Cherney & Ors v Neuman & Ors

Contents

In this case the first claimant, Mr Michael Cherney (“Mr Cherney”), and various entities through which (in broad terms) he owns and controls assets for the benefit of himself and his family, claim damages for professional negligence, breach of fiduciary duty and breach of trust against the solicitors who acted for them in a number of dealings in the London property market between 2004 and early 2008. The solicitors were the firm of Pettman Smith, which on 1 December 2007 merged with Child & Child. It is in general unnecessary to distinguish between the positions of Pettman Smith and Child & Child (which are respectively the second and third defendants), and I shall refer to them both separately and collectively as “the Firm” as well as by their separate names. The partner who had principal conduct of all the relevant transactions on the claimants’ behalf was Mrs Marie-Garrard Newton (“Mrs Newton”).

The claim against the Firm was begun by a claim form issued in the Chancery Division of the High Court on 15 August 2008. At that stage there were four other defendants. The first defendant, Mr Frank Neuman (“Mr Neuman”), is a key figure in most of the relevant transactions. He had been a friend, business associate and trusted agent of Mr Cherney’s, and he was accused (in summary) of having betrayed that trust and used his position as Mr Cherney’s confidential agent and representative in this country to enrich himself at Mr Cherney’s expense. The fourth and fifth defendants were companies through which Mr Neuman carried on business. The sixth defendant, Mr Surtej Singh Janjua (“Mr Janjua”), is on the evidence before me a rather shadowy figure, who was involved, directly or indirectly, in several of the property dealings.

The claim against Mr Janjua was discontinued pursuant to an order made by Arnold J on 8 October 2010.

More importantly, in September 2010 the claimants settled all their outstanding disputes with Mr Neuman and his companies. To say that this settlement was unexpected would be an understatement. For the best part of two years, the claimants and Mr Neuman had been engaged in a series of increasingly bitter interlocutory disputes, culminating in cross-applications for committal (by the claimants against Mr Neuman and by Mr Neuman against Mr Cherney) which led to a six day hearing before Proudman J in July 2010. A piecemeal waiver of privilege by the claimants during the hearing led to the disclosure by them of certain documents which, among other matters, appeared to contradict oral evidence already given by Mr Cherney and his principal witness, Mr Daniel Mazin, in the course of the committal proceedings. Furthermore, the documents included a partially redacted manuscript attendance note of what appeared to be a rehearsed cross-examination of Mr Cherney before an English barrister, which had been arranged by his solicitors and taken place less than a week before the start of the July hearing, but without the knowledge of counsel who were instructed to appear for him. In these circumstances, the committal proceedings were adjourned by Proudman J and were due to resume, for a further week’s hearing, in late September. Proudman J was also going to be asked to rule on an application by Mr Neuman for specific disclosure of unredacted versions of the attendance note to which I have referred and various other documents. It was shortly before the resumed hearing that the claimants and Mr Neuman entered into the compromise.

The terms of the compromise were set out in a “confidential compromise agreement” dated 15 September 2010 and signed by the solicitors for the claimants (Fladgate LLP) and the solicitors for Mr Neuman (Denton Wilde Sapte LLP). The principal terms included the following:

When the settlement agreement was first disclosed to the Firm’s solicitors (Berrymans Lace Mawer LLP) in October 2010, following the issue of a disclosure application by the Firm, paragraphs 8 and 9 were redacted on the ground that they were supposedly irrelevant to the claim against the Firm. However, on 2 March 2011 Fladgate wrote to Berrymans saying that they had now reconsidered the position with counsel in the light of a witness statement served by Mr Neuman,

“… and counsel’s view is that paragraph 8 should now be disclosed as it is relevant for any cross-examination that all parties are aware that Mr Neuman has agreed to give reasonable assistance to Mr Cherney.”

Paragraph 8 of the compromise agreement reads as follows:

“Subject to [Mr Neuman] providing [Mr Cherney] with such assistance as may reasonably be required by the Claimants in respect of their claims against [the Firm] [Mr Cherney] agrees to indemnify [Mr Neuman] against any claim by or liability that he may have to [the Firm] as a result of such action. This indemnity includes [Mr Neuman’s] legal and other costs of defending any such claim, as well as the amount of the claim or liability itself.”

Paragraph 8 needs to be read in conjunction with paragraph 9, which says that:

“In the event that [Mr Neuman] pursues his action: Claim No. HC08C01346 against [the Firm] he agrees to indemnify the Claimants against any claim by or liability that one or more [of] them may have to [the Firm] as a result of such action. This indemnity includes the Claimant’s legal and other costs of defending any such claim, as well as the amount of the claim or liability itself.”

It can thus be seen that, as part of the overall settlement reached between them, the claimants and Mr Neuman agreed to provide each other with cross-indemnities in relation to their respective claims against the Firm. By paragraph 8, Mr Cherney agreed to indemnify Mr Neuman against any claim by the Firm, or any liability that Mr Neuman might incur to the Firm, as a result of the claimants’ claim against the Firm. Such claims or liability on the part of Mr Neuman could most naturally be expected to arise in the context of contribution proceedings between the Firm and Mr Neuman, because a major plank of the Firm’s defence was that Mr Neuman had had either actual or ostensible authority to act on the claimants’ behalf in most of the impugned transactions, and in his own amended defence and counterclaim (now to be discontinued) Mr Neuman had himself advanced a positive case that he was Mr Cherney’s agent in relation to a wide range of matters. Thus, if the claim against the Firm succeeded, the Firm would be likely to seek to pass on as much of its own liability as it could to Mr Neuman; but in such circumstances Mr Cherney now undertook to indemnify Mr Neuman, subject to the requirement, in the opening words of paragraph 8, that Mr Neuman should provide Mr Cherney with such assistance as the claimants might reasonably request of him in relation to their own claims against the Firm.

To similar effect, but without any reciprocal obligation on the part of Mr Cherney or the claimants to provide him with reasonable assistance, Mr Neuman agreed by paragraph 9 to indemnify the claimants against any claims by, or liability to, the Firm that they might incur as a result of Mr Neuman pursuing his separate claim against the Firm. This claim had been begun by Mr Neuman, also in the Chancery Division of the High Court, on 21 May 2008, and in his particulars of claim dated 4 June 2008 he had claimed that the Firm acted for him personally in relation to the purchase and subsequent sale of the Arlington Street property, and had sought an account and related relief in relation to the proceeds of sale. It was recognised at an early stage that this action was closely connected with that part of the claimants’ claim against the Firm which related to Arlington Street, in which it was alleged that Mr Neuman’s participation in the transaction had been as Mr Cherney’s agent and not on his own behalf. It was accordingly ordered in July 2009 that the two actions should be managed and tried together.

The existence and terms of this settlement give rise to a number of defences and submissions by the Firm that I will need to consider in due course, including in particular a contention that it is circuitous, and an abuse of process, for the claimants to seek to recover damages from the Firm, which the Firm will then be entitled to recover in full from Mr Neuman by way of contribution, and in respect of which Mr Cherney will then be obliged to indemnify Mr Neuman. At this stage, however, it is enough to record that the sum of £1.06 million was duly paid by Mr Cherney to Mr Neuman; that the contempt proceedings were discontinued; and that the claims by the claimants against Mr Neuman and his companies in the present action were likewise removed by re-re-amendments made pursuant to Arnold J’s order of 8 October 2010. As the claim against Mr Janjua was also discontinued on that occasion, it follows that since October 2010 the Firm has been the only effective defendant to the present action.

By a Part 20 claim form issued on 17 December 2010, the Firm sought an indemnity, or alternatively a contribution, from Mr Neuman pursuant to the Civil Liability (Contribution) Act 1978, together with interest and costs. Mr Neuman served a defence to this Part 20 claim on 7 February 2011.

At the time of the committal proceedings and the negotiation of the compromise agreement, Mr Neuman was represented by leading counsel, Mr Thomas Beazley QC. His defence to the Firm’s Part 20 claim was settled by junior counsel, Mr John Machell. The hearing of the present action, and of Mr Neuman’s action against the Firm, was due to begin in a five day window from 14 March 2011. However, on 28 February 2011 Mr Neuman’s solicitors, SNR Denton UK LLP (formerly Denton Wilde Sapte LLP) made an application to come off the record, and on the evening of Wednesday, 9 March they notified the Firm’s solicitors that they were no longer acting for Mr Neuman. Between then and the start of the trial on 17 March (after two reading days for the court), Mr Neuman’s intentions in relation to the trial remained unclear. He took no steps to arrange alternative representation, but nor did he apply for an adjournment. In the event, he appeared on 17 March as a litigant in person, but was attended by his former solicitors as McKenzie friends. This arrangement continued throughout the trial until the evidence had been completed. At that stage, Mr Neuman re-instructed his former solicitors, and junior counsel (Mr Machell) made closing submissions on his behalf. I should record that, despite these rather curious arrangements, Mr Neuman’s solicitors were scrupulously careful not to go beyond the proper functions of McKenzie friends during the period when they were off the record. I also record my gratitude to Mr Machell for the assistance that he was able to give me in his closing written and oral submissions on Mr Neuman’s behalf, even though he had been re-instructed at short notice and had not been present at the earlier stages of the trial.

On the first day of the trial Mr Neuman made it clear that he no longer wished to pursue his own action against the Firm. Accordingly, his claim against the Firm was dismissed by a consent order dated 22 March 2011. The reason for the abandonment of his claim, however, was not that he accepted that he had entered into the Arlington Street transactions on behalf of Mr Cherney, but rather that his queries about the proceeds of sale had apparently been answered to his satisfaction. The factual issue whether Mr Neuman participated in the Arlington Street transaction on his own account, or as an agent for Mr Cherney, therefore remains a live one. However, the claims which I need to deal with in this judgment are now confined to (a) the claimants’ claims against the Firm, and (b) the Firm’s Part 20 claim against Mr Neuman.

Although the claimants had been represented by both leading and junior counsel (Mr Philip Jones QC leading Mr Hugh Norbury) at most of the earlier hearings since the claim was begun in 2008, they were represented at trial by junior counsel only (Mr Norbury leading Mr Thomas Elias). Counsel who appeared for the Firm were Mr Justin Fenwick QC, Mr Jamie Smith and Mr George McDonald. I am grateful to all counsel for the high quality of their written and oral submissions. In particular, Mr Norbury argued the case for the claimants with skill and discretion, and performed the difficult task of cross-examining Mrs Newton with unfailing courtesy and fairness.

With this introduction, I will now make some preliminary remarks about the witnesses and then examine the relevant transactions in turn.

The witnesses who gave evidence for the claimants were Mr Cherney, Mr Todor Batkov and Mr Evgeny Traspov.

Mr Cherney

Mr Cherney is a man of enormous wealth, the origins of which are to a large extent shrouded in mystery. He was born in the Ukraine (then part of the USSR) and grew up in Uzbekistan (also then part of the USSR). Throughout his adult life he has been a business man. In the early 1990s he and his family left the territory of the former USSR and began to live in the West. In 1994 he became an Israeli citizen, and Israel is the country where he lives today. Before the rise to power of Mr Putin, Mr Cherney had what he describes as “significant influence and vast contacts in government structures” in the former USSR, but since then fears for his safety have (by his own account) prevented him from visiting those countries.

In his fourth witness statement dated 22 February 2011 (the principal written evidence on which he relies in the action), Mr Cherney describes the way in which he carries on business as follows:

“3.

… I am not a conventional business man who every day attends an office with regular support staff. I delegate day to day management of my main business interests to the relevant partner in that particular business. This applies as much to major business interests such as the acquisition of the Bulgarian telecommunications company Mobiltel in 1997, where I delegated the day to day management of Mobiltel to the company management, as to the purchase of various properties in London during the period 2004 to 2006.

4.

There are two main consequences which flow from the style of management. First, I did not and do not personally retain, indeed, I have never received, much in the way of routine documentation. Secondly, I placed considerable trust and reliance on those people helping me. In this case, that meant primarily Frank Neuman and Marie-Garrard Newton.

5.

I should also say something about the other claimants in this case. The second and third Claimants [Paradiso Foundation and Vida Foundation] are corporate entities which were set up in Liechtenstein in the 1990s as part of my group. After the sale of Mobiltel, my Bulgarian lawyer, Todor Batkov, advised me to deposit $150m into Paradiso and Vida. I deposited part of the sale proceeds of Mobiltel in each entity and arranged for my wife and two daughters [who were born in 1989 and 1996 respectively] to be the beneficiaries. In about 2006, the beneficiaries agreed to transfer their rights in the foundations to myself and I became the ultimate beneficial owner. Lusaka Trust [the fourth claimant, a trust incorporated in Liechtenstein] is owned by Paradiso and was specifically set up to buy the apartments at The Knightsbridge in September 2005.

6.

I would say that one of my most trusted confidants is Mr Batkov. I first met him in March 1996 when I had a problem with a Bulgarian bank. Mr Batkov assisted me in resolving this issue and subsequently became involved in the purchase and sale of Mobiltel. Since then, he has worked very closely with me and I trust him to make payments and act generally on behalf of the Claimants. I have given Mr Batkov authority to dispose of funds held by the Foundations and I believe that he communicated this to Marie-Garrard Newton when he first dealt with her in 2004. I also told Ms Newton this when I met her in 2006.”

Despite the prominent role played by the two Liechtenstein foundations in funding several of the relevant property transactions, no evidence has been given by any of their officers, and the disclosed documentation concerning their operations and affairs is scanty in the extreme. Mr Cherney made it clear in cross-examination that, even when the only named beneficiaries of the two foundations were his wife and daughters, he nevertheless regarded himself as the person who in practice decided what was to be done with the trust assets. He never drew any distinction between the legal entities involved, and regarded the assets as common or family property which was under his sole control. At the beginning of day 2, Mr Fenwick QC sought to summarise the effect of Mr Cherney’s evidence as being “that you were the decision maker, whoever was the legal owner or beneficial owner of the various assets generated from your business activities”, to which Mr Cherney replied: “Yes, indeed. I was making the decisions”.

I have no hesitation in accepting this evidence, in the sense that Mr Cherney was, I am sure, the person who took the major decisions, and the foundations could in practice be relied upon to act in accordance with his wishes. Nevertheless, I am not prepared to hold that the legal structures through which Mr Cherney held and controlled his wealth can be wholly disregarded. On the limited evidence available to me I am unable to hold that the foundations, or any of the multitude of companies through which Mr Cherney owned or controlled his wealth, were devoid of legal substance or that they can be treated for all purposes as Mr Cherney’s agents. The position is obscure, no doubt as Mr Cherney intended it should be.

For what it is worth (and in the circumstances, without supporting evidence and documentation, it is in my view very little), the only documents before the court relating to the establishment and management of the Liechtenstein trusts are the following:

It is convenient at this point to say a little more about the position of Mrs Anna Cherney. In 1999 Mr Cherney agreed that she should move with their daughters to London for the purposes of their education. To begin with, they lived in rented accommodation, but Mrs Cherney was keen to purchase a permanent residence, and this forms the background to the first of the property transactions in issue in the present case. Mr Cherney was himself unable to visit London until he finally succeeded in obtaining a UK visa in 2006. More recently, the issue by the Spanish authorities of a European arrest warrant against Mr Cherney on 20 May 2009, on charges of organised criminal activity and money laundering, has meant that Mr Cherney is unable to set foot anywhere within the confines of the European Union without running the risk of immediate arrest. He and his wife have therefore lived increasingly separate lives over much of the last 12 years; and when questioned about this in cross-examination, Mr Cherney said that the separation was no longer just a physical one, but had become a voluntary separation as well. By this I understood him to mean that there was a significant degree of estrangement in their marital relationship, and that they would no longer live together even if they were free to do so. There is no mention of this, however, in Mr Cherney’s written evidence, and he instead seeks to explain the absence of any evidence from Mrs Cherney in support of the claim on the basis that “Anna is unhappy about the prospect of giving evidence in court and so I do not wish to put her through this experience” (paragraph 37 of Mr Cherney’s fourth statement). It is difficult to know what to make of this, especially as Mr Batkov in his oral evidence, while expressing an understandable reluctance to comment on a personal matter, described them as a couple with a normal relationship, apart from their enforced physical separation. My impression was that Mr Batkov was saying this out of loyalty to Mr Cherney, and that the truth of the matter is indeed as Mr Cherney admitted in cross-examination, namely that he and his wife are now voluntarily separated. In those circumstances, I do not think it would be right for me to draw any adverse inference from Mrs Cherney’s failure to give evidence on the claimants’ behalf, although Mr Fenwick invited me to do so. The fact remains, however, that the absence of any evidence from her means that the court has heard nothing from one of the protagonists in several of the transactions, and this is a factor which I need to bear in mind when evaluating the evidence.

In view of the European warrant for his arrest, and the principles established by the decision of the House of Lords in Polanski v Condé Nast Publications Limited [2005] UKHL 10, [2005] 1 WLR 637, Mr Cherney sought and obtained permission from the court to give evidence at the hearing of the committal applications by video conferencing facility (“VCF”) from Israel. The order was made by Sir John Lindsay, sitting as a judge of the High Court, on 9 July 2010. At the pre-trial review held before Lewison J on 25 February 2011, a similar application was made by the claimants for Mr Cherney to be permitted to give evidence at trial by VCF from Israel, and the application was granted on condition that a representative of the defendants with knowledge of the case be permitted to travel to Israel to supervise the giving of such evidence. Thus it came about that Mr Cherney gave his oral evidence by video-link from Israel. Inevitably this had a certain distancing effect, which was reinforced by the fact that Mr Cherney gave his evidence through an interpreter. I do not criticise Mr Cherney for his use of an interpreter, because his native language is of course Russian, and nobody suggests that he is a fluent English speaker. Nevertheless, it was apparent at one or two points in his cross-examination that he understood rather more than he was prepared to admit, and I think Mr Batkov was essentially correct when he said of Mr Cherney, in response to a question from Mr Fenwick QC, that “he understands a lot but does not speak”. I am satisfied that the impression Mr Cherney tried to give, that he understood next to nothing until it was translated into Russian for him, was a false one, and that a more candid witness would not have affected such a high degree of incomprehension. The point is not in itself a very significant one, because nobody suggests that Mr Cherney could or should have given his evidence in English; but it is nevertheless an indication that his evidence needs to be treated with caution.

In his closing submissions for the Firm Mr Fenwick QC went much further, and asked me to reject Mr Cherney’s testimony in its entirety save where it is corroborated by contemporary documents. He submitted that Mr Cherney’s oral evidence had shown him to be highly evasive; that his evidence bore the hallmarks of pre-trial coaching, as in the committal proceedings; that his desire to blame the Firm led him to give evidence that was at times absurd; that he was lying about his involvement in the compilation and distribution of the so-called “tax dossier”, relating to Mr Neuman’s tax affairs, which lay at the heart of the committal proceedings; that there were places where his evidence was demonstrably false; and that his oral evidence at times diverged starkly from his witness statements.

In my judgment there is force in many of these criticisms, and I feel no doubt that Mr Cherney’s evidence needs to be treated with very considerable caution. I agree that his answers in cross-examination were often evasive, and he frequently took refuge in what appeared to be a prepared statement to the effect that he had been let down by the Firm and his trust in Mrs Newton had been misplaced. It is unnecessary for me to decide whether this leitmotif was the result of improper pre-trial coaching, or whether it was merely the product of frequent discussions of his case with his lawyers, and I prefer to leave the point open. The significant point, to my mind, is that it betrays a rather entrenched and stereotyped approach to the claims, which Mr Cherney was always anxious to present at a fairly high level of generality and without descending into detail. However, his frequent failure to engage with accuracy on points of detail does not necessarily mean that Mr Cherney’s evidence on more general issues, such as the nature of his relationships with Mr Batkov and Mr Neuman, is also unreliable. After all, if his evidence that Mr Batkov was one of his most trusted advisers, and that he had extensive delegated authority, is accepted, it is hardly surprising if Mr Cherney did not concern himself with the details of the relevant transactions. Nor is it necessarily a cause for surprise if a man of Mr Cherney’s vast wealth and extensive business interests should be imprecise in his recollection of events in the London property market which took place a number of years ago. This is perhaps another way of saying that in my view Mr Cherney’s evidence needs to be carefully assessed in the context of the totality of the evidence, both oral and documentary, and that the temptation of adopting Mr Fenwick’s simple litmus test of reliability should be firmly rejected.

I also decline to make any findings of facts about Mr Cherney’s involvement in the affair of the tax dossier or the evidence which he gave to Proudman J in the committal proceedings. These matters are of only peripheral relevance to the issues now before the court, and at best they go only to credit. Now that the claimants and Mr Neuman have settled their differences, I think it would be most undesirable for the court to be drawn into a detailed examination of the issues on the committal applications. The claims with which I am now concerned do not turn on the propensity or otherwise of Mr Cherney to tell lies in a dispute with his former business partner, but rather on the question whether the Firm provided an adequate standard of professional service when it acted for Mr Cherney in the relevant transactions.

One further matter which I should mention, because it has some bearing on the accuracy of Mr Cherney’s written evidence, is the curiously convoluted procedure which was adopted in the preparation of his witness statements. An indication of this is provided by paragraph 1 of his fourth statement, where he says:

“I am providing my evidence via interpreters to my English lawyers who have then prepared my statement in English which has been translated into Russian for me to approve.”

Consistently with this, the statement (in English) is signed by Mr Cherney at the end, but also by Mr Traspov, who certifies that he read over the contents of the statement in Russian to Mr Cherney, who appeared to understand it and approve its contents, and to understand the declaration of truth and the consequences of making a false declaration, before signing it in his presence. The trial bundle also includes a translation of the witness statement into Russian, certified by a professional translator, and apparently signed by Mr Cherney on 10 March 2011.

Mr Traspov is an Israeli lawyer, who speaks Russian, English and Hebrew. He has acted for Mr Cherney in various legal matters since 2005, and he said in cross-examination that this work occupies about 95% of his time. He described the process which led to the finalisation and signature of Mr Cherney’s statements as an iterative one, which began with Mr Cherney meeting his English lawyers to discuss the content of his evidence. They would then produce a first broad draft for him in English, which Mr Traspov would translate into Russian, and upon which Mr Cherney would then comment. Mr Cherney’s comments would then be inserted by Mr Traspov in English, after which he would translate them into Russian. In the end a final draft which had Mr Cherney’s approval would be agreed, and he would sign it. He would sometimes sign the statement first in English, after Mr Traspov had provided him with an exact translation of it; but in such cases he would subsequently sign the Russian version after he himself had read it. This appears to be the procedure which was followed in relation to Mr Cherney’s fourth statement.

Quite apart from the scope for error or misunderstanding in such a complex procedure, it is far from clear that Mr Cherney was always shown or had translated for him the documents to which he refers in his statements. So, for example, he refers in paragraph 48 of his fourth statement to a letter from Mrs Newton dated 24 March 2006, of which he says he was told by Mr Batkov, but in his oral evidence he denied that he had ever seen this letter or that it had ever been read to him. I do not wish to imply that there was any impropriety in the methods by which Mr Cherney’s written evidence was prepared, and I am sure that the lawyers and translators involved, including Mr Traspov, did their best to help produce a final version that correctly reproduced Mr Cherney’s statements and intentions. But with the best will in the world a process of this nature departs a long way from the ideal, which is that a written statement should contain the evidence of the witness in his own words.

Mr Batkov

Mr Batkov is a Bulgarian lawyer. He is managing partner of Batkov & Associates of 48 Alabin Street, 1000 Sofia, Bulgaria. He is also senior legal counsel to the Bulgarian company Mobiltel EAD, chairman of Standard News Limited and President of the Levski Football Club. He is clearly a man with extensive business as well as legal interests.

Mr Batkov gave his evidence confidently in fluent, although at times rather idiosyncratic, English. He explained that he had learnt English at school and university, and often has occasion to speak it in the course of his professional life. However, his Russian is much better, and this is the language in which he communicates with Mr Cherney.

Mr Batkov first met Mr Cherney in March 1996, when Mr Cherney had a problem with a Bulgarian bank in relation to a loan. Mr Cherney was dissatisfied with the way his original lawyers had handled the case, and Mr Batkov was recommended to him. He then won the case at first instance and on appeal in 1999. By this time Mr Cherney had begun other business ventures in Bulgaria with which Mr Batkov became involved. Mr Cherney was the first GSM operator in Bulgaria, and invested $100 million in Mobiltel. He also held a 50% interest in a bank, and a 90% interest in the largest Bulgarian insurance company, DZI. Mr Batkov became involved in these business interests, and got to know Mr Cherney and his family. When Mobiltel was sold in 2002, he received a very substantial payment from the proceeds of sale.

Mr Batkov describes himself as having been in charge of the worldwide assets of Mr Cherney and his family between 2001 and 2007. In this capacity he helped Mr Cherney to rearrange his affairs following the sale of Mobiltel, and it was on his advice that Mr Cherney deposited $150 million into the Vida and Paradiso foundations. He had Mr Cherney’s general authority to give instructions to the foundations, and one document which appears to evidence this has been disclosed: see paragraph 22 above. Mr Batkov agreed that the initial beneficiaries of the foundations were Mr Cherney’s wife and daughters, but he explained in his oral evidence that Mr Cherney had the right to give instructions on behalf of his daughters while they were still under the age of 18. As I have already said, the evidence before me about the Liechtenstein foundations is extremely vague and unsatisfactory, but the practical reality, I have little doubt, is that Mr Cherney did indeed give the instructions, and Mr Batkov was until 2007 usually, if not always, the channel through whom Mr Cherney made his wishes known to the foundations’ officers.

It appears that Mr Batkov’s relationship with Mr Cherney underwent something of a crisis in or about October 2007. More than once in his oral evidence he described this episode as his personal “Waterloo”. The closest that he came to providing an explanation for the crisis was that “I did not succeed to protect properly, as a lawyer, the interest of the client here in UK” (transcript, day 6, page 32). It seems that his error had been a failure to obtain security from Mr Neuman before transferring a sum of €4.25 million from one of Mr Cherney’s companies, Denise Overseas Limited, to a BVI company called Rye Park Enterprises Limited (“Rye Park”) which had originally been acquired by Mr Neuman for use in connection with Spanish property transactions. Mr Cherney was a man who made it very clear when he was displeased, and I infer that the episode was a thoroughly uncomfortable one for Mr Batkov. As a result, the relationship between Mr Cherney and Mr Batkov was restructured. Mr Batkov gave up the day to day management of Mr Cherney’s funds, companies and business interests, but remained as his legal adviser on several major cases, including his well-publicised litigation with Mr Oleg Deripaska. Since that date Mr Batkov has received a monthly retainer from Mr Cherney of $50,000. In addition, it seems that he is still involved in some joint business ventures with Mr Cherney, with an entitlement to a share of realised profits.

In the light of this background, Mr Fenwick QC submits, and I accept, that Mr Batkov has a powerful incentive to give evidence that is supportive of the claimants’ case. He may well hope to redeem his error in 2007 if the present case has a favourable outcome from the claimants’ point of view. That apart, it is clear that he is still a trusted legal adviser of Mr Cherney’s and that they have a continuing business relationship, although his day to day management and executive role in the conduct of Mr Cherney’s affairs came to an end in 2007. For these reasons alone, it would be appropriate for me to treat Mr Batkov’s evidence with considerable caution. However, there are other causes for concern about his evidence, of which I will mention two.

The first is the almost total absence of any attendance notes or contemporary records to verify his recollection of events. His oral evidence was that he had taken notes at the time, including shorthand notes, and that he had “partially” refreshed his memory from those notes before he made his witness statement. He also said that he had provided all such notes to the claimants’ solicitors, describing it as “a huge amount of information and documentation”. However, the relevant disclosure made by Fladgate does not bear this out; and although Mr Batkov undertook in the witness box to conduct a further detailed search of his offices when he returned to Bulgaria, the further disclosure which this exercise yielded consisted of under 30 pages of miscellaneous documents, including only one purported attendance note. In the circumstances there appear to be two possibilities, each of which is equally disquieting. The first possibility is that Mr Batkov does indeed possess contemporaneous notes, but he is unwilling to disclose them and he lied when he told the court about the material he had supplied to Fladgate. The second, and I think rather likelier, possibility is that Mr Batkov was never in the habit of taking detailed notes, shorthand or otherwise, and he lied about doing so (or at any rate greatly exaggerated the true position) in order to give a false picture of the accuracy of his recollection.

