, made it perfectly clear that the parties had agreed that DDC, and not DDH, was to pay the pension deficit. To succeed in unilateral mistake, DDC needs to show that, even after that objectively viewed concession by DDC, DDH still knew that DDC was mistaken. Mr Croxford puts forward a number of attractive forensic submissions on behalf of DDC in support of this contention.

150.

DDC says that none of the lawyers or anyone else understood that the agreement of clause 14.10.3 was a change in the bargain agreed between the parties. This is, of course, true. The solicitors on both sides always thought DDC was paying the deficit, because clause 14.10.2 so provided, and clause 14.10.3 was only introduced out of an abundance of caution by RBS. Mr Bruno and Ms Gregory never understood that there was a problem, and, surprisingly perhaps, did not see clause 14.10.3 as changing anything. Mr Roebuck may have seen RBS’s proposal as his redemption, but DDH saw it as in line with the existing deal. As it seems to me, however, this misses the point. The question is whether DDH was aware of DDC’s mistake, and failed to draw it to its attention. On any basis, the proposal of clause 14.10.3 must have drawn to DDC’s attention that DDH wanted DDC to pay the deficit. Can it really be said that, after that, DDH knew that DDC was mistaken? The fact that the proposed clause was not seen as a change is a function of the underlying mistake and the failure by DDC’s representatives properly to read the contractual provisions. But it seems to me that that is DDC’s own fault. The proposal of clause 14.10.3 was a clear exposition of what DDH thought the Transfer Contract was to achieve, and DDC failed to understand that at its peril.

151.

Secondly, DDC argues that the DDC negotiators (Ms Gregory and Mr Bruno) are to be regarded as separate from the solicitors (Mr Heath and Ms Hargreaves). It was not enough, says Mr Croxford, for DDH’s solicitors to raise clause 14.10.3 with Cobbetts. Mr Roebuck had to ring Mr Bruno or Ms Gregory to alert them to the problem. This submission cannot, in my judgment, succeed. When commercial parties (a term I use in this context to include the Claimant Council) use commercial solicitors, they cannot ignore what they are told. The relationship between the solicitor and the client is a matter for the client, not for the counterparty to the transaction. Mr Roebuck was entitled to assume, unless he is shown to have known something different, that Cobbetts were properly instructed and properly informed their client. DDC did not establish that Mr Roebuck knew either that Cobbetts did not communicate properly with DDC, or that Mr Roebuck knew that Mr Bruno had not properly understood clause 14.10.3 as being contrary to his previous understanding. It is true that Mr Roebuck probably ought, for his own peace of his professional mind, to have picked up the telephone to Mr Bruno to make sure that this problem was brought to attention. But that is not the question with which I am here concerned. The difference between the commercial negotiators and the solicitors on DDC’s side does not allow DDC to ignore what its solicitors had agreed on its behalf, and what its solicitors had been alerted to by the proposal of clause 14.10.3. Moreover, as appears later, I do not think that the failure to telephone Mr Bruno was unconscionable, when Mr Roebuck was entitled to rely on DDC’s solicitors’ agreement.

152.

Thirdly, and as part of what is essentially the same argument, Mr Croxford submits that Mr Roebuck must have allowed clause 14.10.3 to be slipped past Cobbetts knowing that it would not be enough to disabuse DDC of its mistake. I shall come to Mr Roebuck’s motives in due course, but I do not think that clause 14.10.3 was slipped past anyone. It was fairly raised and approved and was, in my judgment, sufficient to deprive DDC of a case in unilateral mistake in the absence of proof that DDH still knew after the approval of clause 14.10.3 that DDC was mistaken. That evidence was, as Mr Croxford almost accepted in argument, missing in this case. The exchange of emails with NCC came close to showing that DDC was still mistaken, even after 1st November 2007, but it did not get beyond the solicitors to Mr Roebuck, and Mr Croxford did not rely upon it.

153.

For these reasons, I do not think that either of the 2nd and 3rd requirements of unilateral mistake are made out here. By the date of execution of the Transfer Contract, it cannot be said that Mr Roebuck knew that DDC was still mistaken as to what the Transfer Contract provided, or even that DDC still mistakenly thought that DDH would pay the pension deficit. In these circumstances, DDH cannot be held to have failed to correct that mistake.

154.

