Dennard & Ors v Pricewaterhousecoopers Llp

The Claimants allege that PricewaterhouseCoopers (“PwC”), the Defendant, negligently under-valued their interest in 11 Private Finance Initiative (“PFI”) projects in the sum of £5.1 million. As a result, the Claimants contend that they sold their interest to a subsidiary of Barclays Bank plc (“Barclays”) for £5.5 million. Had PwC properly valued their interest, as it is said it should have done, at around £15-£20 million, the Claimants say they would have retained their shares. In that event, they say they would have been able to sell them 11 months later, as Barclays itself did, at nearly 8 times the price they received – some £40 million. The difference between that sum and the £5.5 million they actually obtained is sought by the Claimants by way of damages for breach of contract.

As a second string to their bow, the Claimants allege that PwC was affected by a serious conflict between its personal interests and the interests of the Claimants, because PwC had a long-standing relationship with Barclays and wanted the deal with Barclays to go through so that it (PwC) would be “first in line” to advise Barclays on the lucrative refinancing project expected to follow from the transaction. The consequence of this alleged breach of duty is said to be the same as flows from the negligent under-valuation, save that the Claimants contend that the damages for this breach would not be restricted to £1 million by the limitation of liability clause upon which PwC rely as one of several defences to the negligence claim. Of course, the Claimants argue on various grounds that the limitation clause does not anyway apply.

As the trial progressed, the issues narrowed significantly, so that the central points of contention ultimately concerned only four main matters: the applicability of the limitation clause, the correct discount rate to apply to Discounted Cash Flow (“DCF”) valuations of the PFI projects, the correct approach to the valuation of the possible future refinancing of the PFI projects, and the alleged conflicts of interest. As will appear, the parties have agreed a more extensive list of issues, but it is in these areas that the bulk of the evidence and argument has been focused.

PFI projects, as part of Public-Private Partnerships (“PPP”), were introduced by the Government in 1992. The objective was to involve the private sector in the provision of all kinds of capital intensive public services, including the provision of care facilities. PFI projects are of various kinds and the sector has been developing rapidly since its introduction. Broadly stated, a private sector company will raise capital to finance the construction or improvement of a property asset, and will assume the risks of both the building project and the operation and maintenance of the facility thereby created. The public sector body will then pay a unitary charge for the use of the facility over a period of, say, 25-30 years. Thereafter, the facility will either revert to the public body or to the private sector investors. The public sector user of the facility can either pay on a demand basis (i.e. as and when it needs the facility) or an accommodation basis (i.e. when the facility is available for use). The latter provides a more constant and reliable income flow for the private sector investor. The assets in this case were all accommodation assets.

PFI projects are normally structured so as to be financed as to a large percentage (often 90%) by senior debt, as to a lesser percentage (often 10%) by subordinated debt, which is often held together with (or ‘stapled’ to) the equity. Most private sector investors make use of single purpose vehicles (“SPVs”) to own the equity in an individual PFI project.

Over time in the early 2000s, a secondary market developed in the shares of companies owning equity, and in the debt, in PFI projects. Often, the original private sector investors were building contractors, whose business was unsuited to the long term commitment required for such projects over their entire life. The future cashflows produced particularly by established (or ‘built out’) PFI projects were attractive to private equity firms. The risks of the projects are obviously somewhat greater during the construction phase.

It is common ground that the valuation of PFI projects should be undertaken on a DCF basis, and that a DCF valuation is essentially a function of 3 variables: (a) the cashflows which are likely to be produced by each project over its remaining life (perhaps 20 or 30 years), (b) the discount rate, which as a matter of judgment, should be applied to reflect the net present value (“NPV”) of the cashflows, and the risks inherent in the project and its operation, and (c) the upsides that should be applied to the valuation to reflect present or future added value, like, for example, the presence of cash trapped in the project which could be released, or the possibility that the debt might advantageously be refinanced at lower interest rates, creating a profit margin.

The Rydon Group included Rydon Construction Limited, Rydon Homes Limited, Rydon Commercial Limited, and Rydon Property Maintenance Limited. The names are broadly self-explanatory as describing the activities of the different parts of the group. Rydon Homes, however, had a valuable land bank that made it particularly attractive. The Claimants had a controlling interest in the Rydon Group.

In 1996, the Claimants established Ryhurst Limited (“Ryhurst”), separately from the Rydon Group, to bid for PFI projects which mainly involved building and operating health care facilities. Each Claimant owned 160 out of 1000 issued shares in Ryhurst (i.e. 16% of the equity), and the other shares were held by other key players in the business, including Ms Alison Montague (“Ms Montague”) who later became Ryhurst’s managing director.

When the Claimants came to sell Ryhurst in 2006, it had essentially 3 parts to its business: (a) its project management business whereby it contracted with the SPVs to manage the PFI projects that it had acquired; (b) a 50% interest in the portfolio of 11 PFI projects, held through SPVs, which were themselves owned by the joint venture company called Ryhurst Barclays Infrastructure Limited (“RBIL”), in which a subsidiary of Barclays called Intermediate Care Limited (“ICL”) held the remaining 50%; and (c) Ryhurst Lift Investment Limited (“Ryhurst Lift”), so named because it was engaged, not in elevators, but in financing projects through Local Improvement Finance Trusts. LIFT projects are similar to PFI projects, but at the time of sale, Ryhurst Lift only had one such project in its portfolio.

RBIL’s 11 PFI projects were all in the care sector in various parts of England. In essence, RBIL’s SPVs contracted with Government entities to construct and manage care facilities, retaining an equity interest. The projects were almost all funded in the traditional way described above, save that the Bexley project had no subordinated debt. Barclays funded the bulk of both the senior and the subordinated debt for the projects.

In January 2006, the Claimants sold their shares in Ryhurst (amounting, with the interests of others, to a 72% stake), save that the fourth Claimant, Mr Colin Dixon (“Mr Dixon”), retained some of his shares, to Barclays European Infrastructure Fund (“BEIF”), another Barclays subsidiary, for £5,500 per share, indicating a value of £5.5 million for the whole of Ryhurst’s interest in RBIL. The price the Claimants accepted was, at least, informed by PwC’s valuation in May 2005 of £5,100 per share.

The foundation of the Claimants’ complaint in these proceedings is that their shares in Ryhurst were re-sold by BEIF only 11 months later, in December 2006, to Secondary Market Infrastructure Fund (“SMIF”) for £40,475 per share, an increase of some 736%. They say that this open market sale value represented the true value of their Ryhurst shares 11 months earlier in January 2006, and they claim the difference between £5,500 and £40,475 per share by way of damages from PwC.

Central to PwC’s defence is the contention that its valuation was undertaken with all proper skill and care, and that the later sale to SMIF is in no way comparable to the earlier sale to BEIF. PwC says that Barclays had confidentiality rights under a shareholder agreement between ICL and Ryhurst, and pre-emption rights under the Articles of Association of RBIL, both of which it used or threatened to use to ensure that there was in practice only one purchaser in January 2006. Moreover, in December 2006, Barclays was selling both equity and stapled subordinated debt, which, says PwC, is a far more attractive commercial proposition. At the heart of this case lies the question of whether PwC simply took too high a discount rate in valuing the Claimants’ shares.

In the early 1970s, Messrs Derek Dennard (“Mr Dennard”), Graham Turner (“Mr Turner”) and Michael Gearon (“Mr Gearon”) worked for Croudace Limited. But in December 1976, these 3 Claimants established the Rydon Group to undertake construction and property development projects, and on 1^st January 1978, the new Rydon Group began to trade.

In 1996, Ryhurst was incorporated with Messrs Dennard, Turner and Gearon holding 16% of the 1,000 issued shares each. Ryhurst was to bid for PFI projects. Colin Dixon was brought in to become Ryhurst’s managing director at that time, and he too was allotted 16% of the shares in Ryhurst.

On 18^th September 2001, PwC issued a financial due diligence report to its then client, Barclays Private Equity (“BPE”) in relation to “Project Mirror”, by which Ryhurst sold its 4 current PFI projects (by selling the shares in the 4 SPVs) to RBIL, which was owned as to 50% by Ryhurst and 50% by ICL. The 4 projects were Bexley, Black Country, Redbridge and Essex & Herts. Ryhurst also sold 100% of the subordinated debt in the projects to BEIF. PwC’s report included the following: “In each case we have provided NPV of the blended equity/subordinated debt cashflow taken at a 13.0% discount rate”.

On 5^th April 2002, Ms Montague, Mr Bob McClatchey (“Mr McClatchey”) of Barclays, Mr Andrew Matthews, and Mr Dixon became directors of RBIL.

On 25^th April 1992, ICL, Ryhurst and RBIL entered into a shareholders’ agreement (the “Shareholders Agreement”) relating to the operation of RBIL. It contained the following provisions:-

The Articles of Association of RBIL were concluded at about the same time as the Shareholders Agreement. Articles 11-17 provided detailed pre-emption rights allowing existing shareholders to buy any stake that another shareholder wished to sell at a price determined by an expert independent accountant, and preventing any sale to an outside third party unless the other shareholders refused to buy at the “Prescribed Price”.

In July 2002, HM Treasury issued a paper entitled “Standardisation of PFI Contracts”, saying that PFI refinancing gains should be split 50/50 between the public and private sectors after July 2002. Prior to that, a sharing of 30/70 between public and private sectors had been indicated.