This brings me on to the second cause for concern, which relates to the accuracy of Mr Batkov’s recollection. In his oral evidence he was at pains to say that he had an excellent memory, and that he was very familiar with all the relevant facts, dates, events and so on. However, it soon became clear in cross-examination that Mr Batkov’s memory was by no means as infallible as he would have liked the court to believe. I will give one example. In paragraph 27 of his witness statement Mr Batkov refers to a meeting at the offices of Pettman Smith which took place on 17 March 2005, attended by (among others) Mrs Cherney and Mrs Newton as well as himself. He says it was at this meeting that Mrs Newton told them that Draycott House and Rose Square had been purchased through the agency of Mr Tam Singh. She also said that some other properties which they were going to view later that day had likewise been introduced by Mr Singh. In cross-examination, however, Mr Batkov gave a detailed description of a visit to Draycott House which followed immediately after the meeting at Pettman Smith’s offices, when it came to his knowledge “that Mr Tam Singh is the real owner of Draycott”. He said the source of his knowledge on this point was Mr Singh himself, who told him that he was the owner “and Mrs Newton most probably confirmed it”. He then went on to say that Mr Singh took them on a car trip around Mayfair and other fashionable areas, and that when they crossed Hyde Park he claimed to be the owner of the lake in the park as well. Mr Batkov said he was “very impressed” by this, and again confirmed “for sure” that on 17 March 2005 it came to his knowledge that Mr Singh was the owner of Draycott. It seems to me, however, that in this passage of his oral evidence Mr Batkov had entirely forgotten what he said in paragraph 27 of his statement, and he allowed himself to be carried away on an almost surreal flight of fancy, culminating in Mr Singh’s implausible claim to be the owner of the Serpentine.

Another example relates to a meeting at Pettman Smith’s offices which, according to paragraph 48 of Mr Batkov’s statement, took place on or about 26 September 2007 and was attended by Mr Cherney, Mrs Newton and himself. This was the occasion, he says, when Mrs Newton told them for the first time that she had not been instructed to draw up a deed of trust in respect of the ownership of Arlington Street, but she would now do so. Mr Batkov comments on an attendance note of that meeting prepared by Mrs Newton, and takes issue with certain points. He then says he is aware that there was a further meeting on about 28 September 2007, at which he was not present, and he records what he was told by Mr Cherney about it.

The passage in Mr Batkov’s cross-examination in which he was questioned about these meetings was, to put it charitably, confused. At first he denied having been present at the former of the two meetings, but he retracted this when shown paragraph 48 of his statement. He then appeared to say that he had no independent recollection of the meeting, but reiterated that he was present at it, and went on to give a series of detailed answers to questions about what took place, claiming that he now remembered it. It is scarcely surprising that a busy lawyer like Mr Batkov should have some difficulty in remembering the precise details of meetings which took place three to five years ago, but once his claim to have a near-perfect recollection of events has been exposed as over-optimistic the near total absence of attendance notes or records of his own becomes even more significant. The upshot, in my judgment, is that Mr Batkov’s evidence needs to be treated with great caution where it is uncorroborated. I would not, however, go so far as Mr Fenwick QC, who submitted that Mr Batkov’s testimony should be “rejected wholesale” except where it is supported by contemporary documentation. As with Mr Cherney’s evidence, I think that a more sensitive and nuanced approach is required, and that a Procrustean test of this nature does not do justice to the complexities of the case or (I would add) of human nature.

An additional difficulty in evaluating Mr Batkov’s evidence was caused by his readiness to veer away from the question asked, and to embark upon lengthy monologues of an argumentative nature. I had to ask him on several occasions to concentrate on the questions asked, and to confine the scope of his answers.

Mr Traspov

I have already referred to the oral evidence given by Mr Traspov about his role as a translator and legal adviser for Mr Cherney. He had no personal involvement in Mr Cherney’s London property dealings, but in September and October 2007 he attended two meetings at Pettman Smith’s London office while visiting London for the purposes of other litigation in which Mr Cherney was engaged. In his short witness statement dated 22 February 2011 Mr Traspov purports to set out what he remembers of the two meetings, while admitting that he is unable to recollect them in detail, particularly as he was unfamiliar with the subject matter. I will deal with this evidence in due course when I come on to the relevant transactions.

Mr Neuman

Mr Neuman gave evidence on his own behalf, in his capacity as defendant to the Firm’s Part 20 contribution claim against him. He did not call any other witnesses, but cross-examined Mr Cherney, Mr Batkov and Mrs Newton. He conducted himself courteously throughout.

Mr Neuman’s personal background is briefly as follows. He was born in Romania, but moved to the United States with his parents in 1967 as a political refugee. From fairly humble beginnings, and with little in the way of formal training or further education, he built up a furniture retail business which grew steadily within the United States, and in 1984 he opened an office in Valencia in Spain which provided him with a European base. By 1991 he was starting to sell furniture from the US and Europe to Russia, and in 1993 he started a wholesale and retail business in Moscow with two partners. The business flourished, until he was forced to close it down as a result (he says) of the activities of the Russian mafia. In 1995 he established a wood processing factory in the Ukraine, and by this date he was running successful businesses in the United States, Eastern Europe, Italy and Spain. He also had various property interests, mainly in Spain. Mr Neuman says in his statement, and I have no reason to doubt, that throughout his working life he has worked hard and made a good living for his family and himself. However, in 2006 he was nearing 60 years of age and also suffered some serious health problems. He says he felt it was time to retire, and began to wind down his business activities, most of which have now been discontinued apart from the business in the Ukraine for which he is still trying to find a purchaser.

Mr Neuman first met Mr Cherney at a hotel in Tel Aviv towards the end of 2001. They were introduced through a mutual acquaintance. Mr Cherney was looking for investment opportunities, and following their introduction he agreed to finance a wood processing business with plants in Russia and the Ukraine, which Mr Neuman and his partners then set up on his behalf. As a result of this business association, and a shared enthusiasm for football, Mr Cherney and Mr Neuman became friends, and Mr Cherney came to trust and rely on him.

Mr Neuman describes the subsequent growth and deterioration of his relationship with Mr Cherney as follows:

“9.

Over time, I became increasingly involved in assisting Mr Cherney generally in his personal and business affairs and it was to me that he often looked for help. Such assistance ranged from furnishing his house in Tel Aviv to helping him obtain a UK visa, which was eventually granted in April 2006. Until that time, Mr Cherney was resident in Israel and his travel was restricted and he could not visit the UK.

10.

In early 2004, I was in Moscow when Mr Cherney asked me to go to London to assist with the purchase of a property his wife had found (Rose Square, which I describe in more detail below). He was unable to travel to England at the time. I agreed to go to London as a favour to him and his wife, and managed to negotiate a better price for the property. I then got involved in finding Mrs Cherney a flat to rent while Rose Square remained tenanted, and in helping her with the practical arrangements for moving into that flat. I was also able to help her open an account at my bank in Spain when Barclays Bank closed her account in the UK. None of the assistance I gave was paid for.

11.

I believe that as a result of my assisting his wife with the arrangements for Rose Square, Mr Cherney felt he could trust me. Following this, I raised with Mr Cherney the possibility of investing in property in London. I told him that I had contacts who could introduce him to property investments in London. I also told him that I had some experience in buying property in Spain and he expressed an interest in this. Over the next couple of years I managed the purchase and (in some cases) the refurbishment of a number of properties. I made it clear to Mr Cherney that I had only limited experience in acquiring, developing and managing property and in the construction business, but for this he could hire professionals. In fact, as far as I know, the people still working for him on refurbishment projects were hired by me.

12.

By around the end of 2006 I was becoming tired of having to travel so much on behalf of Mr Cherney and I was thinking about taking on less. In that year, I had undergone major heart surgery and my father was very sick in New York. I had got to the point where I wanted to slow down and this meant extricating myself from my dealings with Mr Cherney, which by then took up most of my time. In around August 2007 I told Mr Cherney of my intentions, but he reacted badly and seemed unwilling to let me go. He even suggested that I should come and stay with him in Israel where I could get medical treatment for my heart and continue managing his UK and Spanish affairs from there. I refused and told him I would like to part amicably and settle all our business dealings. It was at this point that our relationship noticeably deteriorated.

13.

As I say, I wanted to part with Mr Cherney amicably. Negotiations between our lawyers made some progress. However, ultimately these negotiations broke down and in late March/early April 2008 I went with my son, Emanuel, to Israel to meet with Mr Cherney to discuss matters further. The meeting was held at the Hilton Hotel in Tel Aviv and took place over two days. We failed to reach agreement. It was following this breakdown in our negotiations that Mr Cherney issued proceedings against me in England and separate, but related, proceedings in Spain.”

I will need to examine certain aspects of this account in more detail, and it needs to be remembered that it may contain some self-serving elements, particularly in the reasons that Mr Neuman gives for the breakdown in his relationship with Mr Cherney in 2007. Nevertheless, I see no reason to doubt that the general trajectory of the relationship was essentially as Mr Neuman describes it, beginning in the early years of this century, achieving its maximum intensity between about 2004 and 2006, and then deteriorating sharply in the course of 2007 and culminating in a complete rupture in the Spring of 2008. It is also worth noting that the deterioration in their relations in the latter part of 2007 coincided approximately with Mr Batkov’s “Waterloo” and the restructuring of his own relationship with Mr Cherney.

Both the claimants and the Firm are united in submitting that I should treat Mr Neuman as an unreliable witness. In the case of the Firm, this is hardly surprising in view of the comprehensive settlement reached between Mr Neuman and the claimants last year, and Mr Neuman’s contractual obligation to assist the claimants. It is, on the face of it, more surprising that the claimants should also take the same line, but here I need to guard myself against the possibility that they may, for reasons of their own, be anxious to see Mr Neuman discredited as a witness, thereby exposing him to a claim for breach of the settlement agreement. In any event, having heard Mr Neuman give evidence, and having read the transcript, I am satisfied that his evidence, like that of Mr Cherney and Mr Batkov, needs to be treated with great caution. I do not propose to set out here the specific reasons which have led me to this conclusion, but will deal with the relevant points as and when they arise.

Mrs Newton

The main witness who gave evidence on behalf of the Firm was Mrs Newton. As I have already said, she had conduct of all the relevant transactions in issue between the parties (subject to some very minor exceptions). In her written evidence she describes her qualifications and legal career as follows:

“5.

I qualified as a solicitor in 1971. From 1973 I practised initially as an assistant solicitor and then for about 10 years as a partner in a firm then known as Titmuss Sainer & Webb. I subsequently practised for some 10 years in a firm known as Pickering Kenyon based in Holborn. I was initially a salaried partner in that practice, but then became an equity partner.

6.

In or around June 1998 I joined Pettman Smith as a salaried partner. I practised as a salaried partner up to and after Pettman Smith’s merger with Child & Child on 1 December 2007. I remain at Child & Child to this day.

7.

Since qualification I have handled property transactions primarily relating to commercial property but also residential property. These have involved both freeholds and leaseholds as well as Landlord and Tenant matters, secured lending, acting on behalf of individuals as well as private and public companies, landlords and tenants. For upwards of the last 16 years I have also handled property transactions involving off-shore individuals and companies in various jurisdictions.”

It is thus apparent that Mrs Newton is a very experienced property lawyer, who has practised as a solicitor for some 40 years. She has been a salaried partner with the Firm since 1998, but has never become an equity partner. Pettman Smith was at all material times a small firm with its main offices at 79 Knightsbridge, London SW1. It was founded in 1982, and one of the founding partners, Ann Glaves-Smith, was the senior partner during the relevant period before the merger with Child & Child. The number of partners shown on Pettman Smith’s notepaper during the relevant period, including Mrs Newton, was only six or seven, together with one or two consultants.

By her own admission, Mrs Newton’s system of note taking left a good deal to be desired, and could fairly be described as chaotic. Between 2004 and 2008 her usual practice was to take notes in her own hand in a notebook (either an “Oxford” pad or a blue counsel’s notebook) either during, or immediately after, meetings and telephone conversations. She did not always make a note of her telephone calls, but was more likely to do so if the client gave her a specific instruction to do something, or if he made a particular request, or if the subject matter of the call was important. She usually had a number of notebooks in use at any one time, and generally used the one closest to hand. As a result, notes relating to a single transaction were likely to be spread across several notebooks; while, conversely, a single notebook would contain entries relating to more than one transaction. With the passage of time, pages were liable to fall out of the Oxford pads, and pages of the counsel’s notebooks (which are perforated) might become detached.

Where Mrs Newton did not make detailed manuscript notes, but the content of a meeting or telephone conversation was such as to warrant an attendance note, she would either write up a detailed manuscript record after the event or dictate an attendance note using her Dictaphone. In the latter case, her secretary then typed up the attendance note from the tape. Occasionally her secretary would also type up an attendance note from a manuscript copy. When the typing was done, Mrs Newton would normally review the typed version and amend it as necessary. Once the note had been approved, her secretary would place it on the file in its appropriate date order.

Mrs Newton goes on to explain:

“13.

Once I used up a notebook, I then stored it in my office. I should point out that I am not, and was not, tidy. Whilst I try to (and generally can) recall where I have placed various items, I do not have, and did not have, any filing system for note books. Essentially, I placed my used notebooks wherever there was space on my desk. The notebooks usually ended up on the top of my filing cabinets or on the floor.

14.

In the past, if and when I ran out of space in my office, some of my older notebooks (and loose pieces of paper which had fallen out of my notebooks) were destroyed. I do not know whether any notebooks relevant to these transactions were destroyed.”

The confusion thus caused was unfortunately compounded when in May 2008 Mrs Newton was asked by Mr Batkov and Mr Mazin to send her files to Fladgate on Mr Cherney’s behalf. What then happened is best explained in Mrs Newton’s own words:

“15.

… From mid-late 2008 I conducted a search of my room for the notebooks that I had utilised which were relevant to the various transactions discussed below. As the manuscript notes in my notebooks were not generally on the files, but remained in, or (if loose) with, the notebooks, I wanted to collate all the information on the transactions in one place. I looked in and on the various cabinets and boxes in my room. When I found notebooks, I then flicked through them to see whether they contained any attendance notes relating to the relevant transactions. Although I found a number of notebooks, I cannot guarantee that I discovered every relevant notebook. It may be that, through the passage of time, some of the notebooks had been mislaid or removed from my office to clear space and destroyed. It may also be the case that I have not been able to find every attendance note where the relevant page or pages of the notebook had become detached and I have been unable to locate them or the pages have been lost. I have carried out a thorough search of the notebooks and any spare loose pages which remain in my office.

16.

When I found my notebooks and relevant loose pages, I went through them to identify the attendance notes relevant to Mr Cherney’s transactions. As a result of Mr Mazin and Mr Batkov’s requests … I appreciated that other people may wish to read the files and may have difficulty in understanding my hand written notes. I believed that arranging for the attendance notes to be typed up would assist any person who read the files to understand the contents of the attendance notes. Those which I thought had not been typed up, but which did not appear to be readily understandable for anyone who would read them, were typed up by Naomi Thompson. I identified the attendance notes to be typed up by Naomi Thompson by attaching yellow post-it notes to the pages before handing the notebooks and loose pages to her. I did not cross-refer to the files to see if an attendance note had been typed up.

17.

On the other hand, some of my hand written notes appeared to be more readily understandable. I left those hand written notes as the original manuscripts. I then either left them in the notebooks or removed them from the notebooks and asked Naomi Thompson to place them on the files.

18.

I did not create or dictate any attendance notes, whether manuscript or otherwise. Naomi Thompson only typed up attendance notes from my contemporaneous manuscript notes. Although I cannot be precise, the majority of the attendance notes were typed up in mid-late 2008.

19.

It took some months for Naomi Thompson to type up the attendance notes as I provided them to her on a rolling basis and she would work on them whilst performing her standard role. As per my usual practice, I would review the attendance notes after Naomi Thompson had typed them up to ensure that they accurately reflected my manuscript note. Sometimes it proved necessary to make amendments [some examples are then given]. I cannot be exact about how many attendance notes required revision, and how many remained as originally typed. I confirm that I did not make any substantive additions or alterations that went beyond the content of the manuscript notes.

20.

When Naomi Thompson and I conducted this exercise in 2008, we retained the original manuscript attendance notes. As such, there should be copies of both the manuscript notes and the typed up counterparts available. I understand that some of these cannot, at the present time, be found. I can confirm that I did not intentionally destroy, or order to be destroyed, any of the manuscript attendance notes. In the context of the disclosure process in these actions, I have never suppressed any relevant documents.

21.

After I had reviewed the draft typed attendance notes, Naomi Thompson made any required amendments. I cannot recall whether I instructed Naomi Thompson to place the finalised typed up attendance notes on the file, but my working assumption was that she would. I understand that the attendance notes were placed on the file according to the date of the meeting or telephone conversation …

22.

I am informed that this approach to ordering the files is criticised in the litigation. I did not consider or appreciate that the approach taken was in any way misleading, and I certainly did not intend anyone to be misled. As a conveyancing solicitor I did not consider or appreciate that files could, or should, be constructed in a different way.”

This account is substantially corroborated by a witness statement of Naomi Thompson dated 21 February 2011, on which she was not required to attend for cross-examination.

Given this history, which may be thought to provide an object lesson in how not to maintain reliable conveyancing files, it is unsurprising that Mrs Newton’s attendance notes were the subject of much pre-trial correspondence, and the suspicion arose that at least some of them had been doctored, or had been brought into existence long after the events which they purported to record. In the event, however, only one specific challenge to the authenticity of an attendance note was made by Mr Norbury in his cross-examination of Mrs Newton. The challenge related to the final three lines of the typed attendance note of a meeting on 20 April 2006. These three lines were omitted from an otherwise very similar typed “telephone attendance note” apparently dated the following day. It was put to Mrs Newton by counsel that she had added this paragraph after the dispute emerged. She denied this, saying that “[w]hat may have been put in the correct place on the attendance note was a paragraph in my handwritten notes which was not previously there”. I am prepared to accept this explanation, which is supported by a number of points made by counsel for the Firm in their closing submissions, and I acquit Mrs Newton of the very serious charge of deliberate falsification of documents. I am satisfied that the likeliest explanation is that the version with the extra paragraph was indeed typed up by Naomi Thompson from the original manuscript. It is, however, symptomatic of Mrs Newton’s chaotic approach to document management that her original manuscript notes of the meeting should be missing; that two typed versions of an attendance note, which bear different dates but which appear to relate to the same meeting, should co-exist; and that one of the notes should give the impression from its heading that it was the record of a telephone conversation.

In marked contrast with her frankly careless approach to record keeping, Mrs Newton gave her oral evidence in a scrupulously careful and cautious manner. She confined her answers very closely to the questions put to her, and seemed determined to give away as little as possible. At times, her caution verged on the absurd, as when she refused to admit that an email copied to her had been “sent to” her, and refused to accept that it arrived in her inbox without looking. She then accepted, rather grudgingly it seemed to me, that the email probably had arrived in her inbox, and that “most likely” she would have read it. This kind of stonewalling approach may be indicative of no more than an extreme lawyerly caution, but may also be indicative of a witness who is on the defensive and determined to give nothing away. In the end, I formed the impression from Mrs Newton’s evidence as a whole that the latter explanation was often closer to the truth than the former.

Until the pre-trial review in February 2011, there was no pleaded allegation that Mrs Newton had acted at any stage with conscious impropriety. The complaints against her were, rather, that she had failed to exercise due care and skill, in breach of the contractual and tortious duties of care which the Firm owed to the claimants, or that she had paid away money without authority, thereby acting in breach of trust. At the pre-trial review, however, the claimants sought permission to introduce further amendments alleging conscious wrongdoing by Mrs Newton in breach of fiduciary duty. Only one such amendment was allowed, to the effect that upon the sale of Arlington Street Mrs Newton knew that Mr Neuman was planning to divert £4.5 million of the proceeds to himself, but she did not tell the claimants about this side payment because she was deliberately preferring Mr Neuman’s interests to their own. Mrs Newton denies that she knew about the £4.5 million side payment at any relevant time, and this is one of the key factual issues that I will have to determine. It is also relevant to note that, although not pleaded, similar allegations of breach of fiduciary duty, or at least a failure to perceive the possibility of conflicts of interest, lie behind some of the other allegations of professional negligence. Furthermore, in the course of the trial an application was made by the claimants for permission to amend so as to advance a claim of breach of fiduciary duty in relation to Draycott House. I refused permission to make the amendment, but principally on the ground that the application was too late and the alleged facts which supported it had been known to Mr Cherney and Mr Batkov some months earlier. It was not disputed by the Firm, and was certainly my own view, that these allegations, had they been pleaded in good time, would have given rise to at least an arguable claim for breach of fiduciary duty.

Against this background, it is instructive to see how Mrs Newton dealt in cross-examination about the management of a hypothetical conflict of interest between clients. The passage is a striking one, and it is worth quoting in full:

“Q. As Mr Tam Singh was, as we have seen, a valuable client of Pettman Smith’s, is it fair to say that if you perceived at any stage that information you knew relating to Tam Singh might be of benefit to another of your clients, you would be reluctant to pass that information on?

A.

Depends upon client confidentiality and what it was.

Q.

If you considered that the other client needed to know that information, would you have passed it on?

A.

As I said a moment ago, depends precisely upon what the information was.

Q.

But what I am saying is if you considered that the other client needed to know that information –

A.

What he needed to know? For what purpose was it needed?

Q.

For instance, information which affects the price being paid by the second client on a particular transaction that you were acting on?

A.

Depends when the information arose and when the matter of the particular client was being handled.

Q.

But if you thought it was important, and you knew it in time, you accept –

A.

If I thought it was important and if I did not think there was a breach of client confidentiality, then the information would be passed.

Q.

And what if you thought it would be a breach of client confidentiality, what would you do then to pass on the information?

A.

I would inquire whether I could release the information.

Q.

And if you were told that you couldn’t, what would you do then?

A.

Again it depends on whether it could be construed as a breach of client confidentiality to reveal it. If it was so important to overreach that fact, then it would be revealed.

Q.

So you would prejudice Mr Singh in order to benefit the second client?

A.

But Mr Singh is an agent, he doesn’t buy property.

Q.

I’m sorry, that wasn’t the question I asked.

A.

Well, there is unlikely to be a situation in which Mr Singh would have information that I might know about that was needed by another person. He was not a client. It was not a question of any confidentiality being breached.

Q.

But your earlier answer was that if you needed to you would breach a client confidentiality?

A.

If it was not considered a breach of client confidentiality and the information required was essential, then it might be necessary to pass that information on.

Q.

And if the information was essential but to pass it on would be a breach of client confidentiality, what would you then do?

A.

As I said before, seek instructions.

Q.

And if their instructions were that you couldn’t pass it on, what would you then do?

A.

Again, as I said before it would have to depend upon how essential the information was.

Q.

In what circumstances would you pass the information on if it depends on how essential?

A.

If it’s not a breach of client confidentiality.

Q.

No, we’ve already –

A.

And the information is essential, then it could be. If it is a breach of client confidentiality, the client is unwilling to do it, but it is critical that it should be passed on as we listened in discussion previously in this case then it would be passed on.

Q.

So there are circumstances in which you would breach client confidentiality and prefer the interests of the second client over the first client?

A.

There may be.

Q.

Well there are, if it was critical …

A.

There may be.

Q.

There are.

A.

If there was a critical circumstance which did not breach client confidentiality or did not over reach that breach. Either you over reach it or you don’t.

Q.

Would it not cross your mind in the situation we’ve been talking about that what you need to do is withdraw from the transaction?

A.

Not necessarily. It depends entirely on the particular circumstances.

Q.

Well the circumstances in question are where there is information critical to client 2 which client 1 doesn’t want you to disclose.

A.

What is critical?

Q.

Let’s move on …”

It appears from this passage, in my judgment, that Mrs Newton had only a limited understanding of the duties that may arise when a solicitor is faced with a conflict of interest between clients. She was prepared to accept that, in certain circumstances, information that was confidential to client A could be passed on to client B, even in the face of instructions from client A not to do so. The relevant test, apparently, would be how essential the information in question was to client B. Furthermore, it seems never to have crossed Mrs Newton’s mind that circumstances might arise in which it would be her duty to withdraw from a transaction, or to cease to act for one of the clients concerned. In his closing submissions Mr Fenwick QC sought to draw the sting from this passage in Mrs Newton’s evidence by saying that she had been asked hypothetical questions better suited to a law examination, and that her responses had been those of a practical conveyancer who would seek to resolve any conflict in a pragmatic fashion. He warned me against using this passage as a barometer, or touchstone, of Mrs Newton’s integrity. I have that warning well in mind, and I agree that too much weight should not be attached to it. Nevertheless, I found the passage revealing, because it seemed to me to reveal something of a blind spot in Mrs Newton’s professional expertise concerning the recognition and management of conflicts of interest between clients.

Apart from Mrs Newton and Naomi Thompson, evidence on behalf of the Firm was also given by three solicitors (Ms Glaves-Smith, Mr Andrew Smith and Mr Richard Homewood), and by another secretary, Maggie Lynch. I will deal with their evidence as and when it becomes relevant to do so. No issue arises about any of their credibility, and the witness statement of Maggie Lynch was agreed without challenge.

Introduction

The first claim against the Firm arises out of the purchase in 2004 of a large flat at 12-15 Rose Square, The Bromptons, London SW3 and four associated car parking spaces in Foulis Terrace (“Rose Square”) as a future home for Mrs Cherney and her daughters. It is rightly emphasised by counsel for the Firm that the claim, as pleaded, is a narrow one. What is alleged, in essence, is that the opportunity to purchase Rose Square was introduced to Mrs Cherney by Tam Singh; that Pettman Smith were instructed in May 2004 to carry out the necessary conveyancing and corporate work to acquire the offshore company which held the legal title to Rose Square; that the sale of the property was effected by two back-to-back transactions whereby Tam Singh and his associates made a profit of at least £800,000; that Pettman Smith, through Mrs Newton, either were or ought to have been aware that this profit was being made by the vendors; and that in breach of their contractual and tortious duties of care Pettman Smith failed to inform Paradiso, Mr Cherney, the two companies in whose name the shares were acquired, or any of their authorised representatives, about the profit thus being made.

It is further alleged that as a result of this breach Paradiso (or alternatively the two acquiring companies) lost the opportunity to renegotiate the purchase price, giving rise to a loss which is formulated on two alternative bases. The first basis asserts that Mr Cherney or Paradiso would have been able to negotiate a lower price, in which case the loss is said to be the difference between the price actually paid (£8 million) and the true market value of Rose Square in July 2004 (£6.4 million), namely £1.6 million. The second basis is that Mr Cherney and Paradiso would not have gone ahead with the purchase, and would instead have bought a comparable family property in London for approximately £6.4 million, again resulting in a loss of £1.6 million on the purchase actually made.

Most aspects of this claim (on liability, causation and quantum) are vigorously denied by the Firm, but there is no dispute about the existence of the back-to-back transactions, or the fact that these apparently yielded a profit of the order of £800,000 (or, on one view of the evidence, £900,000) to the immediate vendors. It is further accepted that the existence of this apparent profit was known to Mrs Newton on 5 August 2004, the day before completion. It is denied, for a number of reasons, that the Firm was under any duty to pass this information on to any of the claimants; but on the assumption that such a duty existed, the Firm says that the duty was in any event discharged because on 5 August 2004 Mrs Newton orally informed the claimants, by their duly authorised agent Mr Neuman, that the immediate vendors appeared to be paying only £7.2 million for the shares.

These contentions, which I have sketched only in outline, make it necessary to examine with some care not only the basic chronology of events, but also the nature and scope of the Firm’s retainer, and the roles in the transaction played by Mr and Mrs Cherney, Mr Batkov and Mr Neuman. I will also have to decide whether Mrs Newton did indeed pass on the relevant information to Mr Neuman on 5 August 2004, despite the absence of any documentary record of her having done so.

The facts

The story begins in late 2003 or early 2004, when Mrs Cherney was introduced to Rose Square by Tam Singh. He seems to have given Mrs Cherney the impression that he owned the property, and they visited it together. Mrs Cherney and her daughters had been living in rented accommodation for some time, most recently in Lowndes Square, and she was keen to buy a permanent residence for herself and her family, including Mr Cherney if and when he was able to obtain a UK visa and visit London.

The Bromptons is a prestigious development of luxury flats on the site of the old Brompton Hospital. The development took place in the late 1990s. Flats 12-14 form a single unit of exceptional size on a single floor. Flat 15, as I understand it, is separate but could conveniently be used for staff accommodation. Mrs Cherney liked Rose Square very much, and when she described it to her husband he agreed that it seemed appropriate for their needs.