The fifth requirement does not, in these circumstances, require resolution. But I will deal with it briefly nonetheless. In the circumstances I have described in detail above, Mr Roebuck undoubtedly behaved inappropriately between 20th September and 31st October 2007. It is, however, impossible, in the light of my previous findings to hold that Mr Roebuck behaved improperly after 1st November 2007, once he knew that DDC had agreed clause 14.10.3. It is true that he may have wondered whether DDC, in the light of all the history, really had agreed to give away the point. It is true that he must have regarded himself as extremely lucky. It is true, as Mr Croxford argues, that he still knew about Mr Page’s 5th October emails, but it seems to me that the court cannot assume misconduct, and an ill motivation of the kind alleged needs to be fully proved, because it is always more likely that people will behave properly than improperly. On the evidence before the court, it seems to me that Mr Roebuck was entitled to assume that DDC knew what it was doing and that it had changed its mind. It would have been an honourable course if he had checked that out by making personal contact with Ms Gregory or Mr Bruno, but the court is not concerned with honour, but with the satisfaction of specific requirements for unilateral mistake rectification. Those requirements are not established in this case, and Mr Roebuck did not, after 1st November 2007, behave either inequitably or unconscionably.

Issue 5: Do the circumstances give rise to the alleged duty of care?

155.

Mr Croxford’s alternative case was based on an allegation that “the relationship between [DDC] and [DDH] and the circumstances of the transaction were such that a reciprocal duty of care in tort existed between [DDC] and [DDH] to the effect that neither would seek to benefit from the other’s misunderstanding of any aspect of the transaction or mistake, but would draw such misunderstandings or mistake to the other’s attention, so that the terms recorded in the Transfer Contract would accurately record each party’s intentions”.

156.

It is perhaps worth noting at the outset that, even if such a duty existed, it is hard to see how it was broken as at 5th November 2007, bearing in mind the conclusions that I have already reached. For that reason, if no other, I shall deal with the duty of care issues briefly.

157.

Mr Croxford relied on the following two passages from Henderson v. Merrett Syndicates Limited [1995] 2 A.C. 145 from the speech of Lord Goff at pages 178 and 180:-

i)

The first is a citation from Lord Morris in Hedley Byrne at pages 502-503: “My Lords, I consider that it follows and that it should now be regarded as settled that if someone possessed of a special skill undertakes, quite irrespective of contract, to apply that skill for the assistance of another person who relies upon such skill, a duty of care will arise. The fact that the service is to be given by means of or by the instrumentality of words can make no difference. Furthermore, if in a sphere in which a person is so placed that others could reasonably rely upon his judgment or his skill or upon his ability to make careful inquiry, a person takes it upon himself to give information or advice to, or allows his information or advice to be passed on to, another person who, as he knows or should know, will place reliance upon it, then a duty of care will arise” (emphasis added).

ii)

From these statements, and from their application in Hedley Byrne, we can derive some understanding of the breadth of the principle underlying the case. We can see that it rests upon a relationship between the parties, which may be general or specific to the particular transaction, and which may or may not be contractual in nature. All of their Lordships spoke in terms of one party having assumed or undertaken a responsibility towards the other. On this point, Lord Devlin spoke in particularly clear terms in both passages from his speech which I have quoted above. Further, Lord Morris spoke of that party being possessed of a "special skill" which he undertakes to "apply for the assistance of another who relies upon such skill." But the facts of Hedley Byrne itself, which was concerned with the liability of a banker to the recipient for negligence in the provision of a reference gratuitously supplied, show that the concept of a "special skill" must be understood broadly, certainly broadly enough to include special knowledge. Again, though Hedley Byrne was concerned with the provision of information and advice, the example given by Lord Devlin of the relationship between solicitor and client, and his and Lord Morris's statements of principle, show that the principle extends beyond the provision of information and advice to include the performance of other services. It follows, of course, that although, in the case of the provision of information and advice, reliance upon it by the other party will be necessary to establish a cause of action (because otherwise the negligence will have no causative effect), nevertheless there may be other circumstances in which there will be the necessary reliance to give rise to the application of the principle. In particular, as cases concerned with solicitor and client demonstrate, where the plaintiff entrusts the defendant with the conduct of his affairs, in general or in particular, he may be held to have relied on the defendant to exercise due skill and care in such conduct” (emphasis added).

158.

Mr Croxford submits that DDH assumed a responsibility to DDC primarily as a result of three documents to which it became a party:-

i)

The Memorandum of Understanding that included a recognition that “the best outcome will be achieved if all parties work within partnership principles, recognising that the ongoing relationship between all parties will also be conducted on a partnership basis”.

ii)

The joint letter of 14th September 2007 saying that “Both DDC and DDH are committed to ensuring that the best possible deal is achieved for both parties without causing any detriment to the other. Neither DDC nor DDH is interested in using standard negotiating tactics and ploys to try to squeeze the other party. We simply want a fair and equitable solution, as quickly as possible, for both parties that ensures a sustainable solution on both sides …”.

iii)

The Valuation signed by both parties that included the following: “Both DDC and DDH are committed for both parties without causing any detriment to the other and will ask both PwC and Tribal to now work together creatively on this agreement to resolve the outstanding elements such as minor asset values and right to buy receipts”.

159.