In October 2002, HM Treasury issued a voluntary code of conduct on PFI refinancing deals entitled: “Refinancing of Early PFI Transactions – Code of Conduct” setting out good practice on PFI refinancing transactions.

On 20^th April 2003, Mr Dennard was 60 years old. He was the oldest of the triumvirate of Messrs Dennard, Turner, and Gearon, and they decided that this was the time to start exploring the possibility of retirement and a sale of their businesses.

On 21^st April 2004, Mr Dominic Wilkinson (“Mr Wilkinson”) of PwC met Messrs Dennard, Turner and Gearon for an initial planning meeting relating to the proposed sale of their interests in both the Rydon Group and Ryhurst.

On 14^th June 2004, PwC made a presentation to the Claimants on the proposed sales, code-named “Project Normandy”. The presentation valued Ryhurst’s equity interest in RBIL at £2.3 million, although it is not clear how that valuation was arrived at. In September 2004, PwC prepared a valuation update for a meeting on 15^th September 2004, which repeated the same valuation for Ryehust’s equity in RBIL at £2.3 million, but recorded that Barclays had valued its 50% interest in RBIL in 2002 at £2.62 million. Again, it has not become clear how either of these valuations was calculated.

At the 15^th September 2004 meeting between PwC and Messrs Dennard, Turner and Gearon, the Claimants decided to “go ahead with a sale using PwC”. In the result, PwC’s engagement was divided into 3 parts as follows:-

On 1^st November 2004, PwC wrote its engagement letter for ‘Project Normandy 2’ addressed to the Claimants, Ryhurst, and Ryhurst Lift (the “Engagement Letter”). It concerned the proposed disposal of Ryhurst and Ryhurst Lift, and expressly excluded a valuation. It was signed personally by Messrs Dennard, Turner, Gearon and Dixon, and by Mr Dixon (for Ryhurst) and by Ms Montagu (for Ryhurst Lift) between 23^rd and 25^th November 2004. I shall return to the detailed terms of the Engagement Letter in due course.

On 1^st February 2005, Ms Montague sent Mr Paul Cleal (“Mr Cleal”) of PwC the latest cashflow forecasts for RBIL’s PFI projects, and reminded him that the forecasts used by Ryhurst and BPE for the purposes of valuation in Project Mirror might also be of interest. These documents were sent to PwC in connection with a proposed refinancing that Ryhurst and Barclays were jointly consulting PwC about at that time.

On 8^th February 2005, Mr Oliver Jennings (“Mr Jennings”) of Barclays provided Mr Conrad Williams (“Mr Williams”) of PwC (copied to Ms Montague) with a series of sheets giving details of each of RBIL’s PFI investments.

On 14^th February 2005, Mr Wilkinson of PwC made a file-note recording that Mr McClatchey (of Barclays) had told him that Barclays would be tendering an offer for Ryhurst’s share in the SPVs. Accordingly, it seems that it would have been at about this time that it became apparent to PwC at least that it would be impracticable to sell Ryhurst’s interest in RBIL in the open market, because Barclays wished to acquire Ryhurst’s interest and because of (a) Barclays’ pre-emption rights in RBIL’s Articles of Association, and (b) ICL’s confidentiality rights under the Shareholders Agreement, which meant that no information could be passed to an outside bidder.

On 18^th February 2005, Mr Cleal signed a letter, drafted by Mr Williams, addressed to Mr Jennings by which PwC quoted to Barclays for the work it would do in relation to the proposed refinancing of the PFI projects. The letter was copied to Ms Montague, and suggested an equity value (for 100% of RBIL) of £10 million, and suggested that a refinancing could be worth some £5 million to £7.5 million.

On 22^nd February 2005, Mr Cleal emailed Mr Williams in the following terms. It is this internal email that forms the back-bone of the Claimants’ case on conflicts of interests:-

“I caught up with Oliver [Mr Jennings of BPE] this morning …

It turns out that the shareholders of Rydon want to sell both Rydon and Ryhurst. We (Andrew Pirrie [of PwC]) have the disposal mandate. As part of this work we (IGU [the Infrastructure Government & Utilities department of PwC]) will need to do a valuation of RBIL. Oliver would like to buy Ryhurst out of RBIL. And therefore suggests putting the proposed group refinancing mandate on hold until such time as the sale can be concluded.

This seems to me to be a good outcome particularly given as I said earlier our proposal might look a bit thin versus DWPF [David Wilde Project Finance]. I checked and I sent you all the models on 1 feb and again on the 7^th just to make sure. Anyway there is clearly no point in proceeding with the refinancing mandate before a sale to Barclays is concluded.

Once the sale happens complete [sic] we will have been paid to review the portfolio which will necessarily include looking at refi [refinancing] upside. At that point Oliver [Mr Jennings of Barclays] will want the refi work done (assuming Barclays win the sale) and we will be first in line because we will have recently valued the portfolio. I think we are ok on conflicts as Oliver would be happy to employ us after the sale goes through and Ryhurst won’t have any grounds to object as long as they are happy with our initial valuation. We would then work for BEIF who we don’t as of today consider to be a SECRAC [SEC registered audit client] although this could be subject to change given recent developments…”.

The emphasised passage is that relied most heavily upon by the Claimants as showing that PwC had a conflict of interests.

In response, Mr Williams emailed Mr Cleal on 22^nd February 2005 saying “I’ve just checked my emails and did receive the models. For some reason I got this file mixed up with the spv summary. My f*** up. Sorry”. It seems, therefore, that Mr Williams had not perhaps done quite such a good job in preparing his proposal letter to Barclays for the proposed refinancing as he would have done if he had looked at the cashflow models that Mr Cleal had sent him, and Barclays had provided for the purpose.

On 28^th February 2005, Mr Cleal wrote to Mr Andrew Pirrie (“Mr Pirrie”) of PwC saying:-

“I had a call from Alison Montague this morning. She is clearly anxious that we in IGU provide a valuation for their portfolio of PFI equity interests as part of your mandate. This is so she can benchmark the initial price that she is due to receive from Barclays this week.

We have all the financial models for the projects as we hav just pitched for a refinancing mandate in connection with the RBIL portfolio. I would think we could do the work in a couple of weeks to the level of detail required but would need to start asap.

I understand that there is some doubt about whether such a valuation is included in your mandate? Alison asked about extra cost so lets discuss”.

On Wednesday 2^nd March 2005, there was an important exchange of emails between Mr Cleal and Mr Williams of PwC and Ms Montague concerning a proposed valuation of the RBIL portfolio. The debate about the incorporation into the valuation engagement of the limitation of liability clause contained in the Engagement Letter has centred on these emails:-

On 4^th March 2005, Ms Libby Daniells (“Ms Daniells”) of PwC sent Mr Williams an internal email valuing either Ryhurst’s holding in RBIL or the whole of RBIL at between £10.5 million at a discount rate of 14%, and £28.5 million at a discount rate of 8%.

On 11^th March 2005, Mr Williams emailed Ms Daniells suggesting some amendments to her draft report including many that were later included in the 14^th March 2005 draft.

Mr Wilkinson and Mr Piero Tumini (“Mr Tumini”) of PwC put together a draft Information Memorandum which Mr Wilkinson sent to Mr Dixon on 14^th March 2005. The Information Memorandum related to the overall disposal, but included a specific section on Ryhurst.

Also on 14^th March 2005, Mr Cleal commented on the revised draft that Ms Daniells had prepared, taking on board Mr Williams’s detailed comments. That draft employed discount rates between 10% and 12%, putting a value of £4.3m on Ryhurst’s interest before upsides, the rates having been increased and the value decreased significantly from Ms Daniells’s first draft. Mr Cleal said the following about discount rates: “I don’t think 8-12 is a realistic range for PURE equity where there is a significant amount of subdebt. This will obviously change quite a few of the numbers in the text”.

After Mr Cleal’s email, he and Mr Williams met to discuss the appropriate discount rates in PwC’s offices. This has become known as the “Whiteboard Meeting”, since they apparently used such a board to aid their discussion on discount rates.

Later on 14^th March 2005, PwC produced a first draft “Valuation of Ryhurst’s interest in the [RBIL] Portfolio” valuing Ryhurst’s holding in RBIL at up to £4.1 million (the “Draft Report”), which Mr Williams sent by email to Ms Montague at her husband’s email address, for reasons of confidentiality. The Draft Report is important, because, although PwC later updated it in May 2005, it never issued a final report or valuation. The covering email said as follows:-

“Please find attached the first draft of our report. As discussed this takes into account the 10 PFI projects but not the LIFT that I note you have now forwarded to me. It also includes a revised estimate for the refinancing upside (I mentioned I thought the previous number was too low) which now looks healthier and takes the total value to around £4 million.

Please treat as WIP at this stage. We have some more checks to conduct and we will add in the LIFT as requested. You will also note there are a few points where some clarification would assist us…”

The Draft Report included the following:-

On 17^th March 2005, Mr Tumini emailed Mr Williams the figures for the Epping PFI project that had been omitted from the Draft Report, at Ms Montague’s request.

On 19^th March 2005, Mr Dixon left the Rydon Group and Ryhurst.

On 20^th March 2005, Ms Montague emailed Mr Williams in response to the Draft Report:-

On 24^th March 2005, Mr Williams emailed Ms Montague indicating that they had re-run their numbers and that their revised upper valuation was £4.5 million before any transaction costs or potential sharing of refinancing gains.