Since Mr Cherney was unfamiliar with the London property market, and did not have a UK visa, he decided to appoint someone to go to London to help his wife with the purchase, including the negotiation of the price. Mrs Cherney had told him that Tam Singh was asking £9.6 million for the property. Mr Cherney thought that Mr Neuman would be an appropriate choice, because he respected his negotiating skills and Mr Neuman had told him that he had some connections in London which could help, and that he had experience in the real estate business. Mr Cherney therefore asked Mr Neuman to go to London and help Mrs Cherney to negotiate the purchase price. Mr Neuman offered to do this as a friend rather than as a business partner, and it was understood that he would not be remunerated for his work.

Mr Neuman’s version of events is that he was in Moscow when he received a telephone call from Mr Cherney asking him to go to London to check out the property and to advise him whether it would be worth buying. Mr Neuman was prepared to do this as a favour to Mr Cherney, although he was unable to leave immediately because of work commitments. Some five or six weeks later, early in 2004, he came to London and inspected the apartment, which he understood to be on the market for £12 million. However, when Mrs Cherney introduced him to Tam Singh at a meeting in the Sheraton Park Tower Hotel, Mr Singh indicated that it could be bought for £9.5 million. By the end of the meeting, Mr Neuman had negotiated a reduction in the price to £8.9 million, and over the course of two further meetings he succeeded in negotiating the price down to £8.3 million. At this stage Mr Neuman reported back to Mr Cherney, who thanked him for his efforts and asked him to continue with the negotiations.

Mr Neuman considered the property, which was in the best part of the Bromptons, to be a good investment, and he was willing to recommend its purchase to Mr Cherney. He flew to Israel in order to give Mr Cherney a fuller report, and they met at the Hilton Hotel in Tel Aviv. Mr Neuman was hopeful that he could negotiate a further reduction in the price, because he had developed a good relationship with Tam Singh. However, a problem had recently come to light. The apartment was currently occupied by tenants, whose lease did not expire until January 2005, and they wanted a large sum of money to vacate early. Mr Cherney said that he was prepared to wait until after January 2005 to take possession, and it was agreed between them that the existence of the tenancy should be used to negotiate a better price. Mr Neuman then telephoned Tam Singh, in Mr Cherney’s presence, and negotiated a further reduction in the price to £8 million. Mr Neuman says, and I see no reason to doubt, that Mr Cherney was very happy with this result, and all the more so because his wife was also content.

At an earlier stage, after the purchase price had been negotiated down to £8.3 million but before the meeting in Tel Aviv and the final reduction to £8 million, the vendor had required the payment of a non-refundable deposit of £100,000. Mr Cherney instructed Mr Batkov to arrange for this to be done, and on 1 March 2004 the vendor’s solicitors, Montague Lambert & Company, wrote to Mr Batkov recording their understanding of what had been agreed:

“We understand that you are instructed on behalf of the prospective purchaser who has agreed to purchase the above premises for £8.3 million.

To facilitate the due diligence your clients will be forwarding a non-refundable deposit of £100,000.00 by the 8^th March 2004.

Once your representatives are in receipt of the documentation then your client will have 21 days within which to exchange contracts and make payment of the balance deposit of £730,000.00 for a 10% deposit on exchange with completion to be scheduled for the 3^rd June 2004.

This matter is to proceed by way of a share sale of the entire shareholding in Benwick Limited which is incorporated in Guernsey and is a sole asset holding company.”

The letter was copied to Mr Neuman. The writer’s reference (“SS Janjua J1238”) suggests that the client for whom Montague Lambert were acting was probably Mr Janjua, which in turn suggests that Tam Singh’s involvement in the transaction was probably as an agent or middleman, and not as the beneficial owner of the property.

The sum of £100,000 was duly paid on 5 March 2004 by means of a transfer from a personal bank account of Mr Cherney’s with the Alpha Bank in Limassol, Cyprus. When questioned about the payment in cross-examination, Mr Cherney was inclined to prevaricate, and refused to accept explicitly that the payment was indeed non-refundable. However, I find that it was – the terms of Montague Lambert’s letter are unambiguous – and I infer that Mr Cherney was willing to pay it, and to commit his personal funds for the purpose, because Mrs Cherney had set her heart on the property, and he did not wish to disappoint her. At one point in his cross-examination he volunteered that, although Mrs Cherney had a number of choices of London properties, “One has to admit that the Rose Square property was her favourite”.

Once the price of Rose Square had been finally agreed, the next step was to find a suitable solicitor to act in the transaction on Mr Cherney’s behalf. Mr Cherney did not know any English property lawyers personally, so he made enquiries of various friends and associates, including Mr Neuman. It was Mr Neuman who recommended Mrs Newton of Pettman Smith. He had been introduced to Mrs Newton by Tam Singh in February or March 2004, and had been favourably impressed both by her and by the Firm. Mr Cherney also asked Mr Batkov’s opinion, and he was content for Pettman Smith to be retained as he had no contacts of his own with real estate lawyers in London. Mr Cherney therefore agreed to engage Pettman Smith, and asked Mr Batkov to get in touch with Mrs Newton. Mr Cherney also instructed Mr Batkov to monitor the transaction, to organise the provision of funding, and to agree the structure of the purchase with Mrs Newton. He informed Mr Batkov that the ultimate proprietor of Rose Square was to be Paradiso, which would provide the necessary funding.

On 6 May 2004 a meeting took place at Pettman Smith’s offices, attended by Tam Singh, Mr Neuman and Mrs Newton. The purpose of the meeting was for Mr Singh to introduce Mr Neuman to Mrs Newton. Mrs Newton had never met Mr Neuman before, and I infer that Mr Neuman had asked Mr Singh to effect the introduction. In her statement Mrs Newton describes the meeting (of which both her manuscript and typed attendance notes survive) as follows:

“30.

At the meeting on 6 May 2004, Mr Neuman informed me that:

a.

he represented a good friend of his, Mr Cherney, who was considering purchasing some property in London;

b.

Mr Cherney was not able to come to London personally. He was living in Israel and did not have a visa to enter the UK. From the outset of our retainer with Mr Cherney, it was always envisaged that he would shortly be able to travel to the UK …

c.

Mr Cherney had emigrated to Israel from Russia and did not speak English. As such, contact with Mr Cherney would be via Mr Neuman or Mr Batkov, a Bulgarian lawyer who was Mr Cherney’s main legal representative, whom I should meet in due course. In addition, Mr Neuman informed me that Anna Cherney lived in London with their two daughters who were being educated here;

d.

the properties Mr Cherney had in mind were new flats to be bought as homes for his wife and their daughters and another apartment which might be purchased for his other children from a previous marriage. We discussed the proposed transactions relating to the purchase of a flat in The Bromptons [i.e. Rose Square] and the two particular flats in Knightsbridge, as addressed in more detail below; and

e.

it was likely that Mr Cherney would purchase the properties through [Paradiso]. If so, the Trust would therefore be the client.

31.

I was not alarmed to be instructed by an agent in this manner. It was similar to my dealings with wealthy Middle Eastern people or some of my Far Eastern clients who usually used an agent and I only rarely met the client in person. Indeed, it is also not uncommon for foreign clients to bring interpreters to our meetings even if they speak English themselves.

32.

… The fact that I did not initially meet the person who was the client was not a concern. I could, and did, carry out the necessary money laundering checks.”

This account is substantially borne out by the two attendance notes, from which it also appears that:

In cross-examination Mrs Newton said she understood from the meeting “that Mr Neuman was a friend and was acting as an agent for Mr Cherney; that Mr Batkov was Mr Cherney’s main Bulgarian lawyer; that I would be contacted by Mr Batkov and probably also Liechtenstein, but that I would be receiving instructions generally from Mr Neuman”. This answer was in my view broadly correct, but in so far as it gives the impression that Mrs Newton expected Mr Neuman to be her main source of instructions, I do not accept it. I prefer the contemporary evidence of the attendance notes, which record that when Mrs Newton asked how Pettman Smith should get instructions, she was told they would come from either Mr Neuman or Mr Batkov, with no indication of any priority between them. It seems to me that Mrs Newton would naturally have expected to receive instructions on legal matters from Mr Batkov, who she was told was Mr Cherney’s “main lawyer”, and on practical matters relating to the purchase from Mr Neuman.

On the same day, Mrs Newton wrote to Mr Syan of Montague Lambert to introduce herself as the solicitor now acting for the purchaser. She stated her understanding that the purchase price was £8.3 million, and that the transaction would proceed by means of a share sale. She enclosed a detailed “memorandum of information requirements” in relation to a share sale, and asked to receive the relevant papers in due course. The memorandum referred to the vendors as “Tam Singh?” which indicates, as Mrs Newton confirmed in cross-examination, that she did not at this stage know for whom Tam Singh was acting, or whether he was selling the property on his own account. She described him as a person who, to her knowledge, acted for a number of people, and had made several valuable introductions to the Firm. On the question whether Tam Singh had himself ever been a client of the Firm, Mrs Newton was non-committal but thought there might have been one occasion when the litigation department acted for him. When shown an internal email dated 17 December 2004, in which the senior partner, Ms Glaves-Smith, referred to Tam Singh as “a valuable client”, in the context of a possible problem with conflicts of interest, Mrs Newton said she imagined Ms Glaves-Smith merely thought that “as he introduced clients to the Firm, he was of importance”. She also disclaimed any close involvement in the conflicts issue, although she reluctantly acknowledged (as I have already said: see paragraph 57 above) that she was copied into the relevant email traffic and had indeed briefly participated in the discussion. I found Mrs Newton’s answers on these matters evasive and unconvincing, and on balance I feel little doubt that Tam Singh was not only a valuable introducer of business to the Firm, but also a regular client in his own right. He was certainly well known to Mrs Newton personally, and it can have come as no surprise to her to find that he was closely involved, in one way or another, with the sale of Rose Square.

In her letter of 6 May Mrs Newton also referred to the deposit of £100,000, saying it had been paid as evidence of the purchaser’s good intentions and asking for confirmation that the sum was held by Montague Lambert as stakeholders.

On 12 May Montague Lambert replied, enclosing some draft documentation and explaining that the £100,000 had been paid as a non-refundable deposit. Mr Syan said he understood that the purchase was proceeding by way of a share sale, and he awaited a draft share purchase agreement. Mrs Newton responded, presumably on the same day (the letter is misdated 6 May), saying she looked forward to receiving replies to the enquiries sent on 6 May so that Pettman Smith could proceed to prepare the share sale documentation.

On the next day, 13 May, Mrs Newton wrote again to Mr Syan raising a number of points of concern arising out of the draft documentation which had been provided. She also asked Mr Syan to state whether his client was in fact Benwick Limited or another party, and if it was Benwick, in which jurisdiction it was incorporated.

On the same day Mr Neuman contacted Mrs Newton, presumably by telephone, and told her that a further “deposit” of £600,000 either had already been sent, or was shortly going to be sent, by Mr Batkov direct to Montague Lambert. Mrs Newton pointed out to Mr Neuman that deposits are usually paid only on exchange of contracts, to which Mr Neuman’s reply was that he wished the purchase of Rose Square to proceed as soon as possible. I am confident that this reflected the wishes of Mr and Mrs Cherney, which they had communicated to Mr Neuman. I also infer that it was Mr Cherney who told Mr Neuman of his intention to procure the payment of a further £600,000, before exchange of contracts, in order to help secure the deal.

Despite the terms of her own written attendance note, Mrs Newton seems to have got the impression that the £600,000 had definitely already been transferred to Montague Lambert. In any event, she wrote a further letter to Montague Lambert on 13 May recording her understanding that the sum had already been transferred to Montague Lambert’s account, and saying that it must be held strictly to Pettman Smith’s order. She also made some further enquiries in relation to the share sale, and asked to hear from Mr Syan urgently so that the matter could proceed swiftly.

On 14 May Mr Batkov sent an email to Mrs Newton. This was the first direct communication between them. He said he had just spoken to Mr Neuman, who was then in the Ukraine, and on his advice he was addressing Mrs Newton directly. He introduced himself as “a legal counsel of the physical persons – the real purchasers of the estates hereinbelow”. By “the physical persons” he must, I think, have meant both Mr and Mrs Cherney, although Mrs Newton says she understood the reference as being to Mr Cherney alone. Mr Batkov then said he had known about the proposed purchase since February, and he gave contact details for Paradiso and its administrator, Syndikus. He said that he had been in Liechtenstein the previous day, and had given the necessary instructions to the directors of Paradiso. He then continued, in relation to Rose Square:

“I was informed that the real estate is a property of an offshore company registered on the Guernsey Island. It is claimed that the above offshore company is a SPV and does not perform any other activity except from owning the above real estate. We have made only one payment amounting to [£100,000] (non-refundable deposit) from the personal account of the Principal so far … As far as I know from the only one document I have in my disposal originated from Montague Lambert & Company, Solicitors (also enclosed) we are in delay with the payments. In case the real property really belongs to a SPV I do not see any problem Paradiso to acquire directly the shares of the offshore company. Mr Neuman assured me that great endeavours are made part of the price …

In connection with the above acquisition I kindly ask you:

1.

to provide me with information about the offshore company – owner of the above property, if possible – registration documents, financial statements, etc.

2.

to provide me with information about the property itself – location, plan, etc.

3.

to give information what payments must be made just now in order not to lose the deal.”

Mr Batkov then dealt with the proposed acquisition of the Knightsbridge property, and concluded by assuring Mrs Newton that she could rely on the full co-operation of Paradiso.

Mrs Newton replied to Mr Batkov on the same day, explaining that she was still awaiting information from Montague Lambert.

The precise basis upon which the vendor was apparently requesting a further pre-contract payment of £600,000 remains obscure, but it is common ground that on 25 May 2004 this sum was paid by Paradiso to Montague Lambert’s client account as a deposit for Rose Square. Mr Batkov’s office notified Mrs Newton of the payment on 26 May, and reminded her that “the people in Liechtenstein” were still waiting for the necessary documents. Mrs Newton replied on the same day, explaining that she was still little further forward than when they had last corresponded due to the failure of Montague Lambert to provide the necessary documents. She then gave him a detailed explanation of the outstanding issues, and expressed the hope that, if she received all the outstanding information shortly, completion of the purchase could take place within the next two weeks. She also said that she would be sending a formal “client care” letter setting out Pettman Smith’s terms of business, and that she would send it to the offices of Paradiso, with a copy to Mr Batkov, unless she heard to the contrary.

The client care letter was then sent on the same day, 26 May 2004, and addressed to the Trustees of Paradiso. I will quote the first paragraph of the letter:

“We write further to our recent conversation and previous conversations with Mr T Batkov and Mr F Neuman when you confirmed your instructions to us to act on your behalf in respect of various transaction[s] including the purchase of the shares in a company called Benwick Limited the only asset of which is [Rose Square] and the acquisition of two flats at The Knightsbridge, London. In addition we understand that your representatives are negotiating the acquisition of another company, Gwenberry Investments Limited the sole asset of which is a property known as Draycott House, Draycott Place, London on which matter you have indicate[d] we are instructed. We enclose for your information a copy of our Client Care Policy.”

Over the next few weeks progress continued to be made in relation to the flats at The Knightsbridge, and Mrs Newton corresponded with Mr Batkov and the vendors’ solicitors (Withers LLP), but little seems to have happened in relation to Rose Square, at any rate so far as Mrs Newton was concerned. There must, however, have been communications between Montague Lambert and Mr Batkov, perhaps via Mr Neuman, because on 24 June Mr Batkov sent an email to Mrs Newton informing her that a further £3.8 million had to be paid in relation to Rose Square. Mr Batkov also said he had been informed that Paradiso had already acquired the shares of Benwick Limited. Mrs Newton replied on the same day, saying she was not aware that the shares of Benwick had already been transferred and enclosing the information which she had been able to obtain regarding that company. On 29 June Mr Batkov sent another email to Mrs Newton, saying he still had no proof that the shares in Benwick Limited had been transferred, and that this was holding up the transfer of the £3.8 million. He said he would be in London on 2 July, and asked if it would be possible to arrange a meeting in the afternoon in order to discuss the matters in detail.

Mrs Newton replied on the same day, explaining that the transfer of the shares and payment of the consideration for the purchase ought to happen simultaneously; that to the best of her knowledge no such transfer had yet taken place; and that so far as she was concerned she did not yet have sufficient information from Montague Lambert to enable her to report to Mr Batkov on the transaction and request the release of the funds for completion. She also said that she would be delighted to meet him on the afternoon of 2 July.

The meeting which had been arranged for 2 July duly took place at the offices of Pettman Smith. Nobody was present apart from Mr Batkov and Mrs Newton. According to Mrs Newton’s manuscript and written attendance notes, Mr Batkov explained that he had acted for Mr Cherney for a number of years, and that he was a prominent and well-known Bulgarian lawyer. He said he had set up the trusts in Liechtenstein, and that Mr Cherney had made him fully aware of the property transactions. He asked Mrs Newton for details, and she then explained the position in relation to the flats at The Knightsbridge and Rose Square. The final paragraph of the attendance note reads as follows:

“[Mr Batkov] confirmed we should take instructions from [Mr Neuman] for [Mr Cherney] and he/Liechtenstein would also contact us. [Mr Batkov] stated he should be kept advised of progress. Confirmed we should do so.”

In her oral evidence Mrs Newton said, and I accept, that in accordance with her usual practice she would have prepared the manuscript attendance note either during or immediately after the meeting. I see no reason to doubt its accuracy, not least because at this early stage of the transaction Mrs Newton could have had no possible motive to misrepresent, or mis-record, what Mr Batkov said to her. On the contrary, Mr Batkov’s statement that Pettman Smith should take instructions from Mr Neuman on behalf of Mr Cherney, but that Mr Batkov would also contact the Firm and he should be kept advised of progress, is entirely consistent with what Mr Neuman himself had said at the earlier meeting on 6 May. At most, there was a slight change of emphasis, in that Mrs Newton might now have been justified in regarding Mr Neuman as her principal source of instructions emanating from Mr Cherney, although Mr Batkov would need to be kept fully informed of progress; and it was already her understanding that any requests for funds should be made to him. Nevertheless, Mr Batkov vehemently denied in cross-examination that this was an accurate record of what he had said to Mrs Newton. He suggested that the note was fraudulent and back-dated, and that Mr Neuman never had any authority to give instructions on Mr Cherney’s behalf. I reject this evidence, which seems to me a product of the later falling out between Mr Cherney and Mr Neuman, and perhaps also of Mr Batkov’s desire to regain full favour with Mr Cherney by giving supportive evidence.

On 12 July Mrs Newton faxed a draft share sale agreement to Montague Lambert, and on 13 July she wrote to Mr Syan enclosing a list of further enquiries on both the company and the property sides of the transaction. Just before sending the draft agreement on 12 July, Mrs Newton had been supplied with the accounts and financial statements of Benwick Limited for the year ended 31 March 2004, and some of the further enquiries related to this material. In her covering letter to Mr Syan, she also reminded him that she had yet to receive replies to the questionnaire which she had sent to him on 6 May. She asked him to provide the answers to it as a matter of urgency, stating her belief that the clients on each side wished to finalise the transaction “very shortly”. On the same day she wrote to Mr Batkov, attaching copies of the accounts and bringing him up to date with progress.

On 14 and 15 July Mrs Newton corresponded further by email with Mr Batkov in relation to both The Knightsbridge and Rose Square. The purchase of the flats at The Knightsbridge proceeded to exchange of contracts on the morning of 15 July. With regard to Rose Square, Mr Batkov informed Mrs Newton, apparently for the first time, that the price had been negotiated down to £8 million, which she duly noted. She also canvassed with Mr Batkov the possibility of proceeding by means of a purchase of the property itself, which would entail payment of stamp duty at the rate of 4% of the purchase price, if it proved impossible to obtain satisfactory replies to the company enquiries in the near future.

On 16 July Mrs Newton received a copy of an accountants’ report on Benwick Limited dated 15 July 2004, and sent a copy on by email to Mr Batkov. The report confirmed that all liabilities of the company would be dealt with before completion, and Mrs Newton expressed the view that in the light of the new accounts the financial position of the company seemed “more acceptable”. It is also worth noting, although Mrs Newton did not draw this expressly to Mr Batkov’s attention, that both in the accounts to 31 March 2004, and in the accountants’ report of 15 July 2004, Rose Square was shown as a fixed asset with an acquisition cost of £6,384,640. Further, this figure had remained unchanged since 31 March 2003, so the original acquisition must have taken place before that date.

On 20 July Montague Lambert finally sent Mrs Newton replies to the enquiries which had been raised, together with supporting documentation. Mrs Newton discovered from this material that the 100 shares in Benwick Ltd were held as to 99 shares by a Guernsey company called Delancy Ltd and as to one share by another Guernsey company called Bachmann Alpha Ltd. She also discovered that the immediate vendor did not yet own the shares. She did not yet know for sure, but clearly believed it to be likely, that the transaction was proceeding by way of a sub-sale. Thus on 22 July she wrote to Montague Lambert saying she had been told their client was a company called Draycott House (Bahamas) Ltd “which company I believe is purchasing the shares from the existing owners”. She told Mr Syan that she was still awaiting further information on Benwick Ltd pursuant to enquiries which she had made in Guernsey, and that the Firm was still not in funds to complete the transaction, but to progress matters she would send him the necessary stock transfer forms for execution by his client. She pointed out that under Guernsey law it was necessary for there to be at least two shareholders, and asked him to let her know the name of the second proposed shareholder.

On 23 July Mr Batkov informed Mrs Newton by email that Liechtenstein was ready to pay the £7.4 million needed to complete the purchase of Rose Square, but they needed documentary proof of the transfer of the shares as well as documents showing that Benwick Ltd had no liabilities. In her reply Mrs Newton reminded Mr Batkov that the share sale would happen at the same time as the monies were paid on completion, and that no executed documents could be provided until after completion. She brought Mr Batkov up-to-date, and also attached a lengthy letter which she had been about to send him. This letter recorded that Pettman Smith had “now come a very long way towards completion of this transaction, having obtained more information regarding both the property and the company”. Details were then given, and Mrs Newton asked Mr Batkov for instructions on the identity of the purchasing shareholders, of whom there would have to be two in order to comply with Guernsey law, and on the question whether there should be a change in the existing directors of Benwick Ltd after completion. By this date Mrs Newton had also been informed that Draycott House (Bahamas) Ltd was to acquire the shares in Benwick via two nominee companies established for the purpose by a registration agent, Confiance Ltd. The names of the nominee companies were C N Alpha Ltd and C N Beta Ltd. This information, too, was passed on by Mrs Newton to Mr Batkov in her letter of 23 July.

On 27 July £7.4 million was duly transferred into Pettman Smith’s client account by means of a transfer from Liechtenstein, and Mr Batkov sent Mrs Newton an email to confirm that this had been done. On the same day Mrs Newton wrote to Mr Batkov to thank him, and to bring him up to date on conversations which she had had on the previous day with Ms Karin Liechti of Syndikus and Mr Neuman. She said she had met Mr Neuman, who had confirmed that “our mutual client” (presumably Mr Cherney) wished Confiance Ltd to be the registered office and agent for Benwick Ltd, and was satisfied that the transaction should be completed with service companies provided by Confiance as both shareholders and directors. The record of this conversation with Mr Neuman is in my view revealing for a number of reasons. First, it shows that Mr Neuman was still acting as a channel for instructions from Mr Cherney to Pettman Smith in relation to the structure of the transaction. Secondly, Mr Batkov did not question in any way why Mrs Newton had taken instructions from Mr Neuman, nor did he express any dissatisfaction about it. Thirdly, if it were not for this letter, the authenticity of which is not in question, there would be no other record of this meeting and conversation between Mrs Newton and Mr Neuman. If Mrs Newton made a separate attendance note, it has not survived.

On 28 July Mrs Newton received a fax which according to its header came “from Draycott House” and was sent by Tam Singh and a Mr Faisal Khan. It enclosed a copy of a share purchase agreement dated 18 February 2004 whereby Delancy Ltd and Bachmann Trust Company Ltd, as trustees of the Nadin Trust, had agreed to sell the shares in Benwick Ltd, and in another company which owned a different property, to Draycott House Ltd, registered in the Bahamas, for a combined purchase price which was redacted, with completion to take place on 16 June 2004 or such other date as might be agreed by the parties. The purchaser’s solicitors were defined in the agreement as Jeffrey Green Russell. Upon receipt of this document, if not earlier, Mrs Newton can have been left in no reasonable doubt that the purchase of Rose Square was indeed proceeding by means of a sub-sale, although she did not yet know the price which Draycott House Ltd had agreed to pay the original vendors, or the turn which it was making on the sub-sale.

The precise circumstances in which this document came to be faxed to Mrs Newton are unclear, but it is notable that it came directly from the immediate vendor, Draycott House Ltd, at the instigation of Tam Singh and/or his associate Mr Khan. It seems to me improbable that they would have sent the fax unprompted, and I infer that Mrs Newton had probably asked Mr Singh (whom she knew well, and who was as I have found a regular client of the Firm) to provide her with information about the sub-sale.

On 5 August Jeffrey Green Russell faxed to Mrs Newton a copy of a board resolution of Draycott House Ltd resolving to sell Benwick Ltd to Paradiso, and a completion statement which revealed that the purchase price paid by Draycott House Ltd for Rose Square had been £7.2 million, and that the balance needed to complete the transaction on 5 August was £7,087,419.18. Mrs Newton explains in her written evidence that Montague Lambert had previously asked her to arrange for the completion monies to be paid to Jeffrey Green Russell, who were acting for the original vendor. Mrs Newton now became aware, for the first time, of the purchase price which Draycott House Ltd had agreed to pay, and of the fact that it therefore stood to make a turn of either £800,000 or £900,000 (depending on whether the original non-returnable deposit of £100,000 was to be set off against the purchase price of £8 million) on the sub-sale.

Mrs Newton’s clear evidence is that she then spoke to Mr Neuman and obtained his authority to proceed. In her written evidence she says this:

“72.

Upon receipt of the fax dated 5 August 2004, I spoke to Mr Neuman. Among other things, I informed him about the sub-sale and that [Draycott House Ltd] appeared to be acquiring the shares in Benwick for £7.2 million. Mr Neuman instructed me that the transaction should proceed at £8 million as agreed. I understand that no attendance note of this conversation can be found. I consider it is likely that I would have recorded this conversation, but cannot recall whether that is the case. In the circumstances, it is more likely that this attendance note has been lost or mislaid, but it may be the case that I did not make any manuscript note of the conversation. However, I do recall informing Mr Neuman of the price at which [Draycott House Ltd] appeared to be acquiring Benwick, and I remember Mr Neuman giving me definite instructions to proceed nonetheless. In light of Mr Neuman’s role as Mr Cherney’s agent, I believed I could follow his instructions.”

This account is denied by Mr Neuman, who says that Mrs Newton never informed him about the sub-sale or the profit being made by Draycott House Ltd, and says that he became aware of this only as a result of disclosure in the present proceedings.

Before resolving this conflict of evidence, I should record that on the next day, 6 August, Mrs Newton emailed to Mr Batkov a two page letter describing the arrangements for completion and expressing the hope that the transaction would be finalised that day. She attached the final version of the share sale agreement, and described various fees and disbursements which would be payable. She said she had mentioned the fees to Mr Neuman “when recently speaking with him”, and she understood them to be acceptable. She had also explained to Ms Liechti of Syndikus the need for nominee shareholders and directors, with the consequential need for declarations of trust by the nominees stating for whom they held the shares. She explained the mechanics that would be needed to effect this on completion, and undertook to send Mr Batkov copies of the relevant documentation for his records once completion had taken place. She said nothing anywhere in the letter about the sub-sale, or the profit apparently being made by Draycott House Ltd.

As Mrs Newton expected, completion did then take place on 6 August. Pettman Smith transferred the sum of £7,287,419.18 due to Jeffrey Green Russell, and the necessary share transfers and declarations of trust were executed. During the afternoon Mrs Newton telephoned Mr Neuman to inform him that completion had taken place, and sent a confirmatory fax to that effect. She said that she would let him have other information at the beginning of the following week (6 August 2004 was a Friday), and on Monday 9 August she drafted a long letter for that purpose, although it was not sent until 12 August (with some additions to the original draft). This letter dealt mainly with practical matters following completion, and again said nothing about the sub-sale or the profit being made by Draycott House Ltd.