When I asked Mr Croxford what service DDH was undertaking for DDC, he replied as follows:-

The service that is being undertaken here … is that the parties in the middle of September, recognising that they were on the cusp of finding a mechanism whereby to be able to agree upon terms for a contract and then contract, … was to ensure that in carrying forward that search for the deal and the formal contract, DDH would use reasonable care and skill to ensure that there was no detriment caused to DDC and that there would be a maximisation of the capital receipt for the Council”.

160.

This supposed duty, as it seems to me is entirely at odds with DDH’s negotiating position. If DDH had truly undertaken to negotiate the maximum capital receipt for DDC, it would have to have stopped negotiating on its own behalf. In any event, such an undertaking (if it had any real content) would give rise to a contractual, not a tortious duty.

161.

It must be accepted that, absent the documents I have mentioned, no duty would exist between parties negotiating a commercial agreement (even between public or charitable bodies). The true interpretation of the documents that I have mentioned is not that DDH was offering any service to DDC, nor that it was assuming any responsibility towards DDC. What it was doing was accepting the principle of fair play, and agreeing to negotiate in good faith. Such an understanding does not, in my judgment, give rise to any duty of care. If it did, it would make the negotiation of commercial transactions unworkable, uncertain and risky. Parties negotiating transactions must know where they stand. Whatever they may say to one another about behaving well, they must know that they will only owe duties of care to each other if their relationship goes some way beyond that of arm’s length counterparties. I cannot speculate as to where that line might in other cases be crossed, but in my judgment, it is far from being crossed here.

162.

I should also say that a supposed duty not to “to benefit from the other’s misunderstanding of any aspect of the transaction or mistake” or to “draw such misunderstandings … to the other’s attention” would cause great difficulty in the law of mistake. Over many years, the courts have laid down a carefully structured set of rules applicable to the rectification of written contracts for common and unilateral mistake. If those rules were to be overlaid with some general duty of care to identify and point out such mistakes or not to benefit from them in some, but not all, circumstances, the law would be thrown into some uncertainty. Commercial parties would have no idea of the extent of their duties or of what they were supposed to do in negotiating a contract. Moreover, such duties are not necessary. If the requirements of common mistake or unilateral mistake are satisfied, the contract will be rectified. If they are not, it is because the mistake, if made, was not of the kind that the law recognises as requiring rectification. I venture to say that to extend the law of negligence in the way suggested by Mr Croxford would be a retrograde step in the development of the English law of commercial contracts.

163.

I am satisfied that, in this case, DDH owed no duty of care of the kind pleaded by DDC.

Issue 6: If such a duty of care existed, did DDH breach it?

164.

This issue does not arise, but it is already clear from what I have said, that I do not think any such duty would have been breached even if it had arisen. This follows from my conclusions on issues 2 and 4.

Issue 7: Would DDH have agreed to an amendment of clause 14.10.3 if DDC had sought it?

165.

This issue also does not arise, but it is as well to say something about it. In the light of my findings, I am quite sure that, had DDH been asked to agree the reverse of clause 14.10.3, whereby it was required to pay the pension deficit within 5 days of completion, it would not have done so. This is the point on which Mr Jones relies as demonstrating that no common mistake rectification could possibly be allowed. DDH could not have agreed to pay the deficit without funding within its business plan. I do not say that such funding could never have been found, I am sure it could, had it been necessary, but DDH had not embarked on the process of seeking to do so, and RBS would not have agreed to fund the project at all on the basis that £2.4 million might be available from what has been described as ‘fat’ in the business plan.

166.

Thus, had the Transfer Contract reflected what DDC intended, DDH would not have signed it on the 5th November 2007 or probably at all. Instead, the parties would have been thrown back into a renegotiation of the commercial terms of the deal.

Issue 8: If DDC suffered loss as a result of DDH’s breach of duty, what damages represent that loss, and was the loss contributed to by DDC’s own negligence, and if so by what amount should damages be reduced?

167.

This issue does not arise. It seems to me, however, that even if the claim for breach of duty had succeeded, it would be doubtful if any loss had been sustained, since DDH would not have been able to finance the deficit payment without a major revision to its business plan. Moreover, even if it had eventually agreed to make such a payment, it is hard to see how DDC could have avoided a significant finding of contributory negligence, bearing in mind Mr Bruno’s approval of clauses 14.10.2 and 14.10.3, and the knowledge of DDC’s solicitors as to Mr Page’s first 5th October email, and the early November correspondence with NCC.

Conclusion

168.

For the reasons I have given, DDC’s claims for common mistake rectification, unilateral mistake rectification, and damages for breach of a duty of care must all fail.

169.

I will hear counsel on the form of order and costs.

Daventry District Council v Daventry & District Housing Ltd

[2010] EWHC 1935 (Ch)

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