On 8^th April 2005, Ms Montague and Mr Williams met Messrs McClatchey and Jennings of Barclays to discuss the respective valuations. Ms Montague led the negotiations with Barclays, and Mr McClatchey is said to have adopted an aggressive stance. Mr McClatchey rejected Ms Montague’s suggestion that Barclays should pay a premium for control, and it became clear that PwC and Barclays had indeed been using different valuation methodologies. Barclays said it wanted to understand PwC’s case on trapped cash and refinancing, but said that it would not in any circumstances do a covert refinancing (i.e. one that did not follow the Treasury’s guidelines on sharing). It appears that the main differences in methodologies were (a) that Barclays was not valuing any upsides, but was using lower discount rates, and (b) that Barclays had at some stage adjusted some of the cashflows, so as to reduce the overall expected income, but to bring it forward in time. From Mr Williams’s point of view, the outcomes were that Barclays disclosed the discount rates that it was using in its valuation of RBIL’s portfolio (though PwC never disclosed its discount rates), Barclays agreed to provide the cashflows that it had been using, and Mr Williams understood that Barclays was only going to increase its valuation and its offer if it could be persuaded that the cashflows it was using were wrong.

On 13^th April 2005, Ms Daniells emailed Ms Montague asking her to approve a memorandum addressed to Barclays “which provides them with some detail of the valuation upsides we discussed”. The memorandum dealt with both trapped cash and refinancing, the two being intimately related, since trapped cash can be used in any refinancing. The memorandum included the following:-

On 14^th April 2005, Mr Jennings of Barclays had a drink with Mr Williams of PwC. It appears that Ms Montague was present as well. Thereafter, Mr Williams emailed Mr Cleal as follows:-

“Saw oj [Mr Jennings] this evening. Think they will go to 5 [million] for the portfolio. He accepts that they have taken a very simple approach and that [things] like [insurance] cost savings, trapped cash and maybe [refinancing] mean they will have to up their offer. He suggested that as we were at 6 [million] and they were at 4 [million] then about 5 [million] was where things would end up. If they move to that I think that’s a good deal for Alison [Ms Montague]. Can you [forward] the [Mirror Report] just so I can check not [missed] anything …

[In relation to new business] What’s your view on [Barclays] though? Mentioned them earlier today but can I try to get position or should I assume Nigel c et al will eventually [veto] and focus elsewhere?”.

It became clear that it had been Ms Montague that had suggested that PwC were valuing the portfolio at £6 million, and Mr Williams, understandably, did not want to contradict her in front of Mr Jennings.

An unredacted version of Mr Williams’s 14^th April 2005 email was disclosed in the course of the trial. The parts of the email that had been redacted dealt with PwC’s interest in other work from Barclays, though I do not think that the details take the Claimants’ allegations as to conflicts of interest much further.

On 15^th April 2005, Mr Cleal emailed Mr Williams saying that he did not have the Mirror Report, but did not see why they should not pursue Barclays as a client. On the same day, Mr Montague emailed Ms Daniells to ask her to chase Barclays for their cashflows.

On 19^th April 2005, Mr McClatchey wrote a long email to Ms Montague, Ms Daniells and Mr Williams in preparation for the meeting that had been fixed for Friday 22^nd April 2005. He indicated that Barclays’ valuation was £4 million, and asked to see PwC’s discount rates, models and cashflows. He concluded by saying: “The basic point is that if you want us to increase our valuation of what we think 50% of the equity is worth, you need to give us good, valid, well thought through reasons to do so. If both [of] us can’t get there, then we might as well move on and start thinking about the portfolio refinancing with both parties represented in RBIL as currently … apologies if the above is a little blunt”.

Later on the 19^th April 2005, Ms Montague responded to Mr McClatchey’s email by sending emails:-

Although Mr Williams made clear in his evidence that feeding in Barclays’ discount rates to PwC’s models was like comparing apples and pears, it appears that Mr Chris Williams, the most junior member of the PwC valuation team, did just that, coming up with a result of £5.9 million before upsides. In submissions put forward after the trial, the Claimants have contended that the cashflows used by Barclays and by PwC were the same for 4 projects, namely Avon & Wilts, Hertford, Lymington and West Mendip, but differed for most of the remainder. I cannot resolve the question of precisely how the Barclays’ cashflows differed from PwC’s cashflows, and I am not at all certain that the precise differences matter. It is common ground that, on some projects at least, Barclays were not using the same cashflows as PwC was using.

It appears that Mr Jennings sent Mr Williams the cashflows that Barclays were using on the 19^th or 20^th April 2005. PwC had not had access to Barclays’ cashflows before this time. Mr Williams forwarded them to Ms Montague on 20^th April 2005.

On 22^nd April 2005, Ms Montague met Barclays again, but this time Mr Williams did not attend the meeting.

On 10^th May 2005, Mr Williams emailed Mr Cleal, saying that Mr Chris Williams of PwC and Ms Daniells had spent 60 hours work since the Draft Report, and that “going forward we are going to have to do quite a bit of number crunching”. Mr Williams had obviously spoken to Ms Montague about fees going forward, because he records that “she wanted some certainty in terms of cost, but does appreciate that we are helping them get the price up and its difficult to give a fixed quote, given we don’t know how many further iterations we will do”. He asked Mr Cleal whether he was OK with 80% scale rates capped at £25,000 to the end of May 2005, with a further £20,000 cap to the end of June 2005. Mr Cleal responded by saying that it was difficult to justify less than 100% given the size of the job.

It appears that during April and May 2005, Ms Daniells and Mr Chris Williams continued working with Mr Nigel Dodds and Ms Montague on various calculations and models. Ultimately on 17^th May 2005, Mr Chris Williams produced a schedule to Mr Dodds and Ms Montague updating the Draft Report showing a revised valuation of £5.1 million or £5,100 per share, and saying “the main difference is obviously a result of the base case models being updated to reflect actuals/reality”. The valuation was broken down as to £3.4 million for the “base case”, £0.3 million for the “upside of 2.7% inflation”, £0.5 million for the “upside of trapped cash”, and £0.9 million for the “upside of re-financing”. This is the valuation on which the Claimants contend they relied, and it is referred to in this judgment as the “May Valuation”.

On 18^th May 2005, Mr Nigel Dodds emailed the PwC team saying he wanted to discuss the use of the 18% discount factor in the valuations, and that he was not sure of the “rationale for this (during Project Mirror in 2002 a DF of 13% was used)”.

In early June 2005, Mr Williams drafted a fee proposal to Ms Montague saying they had done £42,000 worth of work up to 17^th May 2005, and suggesting a cap of £40,000 to the end of May 2005, and an additional £25,000 to the end of June 2005. It appears that this email was not sent, but PwC undoubtedly continued working on the numbers with Mr Dodds and Ms Montague.

On 20^th June 2005, PwC sent Ms Montague a risk management letter saying she was not their client, and that they were acting for the named addressees to Engagement Letter only.

On 8^th August 2005, Mr Dodds emailed Mr Williams and Ms Daniells asking them for the current position on the SPV valuations. His postscript indicated that he had identified insurance savings of £200,000 per annum when all schemes are operational.

On 11^th August 2005, Barclays wrote to Ryhurst making a revised non-binding offer for BEIF to acquire Ryhurst’s 50% interest in RBIL for £5 million.

On 30^th September 2005, Mr Williams dropped in to a meeting between Mr Wilkinson and Messrs Dennard, Turner and Gearon. PwC alleges that Mr Williams said that he was seeing an increased interest in PFI projects in the market which could have an impact on value, but Mr Gearon responded that “we are where we are: the deal’s going ahead” implying that he had no wish to re-open the valuation. Mr Williams told me that base discount rates had moved down by about 1% by this time and that was what he communicated to Mr Gearon. Mr Gearon, on the other hand, did not think that that was what Mr Williams had said, although he accepted that Mr Williams might have said that there was some movement in valuation. I accept that Mr Williams mentioned the movement in rates, but it does not seem to me that this conversation was intended by either party to have any significance. It simply made the Claimants broadly aware (of what they probably anyway already knew) that PFI values were moving upwards.

There followed a period of negotiation with Barclays in which Mr Wilkinson, but not Mr Williams, was mainly involved. On 3^rd October 2005, Barclays increased its offer to £5.25 million, to take account of insurance savings, and on 7^th October 2005, Barclays increased its offer again to £5.5 million, expressed to be final, to take account of sinking fund benefits, provided Ryhurst retained those benefits. Meanwhile, deals were done which allowed Ryhurst management to retain their shares, Ms Montague to increase her shareholding, and Mr Dixon to retain 7% of his 16% holding.

On 3^rd October 2005, Mr Dixon told Mr Gearon that he had been advised not to sell his shares in Ryhurst. On 11^th October 2005, Mr Gearon accepted the £5.5 million offer in principle, and instructed the Claimants’ lawyers to draft the Heads of Agreement, and on 14^th October 2005, Mr Dixon signed the Heads of Agreement.

On 27^th October 2005, Mr Dodds emailed Ms Daniells highlighting an error in one of the assumptions in the Essex & Herts valuation, and enclosing a revised cashflow model.

On 1^st November 2005, Ms Daniells emailed Mr Wilkinson saying that the new numbers decreased the valuation by approximately £100,000 at the 10.5% discount rate that Barclays suggested for Essex & Herts.