I now return to the critical issue whether Mrs Newton did indeed inform Mr Neuman of the sub-sale on 5 August. Under cross-examination she maintained that the conversation took place, and although she could not recall her exact words said she would have told him that the completion statement received from Jeffrey Green Russell showed that Draycott House Ltd was purchasing the property for £7.2 million. She accepted that the fact of a back-to-back transaction is of importance to a purchaser, and it was for this reason that she informed Mr Neuman about it. She had not done so before, because there was no point in doing so until she knew the price being paid by Draycott House Ltd. When asked why she did not tell Mr Batkov, or take steps to update him, she replied that she was not asking for instructions from anyone other than Mr Neuman, and she assumed that any information would be passed on by Mr Neuman to Mr Cherney and Mr Batkov. She did not update Mr Batkov on this particular point, although she knew that he had requested her to keep him up to date, and she had written him several letters for that purpose, because on this occasion she was updating Mr Neuman. When asked why there was no reference to the matter in her letter of 6 August to Mr Batkov, she said she had no idea, but thought the reason might have been that she dictated the letter on the previous day, before she had received the completion statement, and she then failed to amend it before the typed up version was sent. In view of the importance of the fact, and Mr Batkov’s status as Mr Cherney’s main lawyer, she agreed that she should have included in the letter a reference to the profit of £800,000 or £900,000 being made by the immediate vendor.

I have not found the question whether Mrs Newton informed Mr Neuman about the sub-sale an easy one to resolve. There are a number of factors which could point to the conclusion that she did not. First and foremost, there is the absence of any written record of the conversation, and the absence of any reference to it in her contemporary letters to Mr Batkov and Mr Neuman. Secondly, there is a possible motive for a failure on her part to inform Mr Batkov or Mr Neuman. Tam Singh and/or his business associates clearly stood to benefit from the sub-sale, even if the ultimate beneficial ownership of Draycott House Ltd was unclear; and if the sub-sale had come to the attention of Mr Cherney, it is in my view quite possible that he would have tried to negotiate a further last-minute reduction in the £8 million purchase price of Rose Square. Both Mr Janjua and Mr Singh were clients of the Firm, and it may be thought that Mrs Newton would not have wished to expose them to this risk. Thirdly, Mrs Newton’s blind spot about conflicts of interest might have predisposed her to conceal the sub-sale from Mr Cherney and his other advisers.

On the other hand, Mrs Newton’s evidence on the point was clear, firm and essentially unshaken in cross-examination: she did inform Mr Neuman, and she considered that she had thereby discharged her duty to bring the sub-sale to her client’s attention. It would in my view have been reasonable for her to take the view that informing Mr Neuman was sufficient, given what she had been told about his authority to represent Mr Cherney’s interests and to give instructions on his behalf at the meetings on 6 May and 2 July. Mr Neuman’s evidence that he was not told is uncorroborated, and in my judgment needs to be treated with great caution in view of his contractual obligation under the settlement agreement to support the claimants’ case and the roller-coaster history of his own relationship with Mr Cherney. The absence of any attendance note of Mrs Newton’s conversation with Mr Neuman is less surprising than it would be with a solicitor who had a more reliable system of record keeping. Furthermore, the contemporary correspondence shows that she was in close and regular contact with Mr Neuman in the days leading up to completion, and that more than one conversation took place between them. Her letter of 27 July 2004 to Mr Batkov, in particular, provides a telling example of a conversation of which no record would otherwise exist, and which shows Mr Neuman giving instructions on Mr Cherney’s behalf about the legal structure of the transaction without demur from Mr Batkov. Finally, it is at least possible (although I think on balance unlikely) that Mrs Newton always intended to include a reference to the sub-sale in her letter of 6 August to Mr Batkov, and that her explanation for having failed to do so is correct.

I also bear in mind that Mrs Newton is a solicitor and officer of the court. It would not be plausible to suggest that her memory on such a significant point is at fault, and if I were to find that the conversation never took place, the conclusion that she had deliberately misled the court would be inescapable. Regrettably, such things can and do happen from time to time, and as will appear later in this judgment there are important parts of her evidence relating to subsequent transactions which I have found incredible. I also remind myself that I am applying the civil standard of proof on the balance of probabilities. Nevertheless, the inherent improbability of a solicitor deliberately misleading the court in evidence given under oath means that I would need to feel a high degree of assurance before concluding that the conversation never took place. In the end, and after giving the matter anxious consideration, I have reached the conclusion that the conversation did indeed take place, and that Mr Neuman orally instructed Mrs Newton that the transaction should proceed at £8 million. I also find that Mr Neuman had actual authority to give this instruction on Mr Cherney’s behalf.

Conclusions

The findings of fact which I have just made are sufficient to dispose of the Rose Square claim. Since Mr Neuman was informed by Mrs Newton of the sub-sale, and since he then gave her instructions on behalf of Mr Cherney for the purchase to proceed at £8 million, the necessary factual foundation for the claim is not made out and it must be dismissed. It is therefore unnecessary for me to consider the difficult issues of causation and quantum which would have arisen had I found that the conversation between Mrs Newton and Mr Neuman never took place. It is also strictly unnecessary for me to consider the prior question whether the Firm was under a duty to disclose the existence and terms of the sub-sale to Mr Cherney or Paradiso. I will, however, briefly indicate my views on that question, and on the nature and extent of the Firm’s retainer, because these matters may have some relevance to the later transactions which I will need to consider.

I am satisfied that the general nature of the Firm’s retainer was to act and provide advice on the conveyancing and corporate aspects of the purchase of Rose Square, and the other London properties that Mr Cherney wished to acquire. The retainer did not extend to providing advice on the commercial merits of the transactions, or on the prices to be paid. It is relevant to note in this context that Pettman Smith were instructed only after the price of Rose Square had been agreed at £8 million, and after the non-returnable deposit of £100,000 had been paid. Mr Cherney was a man of immense wealth and wide business experience, with trusted legal and business advisers already acting for him. What he lacked was the services of a London firm of solicitors to handle the conveyancing and corporate sides of the acquisitions, and it was essentially to fill this gap that Pettman Smith were instructed. If Mr Cherney had required expert advice on the values of the properties, or on the prices to be paid for them, I am sure that he (or Mr Batkov or Mr Neuman acting on his behalf) would have instructed specialist valuers for the purpose. He could not reasonably have expected Pettman Smith to advise him on such matters, which fell outside their expertise as a small firm of West End lawyers.

It does not follow from this, however, that the Firm was under no duty to inform Mr Cherney or his agents about the sub-sale once its existence and terms had come to light. In the context of a purchase about to be completed for £8 million, plus the non-returnable deposit of £100,000, it was in my view plainly incumbent on the Firm to inform the client that the immediate vendor stood to make a profit of £800,000 or £900,000 on the transaction, and that it had contractually bound itself to acquire the property for only £7.2 million in February 2004. In cross-examination Mrs Newton accepted without hesitation that the fact of such a back-to-back transaction was important, and was something about which the purchaser had to be informed. In my view she was right to do so, and I therefore reject the submission of counsel for the Firm that it was under no duty to pass this information on to the client.

The proposition that there was such a duty is really one of commercial common sense, and does not require authority to support it; but I derive some assistance from the decision of the Court of Appeal in Mortgage Express Ltd v Bowerman & Partners [1996] 2 All ER 836, where it was held that a solicitor acting for both purchaser and lender in relation to the purchase of a domestic flat for £220,000 was under a duty to disclose to the lender the fact that the vendor was himself purchasing the property for only £150,000 and was selling it on simultaneously. This figure was some 21% lower than the lender’s valuation of £190,000, and some 46% lower than the purchase price of £220,000. The divergence between the prices paid on the original acquisition and the sub-sale was of course much greater than in the present case, where the difference is of the order of 11%; and the present case also concerns a high-value central London flat in a prestigious redevelopment, which may well have been difficult to value with accuracy. Nevertheless, I find the discussion of the duty owed by the solicitors to the lender in the judgment of Sir Thomas Bingham MR at 841g to 842e helpful, including in particular his concluding words:

“A client cannot expect a solicitor to undertake work he has not asked him to do, and will not wish to pay him for such work. But if in the course of doing the work he is instructed to do the solicitor comes into possession of information which is not confidential and which is clearly of potential significance to the client, I think that the client would reasonably expect the solicitor to pass it on and feel understandably aggrieved if he did not.”

See too the concurring judgment of Millett LJ at 844j to 845h. Schiemann LJ agreed with both judgments.

I will also add, for completeness, that even if I had found that Mr Neuman lacked actual authority to give instructions on behalf of Mr Cherney and/or Paradiso to Pettman Smith for the transaction to proceed to completion at £8 million, I would have held that he had ostensible authority to do so. The necessary representation for this purpose was given by Mr Batkov on 2 July 2004, when he confirmed that Mrs Newton should take instructions from Mr Neuman. I accept the submission of counsel for the Firm that this is not an example of impermissible delegation by Mr Batkov, but rather gives rise to the legal issue whether an agent (here Mr Batkov) can make a representation on his principal’s behalf that a further person also has authority to act on behalf of the principal. On this question, and the reasons for answering it in the affirmative, see generally Bowstead & Reynolds on Agency, 19^th edition, Article 72 and paragraphs 8-013 to 8-023, and in particular paragraphs 8-021 and 8-022.

The next pleaded claim relates to the purchase of a long-stay hotel called Draycott House (not to be confused with the Bahamian company of that name which was the vendor of Rose Square). In the broadest terms, it was alleged that Vida agreed to purchase the shares in the BVI company which owned Draycott House (the fifth claimant, Gwenberry Investments Ltd) for a price of approximately £11.3 million; that Pettman Smith were again instructed to carry out the conveyancing and corporate work in connection with the purchase; that the vendors of Gwenberry made a huge profit at the expense of Vida, as Draycott House had been acquired by Gwenberry in January 2004 for a consideration of only £1.3 million; that the actual value of Draycott House in mid-2005, when completion took place, was no more than £7.75 million; and that in breach of their duties of care Pettman Smith failed to ascertain the profit being made by the vendor, and failed to inform Mr Cherney or his authorised representatives about the earlier purchase of Draycott House in January 2004, thus depriving Vida of the opportunity to renegotiate the price.

The defence, as amended, took issue with almost all aspects of this claim, and in particular denied that the vendors of Gwenberry had made a huge profit as alleged; the price of £1.3 million paid in January 2004 had been for the freehold interest in the property, which was then subject to a number of long leases, but by June 2004 at the latest those leases had been surrendered, and the current value of the unencumbered freehold was much higher. Further, in December 2004 the Bank of Scotland had agreed to provide a term loan facility, secured on Draycott House, in the sum of £6.5 million, and had obtained its own valuation for that purpose. Although that valuation had not been disclosed, it was reasonable to infer that it must have been significantly in excess of £6.5 million.

At the pre-trial review Lewison J refused the claimants permission to adduce expert evidence out of time on the value of Draycott House. There was no appeal against his ruling. In those circumstances, the claimants were never going to be able to establish at trial that Draycott House had been purchased at an overvalue, and for that reason alone the claim was doomed to failure. Indeed, in their skeleton argument for the trial the claimants’ counsel realistically accepted “that without expert evidence they will never overcome the evidential burden … of establishing how much they overpaid, even if the Court might well be left with the strong impression that an overpayment was made” (paragraph 63). However, the matter took a potentially fresh turn when, on the eve of the trial, Mrs Newton served a second witness statement which set out her involvement in the purchase of Draycott House by a company called Pulrose Ltd in September 2003 for a total price (including both the freehold and the leasehold interests) of £8.05 million. Pulrose was beneficially owned by Mr Janjua, and he was the client for whom Mrs Newton had acted on the acquisition. None of these facts was disclosed by Mrs Newton when the Firm subsequently acted for Vida on the purchase of Draycott House in 2004/5.

Against this background, the claimants (as I have already mentioned) applied in the course of the trial for permission further to amend the claim so as to introduce an allegation of breach of fiduciary duty, and to seek to recover the difference between the price paid by Vida and the market value of the property. In order to run this fresh case, it would also have been necessary to obtain relief from the sanction imposed by Lewison J for the claimants’ late disclosure of expert evidence, and this therefore formed the second limb of the application which I had to consider. For the reasons which I gave in my ruling, I refused permission to make the amendments. Although the claim was an arguable one on the merits, it had been made too late, and the evidence of both Mr Cherney and Mr Batkov established that the necessary facts to ground the claim were known to at least some of the claimants’ legal advisers well in advance of the pre-trial review.

I refused the claimants permission to appeal against my ruling, and no subsequent application for permission has been made to the Court of Appeal. In those circumstances, it is accepted by the claimants that their claim relating to Draycott House cannot succeed, and I therefore need say no more about it.

Introduction

I now move on to the claims which relate, in one way or another, to the purchase and sale (through a corporate vehicle) of a long leasehold interest in a development site in Central London at 11-15 Arlington Street, W1 (“Arlington Street”). The corporate vehicle for the acquisition of Arlington Street was a BVI company called Thornley Estates Ltd (“Thornley”), which Pettman Smith purchased off the shelf from a firm of company formation agents in February 2006 on the instructions of Mr Neuman. It is common ground that Mr Neuman was the sole shareholder and director of Thornley. The acquisition of Arlington Street then took place in two stages. Stage one, which involved payment of a total consideration of £2,488,225, was completed on 21 February 2006. Stage two, which involved the grant of a lease by the freeholder, London Underground Ltd (“LUL”), was completed on 30 March 2006 when the balance of the purchase price amounting to approximately £7.77 million (inclusive of VAT) was paid to LUL, together with Land Tax of £312,550 and various costs and expenses. Thus the total amount paid for the purchase of Arlington Street was about £10.595 million, including tax and expenses.

The subsequent sale of Arlington Street took place between October and December 2007. On 11 October 2007 a contract for the sale of Arlington Street itself (the property, not the company) was entered into between Thornley as vendor and a company called Halsbury Holdings Enterprise Ltd (“Halsbury”) as purchaser, with a completion date of 29 November 2007. The contract contained an option for Halsbury to purchase the shares in Thornley instead of completing the purchase of Arlington Street. The agreed purchase price was, on the face of the agreement, £13.3 million, and a deposit of £400,000 was paid. Arlington Street had previously been offered for sale to a different purchaser, Raylan Ltd (“Raylan”), and a purchase price (subject to contract) of £18 million had been agreed with Raylan. For various reasons, which I will need to explore, no sale to Raylan at that (or a reduced) price had ever taken place, and Halsbury was, at least ostensibly, a fresh and unconnected purchaser.

On 30 November 2007 Halsbury entered into an agreement with Mr Neuman (and others) to exercise its option to purchase Thornley, and this agreement (together with a sub-sale of Arlington Street itself) was completed on 12 December 2007 when the balance of the ostensible purchase price of £13.3 million was paid to Child & Child (as Pettman Smith had by then become). At or about the same time, however, a further sum of £4.5 million was transmitted to Mr Neuman in Spain by Halsbury’s solicitors. It is convenient to refer to this sum as the “side payment”, although that label should not be taken at this point to prejudge in any way the true nature of the payment. Thus, on the assumption that the side payment formed part of the consideration for the sale of Thornley, the total consideration paid by Halsbury was £17.8 million, comprising the ostensible purchase price of £13.3 million plus the side payment.

This is the bare factual background against which the Arlington Street issues fall to be decided. The issues are pleaded at considerable (although not excessive) length in the parties’ amended statements of case, and I will do no more than summarise them at this stage. In outline, there are two important preliminary issues of fact, and then a number of detailed allegations of breach of trust and breach of duty by the Firm, most of which relate to particular payments made by the Firm.

The preliminary issues of fact are, broadly speaking:

The detailed allegations of breach concern, in chronological order, the following specific matters:

With this introduction, I will now make fuller findings of fact about the history of the Arlington Street transactions.

The history of events

In early 2006 Mr Neuman noticed a large, empty property in Arlington Street, near Le Caprice Restaurant in Piccadilly. He could not understand why such an impressive property in a side street behind the Ritz Hotel should be empty, and on the next day he asked Tam Singh to investigate. Mr Singh soon discovered that the owners were two brothers, named Glantz, who were property developers, and that they wished to sell their interest in the property, which consisted of an option to buy a long lease held in a company called 11-15 Arlington Street Ltd. The freehold was owned by LUL, and the option was due to expire on 28 March 2006. Following his discussion with Mr Singh, Mr Neuman inspected the property and was told there was planning approval to develop it as flats.

On 1 February Mr Neuman had two telephone conversations with Mrs Newton. He told her that Mr Cherney wanted three new companies to be incorporated in the BVI for property transactions in Spain, and that Mr Cherney was considering other property investments in London. Mr Neuman said he had discussed a development in Mayfair (which I assume to be Arlington Street) with the owner, but terms had not yet been agreed. On the following day a further conversation took place between Mr Neuman and Mrs Newton in which they discussed various matters, including (according to her manuscript note) “possible purchase of a property in Central London which is a development site”. Mr Neuman told her that he had been introduced to the opportunity by Tam Singh, and he (Mr Neuman) was going to meet the vendors to negotiate. If agreement was reached, matters would need to proceed very swiftly. On 9 February he called again, to inform Mrs Newton that agreement had now been reached, and on 10 February Mrs Newton wrote to Mr Tony Glantz at the address of his company, Willowacre Ltd. In her letter she said that the Firm were instructed “by a client who is interested in tendering an offer” and she then set out the proposed terms, which included payment of a premium of £6.65 million to LUL upon completion of the lease and payment of just under £1.8 million to Willowacre. Although Mrs Newton did not name her client in the letter, she explained in cross-examination that her reference in the heading included the client number of Paradiso. She must therefore have considered that on this occasion, as before, Mr Neuman was acting on behalf of Mr Cherney.

Negotiations then continued, and by 14 February the offer had been increased to £8.725 million, consisting of £6.65 million for the property and £2.075 million plus VAT as a consultancy fee for Willowacre. Mr Glantz provided Mrs Newton with a breakdown of the consultancy fee, which included costs it had incurred over three years in reaching agreement with LUL and securing planning permission.

Meanwhile, Mr Neuman flew to Israel and met Mr Cherney. According to Mr Cherney, Mr Neuman told him that the deal had again been introduced by Tam Singh, who wished to be included in it. Mr Cherney said that Tam Singh should not be included. However, he told Mr Neuman that he was interested in the project, because he knew that it was a very good area, near to where his wife was renting an apartment, and Mr Neuman assured him that he would be able to sell the property for double the price of about £7 to £8 million. Mr Cherney says he then agreed that Mr Neuman should start investigating the property, but he did not at that stage authorise Mr Neuman to use any money held on client account at Pettman Smith or elsewhere.

Mr Neuman’s account of this conversation is very different. According to him, Mr Cherney said that he was not interested in purchasing the property himself. Mr Neuman then tried to persuade Mr Cherney to invest, explaining how most of the purchase money could be raised by mortgaging Draycott House and the balance (apart from the VAT on the purchase) could be met from funds which he had already transferred to Pettman Smith in connection with other property transactions and refurbishments. Mr Cherney remained hesitant, and Mr Neuman then said he would like to develop the property himself if he could raise funds in the way he had suggested and obtain a loan for the VAT from Mr Cherney. The discussion ended, according to Mr Neuman, with Mr Cherney saying that Mr Neuman could go ahead on the basis he had outlined, using Mr Cherney’s funds, but he wanted to be paid interest. He told Mr Neuman to talk to Mr Batkov about arranging a loan of around £1.5 million to cover the VAT, on the footing that the loan would bear interest at 6% per annum.

I will say at once that I reject Mr Neuman’s account of what was said at this meeting. It does not seem to me at all plausible that Mr Cherney would have agreed to Mr Neuman taking over this transaction, in a prime site in Mayfair, with loan finance to be provided by Mr Cherney or raised on the security of Draycott House. If Mr Cherney and entities associated with him were going to finance the acquisition, they would naturally expect to do so (as they had in the past) on their own account, and to benefit themselves from the profit which was expected to materialise. This also coincides with Mrs Newton’s understanding of the matter. She says, and I accept, that at this stage she considered Mr Cherney (through one of his trusts) to be the principal and beneficiary of the intended transaction.

On 17 February a meeting took place, presumably at Pettman Smith’s offices, attended by Mr Neuman, Tam Singh and Mrs Newton. There was discussion of the terms of the lease, which was in a form that had already been agreed. Mrs Newton pointed out that it contained provisions relating to insurance that might entitle the landlord to determine the lease if the premises were destroyed, which might not be acceptable to a lender. It was not possible to vary the lease at that stage, but it might be possible to consider a variation later with LUL, and it was decided that this problem would have to be dealt with, if necessary, at a later date. Mr Neuman gave instructions that the transaction was to go ahead on the basis that the shares would be purchased in a BVI company, and he requested Pettman Smith to organise the acquisition of a new company for that purpose. He made it clear that he was to be the director and shareholder.

On 20 February the acquisition of Thornley was arranged through Mossack Fonseca & Co (Jersey) Ltd, whom Pettman Smith had previously instructed to provide the three BVI companies required by Mr Cherney for his Spanish property transactions. One of those three companies was Rye Park (the other two were called Tizane and Ramiro). Mrs Newton sent a fax to Mossack Fonseca, under a Cherney reference, saying that she still awaited her client’s instructions on the directors and shareholding of Tizane, Rye Park and Ramiro, and that the director and sole shareholder of Thornley was to be Mr Neuman. Thornley was duly established on this basis later the same day.

On 21 February a sale and purchase agreement relating to the issued share capital of 11-15 Arlington Street Ltd was entered into between the Glantz brothers as sellers and Thornley as purchaser, with completion to follow immediately following signature of the agreement. The consideration for the sale of the shares was £100. On the same day Mrs Newton attended a completion meeting at the offices of the vendors’ solicitors, Taylor Wessing, and the sum of £2,488,225 was transferred by Pettman Smith to Taylor Wessing. Mrs Newton discussed a few last minute changes in the documentation with Mr Neuman, and suggested some amendments. Agreement was eventually reached, Mrs Newton approved the release of the funds which Pettman Smith had transferred to Taylor Wessing, and Thornley acquired the shares.

It is common ground that the funds for stage one of the Arlington acquisition were taken from monies held on client account by Pettman Smith in respect of Draycott House, Rose Square and The Knightsbridge, together with part of a loan of £396,998 by Mr Janjua which had been arranged at short notice in order to enable completion to take place. Mr Neuman authorised Mrs Newton to use the client account monies in this way. The loan by Mr Janjua was arranged through the agency of the ubiquitous Tam Singh. Mr Cherney says that he never authorised Mr Neuman to use the client account money, and stage one of the acquisition was completed without his knowledge or approval. Mr Batkov likewise says that he was not informed. Nothing turns on this, however, because it is common ground that, if the transaction was originally unauthorised, it was later adopted and ratified by Mr Cherney. If it were necessary to do so, I would anyway have held that the use of the client account monies, and the arrangement of the loan from Mr Janjua, fell well within Mr Neuman’s ostensible authority so far as Pettman Smith were concerned.

It is convenient to record at this point that around this time Pettman Smith prepared a draft “short report on company/property ownership” for Paradiso, Lusaka and Vida. This recorded, among other matters, that the two apartments at The Knightsbridge were owned by BVI companies (Thornmead Ltd and Heathley Investments Ltd respectively) of which the sole shareholder and director was Mr Neuman. Similarly, Draycott House was indirectly owned by another BVI company, Forumside Ltd, of which Mr Neuman was again the sole director and shareholder. In each case, declarations of trust were in place recording the beneficial ownership of the relevant Liechtenstein entities. Against this background, there is nothing strange about the fact that Thornley was established with Mr Neuman as its sole shareholder and director, and I am satisfied that everybody proceeded on the assumption that a declaration of trust would be put in place as soon as Mr Cherney had decided who the beneficial owner was to be. I am sure that it was never intended by anybody including Mr Neuman, that he should be the beneficial owner of Thornley. By the same token, it seems clear to me that Rye Park was intended from the outset to function as another Cherney company, albeit with Mr Neuman as its director and shareholder. This was certainly Mrs Newton’s understanding of the position, and in my view it was correct. Her unchallenged evidence is that Pettman Smith paid the acquisition costs of Rye Park, Ramiro and Tizane, together with associated costs and disbursements, from funds held by the Firm for Mr Cherney or Paradiso. Pettman Smith also paid the subsequent annual fees, being authorised to do so by Mr Neuman. Mrs Newton also says, and I accept, that she asked Mr Neuman at the time of acquisition whether he also required her to prepare deeds of trust for the three companies, but he told her this would not be necessary because if deeds of trust were required they would be prepared and executed in Spain, to ensure compliance with Spanish law, bearing in mind that the companies were to be used in connection with property acquisitions in Spain.

The second stage of the acquisition of Arlington Street involved the purchase of the lease from LUL. In late February or early March 2006 Mr Neuman informed Mrs Newton that he had discussed the financing of the transaction with Mr Cherney, who had decided that part of the funds would come from a mortgage that was being arranged with Barclays Bank and would be secured on Draycott House. Mrs Newton then engaged in correspondence with the Bank, as well as with LUL. The purchase price, or more accurately the premium, payable on grant of the lease was £6.65 million plus VAT, making a total of £7,813,750, all of which was still outstanding apart from a deposit of £50,000 which had been paid on exchange of contracts. On 3 March LUL wrote to Mrs Newton enclosing an engrossment of the lease and asking her to arrange for execution by her client in preparation for completion on 24 March. On the same day Mrs Newton spoke to Mr Neuman and sent him an estimated completion statement.

On or about 7 March Mr Batkov, who at this stage knew little or nothing about Arlington Street, arranged the transfer of €4.25 million from the account of a company called Denise Overseas Ltd to Rye Park, for the purpose of completing the purchase of a hotel in Moraira (halfway between Alicante and Valencia) called the Gema Hotel. This was one of the Spanish properties in which Mr Cherney wished to invest, and Mr Neuman had already entered into a contract for its purchase in 2004, paying a deposit of €400,000. According to Mr Batkov, Mr Neuman told him that the three BVI companies were to be subsidiaries of Denise Overseas Ltd, and Mr Cherney instructed him to transfer the balance of the purchase money to Spain. Mr Neuman sent to Mr Batkov the purchase contract, which showed that the deadline for payment of the purchase price had expired, but explained that it had been extended. Mr Batkov passed this explanation on to Mr Cherney, who was evidently satisfied with it, and authorised the payment of €4.25 million to Denise Overseas Ltd. On 9 March 2006 this sum was then transferred from an account held by Denise Overseas Ltd with Alpha Bank in Limassol, Cyprus, to Rye Park. Mr Batkov described the remittance to the paying bank as being for the acquisition of real estate in Spain.

On 10 March Mrs Newton wrote to LUL asking, among other matters, why LUL was charging VAT on the purchase price and not transferring the property as a going concern. On 14 March Barclays Bank provided a facility letter for Gwenberry Investments Ltd, the direct owner of Draycott House, providing for a loan of £6.6 million for a term of one year, to be drawn down in a single amount by 30 April.

On 16 March Mrs Newton wrote a long letter to Mr Batkov, and a shorter letter (enclosing a copy of her letter to Mr Batkov) to Ms Liechti of Syndikus. Mrs Newton began by saying that she understood, from Mr Neuman, that Mr Batkov was “fully aware of the acquisition of [11-15 Arlington Street Ltd], which happened very suddenly (within 24 hours) on 21 February 2006”. She went on to explain in considerable detail the arrangements for completion of stage two of the acquisition. She had evidently received a reply to her query about VAT, because she recorded that LUL had elected to waive the exemption which would otherwise have applied, and that VAT was therefore payable on the premium of £6.65 million. She also raised the question of a deed of trust in relation to Thornley, and said this:

“Whilst obviously I shall report to you in detail on the whole transaction relating to the Company and the Arlington Street property in due course, at this moment of time may I mention that the Company is an onshore company being incorporated in this country. To acquire the shares in it, we established a new company incorporated in the British Virgin Islands, the name of which is Thornley Estates Limited. As with the other BVI companies, there is a sole director and shareholder, namely Mr Frank Neuman. I have prepared a deed of trust, but I do not know the name of the trust for whom Mr Neuman will be acting as nominee in this particular instance and therefore do need to receive that information, so that I may finalise the deed.”

In cross-examination it was put to Mrs Newton that she had not in fact prepared a draft deed of trust, but I see no reason to doubt that she had indeed done so. Self-evidently, she could not complete the draft deed until she received instructions who the beneficiary was to be. With her letter Mrs Newton enclosed the completion statement for stage one of the acquisition, and an estimated completion statement for stage two. She explained that it was not certain that the loan from Barclays Bank would be available for use on 24 March, and that in any event she did not expect to receive more than £6,190,600 on drawdown after taking account of a retention for interest in the sum of £400,000 and the bank’s arrangement and security fees. She therefore hoped it would be possible for the whole of the completion monies shown on the estimated statement to be remitted to Pettman Smith’s client account as soon as possible.

Mr Batkov’s evidence is that he had not been made fully aware of the acquisition of Arlington Street by Mr Neuman or anyone else, and when Mrs Newton’s letter of 16 March came to his attention he did not know what to do. He immediately discussed the situation with Mr Cherney, who was also extremely surprised and angry. Mr Cherney said he would think things over and then instruct Mr Batkov how to proceed. Meanwhile, Mr Batkov did not reply to Mrs Newton’s letter, nor did he give her any instructions about the beneficiary for a deed of trust.

On 22 March Mrs Newton sent Mr Batkov a chasing email, but again received no response. On the following day, with completion looming on 24 March and no funds yet available either from the Bank or Liechtenstein, Mrs Newton met Mr Neuman to discuss how to proceed. Mr Neuman told her that he had arranged for £2 million to be sent to Pettman Smith from Spain, and that he had agreed with LUL to extend the completion date until 30 March in return for the payment of an additional £1.6 million by way of further deposit on 24 March. Mr Neuman also said that £5 million should be used from the bank advance, and that Mrs Newton should ask Mr Batkov where the balance of the funds was to come from.

On 24 March the contract with LUL was varied on the terms negotiated by Mr Neuman, and the sum of £2 million (less bank charges of £6) was remitted from Rye Park’s account with La Caixa Bank in Spain to Pettman Smith. This funded the further deposit of £1.6 million. On the same day Mrs Newton sent two letters to Mr Batkov, informing him of developments and asking him (by the second letter) to transfer £1.5 million to Pettman Smith by no later than 25 March so as to enable the purchase to be completed. The sum of £1.5 million was requested on the footing that the amount Mrs Newton expected to be available from the bank was now only about £4.6 million. The reason for the reduction was apparently that the bank required a substantial retention for the cost of refurbishment works at Draycott House, not having originally realised that the loan was required for an unrelated property transaction. In her first letter to Mr Batkov, Mrs Newton had referred to the Rye Park monies as “remitted to us by our mutual client from funds held in Spain”.

Mr Batkov was concerned when he received these letters, because Mr Cherney had not yet decided how to proceed and no instructions had been given to Pettman Smith. In addition, he knew nothing about the money transferred from Spain. However, Mr Cherney had by this stage decided that the purchase would have to proceed, if only because he would otherwise lose the money which had already been paid over at stage one and by way of deposit for stage two. Mr Cherney was happy with the purchase price, but disappointed that Mr Neuman had not kept him informed. He was also surprised that money earmarked for purchase of the Gema Hotel had been transferred by Mr Neuman to Pettman Smith towards the purchase of Arlington Street.

On 29 March, if not before, Mr Cherney evidently decided that the purchase should proceed, and instructed Mr Batkov accordingly. Mr Batkov wrote on the same day to Mr Strauss and Ms Liechti of Praesidial in Liechtenstein, informing them that “the principals of Vida Foundation” had decided to acquire Arlington Street, and that the property was to be held through a subsidiary of Vida. He said that the main funding would come from the Barclays loan, but that Vida should also provide a loan of £1.5 million for a term of three months with interest at 6% per annum. He asked them to arrange for the latter loan to be received by Pettman Smith for value on 30 March. The borrower was to be 11-15 Arlington Street Ltd, and it was expected that the loan would be repaid as soon as that company obtained a reimbursement of the VAT. On the same day Mr Batkov informed Mrs Newton by email that he had just been instructed by the principals of Vida to arrange a transfer of £1.5 million into Pettman Smith’s client account, and asked her to provide him with a set of the incorporation documents of 11-15 Arlington Street Ltd so that he could prepare a draft loan agreement between Vida and Arlington. Mrs Newton acknowledged this message, and sent Mr Batkov copies of the relevant documents.

Also on the same day, a variation of the facility with Barclays was agreed whereby the amount to be advanced was reduced to £5.5 million of which £5 million would be provided as equity release and the balance retained to cover interest and costs. As a result of this variation, the amount prospectively available for use on completion was increased from the previously indicated £4.6 million to £5 million. The increase appears to have been negotiated by Mr Neuman, and he discussed it with Mrs Newton on the telephone.

On 30 March completion of the lease duly took place. The sum required for completion was £6,169,478.13, and Pettman Smith transferred it to LUL. The completion monies comprised the £5 million advance from Barclays and further monies drawn from the Firm’s client account ledgers for Rose Square and The Knightsbridge. A typewritten attendance note records that Mrs Newton obtained instructions from Mr Neuman before using the funds held on the client accounts in this way. The £1.5 million from Vida also arrived on the same day, but does not appear to have been used for completion, perhaps because the terms of the loan agreement had still not been finalised. In due course Mr Neuman instructed Mrs Newton to allocate the £1.5 million so as to reimburse the amounts used from the Firm’s client ledgers for Rose Square, The Knightsbridge and Draycott House on completion of stages one and two. This was done, and Mrs Newton used the remaining money to discharge the Firm’s costs and to pay the Land Tax and Land Registry fees relating to the acquisition.

In April 2006 Mr Cherney was able to travel to England for the first time, and on 20 April a meeting took place at the Firm’s offices attended by Mr and Mrs Cherney, Mr Neuman, Ms Glaves-Smith and Mrs Newton. This was of course the first occasion on which Mrs Newton met Mr Cherney. I have already referred in paragraph 56 above to the two typewritten attendance notes which relate to this meeting, and the final three lines which appear in only one of them. Those three lines are important, and read as follows:

“[Mr Neuman] stated that [Mr Cherney] wished us to continue as we had been doing by taking instructions from [Mr Neuman] and [Mr Batkov]. He was very happy with [Pettman Smith] and what had been happening. [Mr Cherney] hoped to become more involved now that he was able to visit this country.”

As I have explained, I acquit Mrs Newton of the charge of having fabricated this passage, and I accept it as an accurate record of what Mr Cherney said, at any rate as it was translated by Mr Neuman. In particular, I accept that Mr Cherney expressed himself as being content with developments to date, and that he told Mrs Newton to continue taking instructions, as before, from Mr Neuman and Mr Batkov. Mr Cherney may have been irritated by some of Mr Neuman’s unilateral actions in relation to the acquisition of Arlington Street, but he had decided to ratify the transaction, and he regarded the price as a good one. Mr Neuman had explained his plans for the future development of Arlington Street earlier in the meeting, and I feel confident that Mr Cherney now regarded it as a good investment.

One further thing which happened at the meeting was that Mr Neuman signed the Vida loan agreement. Mrs Newton explained the content of the agreement to him, and he and Mrs Cherney also explained it to Mr Cherney. The opportunity was not taken, as it might have been, to obtain Mr Cherney’s instructions on the Thornley declaration of trust and get Mr Neuman to sign that document too. Mrs Newton was pressed in cross-examination on why this was not done. She accepted, rather defensively, that it could have been done, and agreed that she did not raise the point at the meeting. She also agreed that she had not chased Mr Batkov for a reply to her earlier enquiry about the identity of the beneficial owner.

On 3 May Mrs Newton returned the signed Vida loan agreement to Liechtenstein. On 8 May she discussed various matters to do with Arlington Street on the telephone with Mr Neuman. On 30 May Mr Neuman telephoned Mrs Newton and instructed her to transfer £750,000 to the account of Rye Park with La Caixa at Valencia. Mrs Newton obtained the necessary account details from La Caixa, and effected the transfer on the same day.

In her written evidence Mrs Newton says Mr Neuman told her that the £750,000 was not a partial repayment of the £2 million which had previously been transferred to the Firm, but was urgently required in connection with one of Mr Cherney’s property transactions in Spain, and that Mr Cherney knew the reason for the transfer. This explanation is not reflected in Mrs Newton’s short attendance notes, but Mrs Newton’s recollection on this point was not challenged in cross-examination and I accept it. Mrs Newton also said, and I also accept, that she understood she could take instructions from Mr Neuman in relation to the transfer, especially as she believed that Rye Park was beneficially owned by Mr Cherney. It was put to her in cross-examination that, in view of the size of the sum, she should have confirmed Mr Neuman’s instructions with Mr Batkov and Mr Cherney, but she replied, in my view reasonably enough, that she understood Mr Neuman to have the necessary authority. It was only a few weeks earlier that Mr Cherney himself had said that she could continue to take instructions from either Mr Neuman or Mr Batkov, and nothing had happened in the meantime to give her reason to suppose the position had changed.

On 12 July 2006 Mrs Newton attended a meeting with LUL and Mr Neuman at which Mr Neuman explained to LUL his proposals for the development of Arlington Street. LUL reminded him of various possible constraints on the development of the site, but said they would probably have no objections in principle so long as their interest in the land was not adversely affected.

On 13 July Mr Cherney, Mr Batkov and Mr Neuman attended a meeting at the Firm’s offices to discuss Mr Cherney’s immigration problems. The solicitors present were Mrs Newton and her colleague Mr Michael Noel-Clarke. The meeting lasted a little over two and a half hours, and the note of it prepared by Mr Noel-Clarke contains a detailed chronological record of the background which Mr Cherney provided. None of this is of any immediate relevance to the issues I now have to decide, but I mention it because Mrs Newton will have learnt on this occasion, if she did not already know, that Mr Cherney’s immigration problems were of extreme complexity; that he had frequently been refused admittance to various countries; that he had been held in custody for short periods by a number of immigration authorities while his background was investigated; and that many allegations of involvement in organised crime had been made against him, although none had been substantiated. The immediate purpose of the meeting was to concentrate on trying to have the restrictions on his entry to Switzerland and France removed.

Over the following months Mrs Newton corresponded with HMRC about the VAT problem, and various meetings of a routine nature took place to discuss progress with Rose Square, The Knightsbridge, Draycott House and Arlington Street. Mr Cherney, Mr Batkov and Mr Neuman were all involved, and on at least one occasion (in January 2007) all three of them attended a meeting with Mrs Newton. A further recurrent theme during this period was the making of requests by Praesidial (which had taken over the business of Syndikus) to Pettman Smith asking for documents relating to the London property transactions for their files. To begin with the requests did not relate to Arlington Street, but on 5 July 2007 Praesidial expressly asked, in relation to “Arlington Road”, for “Whole documentation about this property (Purchase Agreement, Declaration of Trust, Land Registry, Lease of the property etc)”. Mrs Newton’s reply to this request, in a letter dated 13 July, was to say, apparently rather oddly:

“At this moment of time we have no instructions to provide any information to you relating to Arlington Street although obviously are seeking immediate instructions on this matter.”

I will return later to the reasons which Mrs Newton may have had for writing in this way.

On 19 July 2007 Mrs Newton was informed by Mr Neuman and Tam Singh that they had been negotiating a proposed sale of Arlington Street. Mr Singh had introduced a prospective purchaser to Mr Neuman, and Mr Neuman was in the process of finalising discussions about the sale. He thought he had just about secured agreement to a purchase price of £18 million. Later the same day, Mr Singh telephoned Mrs Newton to confirm that the price had been agreed at £18 million with the prospective purchaser, Raylan Ltd (“Raylan”), whose solicitors were Cawdery Kaye Fireman & Taylor (“CKFT”). A few days later Mr Neuman confirmed the information supplied by Tam Singh, and instructed Mrs Newton to contact CKFT which she duly did by a letter dated 24 July. She said in her letter that Pettman Smith were instructed by the owners of the head leasehold interest in Arlington Street, and she understood that terms had been agreed for the property to be sold to Raylan for £18 million. Her understanding was that the purchaser wished to exchange contracts swiftly, so she enclosed two lever-arch files of relevant documentation. She also said that a draft contract was under preparation, and would be submitted in due course.

Meanwhile, on 23 July Mr Batkov had sent Mrs Newton an email, marked with high importance, asking her to provide him as soon as possible with information regarding all the payments which had been wired to the Firm’s client account for the purchase, renovation etc of the Cherney family’s London properties (Rose Square, The Knightsbridge, Draycott House and Arlington Street) from May/June 2004 to date. Mr Batkov also asked to be informed whether Mr Neuman “ha[d] transferred any sums in your favour”, as well as how the rent from Rose Square had been utilised. At least with the benefit of hindsight, this request may be seen as the first indication to Mrs Newton that the relationship between Mr Cherney and Mr Neuman might be coming under strain. On 27 July Mrs Newton attempted to email copies of the account ledgers relating to the relevant properties and companies to Mr Batkov, under cover of a letter which she had dictated the previous day. Unfortunately the email transmission did not go through, perhaps because of the volume of the enclosures, and on 30 July Mr Batkov sent Mrs Newton a reminder, adding that Mr Cherney had explicitly asked to be informed in advance about any expenditure relating to the most recent transfer from Paradiso to the Firm’s client account. Accordingly on 31 July Mrs Newton re-sent her earlier letter, together with updated copies of the enclosures. On 1 August she also sent the same material to Mr Batkov by fax.

In early to mid-August 2007 CKFT became concerned about the insurance provisions in the lease of Arlington Street, and on 16 August a meeting took place between Mrs Newton, Mr Neuman and Mr Cherney to discuss the problem. The difficulty was caused by a term in the lease which entitled LUL to recover possession of the property by service of a six month notice to quit if the property were damaged by an insured risk and the premises were not then reinstated within five years. CKFT considered that, if Arlington Street were developed into a block of flats, as intended, a purchaser of a flat would have difficulty in obtaining a mortgage in view of this provision in the head lease. Unless the problem could be rectified, Raylan might not be prepared to proceed with the purchase at all, or would proceed only at a substantially reduced price. It was therefore agreed at the meeting that Mrs Newton should contact LUL to seek a variation of the lease.

On 20 August Mrs Newton wrote to LUL, asking for assistance “on what has become a very important and urgent issue”. She described the problem in her letter, and enclosed a draft deed of variation deleting the six month break clause. She also sent a copy of her letter to CKFT. On the next day LUL’s solicitor replied, saying that he was seeking instructions and would be in contact in due course. Having taken instructions, the solicitor wrote again on 23 August to say that LUL was not prepared to enter into the proposed variation. He added:

“I recall that the terms of the lease were negotiated at great length at the time and we conceded on many issues to satisfy the then purchaser’s funders. The period of 5 years in the particular sub-clause was originally 3 years, but an amendment to this was later agreed. The consideration paid therefore reflects the terms of the lease as it was entered into.”

Apparently before this refusal was received (it was sent by an email timed 11.36 am), a further meeting took place at Pettman Smith’s offices between Mrs Newton, Mr Neuman and Mr Cherney. The need for a deed of variation was again discussed, subject to the possibility of obtaining indemnity insurance which it was agreed the Firm should investigate.

At the end of August further communications took place between Mr Batkov and Mrs Newton, which must have made it clear to her that the relationship between Mr Cherney and Mr Neuman was deteriorating. On 29 August Mr Batkov sent Mrs Newton an email, marked urgent and strictly confidential, in which he said that Mr Cherney had recently “become rather upset” about the lack of exact information about how the funds for acquisition and repairs of the London properties had been spent. He continued:

“[Mr Cherney], through me only , would like you to present him detailed information as regards the above issue … [Mr Cherney] kindly asks you to approve personally all the funds for repairs as well as all the sums from the sale of the real estates. He is flying to London on 13 September and is going to spend a little time there. During his stay he will be glad to meet with you.”

Mrs Newton replied on 30 August, undertaking to send “to you only” statements of the relevant expenses within the next couple of days. She also said that information relating to any sales would be provided to Mr Batkov “so that our mutual client may authorise these before any commitment is reached”.

On the same day Mr Batkov sent Mrs Newton a further email, saying that he supposed “the disagreements between [Mr Cherney] and [Mr Neuman] [had] deepened”. He said he had just received a call from Mr Cherney, who wanted Mrs Newton to arrange for Mr Neuman’s brother-in-law Tami to be restored as a director of “the company”, and repeating his “definite requirement” that all the contracts and payments in relation to the London properties should be approved in advance by him. Mr Batkov said that Mr Cherney was planning to fly to London, and would like to discuss the situation with Mrs Newton, in Mr Batkov’s presence, on 10 or 11 September. Mr Batkov then said:

“In addition [Mr Cherney] declared that he does not like any payments to and from Spain?!? to be made (I do not know what he meant).”

Mrs Newton replied briefly on the same day, noting what Mr Batkov had said and adding:

“I believe that I understand the reference to payments to and from Spain! There have in the past been some such payments made and received”.

The reference to payments to and from Spain, I have little doubt, was a reference to payments to and from the Spanish bank accounts of the companies which Mr Neuman had established in the BVI for Mr Cherney’s Spanish property transactions, including the purchase of the Gema Hotel. Those payments included the payment of £2 million from Rye Park’s Spanish bank account to the Firm on 24 March 2006, and the payment of £750,000 by the Firm to Rye Park on 30 May 2006. Mrs Newton also seems to have informed Mr Batkov, as he acknowledged in a further email, that it would not be possible to implement Mr Cherney’s request concerning Tami because the company in question belonged to Mr Neuman. I do not interpret this, however, as an acknowledgement that Mr Neuman was the beneficial owner of the company. It was merely that, since he was the sole shareholder, no steps could in practice be taken without his consent and co-operation.

Mrs Newton was now in a potentially rather delicate position, because she knew from Mr Batkov that Mr Cherney’s confidence in Mr Neuman was crumbling, and that any expenditure had to be approved by Mr Cherney personally, but Mr Neuman (with whom she had established a good working relationship) was still in charge of the Arlington Street negotiations as well as the repair and refurbishment works to the other properties. Thus matters continued on the ground much as before, and on 31 August, for example, Mrs Newton discussed the insurance clause in the lease with Mr Neuman and Tam Singh, either at a meeting or (as the typed attendance note suggests) on the telephone.

On 6 September Mrs Newton wrote again to LUL about the insurance problem, but on 11 September LUL repeated its earlier refusal to agree a variation of the lease. Discussions then ensued between Mrs Newton and LUL’s in-house surveyor, Mr Philip Clarke, from which it emerged that LUL might be willing to consider a variation in return for a substantial payment, the amount of which it would need to discuss with external surveyors whose costs the vendor would also be expected to pay. The amount of the possible payment was thought to be in the region of £3 million. Mrs Newton discussed this development at a meeting at the Firm’s offices on 19 September attended by Mr Cherney, Mr Neuman and Mr Traspov. She also discussed the possibility of indemnity insurance, about which she had written to a broker on 17 September. Finally, and importantly, Mrs Newton’s attendance notes record that they were told, presumably by Mr Neuman, that there was another party who appeared to be interested in acquiring the Arlington Street site. It was understood that this party was an offshore company, in which case the transaction would probably be by way of a share sale instead of a property sale. Mr Neuman was in negotiation with the new party.

Mrs Newton adds in her witness statement, although this is not recorded in the attendance notes, that Mr Neuman also indicated that the price being offered by the new prospective purchaser was considerably less than £18 million. With some hesitation, I accept this evidence, but I do not believe (and to be fair Mrs Newton does not suggest) that any particular price was mentioned by Mr Neuman. I am unable to accept Mr Traspov’s evidence that there was no discussion at the meeting about a possible price reduction on the sale of Arlington Street. There must at least have been discussion of the reduced price that Raylan would be willing to pay. Mr Traspov frankly accepts that he cannot recall the meeting in detail, particularly as he was unfamiliar with the subject matter, and I am satisfied that his recollection on this point is mistaken. I do, however, agree that there was no discussion of a sale of the property for only £13.3 million.

Over the next few days Mrs Newton corresponded further with LUL’s solicitor and the insurance broker. It emerged that insurance was probably not going to be a realistic alternative, because cover could only be provided for a period of 25 years, whereas the flats would be let for substantially longer terms.

On 26 September Mrs Newton held a further meeting with Mr Cherney and Mr Batkov at which she brought them up to date on developments over the last week. She told them that LUL had still given no firm commitment, nor had they said what payment they would be prepared to accept for a variation of the lease, although the latest indication from LUL’s surveyors was that the payment required would probably be over £2 million.

Two further matters were discussed at this meeting. First, Mr Batkov asked for details of the deed of trust for Arlington Street, and was told by Mrs Newton that none had been entered into. She reminded him that the Firm had never been instructed who the beneficiary of such a deed was to be. Mr Batkov said that Mr Neuman should now enter into such a deed, and Mrs Newton confirmed that she would ask him to do so. In cross-examination it was put to Mrs Newton that Mr Cherney and Mr Batkov were furious when they discovered that no deed had yet been executed by Mr Neuman, but she denied this, and I accept her evidence on the point. She said (and I can readily imagine) that there was no difficulty in knowing when Mr Cherney or Mr Batkov was angry, but on this occasion they were not. I am satisfied, however, that she was left in no doubt that this was an omission which now had to be rectified as soon as possible. She must also have been instructed that the beneficial owner of the shares in Thornley was to be Paradiso, and not (as might have been expected) Vida.

The second matter discussed was an apportionment of the future proceeds of sale of Arlington Street between Mr Cherney and Mr Neuman. Mr Batkov and Mr Cherney discussed this between themselves in Russian, and Mrs Newton was informed that Mr Cherney would be prepared to agree to Mr Neuman receiving 20%, providing Mr Cherney could be sure of receiving the remaining 80% in full. Mrs Newton was requested to prepare a draft deed for this purpose, in which the relevant percentages would subsequently be inserted.

Two days later, on 28 September, a further meeting took place at the Firm’s offices attended by Mr Neuman, Mr Cherney and Mr Mazin, but not Mr Batkov. Mrs Newton’s manuscript attendance note of this meeting is dated 27 September, but I accept her evidence that this was a mistake: she agreed in cross-examination that dates are “not [her] thing”. At the meeting a deed of trust was produced for Mr Neuman to sign, but he refused to do so, saying that the property was his. Mrs Newton described the emotional register of the meeting as “animated”, and it was clear to her that Mr Cherney and Mr Neuman were having an argument. This was not only about the deed of trust, but also about the division of the proceeds of sale. Various figures were discussed and written down, but as their conversation was in Russian Mrs Newton did not understand what they were saying. It was, however, apparent to her that the figures under discussion were changing from time to time. There was also a brief discussion of the position on the sale of Arlington Street, and Mr Neuman repeated that he was discussing a possible sale with a new purchaser.

The outcome of the meeting was that Mr Neuman took copies of the draft documents away with him, and said he would consider them and discuss the matter with his advisers before reverting to Mr Cherney. Mrs Newton informed Mr Batkov of this by email on 2 October, and agreed to fix up a meeting in October when Mr Cherney and Mr Batkov expected to be in London.

After Mr Neuman had left the meeting on 28 September, Mr Cherney asked Mrs Newton through Mr Mazin to confirm that she was acting for him alone in relation to the sale of Arlington Street. She replied that she was acting for Paradiso, and therefore for Mr Cherney as the beneficial owner of Paradiso. Mr Mazin then made a comment to the effect that Mrs Newton was acting in Mr Cherney’s best interests, to which she said “of course”.

Mrs Newton was asked in cross-examination to describe the nature of her relationship with Mr Neuman in late September 2007. She described it as being “like any relationship with a client”, and denied that they were close friends, although she accepted that she and her husband had occasionally been out to dinner with him. She agreed that he was good company, and that she had never had similar social contact with Mr Batkov. Mr Neuman is a man of considerable charm, and I am satisfied that Mrs Newton was on terms of easy familiarity with him. It is, I think, revealing that he began his cross-examination of her by asking whether he could address her as “Marie-Garrard … the way I always used to call you”. At a later stage, when Mrs Newton was briefly recalled to answer questions on some documents, he even addressed her on one occasion as “My dear”. I do not mean to imply that there was any impropriety in their relationship, but I think their friendship was a good deal closer than Mrs Newton was prepared to admit.

On 8 October a meeting took place between Mrs Newton, Mr Neuman and Tam Singh. According to Mrs Newton’s written and typed attendance notes, Mr Neuman said that there was to be a new transaction relating to the sale of Arlington Street, with a provision that the buyer could ask for a sale of the shares in Thornley instead of a sale of the property itself. The purchase price was to be £13.3 million, and contracts were to be exchanged as soon as possible. The solicitors acting for the buyer were Montague Lambert & Co, and the buyer was an offshore company, the name of which Pettman Smith would have to obtain from Montague Lambert. The person dealing with the matter at Montague Lambert was Mr Syan. In cross-examination, Mrs Newton said her understanding was that this buyer had again been found by Tam Singh, who she thought was attending the meeting as an agent. She did not know for certain that he was going to be paid for his participation, but would not have been surprised if that was the case. When asked to comment on the price, which was nearly £5 million less than the offer by Raylan which had still been on the table on 28 August, she said that Raylan’s offer had been formally withdrawn, and Mr Kaye of CFKT had informed her of this towards the end of September, although she accepted that no record of their conversation survived, and she had not referred to it anywhere in her witness statement. In any event, Mrs Newton was clear that she could not have sent out a draft contract for the new sale if the original offer from Raylan had not been withdrawn.

Shortly afterwards, Mr Cherney and Mr Traspov also called in to see Mrs Newton, and according to her attendance note (which is dated 8 October) the new sale of Arlington Street for £13.3 million to a different buyer was discussed between them, including the option for the transaction to proceed by way of a share sale. According to Mrs Newton’s written evidence, Mr Cherney gave the impression that he was aware of the transaction and was willing for it to proceed. Mr Cherney himself denies that Mrs Newton told him about the new sale price, and says that he would certainly have remembered such a substantial price reduction if he had been told about it. He says that the main purpose of the short, unplanned meeting was to ask Mrs Newton for further reassurance that she was acting only for him, and that Mr Neuman could not enter into any transactions in relation to his properties without his approval. He also says that Mrs Newton must be mistaken about the date of the meeting, because his travel document stamp shows that he entered England on 9 October. As for Mr Traspov, he recalls that the meeting was unplanned and very brief, and he says that Mr Cherney specifically asked Mrs Newton to confirm she was acting for him, and not for Mr Neuman. She gave the confirmation requested. The figure of £13.3 million was not discussed. He too says that his passport shows that he entered London on 9 October, and left on 13 October.

It seems to me probable that the meeting took place on 9 rather than 8 October. This would not be the first time Mrs Newton made a slip in her dating of an attendance note. But I find it hard to believe that the purpose of the meeting was merely for Mr Cherney to obtain a repeated assurance from Mrs Newton that she was acting for him alone. She had already given him such an assurance on 28 September, and as she was at this stage his trusted London solicitor I cannot see why he would have wished to repeat the exercise, or what advantage he would have hoped to obtain from doing so. The meeting may have been short and unplanned, but on balance I am satisfied that the new proposed sale for £13.3 million was indeed mentioned, and that Mr Cherney did not raise any objection to it. I consider the evidence of Mr Cherney and Mr Traspov on this point to be unreliable, and I prefer the contemporary evidence of Mrs Newton’s attendance note, the authenticity of which was not challenged.

On 10 October Mr Syan sent a simple form of share purchase agreement to Mrs Newton, from which it appeared (if she did not know already) that the prospective purchaser was Halsbury. The purchase price in the draft was left blank.

On 11 October Mr Neuman wrote to Mrs Newton, giving her instructions for distribution of the sale proceeds upon completion of the sales of Arlington Street and Draycott House. In relation to Arlington Street, he said that the £13.3 million should be applied in redeeming the charge over Draycott House and repaying the loan of £1.5 million from Vida together with interest at 6%. The balance of the £13.3 million, after deduction of the Firm’s charges relating to the sale, should be paid to Mr Cherney or as he might direct. In relation to Draycott House, Mr Neuman said that a share sale had been negotiated for £25.9 million and he hoped that contracts would be exchanged shortly. He said that the proceeds should be used to repay the loan from Barclays, if it had not already been repaid following the sale of Arlington Street; that a fee of £100,000 had to be paid to the property broker who had introduced the buyer; and that the balance, after deduction of Pettman Smith’s costs and disbursements, should be paid to Vida. He also directed that if any VAT was recovered from HMRC in respect of Arlington Street, the whole of it after deduction of legal and accountancy fees should be paid to Mr Cherney.

At about the same time Mr Neuman prepared, or had prepared for him, a document dated 10 October 2007 and headed with his Spanish address (Calle Jesus, 35 92 1B, 46007 Valencia), the body of which reads as follows:

“Total sums due to me (25% of net profit) upon sale of Arlington for £13,300,000 and Draycott House for £25,900,000:

The document was signed by Mr Neuman, and contained a space for signature by Mr Cherney beneath the statement:

“I agree to the above figures on the basis that the properties are sold for the sums mentioned no later than 10 December 2007 and to pay those sums to you immediately following the sale.”