On 2^nd November 2005, Mr Dodds emailed Ms Daniells and Ms Montague suggesting some valuation improvements for Lymington and for inflation, which, he said, counteracted the effect of the NPV adjustments for Essex & Herts.

On 3^rd November 2005, Ms Montague responded to Mr Dodds saying “that’s really helpful – you could get blood from a stone, we have gone very far from the PwC valuation advice anyway. In reality I would be surprised if [Mr McClatchey] reduces his offer … if he does we have plenty of ammunition now”.

On 23^rd November 2005, the Revenue refused tax clearance for the then proposed hive up structure to a new Ryhurst company, whereby Ryhurst would end up parting with its interest in RBIL to BEIF. It was after this that the structure of the proposed transaction changed, so that it was proposed that the shareholders in Ryhurst would sell their shares directly to BEIF.

On 23^rd December 2005, PwC invoiced Rydon Group Limited for £25,000 for “Fees in relation to the valuation of the RBIL portfolio of PPP projects”.

On 16^th January 2006, at Ms Montague’s request, PwC re-issued the invoice to the “Cost Bearing Shareholders of Ryhurst Limited” for £25,000 for “Fees in relation to the valuation of the RBIL portfolio of PPP projects”.

On 21^st January 2006:-

HBOS made its offer on the basis that the whole group would be acquired including the trading arm of Ryhurst. Moreover a large number of consents were required from BPE under credit agreements, inter-creditor deeds, project documents and management agreements. In addition, Barclays’ consent to the transfer of Rydon shares was required under a parent guarantee between Barclays, Rydon Group and Ryhurst St Margaret’s Limited. Thus, at the very least, it can be said that Barclays co-operation was highly desirable in allowing the entire deal to proceed as it did.

On 31^st January 2006, Mr Wilkinson wrote a post-transaction file note recording that “PwC Corporate Finance was retained by Rydon’s principal shareholders to advise them on their strategic options and ultimately in the successful sale of their business”, and that “Retainer 3” raised a fee of £25,000.

In September 2006, Barclays issued its “Project Maze” prospectus concerning the intended sale of the Ryhurst PFI portfolio of 11 projects, by then owned 100% by Barclays. This document was often referred to in the trial, since it portrayed an asset that was described as far more valuable than Ryhurst’s equity interests in the RBIL portfolio had been thought to be, less than 12 months before. The Maze prospectus was described as a “Rolls Royce job”, but in essence the cashflows on which it was based had been radically re-worked since the discussions a year before, and the discount rates applied to value what was then on sale varied between 5% and 7%, which was a quite different range from the figures under discussion in 2005. These discount rates were said expressly to “reflect recent transactions in the secondary market”. Both parties tried to make much of the disparity in the discount rates attributed in the prospectus, and by bidders, to equity on the one hand and subordinated debt on the other. Since, however, the two were being sold together, and there was no evidence that anyone ever contemplated their being ‘unstapled’, I am far from sure that a very great insight can be gained from this approach. I will say more about this when I come to consider the premium in the discount rate (if any) attributable to the fact that the portfolio valued in this case was equity alone.

On 19^th October 2006, Mr Williams emailed Mr Wilkinson saying that he was working on the Ryhurst disposal (this time by Barclays) for a potential acquirer, Infrastructure Investors Limited. On 20^th October 2006, Mr Wilkinson replied saying that he had been told that the Ryhurst portfolio was being sold for £70 million, and that he recalled that Mr Williams had valued 50% of it at about £7 million, and saying “it would be good to understand why our value was so far off”.

On 20^th October 2006, Mr Williams responded to Mr Wilkinson saying that he had valued at around £6-7 million in the end (which he had not in fact), and that the valuation was not far off. He said that his valuation did not relate to what is now being sold: “we are comparing apples and pears”. He made the point that pure equity was being sold before, but equity and subordinated debt was now being sold: “a very different asset”, and that yields had “really come on” in 2006.

On 8^th December 2006, the interests previously held by Ryhurst were re-sold by BEIF to SMIF for the equivalent of £40,745 per share. The total price paid for the equity and debt was some £121.9 million, with about £39.9 million for the subordinated debt, making some £82 million for the equity alone.

On 8^th January 2007, Mr Williams sent a report to Mr Cleal (addressed to Mr Quentin Humberstone, the lead PwC partner) explaining why the valuation was so much less than the sale price to SMIF. The draft contains some important explanations of PwC’s rationale for the May Valuation and the surrounding events. In addition, Mr Williams included the following concerning the PFI secondary market and the discussions with Barclays:-

On 4^th December 2007, Allen & Overy wrote a letter before action on behalf of Messrs Dennard, Turner and Gearon, and on 28^th March 2008, PwC’s solicitors responded. On 19^th December 2007, Hyde Law wrote a letter before action on behalf of Mr Dixon. On 28^th March 2008, Barlow Lyde & Gilbert, on behalf of PwC, responded to Allen & Overy rejecting the claim. On 17^th April 2008, Barlow Lyde & Gilbert replied to Hyde Law also rejecting his claim, and saying that Project Normandy 2 was an “entirely separate retainer” from the valuation engagement.

On 28^th October 2008, the Claim Form was issued in HC08CO3022 by Dennard, Turner and Gearon. On 12^th November 2008, the Claim Form was issued in HC08CO3192 by Mr Dixon. On 17^th December 2008, the Particulars of Claim were served, and on 12^th February 2009, the Defence was served. Amended pleadings were exchanged in due course.

PwC’s engagement letter of 1^st November 2004 for Project Normandy 2, countersigned by the Claimants, included the following provisions:-

PwC’s UK Terms and Conditions were annexed to the Engagement Letter. They included the following provisions:-

The parties agreed some of the issues before the Court at the beginning of the trial. Since I allowed the Claimants to amend to rely on the alleged conflicts of interest, and PwC to rely on a plea that its exclusion clauses were reasonable, I redrafted the issues and provided the redraft to the parties. Taken together with some small additions that the parties suggested, the issues that arise for determination are as follows:-

Each Claimant was called to give evidence in the first week of the trial, and then recalled, after a second witness statement was filed, in the early part of the second week of the trial. The supplementary witness statements were served to deal with the issue of the reasonableness of PwC’s limitation of liability clause, and the allegations of conflicts of interest in accepting the valuation engagement. Mr Paul Downes Q.C., counsel for the Claimants, agreed that he should not be permitted to use the second statements to improve any evidence that had already been given orally by the time they were put in. And on that basis, Mr Justin Fenwick Q.C., counsel for PwC, did not object to their admission. It seems to me, however, that the second statements of the Claimants added little of importance, except on the conflicts point.

On the conflicts issue, the Claimants’ thesis was that 2 documents most clearly demonstrated PwC’s conflicts of interest. First, PwC’s draft pitch to Barclays dated 17^th February 2005 concerning the proposed refinancing of RBIL’s PFI projects. That draft apparently included a very high valuation of the potential refinancing upside in the portfolio, which seemed irreconcilable with PwC’s eventual May Valuation. Mr Williams, however, served a second statement explaining how the draft was incomplete, and why the apparently huge valuation related to another project for which the draft had originally been prepared. At that stage, the Claimants’ allegations based on the 17^th February 2005 draft were dropped. Secondly, as I have already mentioned, the Claimants alleged that the 22^nd February 2005 email showed that PwC wanted to be “first in line” for the refinancing work if the sale to Barclays was completed.

Mr Michael Gearon was the first witness called by the Claimants. He was mostly candid and straightforward, but he was not a man who paid careful attention to documentation. He accepted that he had either not read, or in some cases ‘skim read’, many of the crucial documents in the case including the Engagement Letter. Several of the answers he gave were at variance with the witness statement that had obviously been drafted for him. In each case, I prefer what he said, often with disarming candour, in the witness box, to what he had said in his statement.

I summarise below the more important parts of Mr Gearon’s evidence:-

Mr Colin Dixon was a rather more defensive witness than Mr Gearon. He seems to have provided Mr Jonathan White, the Claimants’ expert, with much of the more contentious information that he relied upon. The important parts of Mr Dixon’s evidence can be summarised as follows:-

Messrs Dennard and Turner broadly confirmed Mr Gearon’s evidence, and, very sensibly, the parties agreed that Mr Fenwick did not need to cross-examine them all on exactly the same points. There were aspects of each of their statements, however, which had plainly been drafted for them, and which they could not really support orally. In particular, I do not accept that either of them had any real contemporaneous view about whether or not the valuation engagement was separate from or on the same terms as the Engagement Letter. The passages in their statements saying that they believed that the valuation engagement was separate from the Engagement Letter was obviously affected by hindsight, and I do not believe either of them would have had any view at the time.

Both Messrs Turner and Dennard said that, had they been told that the shares were worth double what Barclays was paying for them, they would have negotiated again. The implication was that, below that figure, they would have gone ahead with the deal with Barclays if they had been unable to obtain an increase in the price.