There can be no doubt that Mrs Newton was in possession of this document, because it was placed on the Firm’s general file for Paradiso and contains in the top right hand corner the reference number for that file in her handwriting. The additional payment of £4.5 million in respect of the Arlington sale appears to be a clear reference to some form of side payment, and Mrs Newton was therefore pressed in cross-examination to accept that she must have known about it. Unconvincingly, to my mind, she claimed to have given the document little attention, and said she did not remember reading it. She said it concerned matters between Mr Neuman and Mr Cherney, in which she was not involved, and if she had glanced at the document, she would not have paid much attention to it. Even more unconvincingly, Mrs Newton says in her witness statement that she might have considered the document to have been superseded by Mr Neuman’s letter to her of 11 October, which made no reference to any additional payment. This is an implausible suggestion, because both the document and the letter of 11 October referred to the sale proceeds of Arlington Street as £13.3 million, so the additional payment was clearly something extra, although it was payable in respect of the sale. My conclusion is that Mrs Newton read and understood the document, and she therefore knew that Mr Neuman was expecting to receive an additional payment of £4.5 million connected in some way with the sale of Arlington Street.

The question whether Mr Cherney, too, knew about the side payment is one to which I will have to return, but there is already one strong indication that he did, namely his muted reaction and apparent agreement when Mrs Newton told him that the new sale had been agreed for only £13.3 million. Given that Mr Cherney had recently refused to countenance a reduction to £16 million in the price offered by Raylan, his indifference seems very hard to understand unless he already knew of the existence of a substantial side payment.

On 11 October contracts were exchanged between 11-15 Arlington Street Ltd and Halsbury for the sale of Arlington Street (the property) for £13.3 million, with completion on 29 November 2007. A deposit of £400,000 was paid by Halsbury through Montague Lambert. Clause 17 of the agreement gave the purchaser the option, at any time prior to completion, of purchasing instead the entire shareholding in Thornley for the same price.

On 15 October Mr Batkov sent an email to Mrs Newton, regretting that he had been unable to meet her on his previous visit to London. He said that Mr Cherney “really counts on your professionalism and loyalty as regards further development of the situation with [Mr Neuman]”, and continued:

“The thorough investigation of the statements of accounts showed that 100% of the funds utilized for payment of Arlington belonged to [Mr Cherney]. Therefore, it is necessary to investigate also how the funds provided to [Mr Neuman] for the acquisition of the hotel in Spain have been utilized. It is quite obvious that part of the funds for purchase of Arlington came from Spain. [Mr Neuman] promised to provide us with the respective [information by] 18 October at the latest but one way or another I am trying to get in touch with the Spanish lawyer who took part in the deal.

In relation with the above [Mr Cherney] kindly ask[s] you in case of realization of a sale-purchase deal for Arlington [or Draycott House] not to allow any kind of payments – dividends or upsides, before the completion of the above investigation. [Mr Cherney] confirmed that [Mr Neuman] is to receive 20% of the upside for the one property and 25% of the upside for the other. Do you happen to have any information is there any progress with the documents [Mr Neuman] was supposed to sign? I would appreciate it if you could keep me informed.”

Mrs Newton replied on the same day. She assured Mr Batkov that the documentation issued in respect of the sale of Arlington Street for £13.3 million provided for the purchase price to be paid to the Firm. She then explained how those proceeds of sale would be distributed on completion, and referred to Mr Neuman’s letter of 11 October which she had seen and of which she retained a copy. She continued:

“Whilst I appreciate that [Mr Cherney] does not wish for any payments to be made from the sale proceeds before matters concerning Spain have been satisfactorily investigated by you, I believe that [he] appreciates as, of course, do you, that upon completion of the sale of Draycott it is essential that the mortgage from the Bank is repaid unless that has happened before completion takes place. Further upon the sale of Arlington the Loan from Vida should also be repaid but having regard to the association between Vida and [Mr Cherney] I shall await your further instructions on that point.

Turning to Spain, I have no knowledge or information about nor am I aware of the acquisition of any hotel in Spain. Certainly funds were, as you know, transferred to Spain and I have supplied details of those amounts. I note that you are investigating matters relating to Spain.

Finally as regards documents to be signed by [Mr Neuman], whilst he was presented, at a meeting here with [Mr Cherney] a couple of days after we last met here, with the documents setting out that Arlington was held in Trust in a similar way to Draycott etc and he took those documents away with him he did not at the meeting sign them and indicated that until he had obtained advice from his lawyer on them he would not sign them. The only “document” that I am aware that [Mr Neuman] has signed is the letter which is dated 11 October 2007 mentioned above.”

In her written evidence Mrs Newton says that in the light of this email, and her meeting on 8 October, she understood that she could not disburse the Arlington Street sale proceeds on the sole instructions of Mr Neuman, but she was still authorised to take instructions from him in relation to other matters. That understanding was in my view substantially correct.

On 25 October Mr Kaye of CKFT contacted Mrs Newton with a query arising out of her replies to additional enquiries. He received no reply, and repeated the request on 31 October when he added some further questions. These requests seem to me impossible to reconcile with Mrs Newton’s oral evidence that Raylan had formally withdrawn from the transaction in late September, and I infer that no such withdrawal had taken place. The matter is made even more mysterious by a later email from Mr Kaye to Mrs Newton dated 2 November, in which he said he appreciated that she was no longer acting in connection with Arlington Street, but nevertheless passed on to her a number of requests for information. I am unable to say how Mr Kaye got the impression that Mrs Newton was no longer acting. It was of course completely untrue. It seems likely that Mrs Newton told him so herself, but the point was not put to her in cross-examination, and I am not in a position to make a finding of fact to that effect.

On 7 November Montague Lambert wrote to Pettman Smith asking to be supplied with the contract signed by the vendor for the sale of Arlington Street (the property). On 8 November Mrs Newton replied, enclosing the signed contract. She also enclosed company documents relating to 11-15 Arlington Street Ltd, saying her understanding was that the purchaser now wished to effect the purchase by means of a share sale. On 12 November she emailed the same company documents to Mr Syan, perhaps because they had not yet arrived in hard copy.

On 21 November Montague Lambert sent a draft share purchase agreement to Mrs Newton, and shortly after 7 pm she returned an amended version which she was willing to approve. The amendments were extensive. They included the identification of Mr Neuman as the vendor, the introduction of Thornley (defined as “the Company”) as a party, and the introduction of the concept of the “Vendor’s Loan” defined as the loan, the amount of which was left blank, made by the Vendor to the Company. Clause 3.1 then provided that the amount of the Vendor’s Loan should be paid in cash “in accordance with clause 4.3” and deducted from the consideration for the shares in Thornley, the amount of which was also left blank. The reference to clause 4.3 was, as Mrs Newton accepted in cross-examination, a typographical error for clause 3.3, which provided that the sum needed to discharge the Vendor’s Loan should be forwarded to Pettman Smith by CHAPS automated payment in cash, in full and final settlement to Mr Neuman from Thornley.

It was put to Mrs Newton in cross-examination that she had deliberately introduced the concept of the Vendor’s Loan in order to justify the making of the side payment to Mr Neuman. However, I do not think that this can be correct, and I accept her explanation that the purpose of the concept was to explain, for accounting purposes, how the monies which had been lent for the acquisition of Arlington Street fell to be treated as between Mr Neuman and Thornley. On 26 November Mr Syan asked Mrs Newton to clarify the Vendor’s Loan, to which she replied that it “is what it says it is – i.e. shareholder’s loan”. This reply may have been somewhat curt, but Mr Syan was evidently satisfied and did not pursue the point.

Mrs Newton also appears to have learnt on 26 November that Halsbury had agreed to sell on Arlington Street to a further ultimate purchaser which was a client of Metson Law, solicitors. She found out that CKFT, rather than Montague Lambert, were acting for Halsbury in relation to this onward sale. She contacted then Mr Neuman, who said he would make enquiries and come back to her. Later the same day, Mr Neuman informed Mrs Newton that he and Mr Cherney were content for CKFT to act in relation to the onward sale.

On 27 November Mrs Newton wrote to Mr Cherney, asking him to authorise two payments that Mr Neuman urgently required, the first (of £25,000) for his company Draycott Property Management Ltd, and the second (of £91,350) for “special operations”. Mrs Newton said that the Firm still held approximately £385,000 of the £1 million which Mr Cherney had sent to them in July. She also informed him of the forthcoming merger with Child & Child which would take effect from 1 December, and reassured him that all existing matters and instructions would be taken over by the new merged firm and the same fee earners would continue to deal with the files. On 28 November Mrs Newton’s letter was transmitted to Mr Cherney, via Liechtenstein, and on 29 November she received a written authorisation for the two payments signed by him.

Meanwhile, on 28 November Mrs Newton had sent Mr Syan some further proposed amendments to the share purchase agreement, which included the addition of a Mr Ramesh Radhakrishnan as a fourth party. The reason for this, as Mrs Newton explained in cross-examination, was that she believed Mr Radhakrishnan to be a director of Halsbury, and she knew him to be a close associate of Tam Singh. She also knew that he had acted with Mr Janjua. Quite why any of this necessitated his joinder as a party is unclear to me, but I do not read anything sinister into it. The only other substantive amendment to the draft was the introduction of an indemnity to Mr Neuman given by Halsbury and Mr Radhakrishnan, and in my view the likeliest explanation is simply that Mr Neuman wished to have Mr Radhakrishnan’s personal covenant to support the indemnity. Alternatively, it may be that his joinder was connected in some way with the onward sale of the property.

The share sale agreement was ultimately exchanged, in the form of Mrs Newton’s amended draft, on 30 November 2007. However, the date inserted in manuscript by Mrs Newton at the head of the agreement was 30 October 2007. She insisted in her oral evidence that this was simply a mistake, and was not a deliberate attempt to backdate the document. With a solicitor less prone to careless slips in relation to dates, this explanation would be hard to credit; but the error seems to me characteristic of Mrs Newton, and with some hesitation I am prepared to accept her explanation. I also accept that the reason why she did not mention the mistake in her witness statement is that she only noticed it shortly before the trial, and after she had prepared her statement.

The share sale agreement provided for completion to take place immediately, or in any event within 10 working days after the date of the agreement, in default of which it could be determined by the vendor. In the event, completion took place on 12 December. Meanwhile discussions had taken place between Mrs Newton, Montague Lambert and CKFT, as a result of which it was agreed that on completion, and in view of the onward sale of the property, the property deeds would be sent to CKFT and the company documents to Montague Lambert.

On 10 December Mr Batkov’s office contacted Mrs Newton to say that Mr Cherney and Mr Batkov would be flying to London on 12 December and they would like to meet her in her office at 11 am. Mrs Newton replied on the same day, confirming that this was acceptable and saying that her colleague Mr Noel-Clarke also urgently needed to contact Mr Cherney, presumably in relation to his immigration problems.

On 11 December Mrs Newton communicated with her opposite numbers at Montague Lambert and CKFT. She discovered, apparently to her surprise, that the funds needed for completion were going to come from CKFT, the ultimate purchaser’s solicitors. She said that the amount she was expecting to receive was £12.9 million, i.e. £13.3 million less the deposit of £400,000 already paid. On the same day, however, Mrs Newton sent an email to Mr V Alvarez at La Caixa, attaching a copy of the exchanged share sale agreement and saying this:

“At the request of Mr Frank Neuman I attach a copy of the Agreement entered into by Mr Neuman in connection with the sale of certain shares in a company emanating from which he expects to receive in his account with your bank some funds relating to this transaction today.”

It seems clear to me that this can only have been a reference to the side payment, and that writing as she did in these terms Mrs Newton must have known about it. In cross-examination she accepted that the email to Mr Alvarez was sent either by her or by somebody at her request, and that she never told Mr Cherney or Mr Batkov about this request by Mr Neuman. She tried to explain her failure to do so on the basis that she thought the sum in question was probably money that Mr Cherney had agreed was payable to Mr Neuman, and although she had specifically been told to obtain Mr Cherney’s authority before making any payments out of the proceeds of sale, she did not need to do so at this stage because she was not yet being instructed to send any money anywhere. I am afraid that I find this explanation incredible, and I cannot avoid the conclusion that Mrs Newton knew perfectly well that Mr Neuman was receiving a side payment from the sale. I am equally unable to accept her explanation that she never mentioned the matter to Mr Cherney or Mr Batkov because she “did not think it was relevant”.

On 12 December Mrs Newton had a meeting with Mr Batkov and Mr Cherney, at which they briefly discussed the imminent completion of the Arlington Street sale. Mr Cherney said he had not yet decided whether the Draycott House mortgage should be discharged from the proceeds of sale. Later the same day, the sale was duly completed and £12.9 million was remitted by CKFT to the Firm’s client account.

On 13 December Mrs Newton met Mr Neuman to discuss the sale of Draycott House, in relation to which last minute problems were being encountered. She was also in contact with Mr Syan in connection with a draft agreement concerning the Arlington Street VAT claim. I think she must also have raised with Mr Syan the payment that Mr Neuman was expecting, because by an email later the same day he wrote to her:

“I confirm having instructed by bank to sent [sic] to Mr Neuman £4,500,000.00 to his bank Caixa Valencia Spain.”

Mrs Newton professed not to have seen this email until it was recently shown to her, and said she would have been extremely surprised if she had seen it at the time. I find, however, that she did receive and read it, and because she already knew about the side payment it came as no surprise to her. I am not deflected from this conclusion by Mrs Newton’s evidence that Child & Child experienced major difficulties with its internet and email systems in the aftermath of the merger. It is, of course, possible that the email was never received by her, but its authenticity is not in question, and since I have rejected her claim that she was unaware of the side payment, I think it is far likelier that the email was received by her, and that her explanation for its possible non-receipt formed part of her increasingly desperate attempts, in the teeth of all the contemporary documents, to maintain that she knew nothing about it.

On 14 December (which was a Friday) Mr Neuman wrote to Mrs Newton from his Spanish address instructing her not to release any funds held by her in respect of the Arlington Street sale without further instructions from him, “[a]part from paying the sum of £500,000 to the Agent Mr T Singh”. On the following Monday, 17 December, Mr Neuman telephoned Mrs Newton. Her typed attendance note reads as follows:

“Attending Frank Neuman regarding Arlington. He confirmed that the sum of £500,000 he was sending to the account should be transferred from the client account (if necessary out of funds received on completion of the sale if the funds he was sending did not arrive shortly) to Mr T Singh as soon as possible and be dealt with as Mr Singh directed.

It should be noted the payment made by Mr Neuman is an agency fee due to Mr Singh concerning the negotiations and introduction of the buyer of the shares in Thornley Estates, the owner of Arlington.”

Mrs Newton then telephoned Tam Singh, and was instructed by him to transfer the £500,000 to the client account of Mr Janjua. On 18 December she effected the transfer of £500,000 from the Paradiso client account, into which the completion monies had been paid, to Mr Janjua’s client account with the Firm, the reference number of which was J1182/2. On the same day the Firm received the sum of £500,000 (less £7 bank charges) from Mr Neuman, which was paid into the Paradiso client account. Thus the balance on the Paradiso client account was reduced by the net amount of £7.

On 16 January 2008 Mrs Newton attended a meeting with Mr Cherney and Mr Neuman at the Firm’s offices. There was a discussion about the distribution of the Arlington Street proceeds of sale. According to Mrs Newton’s manuscript attendance note, Mr Neuman claimed that the proceeds were “all his”. Most of the conversation was in Russian, with Mr Neuman translating for Mrs Newton’s benefit. Mr Cherney again wrote figures on a piece of paper “showing proportion paid and percentages”. The meeting was inconclusive, and no agreement was reached.

On 21 January Mr Batkov sent an email to Mrs Newton which I will quote in full:

“In Saturday [Mr Cherney] unexpectedly informed me that he had received information that the deal on Arlington had been closed and that the only problems are with Draycott House. Notwithstanding the agreement all the sums to be kept with you Frank Neuman has received the sum of [£5 million] and now he is proposing a new scheme for settlement of the financial relations between him and [Mr Cherney]. He declares that the sum of [£5 million] is in fact his commission on [both the] deals and it is quite obvious that he has no intention to account for the sum of [€4.5 million] received and utilized by him for repairs and furniture. In addition he is going to take the smaller apartment at Knightsbridge.

There is neither any progress on the deals regarding ownership over the realties in Spain nor any report on the expenses for purchase of the above properties. Frank told [Mr Cherney] that the VAT on Arlington to be reimbursed shall be directed in favour of [Mr Cherney]?!?

[Mr Cherney] is still insisting on the scheme about which agreed during our last meeting, i.e. the total amount from the sale of Arlington not to be touched and to be kept by you.

Kindly ask you to provide me with detailed information what had happened, what is the situation with Draycott House and the VAT on Arlington.

I would appreciate your prompt reply.”

Mrs Newton replied on the following day, and said this in relation to the sale of Arlington Street:

“The purchase price for the sale of the Arlington property was [£13.3 million] which sum is held on this firm’s client account. It has not been distributed – in other words I have paid no sum to Mr Neuman or anyone else from that money. I do not know to what money you are referring when you mention that a sum of £5m has been paid to Mr Neuman as no such money has been paid by this firm and, indeed, we do not hold any such money.”

In view of my finding that Mrs Newton knew about the side payment, I do not need to underline that this was a thoroughly misleading reply, even if it was literally true that she had made no payment out of the £13.3 million (because the payment to Mr Janjua was matched by a transfer from Mr Neuman into the Paradiso client account) and that no sum of £5 million had been paid to Mr Neuman (the sum was £4.5 million, and it had been paid to Mr Neuman’s Spanish bank account).

Mrs Newton’s reply to Mr Batkov was sent at 11.10 am. At 7.31 pm on the same day two documents were printed off Mrs Newton’s computer at the Firm’s offices. The first document was a draft letter, apparently intended to be sent by Mr Neuman to Mr Cherney, setting out his position in the negotiations between them and stating terms on which he would be prepared to settle. The draft letter contained a reference to the side payment in the following terms:

“Totally separately we received a payment for other things not directly associated with [the Thornley] share sale of £4,000,000.00. The share sale as you know was handled by [Mrs Newton] and she holds in her client account the sum of £13,300,000.00. From the sum of £4,000,000.00 which was paid in Spain, £500,000 was sent to [Mrs Newton] so that she could pay that to the agent.”

The second document was a completion statement as at 12 December 2007, which showed the purchase price for the shares in Thornley as £13.3 million, and an additional “Sum paid to Spain by Buyer in respect of separate matters associated to the sale” of £4 million. After deduction of the £500,000 paid to the agent and the acquisition cost of Arlington Street, the net profit was shown as £5,828,028.26. The draft letter claimed 35% of that sum, together with 35% of any VAT recovered. The metadata associated with the two documents show that they were created between 5 and 6 pm on 22 January, that they were “last saved” by Mrs Newton, and that the total editing time was 57 minutes for the draft letter and 84 minutes for the completion statement.

In cross-examination Mrs Newton denied that she had created the documents, and denied that she had helped Mr Neuman prepare them. She suggested that he might have come into the office and asked for the assistance of a secretary to type the documents, to which she would have said “Yes, go ahead”. Further, the system could have shown Mrs Newton as the person who last saved the documents, because it was set up at the time in a way that enabled secretaries to send emails as if they were coming from a particular person’s inbox. I do not find these speculations at all convincing, and I conclude that Mrs Newton helped Mr Neuman with the preparation of both documents.

The next morning (23 January) Mrs Newton sent the two documents to Mr Batkov as attachments to an email which read as follows:

“I have just received a letter and statement from Mr Frank Neuman regarding Arlington. He has asked me to forward these to you with the request that you email a copy to [Mr Cherney]. The letter, which I understand is intended to be addressed to [Mr Cherney] from [Mr Neuman], is attached together with the statement.”

The wording of this email was clearly designed to give the impression that Mrs Newton had played no part in the preparation of the letter and statement, and that she was merely acting as an intermediary between Mr Neuman and Mr Cherney. That impression, I am satisfied, was completely untrue.

On 24 January La Caixa informed the Firm by fax that they were instructed by Mr Neuman to transfer £1.5 million to the Firm’s current account in London, and asked for the relevant account details to implement the transaction. On the following day La Caixa sent a number of transfer request forms to be signed and dated by Mr Neuman, including a form for the transfer of the £1.5 million which described the purpose of the transfer as “New Buy”. Later the same day Mrs Newton supplied the necessary account details and returned the forms duly signed by Mr Neuman.

Mr Batkov also emailed Mrs Newton on 25 January, saying he was “deeply sorry” about the situation between Mr Neuman and Mr Cherney and expressing the hope that their differences might be settled. He said that Mr Cherney had provided the entire acquisition cost of Arlington Street and had paid for the ensuing repairs, so “he has got the right to express his disapproval of the actions [Mr Neuman] has undertaken”. Mr Neuman had, however, informed him in a conversation the previous evening that he had changed his mind, and had already transferred £1.5 million from Spain to the Firm’s client account. Mr Batkov asked Mrs Newton to confirm that the transfer had taken place. Mrs Newton replied on the same day:

“I concur with your sentiments – the situation is most unfortunate and upsetting. At this moment of time we have not received any funds but I have received a fax message from a bank in Spain advising me that they are sending to this firm’s account £1.5 m and seeking confirmation of the account details which I have sent to them. I shall let you know when it arrives.”

Also on the same day, Mrs Newton (as the metadata again suggest) helped Mr Neuman to prepare a draft letter and expenditure statement relating to Draycott House, and she then forwarded these documents to Mr Batkov as attachments to an email saying:

“Mr Frank Neuman has asked me to send you the attached letter and statement that he has prepared.”

Mrs Newton denied that she had played any part in the preparation of these documents, and again suggested that Mr Neuman might have sought the assistance of her secretary. She also said she did not remember sending the email to Mr Batkov, but maintained that, if she did so, it would not have been improper:

“Even though Mr Neuman and Mr Cherney may have been in discussions about apportionment of proceeds etc at that stage, I would not have considered it inappropriate to provide information from Mr Neuman to Mr Cherney/Mr Batkov to assist in resolving those negotiations. I was merely acting as an information go-between.”

The transfer of the £1.5 million from La Caixa eventually took place on 30 January, and Mrs Newton arranged for the money to be credited to Paradiso’s Arlington Street account. I will return later to the question why she credited the payment to this account.

On 31 January Mr Batkov flew to London and attended a meeting with Mrs Newton which he had arranged at very short notice the previous day. They discussed three statements which Mr Batkov had sent to Mrs Newton the previous evening, detailing expenditure on acquisition of the London and Spanish properties and the financing of various woodworking projects in Russia. Mr Batkov emphasised that Arlington Street belonged to Mr Cherney, and that he would hardly have been likely to mortgage Draycott House for Mr Neuman’s benefit. He said that Mr Neuman had also lost Mr Cherney money in Russia, and Mr Cherney was not prepared to let the same situation recur. He also said that Mr Cherney continued to have full confidence in the Firm, and did not wish his dispute with Mr Neuman to have any effect on his relationship with the Firm.

On 1 February Mr Batkov asked Mrs Newton for detailed information about the funding of the acquisition of the London properties, and for an account of all the sums that had been paid out of Cherney client accounts. On 12 February Mrs Newton sent Mr Batkov a detailed letter to which three financial statements were attached. The statements were:

On 13 February Mr Batkov wrote to Mr Neuman, saying:

“I have discussed the matters with [Mr Cherney] regarding the possible ways for you both to break amicably. He still feels rather offended by the way Arlington has been sold and in particular – by the fact that you have turned aside and still are keeping in your account a part of the sum on the deal.”

Mr Batkov then mentioned two other matters about which Mr Cherney was unhappy, and passed on a request from Mr Cherney for Mr Neuman to take certain steps relating to properties in Spain and London as gestures of good faith. He concluded:

“In case you decide to do the above, [Mr Cherney] does not see any obstacles for you to split amicably.”

Mr Batkov sent this letter by fax and email to Mr Neuman in the USA, but was not sure that Mr Neuman had received it because he was travelling back to Europe. Mr Batkov therefore forwarded his letter to Mrs Newton, and asked her to give it to Mr Neuman if he got in touch with her. Mrs Newton confirmed that she would do so. She then met Mr Neuman the same afternoon, and at 7.29 pm she sent to Mr Batkov Mr Neuman’s reply which, she said, he had “now just handed to me for sending to you”. The reply was short and non-committal. It included this passage:

“I do not understand your comments on Arlington. “Turned aside” – what do you mean?

I have no objection to settling everything in Spain so long as we have a final settlement on all our business matters relating to both England and Spain. I do not understand why you always only mention Spain – we must settle England as well as Spain.”

Mrs Newton now says that she did not draft this letter, but accepts that it might have been typed up by one of the Firm’s secretaries. It seems to me more likely, however, that she did in fact help him with it, and that her reference to the letter having been just handed to her was another attempt to disguise how closely she was involved on his behalf.

On 19 February a meeting took place at the Firm’s offices attended by Mr Cherney, Mr Batkov, Mr Mazin and Mrs Newton. Mr Noel-Clarke was also present for part of the time. There was discussion about how the sale proceeds of Arlington Street should be distributed. It was agreed that the Vida loan should be repaid and the Draycott mortgage redeemed. It was also agreed, according to Mrs Newton’s typed up attendance note, that “[o]ther sums should be returned to the various accounts from which they were taken for the purchase”. Concern was also expressed at the meeting about Mr Neuman. Mr Batkov said that Mr Cherney had always been willing to give him a proportion of the sale proceeds, but the property was Mr Cherney’s and it was he who had paid the purchase price. Nevertheless, it was hoped that the difficulties between them could be resolved. It is worth noting, incidentally, that Mrs Newton’s attendance note describes the client as “Frank Neuman”. I have no doubt this was a slip, and she said she had no idea how it had happened; but slips can be revealing, and this one could be taken as an indication, slight in itself, that her loyalties were now divided.

On 20 February Mr Neuman visited the Firm’s offices, and at 4.03 pm Mrs Newton sent an email to Mr Batkov attaching a letter and statement from Mr Neuman “which he requested me to send to you”. Mr Neuman’s letter said that he had been discussing matters with his lawyers, and the annexed statement showed the sums lent to him by Mr Cherney “to assist my purchase of Arlington”. The letter went on to say that the loans from Vida and Barclays were being repaid, and £2 million was being returned to Rye Park. He said he was instructing Mrs Newton to repay the other sums advanced from Cherney client accounts, but subject to that “[a]ll other monies received in connection with the sale of Arlington belong to me”. In return, Mr Neuman offered to give up any claim to a share of profit on the sale of Draycott House.

In her covering email to Mr Batkov, Mrs Newton said “I wonder whether I should also transfer the appropriate funds to Rye Park’s account” at La Caixa, and “having regard to our conversation yesterday, please let me know if that should happen”. I infer that, as before, Mr Neuman’s letter was drafted at the Firm’s offices, with input from Mrs Newton, but she realised that she could not safely return £2 million to Rye Park on Mr Neuman’s instructions without first obtaining clearance from Mr Batkov.

On 21 February Mrs Newton sent a further email to Mr Batkov, saying she had received invoices for the annual fees of the BVI companies, including Ramiro, Tizane and Rye Park. In relation to these last three companies, she said she did not know “whether our mutual client wishes to continue with all or any of these companies”, and she therefore asked for instructions about payment of the fees. Mr Batkov replied on 25 February, authorising her to pay the fees due for all of the BVI companies.

On the same day, 25 February, Mr Batkov sent a further email to Mrs Newton headed “Various matters” and marked with high importance. He said he and Mr Cherney had discussed Mr Neuman’s latest proposal of 20 February “several times”, and Mr Cherney had reacted to it “quite emotionally”. He said that Mr Cherney authorised Mrs Newton to transfer the current balance of the Arlington proceeds of sale (after repayment of the Barclays loan and the sums taken from other client accounts) to Liechtenstein. He continued:

“I lean on your readiness expressed in front of [Mr Cherney] and me to follow whatever instruction given by our mutual client as regards the disposal of the above funds. I am fully aware that the execution of such an instruction might cause you serious problems bearing in mind the fact that [Mr Neuman] has not transferred the ownership over Arlington to [Mr Cherney] before the closing of the deal. On the other hand, the position of [Mr Neuman] expressed in his proposal is rather strange and unacceptable due to the following reason:

- regarding Rye Park – in his letter [Mr Neuman] says that the sum of [£2 million] has been also repaid to Rye Park. As a matter of fact, the actual sum is [£1.25 million]. Probably he forgets that the sum of [£750,000] has been already repaid … You know that Rye Park has been provided with the sum of [€4.25 million] by [Mr Cherney’s] companies on 9^th March 2006 which sum was transferred into its bank account with [La Caixa] with the explicit reference: For acquisition of a property in Spain. We both know that such acquisition has never taken place.

…

I suggest refusing [Mr Neuman] any repayment under Arlington from your client’s account due to the firm objection on the part of [Mr Cherney]. [Mr Cherney] insists on:

1.

repayment of the sum of [£4.25 million] that has been transferred by Denise Overseas to Rye Park …;

2.

report for the sums that have been really spent for repairs on Draycott House, Rose Square and Knightsbridge.