Like the other Claimants, Mr Turner was recalled on Tuesday 16^th March 2010, after his second statement had been put in. Mr Turner signed his second statement in the witness box after he had been recalled. He said in cross-examination that he had skim-read Mr Williams’s second statement “last night”. That statement explained, as I have already mentioned, how Mr Williams had prepared his 17^th February 2005 draft letter to Barclays concerning a possible refinancing, and how the reference in that letter to a refinancing gain of £20 million to £30 million was cut and pasted from another unrelated project, but had not at the time the print-out was made yet been worked on or deleted as being irrelevant to the RBIL case. Mr Turner was asked, if he had read Mr Williams’s second statement, how he could have confirmed the truth of paragraph 8 of his second statement complaining that PwC’s reference in its 17^th February 2005 draft letter to a refinancing gain of £20 million to £30 million was evidence of a conflict of interest. Mr Turner eventually accepted in cross-examination that, had he thought about the matter, he would have wanted to say that, if Mr Williams’s second statement were true, it dealt with the concern he had expressed in paragraph 8. In re-examination, Mr Turner confirmed that, as he had said in cross-examination, he had indeed skim-read Mr Williams’s second statement and not Mr Cleal’s second statement as he had said in cross-examination.

At that point, Mr Downes applied, without objection, to call Mr Rainer Evers, an associate in Allen & Overy, the Claimants’ solicitors, who told me that he had not sent Mr Turner a copy of Mr Williams’s second statement the night before, but only at 7.11 a.m. that morning. That evidence seemed to me of no moment, because Mr Turner could easily have been sent the statement by another partner in Allen & Overy, and could have included 7 a.m. as within “last night”, so that he meant he had read the statement after 7.11am, when he said “last night”. Either way, I am entirely satisfied that Mr Turner had indeed skim read Mr Williams’s second statement as he told me he had, and that it would have been far better if he had mentioned that fact before confirming the truth of paragraph 8 of his second statement without qualification.

Ms Alison Montague was managing director of and a shareholder in Ryhurst. She was primarily responsible for dealing with PwC in relation to the valuation exercise. Ms Montague said in her statement that, when she first contacted Mr Cleal, she asked him for “a proper market value and not, for example, a figure by which to “benchmark” any offer from Barclays, nor a figure reflecting the fact that Barclays seemed to be the only likely buyer”. The first part of this statement is perhaps somewhat at odds with the 2^nd March 2005 emails, to which I have already referred, which make clear that the valuation is intended to assist in their discussions with Barclays.

Ms Montague made clear that her recollection was that the valuation was the subject of a separate engagement letter from Project Normandy 2, although she accepted that no such engagement letter had been found. She also said in her statement that PwC viewed the valuation exercise as a separate engagement. Whilst I accept that the valuation was regarded a separate project, I do not think that this is the real issue. The central question is whether it was agreed that the valuation exercise should be an extension of the Project Normandy 2 Engagement Letter. This is a matter of construction of the emails that passed between the parties (primarily on 2^nd March 2005), and of any other relevant contacts between them. I shall return to this question under Issue 1 below.

Ms Montague was generally a straightforward witness, although I have not been able to accept everything she said. I am sure she made no attempt to mislead, but rather she did not have a particularly good recollection, and at times allowed herself, I think, to reconstruct events rather than speaking only as to what she actually recalled. She too had had her statement drafted for her, and I broadly prefer what she said orally to what had been drafted for her.

Ms Montague’s evidence included the following matters:-

PwC called 3 witnesses. Mr Downes made much of the complaint that other relevant PwC personnel were not called, and that inferences could be drawn against PwC as a result. I am bound to say that I do not think that PwC failed to call truly relevant personnel. Mr Cleal was in charge of the valuation engagement; Mr Williams was in charge of the day to day work on the valuation project, and Mr Wilkinson was the point man engaged on the larger Project Normandy engagements. It is true that Ms Daniells would have been able to shed some light on some of the details of the valuation exercise with which Mr Williams was less familiar, but she was no longer with PwC, and I see no force in the criticism that she was not called. In reality, Mr Downes suspected, from one perfectly sensible reading of the documents, that Ms Daniells would have favoured a far higher valuation of the SPVs, and, therefore, thought that he could have made capital from cross-examining her, and showing that her views on discount rates had been over-ruled by Messrs Cleal and Williams. It seems to me, however, that Mr Downes did not need to cross-examine Ms Daniells to show this. Ultimately, Mr Cleal was responsible for PwC’s valuation, and it is his view of discount rates on which the Claimants relied. If he was wrong, then the Claimants will succeed, and no amount of embarrassment caused by exposing internal differences of view in PwC’s team will make any difference.

Mr Paul Cleal is now a partner in PwC’s Corporate Finance Department. He became a partner in 2001, and was head of PwC’s IGU valuation team at the time of the valuation. He is not himself an accountant, but he is an associate member of the Institute of Chartered Accountants of England and Wales (“ICAEW”). Mr Cleal told me that, before undertaking this valuation, he had done 4 or 5 PFI valuations for strategic advice purposes, and 4 or 5 valuations for transactions in the PFI secondary market.

Mr Cleal was a confident, perhaps just slightly over-confident, witness, but nonetheless straightforward and credible. He was clear thinking and incisive, and answered questions concisely and directly. Apart from some technical areas on matters of judgment where I preferred other expert testimony, I have accepted his evidence as truthful and reliable. The important matters on which he gave evidence may be summarised as follows:-

Mr Conrad Williams was, for the most part, a straightforward and credible witness. He made no attempt to gloss his evidence. I have broadly accepted his factual evidence, but have not, in all respects, accepted the expert view that he and Mr Cleal adopted at the time. He became a chartered accountant in 1995, having trained at Price Waterhouse. Thereafter, he progressed through the firm in its project finance department or IGU, as it was known for some of the time, eventually becoming a partner in PwC in July 2007. At the time of the events that are relevant to this case, Mr Williams was a ‘director’.

The more important parts of Mr Williams’s evidence can be summarised as follows:-

Mr Dominic Wilkinson is a director in PwC’s Corporate Finance Department. He is a member of the Association of Chartered Certified Accountants. His evidence was largely uncontested, and I found him a reliable witness. He told me that:-

Mr Jonathan White of KPMG (“Mr White”) gave expert valuation evidence for the Claimants. I am afraid I did not find him a very impressive expert. First, he had plainly not properly understood many of the decisions that his team had taken in preparing aspects of his valuation. Secondly, one could not help but think that his original agenda had been to arrive at the highest possible sustainable valuation, rather than the valuation or a range of valuations which a reasonably competent valuer, using the information available to PwC, might have produced in May 2005. Thirdly, he was strikingly unfamiliar with the parts of his report concerned with refinancing. Fourthly, as his evidence progressed, he admitted that segments of his report were simply wrong, and that many of the most significant assumptions made by both PwC and Mr Gary Neville (“Mr Neville”), PwC’s expert (which had been expressly or impliedly rejected in his reports), were ones that a reasonably competent valuer could have made.

Mr White’s initial view as to the crucial issue of the discount rate applicable to the base case cashflows were as follows:-

Mr White’s original report had valued the portfolio as between £19 million and £22 million as at May 2005. His second report reduced that valuation to between £14 million and £16 million. Thus, when he began his oral evidence, he valued Ryhurst’s 50% interest in RBIL as at May 2005 at approximately £15m, made up of £10.5 million for the base case, £3.5 million for the refinancing upside, £0.45 million for the insurance upside, and £0.55 million for the residual value upside.

In giving evidence, however, he accepted some important changes to this valuation, as explained in the following sub-paragraphs. The significant parts of his evidence may be summarised as follows:-

If I were to factor in the changes that Mr White accepted as errors, his valuation, even assuming the correctness of his discount rates, had come down to about £13.4 million at the end of his evidence (£10.5 million plus £2.9 million for refinancing gain). I will deal in due course with my findings on discount rates.

Mr Gary Neville of Birwood Advisors Limited was a contrast to Mr White. He was careful and methodical, and seemed to have an insight into the market with which he was concerned. He has not practised as a professional accountant, but is a Fellow of The Chartered Institute of Management Accountants, who worked for Laing, one of the market leaders in PFI, from 2001-2007. In general, I preferred Mr Neville’s evidence, whilst not being able to accept all his views, as will become apparent in due course.

Mr Neville’s initial view as to the discount rate applicable to the base cash flows were as follows:-

Mr Neville valued Ryhurst’s 50% interest in RBIL as at May 2005 at approximately £5.4 million, made up of £4.2 million for the base case, £1.1 million for the refinancing upside, and £0.1 million for the insurance upside. His own preference, however, would have been to use a blended, rather than a single, discount rate, which takes account of the fact that the discount rate will fall after completion and ramp-up. That method allows greater values during construction and ramp-up, and would add £0.9 million to Mr Neville’s valuation making it up to approximately £6.3 million. He was at pains, however, to make clear that he regarded the use of a single discount rate method as a reasonable approach for PwC to have adopted.

The significant points in Mr Neville’s evidence were as follows:-

Mr Neville did not alter his valuation in his oral evidence, but he did accept that his build up showed that he, like Mr White, had used a base case discount rate of 8%, leaving aside the contested issues of the premiums to be applied for the equity only nature of the portfolio, construction and ramp up, and confidentiality and pre-emption rights.

The key question here is whether the agreement to provide a valuation was an extension or variation of, and covered by, the terms of the Engagement Letter.

I did not find the Claimants’ own evidence on this point helpful. Mr Gearon accepted in cross-examination that he knew that the valuation was excluded from the Engagement Letter, and that it was an extra of some sort, but that he had no thought as to the nature of the engagement beyond that, despite what he had said to the contrary in his witness statement at paragraphs 24 and 25.

Ms Montague’s evidence that she thought she had neither accepted nor rejected the suggestion that the valuation engagement should be treated as an extension to the Engagement Letter, turns on the terms of the 2^nd March 2005 emails themselves.

I turn then to the construction of those emails passing between Ms Montague and PwC on 2^nd March 2005. There has been no relevant evidence of any conversations or other dealings between the parties at around that time outside the emails themselves.

In the first place, Ms Montague’s response to Mr Williams on 2^nd March 2005 timed at 15.28 must be taken to be a response to both Mr Williams’s email timed at 15.12 and Mr Cleal’s email timed at 12.18, because Mr Williams opened his email with the words: “Further to Paul’s email of earlier today” indicating that he was reiterating, in effect, what Mr Cleal had said. In fact, Mr Cleal had not directly proposed or offered that the valuation would be performed on the terms of the Engagement Letter. He had said something rather more mercurial, namely that Andrew Pirrie’s “view was that this work would be additional to the work he is already doing and that we should charge you separately (albeit that administratively it is probably easiest to set it up as an extension to his engagement)”, and that he proposed that the fees for the valuation: “would not (unlike Andrew’s disposal mandate) be contingent on the sale of the companies”.

Mr Downes has argued that the terms of the Engagement Letter were singularly inappropriate to the valuation engagement. The team undertaking the disposal mandate was quite different from the valuation team, and the remuneration proposed was different as the first email made clear: a fixed fee as opposed to a success fee. The timescale was quite different too: 3 weeks as opposed to a year. But most important of all, Mr Downes submits that the limitation of liability to £1 million or five times the fees was quite unfair when expanded to include the valuation engagement as well as the disposal mandate. In answer to this latter point, Mr Fenwick said that, since the fees were being increased, the 5 times fees limitation could, in theory, have exceeded the £1 million limitation. In practice, however, he accepted that Mr Downes was right; the effect of the incorporation of the limitation was to make it applicable to both the original Project Normandy 2 engagement and to the new valuation engagement, thus imposing a more severe limitation on liability.

I accept that there were significant differences between the ways in which each mandate was to be delivered, but I do not accept that the terms contained in the Engagement Letter were as inapt to the valuation engagement as the Claimants suggest. I suspect that, if a new engagement letter had been prepared for the valuation engagement, it would have looked much like the Project Normandy 2 Engagement Letter, although, of course, it would have stated different scope of work, personnel and time periods, and it would probably have had its own £1 million limitation of liability dedicated to it. Moreover, the context of the valuation engagement was Project Normandy 2 and the disposal of Ryhurst and Ryhurst Lift. The valuation advice was needed as a step in the disposal, occasioned by the fact that Barclays might be buying the stake in RBIL rather than an arm’s length open market purchaser.

Most importantly, however, it seems to me that the words that Mr Cleal and Mr Williams used can only be taken to have meant that they were proposing that the valuation engagement would be undertaken “as an extension” to Mr Pirrie’s engagement, which can only have referred to the Engagement Letter. Had Ms Montague given the emails a moment’s thought, she would have realised that PwC was suggesting that the terms of the Engagement Letter should apply to the valuation engagement mutatis mutandis, so as to save the time and effort of creating another engagement letter and getting it signed. Had the parties looked back at the terms of the Engagement Letter, clause 7.1.4 expressly contemplated that a limitation on liability should apply to breaches “arising out of the Engagement or any addition or variation thereto”, and clause 7.4 referred again to additions or variations.

Ms Montague’s evidence does not, as I have already indicated, affect these conclusions. She had thought that she had neither accepted nor rejected the suggestion in Mr Cleal’s email, but she did not think such a proposal to have been unreasonable. It seems to me that, objectively viewed, she was clearly accepting that suggestion by the words she used in her response email. Ms Montague thought she had a recollection that some other correspondence suggested that the valuation engagement was entirely separate. In my judgment, that recollection was mistaken.

Mr Downes relied on two further matters. First, he argued that the line of authorities, beginning with J. Spurling Ltd v. Bradshaw [1956] 1 WLR 461 per Denning LJ at page 466, demonstrated that exclusion clauses would not be incorporated unless they were very clearly pointed out. Amiri Flight Authority v. BAE Systems [2003] EWCA Civ 1447 per Mance LJ at paragraph 14, showed more recently that the more extreme the exclusion clause, the clearer the notice that will be required before it will be regarded as having been incorporated. Here, however, the exclusion was not ‘extreme’ at all in the sense mentioned in these cases. It was a well known type of limitation of liability clause. It was actually known to and understood by Ms. Montague, who acted for the Claimants, and the Claimants themselves are businessmen, who would have expected PwC to include a limitation of liability clause; so, this was not an unexpected kind of exclusion that could be assumed to have taken the Claimants by surprise. Secondly, Mr Downes relied on PwC’s response to the pre-action protocol letter, in which it claimed that the valuation engagement was a free standing agreement, contrary to its present stance. It does not seem to me that a lawyer’s argument put forward at an early stage can have any bearing on the true construction of the documents that passed between the parties.

In these circumstances, therefore, I am satisfied that the terms of the Engagement Letter were indeed agreed to be applicable mutatis mutandis to the valuation engagement, so that the limitation of liability clause contained in clause 7.1.4 of the Engagement Letter applied to it.

This issue turned out, in the end to be irrelevant. PwC thought it had been raised because the Claimants were contending that they could rely on a common law duty of care to avoid the contractual limitations of liability in the Engagement Letter, if they were applicable to the valuation engagement. But the Claimants, rightly in my view, disavowed this point. It, therefore, became irrelevant whether a common law duty of care was owed in addition to the accepted contractual duty.

Mr Fenwick also argued that the contractual duty was not owed to the Claimant shareholders at the outset, because the proposed transaction, until tax clearance was refused on 23^rd November 2005, only involved Ryhurst disposing of its shares in RBIL, and not the Claimants selling their shares in Ryhurst. Again, this point seems to me to have no substance, since Mr Fenwick accepts that (a) the Claimants were parties to the Engagement Letter and the valuation extension to that Engagement Letter, and (b) anyway after 23^rd November 2005, the Claimants were entitled to rely on the valuation. No loss can have been sustained until January 2006, when the Claimants sold their shares in Ryhurst, if they did so in reliance on the valuation. At that point, any loss would have crystallised, and at that point also, there is no argument but that the Claimants were the parties entitled to rely on the valuation. Whether they actually did so is the subject of the next issue.

The Claimants all told me that they relied on PwC’s valuation exercise, and I accept that evidence. Ms Montague acted for the Claimants, but she kept Mr Gearon (and to a lesser extent, Mr Dixon) informed as to progress. The Claimants were fully aware that PwC had been instructed to undertake the valuation and understood the purpose of it, namely to assist them in their discussions with Barclays. They may not have been interested in the detail, but on my view of the facts, this is quite irrelevant. The Claimants had deputed Ms Montague to negotiate with Barclays and to deal with PwC. She, together with Mr Dodds, did so. Ms Montague was fully involved in the detail, including the detail of the value of the possible upsides including sinking funds, residual values, insurance and refinancing. PwC knew full well that Ms Montague was acting for the shareholders as well as for Ryhurst – which was no doubt why they included the shareholders in the Engagement Letter. PwC cannot have it both ways. It cannot claim that the Claimants are caught by the limitation clause in the Engagement Letter and then say that they were not entitled to rely on the valuation work done pursuant to the valuation extension they allege to have been agreed to pursuant to the Engagement Letter. Indeed, PwC does not push this argument all the way, as Mr Fenwick’s closing submissions accept, rather grudgingly, that “the existence of such a valuation formed part of the background to [the Claimants’] decision to adopt the transaction for themselves”.

PwC’s other arguments on reliance are both unmeritorious and wrong on the evidence. The Claimants were fully entitled to rely on the work PwC was doing for their benefit with Ms Montague and Mr Dodds. PwC gave continuing valuation assistance on various upsides, on which the Claimants reasonably relied when Ms Montague negotiated increases in the price with Barclays through the latter part of 2005. As it turns out, this advice is not, in itself, the subject of specific attack, so these reliance issues are not of any great importance. But I find it surprising that PwC should seek to call into question whether the Claimants were truly relying on their advice in these circumstances, merely because they stood behind their agent, Ms Montague.

In my judgment, each of the Claimants actually and reasonably relied on the valuation, as they were contractually entitled to do, when they were agreeing to sell their interests in the RBIL portfolio to BEIF.

Mr Downes did not, in the end, submit that the mathematical corrections to the valuation were of any consequence, save as to reliance. He accepted that he could only succeed if he could show that the May Valuation was negligently prepared and wrong.

Before dealing with the facts on PwC’s alleged negligence, I should say what I understand to be the state of the law as it affects allegedly negligent valuations. The parties were agreed that the decision of Lewison J in Goldstein v. Levy Gee [2003] EWHC 1574 (Ch) [2003] PNLR 35 neatly summarised the latest position, although Mr Downes reserved the right to argue on appeal that the decision was wrong. Lewison J was unable wholly to reconcile some conflicting authority, but in the end he opted (rightly in my opinion) to follow the Court of Appeal’s decision in Merivale Moore plc v. Strutt & Parker [1999] 2 EGLR 171. In reality, it is that decision that Mr Downes reserved his right to criticise hereafter.