In my opinion, this position in the best possible degree corresponds to the real relations between the parties as well as it ignores the risk for further objections towards [the Firm] on the part of whatever party.

I would like to underline that [Mr Cherney] has no any intention to cancel his agreements with [Mr Neuman] concerning Draycott and Arlington. He only insists on repayment of [£4.25 million] to Rye Park as well as on a report for the expenses on repairs done in the real estates in the UK.”

It is common ground that the references to £4.25 million are mistakes, and that Mr Batkov intended to refer throughout to the €4.25 million which had been transferred by Denise Overseas Ltd to Rye Park in March 2006.

On 3 March Mrs Newton wrote two long letters to Mr Batkov. The first letter related mainly to Draycott House. The second letter related to Arlington Street, and I need to quote most of it:

“Arlington

I refer to your email messages concerning the proceeds of sale of the above share transaction. Having discussed this matter with my partners we are agreed that we have no difficulty whatsoever in returning to Liechtenstein or wherever our mutual client, [Mr Cherney], may request, the funds which he advanced from this firm’s client accounts relating to matters concerning Draycott House, Rose Square and The Knightsbridge or retaining them if he prefers on the client account of this firm relating to those matters. We have seen [Mr Neuman’s] statement that he sent to you indicating that those monies were to be refunded and therefore we have transferred to the respective client accounts held by this firm the relevant sums plus interest on those sums at the rate of 6% as also mentioned by [Mr Neuman] on the statement [details were then set out, together with particulars of the Vida and Barclays loan repayments].

A further sum to be paid relates to Rye Park. Whilst I note your comments relating to a sum of £750,000.00 already having been remitted to the Rye Park account with La Caixa the clear indication that we have from letters sent by Mr Neuman to you is that the sum of [£2 million] must be paid to the account of Rye Park. We are therefore arranging for those monies to be sent to that account. I do not, however fully understand your reference in paragraph numbered 1 in your message to repayment of GBP 4,250,000 and suspect that this is an inadvertent oversight in that you were intending to refer to €4,250,000 as opposed to GBP. The sum that this firm received from Rye Park’s account in Spain was in sterling and amounted to £1,999,994.00 as whilst we understand that the sum placed in the banking system was [£2 million], the bank had deducted charges of £6.00. In the statement we have, however, referred to the full sum of [£2 million] as that is the amount that has been mentioned by [Mr Neuman].

…

I enclose a statement showing the sale proceeds taking into account the above mentioned payments and this firm’s costs and disbursements relating to the transaction to date from which you will note the net profit amounts to £944,573.07. We are holding that amount on the firm’s client account together with interest accrued on the moneys held. As we believe you appreciate we do not feel able to release those funds to [Mr Cherney] without the authority of [Mr Neuman] who was, as you yourself have pointed out in your message to me, the sole director and shareholder of Thornley. We have during last week tried to contact [Mr Neuman] to obtain more specific instructions regarding the distribution of that balance but have been unable to reach him and therefore to obtain any specific instructions on these funds.

May I add that my comments, when we have recently met, to the effect that I had understood at the commencement of the Arlington purchase transaction that we were acting on behalf of [Mr Cherney] were indeed correct. We had assumed at that time that the transaction was to be little different from others, such as Draycott, with which we had been concerned where [Mr Neuman] had been appointed the director and shareholder of certain companies and entered into Deeds of Trust in connection with [Mr Cherney’s] settlements. [She then referred to Mr Neuman’s refusal to execute a Deed of Trust for Thornley]. This inevitably caused us difficulty although we were and are very hopeful, as believe are you, that the parties will resolve any matters relating to that swiftly and amicably.

We consider that, notwithstanding our assumption at the time of the acquisition of the Arlington companies/property and the fact that the funds to acquire Arlington came from either [Mr Cherney’s] funds on the Pettman Smith client account or from Rye Park, as there were no Deeds of Trust entered into and [Mr Neuman] has in his recent correspondence with you indicated that Arlington belonged to him, we cannot act in any other manner as we hope you understand. Until the funds are distributed they will continue to earn interest on our client account and at the time of distribution all such interest will be taken into account as it is client money.”

The statement annexed to the letter showed £2 million paid to Rye Park as a deduction from the sale price of £13.3 million. There was no reference anywhere in the letter or the statement to the side payment.

The letter was to be sent by email only, but on 6 March Mrs Newton received a message that it had bounced back. She therefore resent the letter at 1.02 pm on 6 March, when Mr Batkov accepts that he received it. On the same day, and without waiting for any reply or confirmation from Mr Batkov, the Firm transferred £2 million to Rye Park’s account with La Caixa. Mrs Newton’s explanation for this was that she had interpreted Mr Batkov’s email of 25 February as giving her explicit instructions to return the sums received from Rye Park, and she did not consider that she needed any further instructions before effecting the repayment. She also considered that no deduction should be made for the £750,000 which had previously been paid to Rye Park on Mr Neuman’s instructions, because she understood that it was not connected with repayment of the £2 million.

Mrs Newton next heard from Mr Batkov on 10 March, when he sent her an email replying to her letter of 3 March on Arlington Street as follows:

“[Mr Cherney] defend his position that the Arlington project has launched like the other projects on acquisition of realties in London. Although the whole financing had been provided by [Mr Cherney], [Mr Neuman] did not transfer the ownership depositing the necessary documentation with you. [Mr Cherney] does not refuse to pay a per cent of the upside as set forth in the contract drafted by you. The same is applicable to Draycott, as well in case of its possible sale. One way or another, [Mr Cherney] insists on regulating the relations regarding Spain, including the issue with [€4.25 million] for Rye Park. [Mr Cherney] also insist [Mr Neuman] to present him a report for the expenditures from the Pettman Smith client’s account utilized for repairs. My recommendation is you to assist in reaching reconciliation between the parties and kindly ask you not to undertake any actions with the funds from Arlington.”

Mrs Newton replied on 12 March. She disclaimed any knowledge of arrangements between Mr Cherney and Mr Neuman relating to Arlington Street before the recent discussions which had begun towards the end of 2007. She also said she had no knowledge of any transactions in Spain, apart from the payments which had been made between Rye Park and the Firm. She agreed with Mr Batkov that every effort should be made to help the parties reconcile their differences, but having now spoken at some length with Mr Neuman it was clear to her that there were still substantial areas of disagreement between them.

On 14 March Mr Batkov met Mrs Newton in London. According to her attendance note, the following matters were discussed:

On 17 March Mr Batkov sent a long six page letter to the Firm, setting out Mr Cherney’s position and repeating many of the points which he had already aired with Mrs Newton at their meeting on 14 March. He asked her to amend the completion statement for Arlington Street by showing as an additional receipt the £1.5 million that Mr Neuman had transferred to the Firm from Spain. In making this request, Mr Batkov was clearly treating the £1.5 million as part of the side payment. He noted the conflicting indications which had been given about whether the amount of the side payment was £4 million or £4.5 million. He left it to Mrs Newton to decide whether to include the balance of the side payment which had not been returned from Spain as a further receipt on the completion statement. In relation to Rye Park, he repeated that he had given clear instructions that no payments to Rye Park were to be made from the sale proceeds of Arlington Street, and requested the Firm to take the necessary steps to cancel any payment which had already been made and to restore it to the Firm’s client account. He said that he and Mr Cherney would hold the Firm responsible if it failed to comply with the request. He also instructed the Firm to transfer £2 million to Denise Overseas Ltd, the company which had made the original transfer of €4.5 million to Rye Park. The letter dealt with various other matters, but I do not need to record them.

Some further correspondence then ensued between Mr Batkov and Mrs Newton, but it throws no additional light on the issues I now have to decide. It was about this time when the Firm first notified its insurers of the possibility of a claim against it, and from mid-March 2008 onwards Mrs Newton no longer had full conduct of the files. She provided assistance when requested, but took no further decisions.

I have now completed the basic factual narrative which forms the background for consideration of the preliminary issues identified in paragraph 121 above, and of all the specific claims down to and including those arising from the payment of £2 million to Rye Park on 6 March 2008. I will now proceed to consider those issues, and claims, leaving over until later the payment of £1.5 million to Mr Neuman on 16 April 2008 which is a self-contained topic to which rather different considerations apply.

Was Arlington Street acquired beneficially by Mr Neuman?

I now return to the first of the preliminary issues: was Mr Neuman the beneficial (as well as the legal) owner of Thornley, and was it always intended that Arlington Street should be his own personal acquisition and not one undertaken on behalf of Mr Cherney or entities connected with Mr Cherney?

In my judgment it is clear that these questions must be answered adversely to Mr Neuman. I have already rejected Mr Neuman’s account of what was said at the critical meeting between him and Mr Cherney in Israel at which the purchase of Arlington Street was first discussed: see paragraphs 127 to 129 above. It follows, and I find, that Thornley was incorporated, on Mr Neuman’s instructions, as a vehicle for the purchase of Arlington Street on behalf of Mr Cherney or such of the entities connected with Mr Cherney as he should direct. In this respect I am satisfied that it was understood from the beginning by Mr Cherney, Mr Neuman and (when he was informed of the transaction) Mr Batkov that Mr Neuman would hold the shares in Thornley on trust for a person or entity to be chosen by Mr Cherney. This was the pattern which had already been established for the purchase of the two flats at The Knightsbridge and for the purchase of Draycott House, where Mr Neuman was the sole shareholder and director of (respectively) Thornmead Ltd, Heathley Investments Ltd and Forumside Ltd, and he had executed declarations of trust in favour of the relevant Liechtenstein bodies. I am confident that Mr Cherney always intended to adopt the same procedure for Arlington Street, if and when the purchase went ahead, and cannot believe that he would have been willing to leave such an attractive investment opportunity in a prime location for Mr Neuman to exploit for himself, with loan finance substantially provided by Mr Cherney or his trusts. If Mr Cherney was to provide all, or the lion’s share, of the finance, especially through a mortgage of Draycott House, he would naturally wish to have at least a corresponding beneficial interest in the property. That is not to say that there may not have been, even at this early stage, an informal agreement or understanding between Mr Cherney and Mr Neuman that Mr Neuman would be entitled to a share of any profit realised on a subsequent sale of Arlington Street. But as to the basic ownership structure which the parties intended, I feel no real doubt.

I am not deflected from this conclusion by Mr Cherney’s evidence that stage one of the acquisition of Arlington Street went ahead in something of a hurry and without his prior knowledge or approval. He was irritated, in my view, that Mr Neuman had acted precipitately, and without further reference back to him before committing client account funds to the purchase. But Mr Cherney did not question that Mr Neuman had been purporting to act on his behalf, and I am satisfied that Mr Neuman’s actions fell within the scope of his actual, or at any rate his ostensible, authority. I think it is revealing, in this context, that when Mr Cherney and Mr Batkov were informed of the completion of stage one of the purchase, they did not immediately contact Mrs Newton to criticise her for having followed Mr Neuman’s instructions. I agree with the submission of counsel for the Firm that their failure to react in such a way is a strong indication that Mr Neuman was acting within his authority.

In my judgment Mr Neuman’s claim to be the beneficial owner of Arlington Street is a negotiating ploy which first occurred to him when his relationship with Mr Cherney broke down in mid-2007. He took advantage of the fact that no declaration of trust had been executed to advance a claim to beneficial ownership which, I am satisfied, he must have realised was a false one. Indeed, I am unable to escape the conclusion that his behaviour was cynical, opportunistic and dishonest.

I will add that in reaching this conclusion I have taken due account of what Mr Neuman said in cross-examination in answer to questions from Mr Norbury and Mr Fenwick QC. I found much of his oral evidence to be evasive, at times contradictory, and generally unconvincing. In particular, I find it impossible to believe that, if Mr Neuman had intended the Arlington Street transaction to be his from the outset, he would not have made this clear to Mrs Newton, and she would not have recorded the fact. The absence of any such suggestion in Mrs Newton’s contemporary attendance notes is to my mind one of the strongest indications that Mr Neuman’s claim cannot be true. Indeed, the first occasion in the written record when he unequivocally claimed to have been the purchaser of Arlington Street seems to have been as late as 19 February 2008 (volume F8, page 1770).

Who knew about the side payment?

I have already found that, despite her denials, Mrs Newton knew about the side payment of £4.5 million to Mr Neuman from at least 10 October 2007 onwards. That was the date of the memorandum signed by Mr Neuman, referring to “My proportion of additional payment, £4,500,000”, which she placed (or gave directions to be placed) on the Firm’s general file for Paradiso. The natural inference of knowledge of the payment from this document is supported by a wealth of other evidence, in respect of which, as I have explained, Mrs Newton’s denials seemed to me increasingly incredible. I refer in particular to:

I have naturally thought long and hard before reaching the uncomfortable conclusion that a solicitor of Mrs Newton’s long experience has, on oath, given evidence that she must have known to be untrue. In relation to Rose Square, and the question whether she informed Mr Neuman about the sub-sale, I felt able to give her the benefit of the doubt; but the cumulative effect of the evidence relating to her knowledge of the side payment is such that I reluctantly feel impelled to reject her version of events as untrue. I should add that, having reached this conclusion, I have reconsidered my previous conclusion in relation to Rose Square, but see no reason to change it.

I now turn to the question whether the existence of the side payment was also known to Mr Cherney and Mr Batkov. I have already referred to one piece of evidence which strongly suggests that Mr Cherney already knew about the side payment when a new purchaser of Arlington Street, apparently for £13.3 million, first appeared on the scene, namely his apparent acquiescence and lack of concern when (as I have found) Mrs Newton discussed this development with him (in the presence of Mr Traspov) at the Firm’s offices on 9 October 2007. In making this finding, I have rejected the evidence of Mr Cherney and Mr Traspov about the purpose of the meeting and what transpired at it. I am satisfied that it was a short and unscheduled meeting, but I accept Mrs Newton’s evidence (supported by her attendance notes) of what was discussed at it. The combination of Mr Cherney’s apparent indifference to the news, if the price had indeed dropped as low as £13.3 million, with his attempt to find a different and unconvincing explanation for the purpose of the meeting, is in my view very revealing.

The impression that Mr Cherney knew about the side payment is reinforced by the fact that, when Mr Fenwick QC cross-examined him about the sale of Arlington Street, he disclaimed any knowledge (prior to the commencement of the present proceedings) of discussions for the sale of the property at £13.3 million, but nevertheless said on two occasions, without prompting, that the true amount of the purchase price was £17.8 million (transcript, Day 3, pages 48 and 51). This is a figure that features nowhere in the Firm’s files or the contemporary correspondence, but it is of course the sum of £13.3 million and £4.5 million. Nor can the references be explained away as statements, with the benefit of hindsight, of the overall price which was in fact paid on the sale of Arlington Street, because in each case Mr Cherney was purporting to recollect what was said at the time. As he said on page 51 of the transcript, in relation to Mrs Newton’s email of 15 October 2007 to Mr Batkov, and after having had the entire document translated to him by the interpreter:

“My Lord, I would like to assure you, from the whole letter there is only one point of truth there. There is only one sentence which is truthful there in regard to my conversation with Marie-Garrard, where I talk that not a penny of the sales proceeds from Arlington should be transferred to Spain.

…

I would like to repeat once again that I have never heard about the price lower than 17,800,000. Had I heard anything like that, I would tell her that she has no authorisation for proceeding in such a way to any contract whatsoever.”

There is also evidence to suggest that Mr Batkov always knew that the true purchase price for the sale of Arlington Street was £17.8 million. In paragraph 54 of his witness statement he refers to the letter from Mr Neuman which Mrs Newton sent to him on 23 January 2008. This was the letter in which Mr Neuman said that a totally separate payment of £4 million had been received, for other things not directly associated with the share sale. Mr Batkov then continues, in paragraph 55 of his statement:

“I telephoned Mr Neuman to find out what was happening. I asked Mr Neuman why the side payment had not been £4.5m to make up the agreed sale price of £17.8m.”

In cross-examination Mr Batkov confirmed that he remembered the occasion, and said he had first heard from Mr Cherney on 19 or 20 January that the sale had taken place and been completed. The cross-examination continued:

“ Q. And you telephoned Mr Neuman?

A.

Yes.

Q. And the first question you asked him was: why is it 4 million, not 4.5 million?

A. Yes.

Q. Correct?

A. Correct.

Q. It was not: why did you receive any money by way of a second part of the transaction?

A.

No. ”

Perhaps realising too late what he had given away, Mr Batkov then sought to say his information was that the total amount of the sale was “around £18 million”, and a little later “We looked for 18 million. That’s it full stop.”

In my view the probable truth of the matter is that the price agreed by Mr Neuman with the new purchaser of Arlington Street was £17.8 million, and this was communicated by him to Mr Cherney before Mr Cherney’s meeting with Mrs Newton on 9 October 2007. In view of the difficulties which had been encountered with Raylan, I have little doubt that the small reduction of £200,000 from the previous asking price of £18 million would have been acceptable to Mr Cherney. I think that Mr Cherney and Mr Neuman must also have agreed, at least provisionally, as part of their on-going and at times acrimonious negotiations to resolve their differences, that Mr Neuman’s share of the new price should be £4.5 million, and that it should be paid to him “under the table”, with an ostensible price payable on completion of only £13.3 million. Mr Batkov must also have been informed of this agreement, presumably by Mr Cherney. In my view it is only the existence of some such agreement between Mr Cherney and Mr Neuman which can explain the otherwise irreconcilable facts that (a) both Mr Cherney and Mr Batkov independently referred to the agreed purchase price, on more than one occasion, as being £17.8 million, but (b) the sale proceeded above board as one for only £13.3 million.

Although I find on the balance of probabilities that this is what happened, I do not disguise that there are several aspects of the affair which still remain puzzling. One question is why the £4.5 million had to be paid under the table to Mr Neuman. It seems not unreasonable to speculate that there may have been (discreditable) tax reasons for this. Another question is why the new purchaser (or purchasers, after the onward sale of Arlington Street itself was agreed) should have been willing to go along with the deception. I do not pretend to know the answer to this question, but there are many reasons (which I need not go into) for believing that the new purchaser or purchasers were connected in one way or another with the mysterious figures of Tam Singh and Mr Janjua, or even (as the claimants submit) that the new sale was in substance the original proposed sale to Raylan dressed up in a new guise. A third question is why, if Mr Cherney and Mr Batkov in fact knew about the side payment, Mrs Newton should have been so anxious to distance herself from it and to pretend that she knew nothing about it. One reason for this could be that, although Mr Neuman had told her about it, and enlisted her help in relation to the transfer of the money to Spain, he never told her that it was also known to Mr Cherney and Mr Batkov. It may have suited him, for reasons which are now obscure, to play a double game of this nature. Another possible explanation is that Mrs Newton knew, or at least suspected, the truth, but could not admit it when the hoped for reconciliation between Mr Cherney and Mr Neuman failed to materialise, because no solicitor could properly have been complicit in the deliberate concealment of the true amount of the purchase price.

In any event, whatever the answer to these conundrums may be, I am satisfied that Mr Cherney’s and Mr Batkov’s knowledge of the side payment provides a complete answer to the claims against the Firm which relate to the side payment as a whole. Even if it could be established that the Firm was negligent in not taking steps to prevent the side payment being made, or that Mrs Newton acted in breach of fiduciary duty in preferring the interests of Mr Neuman to those of Mr Cherney, the fact that Mr Cherney and Mr Batkov intended the transaction to be structured in this way, and intended £4.5 million to be paid to Mr Neuman, precludes them from complaining about what happened, or from alleging that any loss was thereby caused either to Mr Cherney or to any of the other claimants. In short, the side payment to Mr Neuman was made with their full knowledge and authority.

The absence of a declaration of trust for Thornley

I now come on to the specific allegations of breach against the Firm, beginning with the alleged failure of the Firm to ensure that Mr Neuman executed a declaration of trust over the shares in Thornley.

The allegation is pleaded as follows in paragraph 67 of the amended particulars of claim:

“In further breach of the duties of care, Pettman Smith failed to ensure or to take reasonably adequate steps to ensure that Mr Neuman executed a deed of trust in favour of Mr Cherney or Vida before [Thornley’s] incorporation alternatively before the initial Arlington Street purchase alternatively before Arlington Street Ltd was sold (as set out below). As a result, Mr Cherney and/or Vida have suffered loss as [a] result of the events after the said sale (as set out in paragraph 118 below).”

Paragraph 118 says that:

“As a result of the said breaches …, Mr Cherney and/or Vida have suffered loss and damage in the sum of up to £5,663,750 in that Mr Neuman rather than Mr Cherney and/or Vida has received up to £5,663,750 belonging to alternatively owed to Mr Cherney and/or Vida from the sale of the Thornley shares.”

I accept the submission of counsel for the Firm that the correct question to ask is whether, in all the circumstances, Mrs Newton failed to take reasonable steps to obtain a deed of trust, signed by Mr Neuman, in favour of an identified beneficiary. In answering this question it is necessary to look at the matter chronologically, and without the benefit of hindsight.

The first stage of the acquisition of Arlington Street took place very quickly. Mrs Newton discussed it with Mr Neuman and Tam Singh on Friday, 17 February 2006, and received instructions from Mr Neuman that the transaction was to go ahead on the basis that the shares in 11-15 Arlington Street Ltd would be purchased by a newly formed BVI company of which he was to be the director and shareholder. On Monday, 20 February Thornley was established, and on the following day the sale and purchase agreement between the Glantz brothers and Thornley was entered into and duly completed. At this early stage Mrs Newton had no reason to suppose that Mr Neuman was acting as anything other than Mr Cherney’s trusted agent, with full powers to effect the transaction on his behalf. I do not think it is realistic to say that Mrs Newton should have taken steps to obtain the execution of a declaration of trust by Mr Neuman at this stage, not least because the purchase of the lease of Arlington Street from LUL (stage two of the acquisition) still had to take place. It was the second stage which would involve the main investment of client funds, and in my view a reasonably competent solicitor could quite properly have decided to leave over the preparation of a deed of trust until completion of stage two. Mr Neuman had signed deeds of trust when asked to do so in the past, and there was no reason to suppose that he would be unwilling to do so again in the future.

On 16 March 2006, a fortnight before the completion of stage two, Mrs Newton wrote to both Mr Batkov and Syndikus saying that she had prepared a deed of trust and expressly stating that she needed to know “the name of the trust for whom Mr Neuman will be acting as nominee in this particular instance … so that I may finalise the deed”. Mrs Newton never received a reply to this request. In my judgment she adequately discharged her duty of care by preparing a draft deed and sending this letter when she did, and the ball was then in the claimants’ court to supply her with the necessary instructions. One reason why no instructions were forthcoming may have been Mr Batkov’s curious belief, elicited in cross-examination, that it would have been satisfactory for Mr Neuman to sign a deed of trust in blank leaving the name of the beneficiary to be inserted at a later date when Mr Cherney had decided who the beneficiary was going to be. Another possibility is that Mr Cherney wanted to keep his options open for as long as he could, before committing himself about where in his property empire this investment was to be held. One thing I regard as certain is that he would not have wished to be named as the beneficiary himself. Such a degree of transparency would not have suited his purposes.

Nor can Mrs Newton be fairly criticised, in my judgment, for failing to make an educated guess about the identity of the beneficiary. It was no doubt likely that Mr Cherney would in due course nominate one of the two Liechtenstein foundations, but there was no way of knowing which one. This is well illustrated by the fact that the transaction is pleaded as one that was intended to be for the benefit of Vida, but in the event the instructions that were given to Mrs Newton in late September 2007 were to draft a deed in the name of Paradiso.

Mrs Newton says in her witness statement, and confirmed in cross-examination, that she again raised the matter of a deed of trust with Mr Neuman before completion of stage two, but he told her that it was probably not necessary to organise one. It was put to Mrs Newton that she should not have accepted instructions from Mr Neuman on this point, because the whole purpose of a deed would have been to protect the principal, Mr Cherney, against his agent, Mr Neuman. However, I agree with the submission of counsel for the Firm that this is an artificial way of looking at the matter, and heavily coloured by hindsight. At that stage Mrs Newton still had no reason to suppose that there was likely to be a conflict of interest between Mr Neuman and Mr Cherney, and she was in my view fully entitled to accept Mr Neuman’s response as an indication, on Mr Cherney’s behalf, that the time was not yet ripe for a decision to be made on the identity of the beneficiary.

On 20 April 2006 Mrs Newton met Mr Cherney for the first time. I have already found (see paragraph 147 above) that Mr Cherney said on this occasion that he was content with developments to date, and that he told Mrs Newton to continue taking instructions, as before, from Mr Neuman and Mr Batkov. It is true, as Mrs Newton reluctantly accepted, that the opportunity could have been taken to obtain Mr Cherney’s instructions on the Thornley declaration of trust, and to get Mr Neuman to sign it then and there. With the benefit of hindsight, this would obviously have been an appropriate occasion for this step to be taken. Nevertheless, I am not prepared to stigmatise her failure to raise the subject as a breach of duty. It was, at most, a non-negligent error of judgment on her part.

The matter was then left in abeyance for well over a year. I accept that a solicitor better organised than Mrs Newton would probably have followed up her earlier request for instructions with one or more reminders, but the fact remains that the ball was still in the claimants’ court, and they took no steps to provide Mrs Newton with the necessary instructions. I cannot regard her failure to follow the matter up, with experienced clients who were well able to look after their own interests, as a negligent breach of duty. As a lawyer dealing with the conveyancing and corporate sides of the transaction, it was in my view sufficient for Mrs Newton to have sought the necessary instructions once in clear terms in correspondence, and to have raised the matter again with Mr Neuman. She says that she may also have mentioned the lack of a deed of trust to Mr Batkov in a later meeting. Whether or not that is the case – and her evidence on the point is too inconclusive for me to make a finding on it – I consider that her rather passive attitude to the problem falls, albeit by a narrow margin, on the acceptable side of the line. With a wealthy overseas client like Mr Cherney, surrounded by business advisers of his own, it was not her duty to chivvy him on a matter which he must have understood perfectly well for himself.

On 5 July 2007 Praesidial asked Mrs Newton for the first time to provide the “whole documentation” in relation to “Arlington Road”. I have already quoted (see paragraph 153 above) from Mrs Newton’s reply to this request on 13 July, when she said that the Firm had no instructions to provide such information. I commented that the reply reads rather oddly, because it seems only natural that the foundations which provided much of the purchase price of Arlington Street should have wished to be supplied with a full set of documents, and one wonders whether Mrs Newton really needed to obtain instructions before complying with such a simple request. In her oral evidence Mrs Newton said, rather defensively, that she was expecting to get instructions from either Mr Neuman or Mr Cherney, but she was not asked to explain why it was necessary to get instructions at all. The answer may be, as counsel for the Firm submitted in their closing submissions, that in August 2006, nearly a year earlier, Mr Cherney had given her instructions (presumably through Mr Neuman) not to forward information to Leichtenstein about the arrangements made for the flats at The Knightsbridge and Draycott House. Mrs Newton had evidently been rather troubled by this request, and she wrote to Mr Batkov on 17 August 2006 explaining her difficulty:

“In all instances, I am, of course, able to send copies of all the documentation to Liechtenstein to bring them up to date to ensure that they have current information on these properties, but in view of the instruction received from our mutual client, I am concerned that by doing so I am acting in a manner which is contrary to his requirements. On the other hand, I fully understand that it is the Trust that is providing the funds and therefore, in effect, instructing me and they are therefore entitled to information. I should therefore be most grateful for your assistance in advising me what action I should now take in responding to Liechtenstein, in particular whether or not I should forward to them copies of the documentation that they seek.”

Mrs Newton and Mr Batkov subsequently met in September 2006, and on 18 September she wrote to Ms Liechti providing some of the information that had been requested. She then sent a much fuller set of documents for the two flats at The Knightsbridge, including the deeds of trust signed by Mr Neuman, on 23 October 2006.

In the light of this background, it seems to me quite probable that in July 2007 Mrs Newton was nervous about supplying documentation relating to Arlington Street without express authority to do so, and that this explains the terms of her response to the request from Praesidial. In any event, I am satisfied that there is nothing sinister about her response, and in particular that it does not betray any attempt by her to buy time, or to prefer the interests of Mr Neuman to those of Mr Cherney. The position was, rather, that for reasons best known to himself Mr Cherney had shown himself reluctant to provide Liechtenstein with full documentation relating to The Knightsbridge and Draycott House, and it was impossible to be sure, without taking instructions, that his attitude in relation to Arlington Street would not be the same.