Lewison J’s reasoning carefully explains the present position, which is that, where a valuation figure is attacked, the claimant must show, not only that the valuer fell in some way below the standards to be expected of a reasonably competent professional, but also that the valuation fell outside the range within which a reasonably competent valuer could have valued the asset. If the valuation is within such a range, then the valuer will not be held to be negligent since the claimant will have suffered no loss, even if some aspect of the valuation process can be criticised as having fallen below reasonably competent standards. This leaves open the possibility that a claimant may be able to demonstrate some other loss flowing from some negligent advice given in the course of the valuation process, even if the figure was within an acceptable range.

The whole of paragraphs 39-69 of Lewison J’s judgment in Goldstein could usefully be incorporated here. I will only set out the following (already somewhat lengthy) extracts from that passage, which repays reading is full:-

“39.

I was referred to a number of authorities. I find it difficult to reconcile them all, and to extract a coherent and principled approach to the question of valuer's negligence. It may be that the divergent streams of authority will have to be resolved by a higher court. But that is not a task for me.

It seems to me that I must embark on the same exercise as Lewison J undertook. But before doing so, a question arises as to whether I should be looking for the range within which a reasonably competent valuer could have assessed each factor in the valuation process, or whether I should be looking to establish the figure which I judge a reasonably competent valuer would have arrived at, and then establish the range within which the reasonably competent valuer might have departed from that mean. The former process in this case would risk arriving at a conclusion for discount factors that might vary widely. Indeed, Mr Fenwick submitted that the range for discount rates for projects under construction was between 14.5% and 23%, when he adopted this process. This kind of wide range was described as absurd by Staughton LJ in Nykredit Mortgage Bank plc v. Edward Erdman Group Limited [1996] 1 EGLR119 at pages 120 and 121. It seems to me that there is a danger also in treating every factor identically, because the evidence has been different in relation to different aspects of the valuation.

In my judgment, there are two aspects to the process. First, since the main allegation is that PwC’s valuation was wrong, I must establish what I find to be the value that a reasonably competent valuer would have advised, and the range of values around that value that could have also been reached by a reasonably competent valuer in the position of PwC. In ascertaining the range, as appears hereafter, the methodology may have to be different in relation to different aspects, because of the nature of the particular valuation process with which I am dealing in this case. Secondly, I need to consider any allegations that go beyond the simple case that the value was wrong. Here, for example, the Claimants contend that PwC adopted a methodology that was such as no reasonably competent valuer could have used. If I were, for example to hold that PwC’s ultimate value fell within a reasonable range, I would still have to ascertain whether any loss could nonetheless be said to have been caused by any other breach of duty (if any is found) affecting the valuation process or the advice given arising from it, as Mance LJ alluded to in his judgment in Arab Bank plc v. John D Wood supra, in explaining how Lord Hoffmann’s reasoning in Lion Nathan Ltd v. C-C Bottlers supra might still be applicable even whilst one was applying the decision in Merivale Moore.

Mr Fenwick submits that I should establish a wider range in this case than might be appropriate in valuing an ordinary domestic property, where he says the range might normally be 10-15% either side. First, he says that the scope for the end result to be different is greater if there are more variables as there are in this case, and secondly, he says that here there is not a general well known market but rather a very thin market and virtually no transactions, making the opportunity for differences between those acting competently that much greater.

I accept that the valuation of equity interests in PFI projects in 2005 was a somewhat rarefied exercise, and that the market was limited, in the sense that the evidence has shown that there were probably only 5 or 6 serious players in the secondary market for PFI projects at that time. I also accept that equity, as opposed to stapled equity and subordinated debt, was almost never sold. But these factors do not seem to me to give the valuer licence to come up with almost any figure. The evidence of the experts in this field has made it clear to me that there were indeed valuation practices in this field that would be regarded as acceptable by a respectable body of opinion within the small cohort of professionals qualified to value PFI projects. In short, there was a clear valuation process and a number of factors that any reasonably competent valuer would consider in reaching his or her conclusion. As appears below, therefore, I have not found it as problematic as might have been thought, on the evidence, to say where a reasonably competent valuer would have come out, or the range within which reasonably competent professionals could reasonably have differed. In the result, however, probably for the reasons Mr Fenwick gave, the range that I have decided upon is indeed rather broader than might be expected in a case where there was a more actively traded market in the assets concerned.

Many of the allegations made by the Claimants have ultimately proved to be without real foundation, or without any significance to the outcome.

Only four substantive allegations have proved to be of importance. They concern (i) the base discount rate (ii) the premium allowed for the fact that equity alone was being sold, (iii) the premium allowed for construction and ramp-up, and (iv) the premium to be allowed for the fact that the 50% stake being sold was affected by confidentiality and pre-emption rights. In the first 3 of these areas, PwC is alleged to have fallen below the standards of a reasonably competent valuer. In relation to confidentiality and pre-emption rights, Mr Fenwick accepts that PwC did not expressly mention them in the Draft Report, but says that in ascertaining the range, I should apply a premium to the discount rate for this factor, as a reasonably competent valuer would have done so.

I will deal first, however, with the allegations of breach of duty as regards methodology, since this will have a bearing on the way in which I approach the process that I have already indicated I need to undertake. The allegations here are the failures: (a) to analyse the projects in the portfolio, (b) to build up discount rates, (c) to review comparables, (d) in ignoring previous discount rates used for the same portfolio.

I do not believe that PwC fell below the standard of a reasonably competent valuer in the analysis it undertook of the projects in the portfolio. Its understanding of the projects increased, quite naturally, as Ms Montague and Mr Dodds provided increasingly detailed information, and certainly by the time of the Draft Report, PwC had something less than a complete picture of the projects and all their intricacies. But they had not been asked to undertake due diligence. They had been asked to provide a valuation to assist in the discussions with Barclays, and the evaluation of Barclays’ expected bid. For that purpose, I am entirely satisfied that their analysis of the projects was adequate. In the result, the real complaints have not anyway arisen from any supposed lack of analysis, but from the specific errors that I have mentioned.

It is true that PwC neither built up its discount rates as both experts before me have done, nor sought direct comparables to assist it in identifying appropriate discount rates. I do not regard either failure as evidence of negligence, without more. Messrs Cleal and Williams had significant experience in this difficult developing field and were fully aware of the market and the discount rates being used by that market. It is true that seeking comparables, conducting market research and building up their rates might have prevented them falling into error, but I do not think that any of these things can in themselves be regarded as evidence of negligence. A perfectly competent valuer could, quite properly, have reached a perfectly correct valuation by using his or her experience in the field, without doing any specific research for comparables for the project in question. As has often been said, the valuation exercise is not a completely scientific one. It is an exercise of judgment based on experience and a proper understanding of the market at the time in question. Both experts have warned against adding up particular percentages for particular factors, since one might easily thereby reach the wrong result. It seems to me that an expert valuer would be quite justified in adjusting a perception of a current mid-market discount rate for a pool of relevant factors affecting the portfolio, without going through the formal process that Messrs White and Neville undertook. They were, as Mr Fenwick said, making their method transparent to assist the Court as experts. The absence of transparency does not automatically render the valuation negligent. Indeed, as I shall explain in due course, PwC’s valuation did, in fact make its reasoning reasonably transparent. The Draft Report starts from a “mid market discount rate” of 10%, and builds up on stated bases from there. PwC explained the factors that had influenced its thinking, but had not built up the discount rate mechanically – a process against which both experts warned, as I have already said.

I am also far from convinced that PwC should have had greater regard to the Project Mirror discount rates or to the rates being used by Barclays in respect of the portfolio. As to Barclays, they were the counterparty, and the Claimants wanted PwC’s own expertise applied to the valuation exercise to allow them to negotiate with Barclays. It is true that seeing Barclays apply lower discount rates might reasonably have alerted Mr Cleal to a potential problem with his approach, but beyond that I do not think that Mr Cleal’s and Mr Williams’s failure to pay heed to Barclays’ rates or methodology was in itself negligent. Barclays was undoubtedly using a somewhat different methodology, based on at least some different cashflows, and apparently refusing to build in upsides. It may have been for that reason that it employed lower discount rates. To compare Barclays’ discount rates with those used in PwC’s methodology would probably have been less than straightforward. And in any event, PwC did not actually obtain access to Barclays’ cashflows until 19^th or 20^th April 2005. Thereafter, the junior staff in PwC’s team did see what happened when they applied Barclays’ discount rates. The Project Mirror rates were many years before and of no particular continuing value in 2005.

In these circumstances, unless the discount rates used or the upsides valued can be shown to have been wrong, I am unpersuaded that PwC can be criticised for the way in which they went about the valuation exercise.

This brings me to the four issues that form the backbone of the allegations against PwC as to discount rate.

Mr Downes relies first and foremost on the fact that PwC took a mid-market or base discount rate of 10%, when, it is argued, both experts accepted that the appropriate base case rate was around 8%. Mr Downes says that a 2% difference is material, that PwC knew that rates had declined since July 2004, when they themselves had adopted a rate of 10% in the Innisfree project, and that they acted as no reasonably competent valuer could have done in failing to recognise the market movement.

The first point to make is that PwC’s mid market rate, and the experts’ base case rate is not exactly the same thing. The experts built up their base case using identified factors upon which they were broadly agreed starting from a risk free rate around 4.5%. Conversely, PwC’s mid-market rate was the rate that Mr Cleal and Mr Williams had observed in the market as being the basic rate being used for availability assets in a steady state without specific risk factors added. This difference does not mean that the two are wholly incomparable, but the experts’ 8% is a rather more scientific measure, and might be expected to be a modicum lower than PwC’s figure.