On 26 September 2007 Mr Cherney and Mr Batkov met Mrs Newton at the Firm’s offices. This was the occasion when, apparently to their surprise, Mr Cherney and Mr Batkov discovered that no deed of trust had been executed for Arlington Street, and Mrs Newton was told to prepare one as soon as possible with Paradiso as the beneficiary. By now, however, it was too late. Relations between Mr Cherney and Mr Neuman had already broken down, and when he was asked to sign a deed two days later he refused to do so.

This narrative establishes, in my judgment, that although Mrs Newton’s conduct in relation to the deed of trust is in a number of respects open to criticism, it never fell below the standard required of a reasonably competent solicitor. The allegation of breach of duty is therefore not made out, and the claim must fail. I will only add that, if liability had been established, the claim would in my view anyway break down at the stages of causation and loss. Even if a deed of trust in favour of Paradiso had been in place, Mr Neuman would still have received the side payment when Arlington Street was sold, and I see no reason to suppose that the existence of the deed would have prevented any of the transactions of which the claimants now complain.

The payment of £750,000 to Rye Park on 30 May 2006

The claimants’ pleaded case in relation to this payment, and the subsequent payment of £500,000 to Tam Singh on 18 December 2007, is as follows:

“85.

Following the Arlington Street purchase, Pettman Smith and Child & Child made the following payments out of funds held in their client account for Mr Cherney, Vida and/or Paradiso on Mr Neuman’s instructions:

85.1

On 30 May 2006, £750,000 was paid to Rye Park by Pettman Smith; and

85.[2] On 18 December 2007, £500,000 was paid to Mr Tam Singh as an “agent fee” by Child & Child.

86.

Neither of the said payments was authorised by the Claimants or any of them. Mr Neuman is accordingly liable to account to Mr Cherney, Vida and/or Paradiso for the said sums. Further, the said payments were made in breach of their retainer and/or in breach of their duties of care and/or in breach of trust by Pettman Smith and Child & Child respectively. Further or alternatively, the said payments were made in breach of Pettman Smith’s and Child & Child’s retainers and/or duties of care respectively in that no alternatively inadequate attempts were made to obtain the authority of Mr Cherney, Vida, Paradiso (whether directly or through Mr Batkov) before making the said payments. The Claimants have suffered loss and damage in the amount of the said payments as a result. Further and in any event, Pettman Smith and Child & Child are respectively liable to restore the said payments.”

In my judgment the claim relating to the £750,000 can be rapidly disposed of. At this relatively early date, there was no sign of any discord between Mr Cherney and Mr Neuman; and little over a month earlier, at the meeting on 20 April 2006, Mr Cherney had expressly stated his wish that the Firm should continue to take instructions from Mr Neuman and Mr Batkov. This payment was made in response to an instruction given by Mr Neuman, and his explanation was that it was urgently required in connection with one of Mr Cherney’s property transactions in Spain. Rye Park had recently been established as a vehicle for one of Mr Cherney’s Spanish property transactions, and all the indications at that date were that Rye Park was a Cherney company, like those used for the London properties, even though Mr Neuman was the sole shareholder and director. I consider that Mr Neuman was clearly acting within the scope of his actual or ostensible authority in giving this direction to Mrs Newton, and that she was fully justified in implementing it without more ado. The only question asked of Mrs Newton in cross-examination about this transaction was whether she thought she should have checked the position with Mr Batkov and Mr Cherney before making the transfer. Her reply was:

“As I stated a moment ago, my understanding was that Mr Neuman had authority as the agent of Mr Cherney to give me such instructions.”

In my view Mrs Newton was entitled to reply as she did, and it is only with the benefit of hindsight that her conduct may appear a little imprudent. It is true, as she accepted in cross-examination, that she had not made any payments before to Rye Park, and the sum of money involved was large. However, she had every reason to believe that Rye Park was beneficially owned by Mr Cherney; Rye Park had itself advanced £2 million on 24 March 2006 to fund stage one of the acquisition of Arlington Street; and although £750,000 was a large sum of money, it was nothing out of the ordinary in the context of Mr Cherney’s property transactions, and she had recently been instructed by Mr Cherney to continue taking instructions from Mr Neuman. In my view the claim is a hopeless one, and it must be dismissed.

The payment of £500,000 to Tam Singh on 18 December 2007

I have set out the claimants’ pleaded case in relation to this payment in paragraph 255 above.

The background to the payment is briefly as follows. On 28 September 2007 Mrs Newton had assured Mr Cherney that she was acting in his best interests in relation to the sale of Arlington Street. On 9 October she had informed him about the apparently new sale of the property for £13.3 million. I have found that both she and Mr Cherney in fact knew that the purchase price for the new sale was in reality £17.8 million, and that Mr Neuman was expecting to receive the side payment of £4.5 million as part of the settlement of his dispute with Mr Cherney. On 11 October contracts for the new sale were exchanged, and Halsbury paid a deposit of £400,000. On 15 October Mr Batkov instructed Mrs Newton by email not to allow payments of any kind to be made from the proceeds of sale of Arlington Street or Draycott House before Mr Cherney had completed his investigation into the utilisation of the funds which Mr Cherney had provided to Mr Neuman for the acquisition of the Gema Hotel in Spain. Mrs Newton’s understanding, as a result of this email and her meeting with Mr Cherney on 9 October, was that she was not authorised to distribute any of the Arlington Street proceeds of sale on the sole instructions of Mr Neuman, although he still had authority to give her instructions on other matters.

On 12 December the sale of Arlington Street was completed, and £12.9 million was remitted by CKFT to the Firm’s client account. At about the same time, £4.5 million was remitted by Montague Lambert to Mr Neuman’s bank account in Spain. On 14 December Mr Neuman instructed Mrs Newton in writing to make a payment of £500,000 to “the agent” Tam Singh, but apart from that told her not to release any of the Arlington Street proceeds of sale without further instructions from him. According to Mrs Newton, this written instruction followed a telephone conversation between her and Mr Neuman in which they discussed the sale proceeds and he informed her that he had agreed to pay Mr Singh an agent’s fee of £500,000 for the introduction of the buyer. Mrs Newton said in cross-examination, and I accept, that this was the first she knew about the payment of such a fee to Mr Singh. However, she told Mr Neuman that she was unable to comply with his request, because she needed Mr Cherney’s permission before making any payments out of the proceeds of sale. His reaction to this was to say that he would arrange for £500,000 to be sent to the Firm’s account from Spain so that the completion monies would remain intact. Thus it was that on 18 December Mr Neuman transferred £500,000 (less £7 bank charges) into the Firm’s client account for Paradiso, and Mrs Newton, acting on the instructions of Tam Singh, transferred £500,000 from the same client account into Mr Janjua’s client account.

When asked why she had not checked the position with Mr Cherney or Mr Batkov before making the payment to Mr Singh, Mrs Newton said that as far as she was concerned the money which came into the client account came from Mr Neuman. She did not think it odd that Mr Neuman was giving Mr Singh £500,000, even though any introduction effected by Mr Singh must have been on behalf of Mr Cherney as the beneficial owner of Arlington Street, because Mr Neuman was in the process of negotiating a split of the proceeds of sale with Mr Cherney, and in that context she thought that Mr Neuman “may have decided or agreed with Mr Singh to make a payment to Mr Singh”. It did not occur to her that Mr Neuman might be trying to conceal the payment from Mr Cherney, and from her point of view it was enough that Mr Neuman had asked for the payment to be made and had then put her in funds to make it. As to the reason why the payment was made into Mr Janjua’s client account, she said that Mr Singh did not have an account of his own with the Firm into which the money could be paid. When asked why the money had to be paid into a client account at all, her answer was “Because those were the instructions which I received”. She accepted that Mr Singh was in the habit of acting as an agent for Mr Janjua, and professed not to be surprised that Mr Singh wanted the money to be paid into Mr Janjua’s account. She thought that Mr Singh might have done this if he had had instructions from Mr Janjua that the money was needed for a particular matter.

In evaluating this evidence I need to bear in mind that Mrs Newton’s position was that she was still unaware of the side payment, and so far as she was concerned the sale of Arlington Street had indeed been completed for £13.3 million, all of which (including the original deposit) had been paid into Paradiso’s client account. I have found, however, that Mrs Newton knew about the side payment, although she may not have known that Mr Cherney and Mr Batkov also knew about it. In these circumstances her evidence takes on a rather different complexion. It seems to me she must have realised that the £500,000 provided by Mr Neuman almost certainly came from the side payment, and that it was not a normal agent’s fee but rather represented the cut taken by Mr Singh and/or Mr Janjua for their participation in the transaction, including (I suspect) engineering the “new” sale to Halsbury with a split purchase price. On the footing that the £500,000 formed part, or almost certainly formed part, of the side payment, Mrs Newton must also have realised that it might be covered by her instructions not to part with any of the proceeds of sale without the authority of either Mr Cherney or Mr Batkov.

In my view Mrs Newton was adopting a very high risk strategy when she agreed to Mr Neuman’s suggested method of payment of the £500,000. In proceeding as she did, she was exposing herself and the Firm to powerful prima facie claims that they had acted in breach of trust (because £500,000 was paid out of the Paradiso client account without any authority from Paradiso); in breach of fiduciary duty (because she was improperly preferring the interests of Mr Neuman to those of her client Mr Cherney); and in breach of the contractual and tortious duties of care which she owed to Mr Cherney and Paradiso (because she knew the £500,000 almost certainly formed part of the proceeds of sale, but she paid it out without obtaining authorisation from either Mr Batkov or Mr Cherney). Nevertheless, assuming these claims (or some of them) to be made out, the question remains whether Mr Cherney or Paradiso can be said to have suffered any loss as a result, or whether any restitution for breach of trust needs to be made. In my opinion it is at this stage that the claim clearly fails, subject to one trivial exception.

The critical point is that Mr Cherney knew about the side payment. By agreeing to a split purchase price, and the payment of £4.5 million to Mr Neuman in Spain, he must in my view have intended that the £4.5 million should then be at Mr Neuman’s free disposal. The precise nature and purpose of the agreement or understanding between Mr Cherney and Mr Neuman in relation to the side payment remains a mystery, but I am satisfied that if Mr Cherney had wished to keep control of the side payment he would not have authorised its transfer to Mr Neuman’s Spanish bank account. Similarly, he can only have intended his instructions to Mrs Newton relating to the proceeds of sale of Arlington Street to apply to the above board purchase price of £13.3 million which was paid into the Firm’s client account. It also seems to me more than likely, and if necessary I am prepared to find on the balance of probabilities, that Mr Cherney knew that Tam Singh was to be paid £500,000 for his participation in the transactions, whether as agent or otherwise, and it was understood between him and Mr Neuman that the sum due to Mr Singh would be discharged by Mr Neuman. If that, or something like it, was the true position, it is plain that Mr Cherney and (through him Paradiso) cannot claim to have suffered any loss as a result of the payment of £500,000 to Mr Singh, because that was always intended to be his cut for the deal, and Mr Neuman was always going to be responsible for paying it.

This conclusion is sufficient to dispose of the claims based on breach of duty and breach of fiduciary duty. A footnote is still needed, however, for the breach of trust claim. Paradiso cannot in my judgment seek to recover the £500,000, even though it was paid out of the Paradiso client account, because the payment was matched by the simultaneous (or virtually simultaneous) payment in of £500,000 by Mr Neuman, and the latter sum (as I have found) was always intended by Mr Cherney to be Mr Neuman’s money once the side payment had been made. In effect, the client account was used as a channel for a payment by Mr Neuman to Mr Singh, and the Firm never held the £500,000 paid by Mr Neuman on trust for Paradiso because it was paid for the specific purpose of funding the onward payment to Mr Singh. However, the net result of the transaction was to deplete the client account by £7, that being the amount of the bank charges deducted from the £500,000 transferred by Mr Neuman.

It seems to me that the Firm has no answer to a claim that the £7 was paid away without authority, and to that trivial extent liability for breach of trust is established. In the context of the present case, however, I regard a claim for £7 as falling within the principle “de minimis non curat lex”, and I will therefore not go on to enquire what defences the Firm might have to the claim, or whether the loss of the £7 remains uncompensated. It is enough to say that many of the points which I will discuss in relation to the next two claims (the £2 million paid to Rye Park and the £1.5 million paid to Mr Neuman) would, in principle, be relevant to any such investigation.

As before, I will begin by setting out the way in which the claim is pleaded:

“121.

As set out in paragraphs 90 to 92, 97 and 100 above, Mr Cherney and/or Mr Batkov on behalf of all the Claimants repeatedly instructed Ms Newton not to transfer funds to Rye Park notwithstanding the fact that £1,999,994 had been advanced from Rye Park monies for the purposes of the Arlington Street purchase (such sums being held by Child & Child on implied or constructive trust for Mr Cherney alternatively Vida or Paradiso at all material times). Further such instructions were given and accepted during meetings between Ms Newton and Mr Batkov on 31 January 2008 and 19 February 2008. Further:

121.1

On 20 February 2008, Ms Newton asked (by email) for instructions as to whether the advance from the Rye Park monies for the purposes of the Arlington Street purchase should be repaid to Rye Park (apparently forgetting or choosing to ignore that £750,000 had already been repaid); and

121.2

On 25 February 2008, Mr Batkov replied by email with instructions from Mr Cherney not to pay Mr Neuman or Rye Park any sums from the Pettman Smith client account(s).

122.

On 6 March 2008, Child & Child paid the sum of £2,000,000 to Rye Park, informing Mr Batkov by a letter (dated 3 March 2008) attached to an email on 6 March 2008 that this payment was being arranged, notwithstanding:

122.1

the repeated instructions from or on behalf of Mr Cherney and/or Vida that the Rye Park monies not be repaid from the funds held on client account by Pettman Smith then Child & Child; and

122.2

the fact that Pettman Smith had already paid Rye Park £750,000 on 30 May 2006.

123.

In making the said payment, Child & Child were in breach of clear instructions to the contrary as set out above and thus in breach of trust.

124.

As a result of the said breach of trust, Child & Child are liable to restore the £2,000,000.”

The factual background to the payment was briefly as follows. On 19 February 2008 Mr Cherney, Mr Batkov, Mr Mazin and Mrs Newton attended a meeting to discuss how the sale proceeds of Arlington Street should be distributed. Mrs Newton received instructions, as recorded in her attendance note, that she should redeem the loan from Vida and the mortgage from Draycott House, and that the “other sums should be returned to the various accounts from which they were taken for the purchase”. Mrs Newton confirmed in cross-examination that she assumed the reference to “various accounts” to be a reference to client accounts. On 20 February Mrs Newton emailed a letter and statement to Mr Batkov on Mr Neuman’s behalf. The letter said that £2 million was “being returned to Rye Park”, but in her covering email to Mr Batkov Mrs Newton expressly asked whether she should implement that payment. She agreed in cross-examination that it was clear to her that she needed instructions from Mr Batkov before releasing any money to Rye Park. Mr Batkov then responded by email on 25 February, having discussed Mr Neuman’s latest proposals with Mr Cherney. I have quoted much of this email in paragraph 219 above, and I will not repeat it. On any view, the email made clear Mr Cherney’s insistence on repayment of the sum of €4.25 million that had been transferred by Denise Overseas Ltd to Rye Park. The email also “suggested” refusing Mr Neuman any repayment “under Arlington” from the Firm’s client account, because of Mr Cherney’s “firm objection”.

In her written evidence Mrs Newton said that as a result of this email “I considered that I had been given explicit instructions to return the sums received from Rye Park”. She had no details about Denise Overseas Ltd, and since the £2 million had originally been obtained from Rye Park, she thought that the only way she could comply with Mr Cherney’s instructions was to return the money to Rye Park. She pointed out that in the final paragraph of his email Mr Batkov had said Mr Cherney insisted on repayment of €4.25 million to Rye Park (emphasis supplied). She said she considered her instructions to be relatively clear, and she did not understand Mr Batkov to take any issue with the making of a repayment to Rye Park, subject to his point that £750,000 had already been returned.

In cross-examination Mrs Newton maintained this line, and said that she clarified her understanding of her instructions in her letter of 3 March 2008 to Mr Batkov. I have quoted most of this letter in paragraph 220 above, and again I will not repeat it. The letter said that the Firm was arranging for £2 million to be sent to Rye Park’s account with La Caixa, and emphasised that Mr Neuman’s instructions were to remit that sum without giving credit for the £750,000 which had been paid in May 2006. Mrs Newton said that the purpose of her letter was to give Mr Batkov an opportunity to revert to her if her understanding of the position was incorrect. She accepted, however, that on 6 March she discovered that her letter had bounced back, and on the same day she authorised the payment of £2 million without knowing whether Mr Batkov objected to it or not. When it was put to her that she took a risk, she replied:

“I assumed, as I had not heard back from him, that I could rely upon the email from him of 25 February which clearly stated that Mr Cherney required the money back that he had sent from Denise Overseas to Rye Park.”

In my opinion Mrs Newton ran a wholly unjustifiable risk in deciding to make the payment of £2 million to Rye Park on 6 March without waiting for express confirmation from Mr Batkov. The authority that she purported to find in his letter of 25 February was far from clear, and even on the most favourable interpretation could have extended only to £1.25 million. Furthermore, since the request for the payment had come from Mr Neuman, it should have been clear to Mrs Newton that the payment was at least arguably covered by Mr Batkov’s “suggestion”, particularly when read with the authority given to Mrs Newton in the first paragraph of the letter to transfer the current balance (after specified repayments) to Liechtenstein. Bearing in mind Mr Batkov’s rather idiosyncratic command of English, common prudence must have dictated that clear and explicit authorisation would be needed before making any payment to Rye Park. This Mrs Newton signally failed to obtain, I suspect because her loyalties were by now hopelessly divided and she wished to help Mr Neuman as much as she could.

In all the circumstances I conclude that the £2 million was indeed paid out of the Firm’s client account in breach of trust, because Mrs Newton had no authority to make the payment. Since the payment was made from the Paradiso client account, Paradiso is the claimant which is prima facie entitled to require restoration of the £2 million.

Money held by a solicitor on client account is held on trust for the client. A trustee who wrongly pays away trust money commits a breach of trust, and comes under an immediate duty to remedy the breach. But, as Lord Browne-Wilkinson said in Target Holdings Ltd v Redferns [1996] AC 421 at 437C:

“the fact that there is an accrued cause of action as soon as the breach is committed does not … mean that the quantum of the compensation payable is ultimately fixed as at the date when the breach occurred. The quantum is fixed at the date of judgment at which date, according to the circumstances then pertaining, the compensation is assessed at the figure then necessary to put the trust estate or the beneficiary back into the position it would have been in had there been no breach.”

In carrying out this exercise, hindsight and common sense are to be employed:

“Equitable compensation for breach of trust is designed to achieve exactly what the word compensation suggests: to make good a loss in fact suffered by the beneficiaries and which, using hindsight and common sense, can be seen to have been caused by the breach.”

(Ibid at 439B)

The starting point in considering this question is the fact that the £2 million was paid to Rye Park, a company which was established as a vehicle for Mr Cherney’s Spanish property transactions, and specifically the purchase of the Gema Hotel. I am satisfied that the original intention of Mr Cherney and Mr Neuman was that Rye Park should be beneficially owned by Mr Cherney, and that this continued to be the position at least until the relationship between the two men began to break down in mid-2007. Mrs Newton says that she still considered Rye Park to be beneficially owned by Mr Cherney even when the £2 million was paid in March 2008; and some support for this may be found in the fact that as recently as February 2008 Mr Batkov had given instructions for the annual fees of Rye Park and the other BVI companies to be paid by the Firm on Mr Cherney’s behalf. Thus it is far from self-evident that the £2 million paid to Rye Park was in fact lost to Mr Cherney. That would be the case only if Mr Neuman, in breach of the original agreement between them, misappropriated the money or otherwise failed to ensure that Mr Cherney received the full benefit of it, whether or not through the medium of Rye Park. If Mr Cherney has, in one way or another, already received the full benefit of the £2 million, it would not be just or equitable to require the Firm to restore the same amount to Paradiso’s client account, or to pay an equivalent amount by way of compensation.

At this point it is necessary to look more closely at the settlement between the claimant and Mr Neuman concluded in September 2010. I have already summarised (in paragraphs 5 to 8 above) the main terms of the written compromise agreement dated 15 September 2010. For present purposes, I draw attention to three of those terms. First, the claimants agreed to accept the compromise in full and final settlement of all claims, rights or causes of action (defined in the widest terms in paragraph 12) which they might have against Mr Neuman, East West Building Consultants Ltd and Draycott Property Management Ltd. Secondly, Mr Cherney agreed to procure the discontinuance of the proceedings brought by Denise Overseas Ltd against Mr Neuman and Rye Park in Valencia, Spain (paragraph 14; this and another set of proceedings to be discontinued were defined as “the Spanish Proceedings”). Thirdly, it was expressly agreed and acknowledged by Mr Neuman (also in paragraph 14):

“… that the properties and all rights attached to them which are the subject matter of the Spanish Proceedings belong to [Mr Cherney], directly or indirectly, and [Mr Neuman] will execute all documents necessary to perfect the registration of those properties according to [Mr Cherney’s] instructions. Further, [Mr Neuman] acknowledges that he has no claim against the Claimants for any monies spent or work done in connection with such properties or any other monies or works whatsoever.”

The pleadings in the relevant Spanish Proceedings are in evidence, with English translations. In bare summary, Denise Overseas Ltd contended that it had paid €4.25 million to Rye Park to complete the purchase of the Gema Hotel, pursuant to a mandate agreement entered into between the two companies. Ownership of the hotel had not been transferred to Denise Overseas Ltd, nor had any of the purchase money been returned. The claimants therefore sought performance of the agreement or return of the money. In his defence Mr Neuman put forward a very different version of events, and denied that the €4.25 million transferred to Rye Park was ever intended to be used for the purchase of the Gema Hotel. He said that he and Mr Cherney, together with their respective companies, had engaged in several joint business ventures, and there had been “an intense legal and financial relationship” between them over the last few years. Mr Neuman accepted that the state of account between him and Mr Cherney needed to be resolved, but said it was not possible to look at one transaction in isolation from all the others. He acknowledged that approximately €2.6 million was prima facie due to the claimants out of the original advance of €4.25 million, but sought to raise a counterclaim for his 20% share of profits from the common ventures. This counterclaim was subsequently struck out by the Spanish court because it was insufficiently closely related to the claim. For its part, Denise Overseas Ltd succeeded in obtaining “precautionary measures” (broadly equivalent to a freezing injunction) attaching to various properties alleged to be owned by Mr Neuman in Spain and Rye Park’s Spanish bank accounts.

There is also a further complication which needs to be noted. Despite all appearances to the contrary, it appears that the written compromise agreement of 15 September 2010 did not represent the entirety of the agreement between the parties. On the eve of the trial, 16 March 2011, Mr John Mark Buckley of Fladgate LLP, the claimants’ solicitors, made a witness statement (his ninth) to correct what he had said in paragraph 3 of his earlier statement dated 7 October 2010, to the effect that the written compromise agreement was the entirety of the settlement between the parties. He said:

“In fact, by oversight I omitted to state that a further term had been orally agreed between the parties on about 15 September 2010 which was that the rights to the Gema Hotel, Moraira, Spain acquired for the sum of €526,751 paid to Massgava SL pursuant to a private purchase agreement signed on 27 May 2004 be given to [Mr Neuman].”

When Mr Neuman was cross-examined by Mr Fenwick, he at first denied that there had been a separate oral agreement relating to the rights to the Gema Hotel, but when he was shown Mr Buckley’s statement he retracted that evidence and said he now remembered that his Spanish lawyer wanted to be sure that Mr Cherney could have no claim to the hotel, and this was then agreed between Mr Neuman and Mr Cherney. Mr Cherney also agreed in cross-examination that there had been a separate oral agreement relating to the Gema Hotel, although he said that he regarded the rights as worthless so he was not in fact giving anything away by the agreement.

Quite apart from the side agreement relating to the hotel, it also transpired from Mr Neuman’s evidence that there was a separate Spanish settlement agreement. The existence of this separate agreement had first surfaced during Mr Neuman’s cross-examination of Mr Batkov, when Mr Neuman asked him whether he was aware that a separate agreement had been drawn up dealing with “everything that had to do with Spain”. Mr Batkov replied “Yes, of course”. Mr Neuman then put it to him that whatever was contained in the agreement “should not be discussed in [the] London court”, to which Mr Batkov said “but this is your point”, and then refused to comment any further in his capacity as a witness. When Mr Neuman was cross-examined himself, he explained the existence of the separate Spanish agreement on the basis that Mr Cherney did not have his Spanish lawyers with him in Israel when the English agreement was concluded, and it was therefore agreed to write up the Spanish agreement later. Mr Neuman maintained that the Spanish agreement followed paragraph 14 of the English agreement “one hundred per cent”, and that allowing for differences in legal terminology the concept, the principle and the points were “exactly the same”. When asked what he had meant when putting it to Mr Batkov that the Spanish agreement should not be discussed in London, Mr Neuman replied:

“There was nothing there that cannot, with exception of the thing that it is the confidential agreement, and a confidential agreement, it is confidential because you are not supposed to discuss it.”

A little later he repeated that there was no difference between paragraph 14 of the English agreement and the Spanish agreement, and no additional terms had been agreed which he did not want to have mentioned in the present proceedings.

It is a notable fact that the Spanish settlement agreement has not been disclosed in the present proceedings, either by the claimants or by Mr Neuman. Without the opportunity to examine it, I am unable to accept Mr Neuman’s evidence that it adds nothing to paragraph 14 of the English agreement. It seems to me very probable that it contains further provisions which neither the claimants nor Mr Neuman wish the court to see, and which might throw light on the question which I am now considering, namely whether Mr Cherney has in one way or another received full value for the £2 million paid to Rye Park.

Even without sight of the Spanish agreement, however, it seems to me reasonable to infer that by virtue of the compromise full value for the £2 million has indeed already been received by Mr Cherney. Mr Cherney freely accepted the terms set out in paragraphs 1 to 11 of the agreement in full and final settlement of all claims of any kind anywhere in the world which he then had against Mr Neuman, and he also agreed to discontinue the Spanish proceedings in return for taking the Spanish properties (with the exception, according to the oral side agreement, of the Gema Hotel). Thus any claim by Mr Cherney or Paradiso to recover the £2 million, either from Mr Neuman personally or from Rye Park, was clearly comprehended in the settlement, as part of the global compromise reached between him and Mr Neuman.

It is true that the terms of settlement clearly envisaged the continuation of the present proceedings, including the claim to recover the £2 million from the Firm. But that does not much affect the basic point that the comprehensive nature of the settlement undermines the loss that is now claimed in respect of the £2 million, particularly when regard is had to the indemnity given by Mr Cherney to Mr Neuman for any consequential liability to the Firm that Mr Neuman may incur. If I were now to give judgment against the Firm for £2 million, the Firm would have a strong case for saying that the whole, or at least a large proportion, of that liability should be passed on to Mr Neuman under its Part 20 claim, and Mr Neuman would then be able to claim an indemnity for that liability from Mr Cherney. Thus the net amount of Paradiso’s loss would be reduced to such amount, if any, as the Firm was not able to pass on to Mr Neuman in the Part 20 proceedings. In my judgment this element of circularity greatly reduces any value which might otherwise be attributable under the compromise to the continuation of the claim to recover the £2 million.

There are two further points which I should add for the avoidance of doubt. The first point is that in addressing the present question I do not think a distinction can sensibly be drawn between the positions of Paradiso and Mr Cherney. The claimants’ whole case is premised on the proposition that Mr Cherney is, so to speak, at the apex of the asset ownership tree, and that the other claimants, including Paradiso, act at his direction and in accordance with his wishes. It follows, assuming this to be correct, that although Paradiso is technically the appropriate claimant to seek recovery of the £2 million, credit must be given for any corresponding value for the £2 million received by Mr Cherney. The second point has to do with the timing of the compromise agreement. It is almost certainly no accident that it was concluded shortly before the resumption of the committal proceedings before Proudman J, and there are good grounds for supposing that Mr Cherney may have been ready to settle on terms favourable to Mr Neuman because he feared a damning judgment against him and/or being compelled to disclose redacted parts of documents. Even if that is so, however, it does not mean that Mr Cherney did not receive full value for the compromise. It means, rather, that part of the value which he received was the immediate termination of the committal proceedings and the related disclosure application.

At the end of the day, the onus is on Paradiso to show that it has suffered any loss as a result of the Firm’s breach of trust in paying away the £2 million. Approaching the matter with hindsight and common sense, and having regard to the settlement agreement reached last September, I am not satisfied that this burden has been discharged. Accordingly, the claim fails.