Though I accept the experts’ evidence that they have started, quite properly, at 8%, I do not think it is established that PwC acted as no reasonably competent valuer could have acted in adopting a mid-market rate of 10% as at early 2005. There are a number of reasons for this:-

The next question is what is an appropriate range for the base figures. This is difficult because of the use of different measures by the experts and by PwC. At this stage, I think I can say no more than I have formed the view that for a base case rate a range of 7-9% would have been reasonable, and for a mid-market rate a range of 8-10% would have been reasonable. Anything outside those parameters would, on the evidence I have heard have been hard to justify. 8% was, I think quite low in early 2005; though rates were falling, there had been no secondary market transaction since the PFI Infrastructure deal in July 2004, when KPMG itself showed discount rates of 9.7% to 12.1%. Laing’s March 2005 report used a base rate of 7.5%, but with a large construction uplift of 6%. PFI Infrastructure’s March 2005 accounts used a weighted average of 9.3% with a far smaller construction uplift of 2.2%, and the mix of projects was fairly comparable with the Ryhurst portfolio.

The second main error relied upon was the premium of at least 4% that PwC applied for the fact that equity alone was being valued rather than stapled equity and subordinated debt. Mr Neville preferred 2% and Mr White argued strenuously that no premium was appropriate.

It is useful first to see what PwC actually did, according to the Draft Report. It explained its approach to equity only quite clearly as follows:-

The reasons contained in these passages from the Draft Report have not been specifically challenged in cross examination. It has not, for example, been suggested that the fact that the equity slice was very ‘thin’ did not affect its attractiveness to investors. Nor has it been suggested that the fact that the equity cashflows were very back-dated and did not start in many cases to produce income until 2015 was not a relevant factor, nor that the irregularity of the income from the equity might put off investors.

For a number of reasons I have concluded, therefore, that some premium on the discount rate was appropriate. In the first place, it is quite clear that nearly all PFI projects sold in the secondary market offered equity and stapled debt together, rather than either alone. Investors were, therefore, accustomed to that offering, and unfamiliar with anything else. That fact alone made the stapled product more attractive and better understood in the market at that time. Secondly, equity is undoubtedly the most risky cashflow from any project since dividends are paid at the end of the line, and can only be paid when the company law requirements for distributable profits are satisfied. It is true that equity provides the only prospect of higher returns, and that different investors with different investment strategies might prefer equity over subordinated debt or vice versa. But that does not mean that an investor in the stapled product would not expect to pay more for the flexibility and control that the two together allow.

As for the size of the appropriate premium, it seems to me that PwC were almost certainly justified in allocating more by way of premium to the back-dated equity cash-flows and to the thinnest slices of equity, but I do not think that they were justified in attributing a premium in excess of 4% pretty well across the board, which (with the exception of Black Country), they seem to have done.

I was impressed by Mr Neville and I think a normal premium for the equity only factors that PwC identified would be 2%, with a premium up to 4% for the projects with long-dated cashflows and the thinnest equity slices.

As will appear from my project by project analysis below, therefore, I have taken the clear view that PwC over-egged the pudding on this ground. It was suggested that Mr Cleal and Mr Williams had become fixated about the premium that had to be applied for the fact that equity alone was being sold, and I think there was a measure of truth in that allegation. In short, I think PwC got the importance of the fact that equity alone was being sold somewhat out of proportion. As to whether they acted as no reasonably competent valuer could have done, the position is not the same for each project, but as appears from my own evaluation below, I think in some cases it did.

The third important factor is the premium to be added for construction and ramp up. Mr White added 2% for construction on a decreasing basis as construction progressed, and nothing for ramp-up. Mr Neville added 4% until construction was concluded, and 2% during ramp-up. But he would have preferred a blended rate that would, as I have recorded above, have ameliorated the effect of applying such a large premium to the cashflows long into the future, when the construction and ramp-up phases would be long completed. PwC seem to have applied a rate of 2%, although Mr Williams’s evidence on this was not very transparent.

It was not suggested that it was negligent to use a fixed, as opposed to a blended, rate that Mr Neville preferred. So, the only allegation of negligence that could possibly be sustained in relation to the construction and ramp up premium is the failure to reduce the premium in a linear fashion to take account of the stage of construction as Mr White has done. It seems to me that this allegation is wholly unsustainable. Mr White’s approach was apparently devised for this case. No previous valuation was shown to have adopted it, and I accept the evidence of Mr Neville and the PwC witnesses that the normal and accepted approach is to use the same premium throughout the period of construction, because things can go wrong until construction is certified as complete and because no income streams can begin to flow until that time.

Thus, PwC’s construction premium of 2% seems to me to have been entirely orthodox. I do not see how an allegation of negligence can be sustained on the basis of it. A normal range for the construction phase of between 2 and 4% seems wholly justified on the evidence.

I also think that some premium could be justified for projects in the ramp up phase, but I would not expect more than 1% to be added for this in a normal situation. A range of 0-2% for ramp up might be regarded as reasonable.

The fourth aspect is the question of whether any, and if so, what premium in the discount rate is appropriate to take account of the fact that the articles of association of RBIL gave Barclays pre-emption rights, and that the Shareholders’ Agreement contained confidentiality provisions preventing an outside bidder from having access to the necessary basic information it would require.

On this aspect, the first question is whether, as the Claimants contend, the valuation was implicitly understood to have been an open market one ignoring the existence of confidentiality and pre-emption rights. Mr Cleal accepted that that was the basis of his valuation, and I accept his evidence. Mr Fenwick urged me to say that his evidence was not clear, but I disagree. The following exchange took place between Mr Downes and Mr Cleal:-

“Q. And the context, I think you have accepted this, is that what the shareholders, what Ryhurst needed was an idea of what this was worth on the open market to Barclays?

A. What it was worth on the open market full stop, yes.

Q. What I mean is without confidentiality and pre-emption provisions in there?

Moreover, there is nothing in the Draft Report itself to indicate that a premium has been added on to the discount rate for the existence of confidentiality and pre-emption rights, and the other factors upon which PwC relied are indeed mentioned. I do not believe that was an oversight. It seems to me that Ms Montague and Mr Williams must have agreed that the valuation was to be, as Mr Cleal described it a value on the “open market full stop”.

There is also another reason why it seems to me that PwC was not considering pre-emption rights. Ms. Montague was obviously seeking a willing seller/ willing buyer valuation on the basis of full information being available (just as the experts were asked to provide). This was, as I have said, for the purpose of assisting in her discussions with Barclays. By April 2005, Barclays had refused point blank to consider paying any premium for the fact that it was obtaining control. The quid pro quo for that may well have been that it was not negotiating on the basis that it was entitled to a discount as the preferred bidder which could prevent third parties obtaining the information to allow them to bid, or which could exercise its pre-emption rights. It is true that, even if the confidentiality clause could have been overcome, prospective outside bidders would probably only have been prepared to bid, had their costs been underwritten, because of the risk that they would be trumped by Barclays’ pre-emption rights. But none of this mattered to the exercise PwC was undertaking. It was valuing Ryhurst’s 50% share in RBIL in the open market, and, for that exercise, any added premium for confidentiality and pre-emption rights was inappropriate. That said, if it had been appropriate, I would have been quite satisfied that a premium of something like 2% should be added to the discount rate for these factors, if they could not be negotiated away. This was Mr Neville’s evidence and experience from the M40 project, and accords, in my judgment, with perfect common sense.

Mr Downes urged that if this reasoning was right, then it should apply to the equity alone premium that PwC applied. Though this argument has a certain logic to it, I disagree. PwC made it perfectly clear in its Draft Report that it was adding hefty premiums for the equity only nature of the portfolio. Ms Montague read the report and understood what PwC had done. She would have queried what PwC had done on equity if she had thought they were valuing on a false basis.

Thus, illogical though it may have been, Ms Montague did not expect and was not given (a) a valuation which had a reduced discount rate for Barclays gaining control (b) a valuation that had an added discount rate for confidentiality and pre-emptions rights, nor (c) a valuation that took account of the fact that Barclays had the subordinated debt, so that the equity only factor could be ignored in a sale to Barclays.

That brings me then to determine what a reasonably competent valuer would have taken to be the appropriate discount rates. It is, of course, perfectly possible that PwC may have made negligent errors in the process, but nonetheless come up with a non-negligent valuation within the range that a reasonably competent valuer could have adopted.

In my judgment, a reasonably competent valuer would have taken 8% as the base case. In addition, looking at the projects individually, a reasonably competent valuer would have added the following premiums for the equity nature of the investment and the other connected factors identified by PwC

Notwithstanding this view, I have taken the view that a reasonably competent valuer could properly have considered that a premium of up to 4% was appropriate for the 8 remaining projects, but I do not think a premium of more than 2% could have been appropriate for Black Country and Redbridge.

A reasonably competent valuer would then have added 1% for ramp-up, and 2% for the projects under construction, although, as I have said, rates of between 0-2% for ramp-up and 2-4% for construction could have been justified.

Thus:

It will be observed that these figures are not just a mathematical addition of the various factors in respect of which I have made determinations. Nor is the figure which I consider the correct one necessarily in the middle of the possible range. That is because the scale is not linear. The lower the figure, the bigger the difference that small changes make. I have tried to reach figures which accord with the parts of the expert evidence I have accepted.

Thus, in tabular form, these are my findings on discount rates:-