Roberts v Frohlich & Anor

Onslow Ditchling Ltd (“ODL”) was created as a special purpose vehicle to acquire 6.3 acres of former quarry land at Ditchling (“the Site”) and to develop it as 30 industrial and trading units to be disposed of on a freehold basis. The individuals behind ODL where the First Respondent (“Mr Frohlich”) and the Second Respondent (“Mr Spanner”). They were ODL’s executive directors and each was the holder of a £1 share in ODL (the entire issued share capital). Beyond subscribing for a share Mr Frohlich did not significantly contribute to ODL’s working capital; Mr Spanner lent some £36,000 to procure reports necessary for the obtaining of bank funding.

ODL conducted its activities entirely upon borrowed money. In order to acquire the Site it (i) borrowed £126,000 from Brantridge Holdings Ltd (“Brantridge”) (a company in the ownership and control of a Mr Towning, who also personally lent some money to pay fees and expenses in relation to obtaining other borrowing) and (ii) arranged a term loan of £437,000 with the Bank of Scotland (“HBoS”) (“the Site Loan”). There was still a shortfall; and that was bridged by Mr Frohlich and Mr Spanner selling to Easier plc (“Easier”) for £100,000 the exclusive right to negotiate to acquire shares in ODL. In order to fund part of the development of the Site ODL arranged with HBoS a facility with a limit of £1.5 million (“the Development Facility”).

ODL acquired the Site on the 24 June 2004. The intended main contractor for the development on the Site was Fitzpatrick Contractors Ltd (“FCL”). Certain works relating to the levelling of the Site and to site access had to be undertaken before the development could begin, and that was immediately put in hand. When that was arranged FCL, as instructed by ODL’s quantity surveyors (“Castons”), began to assemble materials and to commence work on the development of the units themselves under a formal “letter of intent” pending signature of a JCT “Design & Build” contract. There was then a dispute between ODL and FCL as to the basis upon which the formal contract contemplated in the letter of intent would proceed: was it intended to be a “fixed-price contract”? Or was it intended to be a “cost plus contract”? The dispute was not resolved. FCL were not paid for the whole of the work they had already done: and in the light of that, and of the dispute over the formal contract, at the end of November 2004 they suspended further work. On 15 September 2005 an adjudicator awarded FCL about £1.6m (subject to adjustment) in respect of work done but not paid for. On 19 September 2005 Mr Frohlich and Mr Spanner appointed administrators of ODL. The administrators sold the Site (ODL’s only real asset) for £1.65m in February 2006 and repaid HBoS the Site Loan, the balance on the Development Facility and interest (in the aggregate sum of £1.42m). The exit route from administration was a liquidation under paragraph 83 of Schedule B1 Insolvency Act 1986. The administrators appointed the Applicant (“the Liquidator”) as liquidator: he had been investigating matters at the behest of FCL since the start of the administration. The Liquidator received the £25,000 that was the proceeds of the administration of ODL’s assets. Putting the FCL claim at the lowest figures used in the administration there was a deficiency as regards unsecured creditors of about £900,000: using the figure determined in the adjudication it is much higher. Besides FCL (by far and away the largest), the unsecured creditors include the professionals who were engaged on the development and in the disputes that arose, and Brantridge.

In these proceedings the Liquidator of ODL seeks relief under two headings. First, he seeks a declaration that Mr Frohlich and Mr Spanner are guilty of misfeasance and breach of duty as directors of ODL by causing, procuring or permitting ODL to commence the development when they knew or ought to have known that it was speculative, inadequately funded, and bound to fail. The legal foundation of this head of claim is said to be that Mr Frohlich and Mr Spanner each owed (i) a fiduciary duty to ODL to act in what they honestly believed was in its best interests; (ii) a duty to ODL at common law to exercise reasonable skill and care in acting as directors, and (iii) “a duty, at a time when ODL was insolvent or insolvency was reasonably foreseeable, to have regard to the interests of creditors”.

In essence, the factual case advanced is that Mr Frohlich and Mr Spanner:-

The second head of claim is for wrongful trading in breach of section 214 Insolvency Act 1986 (“IA 1986”). Under this head the Liquidator alleges that Mr Frohlich and Mr Spanner knew or ought to have concluded or around 1 July 2004 (or alternatively on or around 1 September 2004) that there was no reasonable prospect that ODL would avoid going into insolvent liquidation.

If either of those heads of claim is made out then specific sums are sought in respect of the misfeasance and breach of duty, and/or a contribution to the assets of ODL is sought under section 214 IA 1986 . At this trial I am concerned only with whether either head of claim is made out: if it is, then the consequences of that conclusion are to be worked out at a subsequent hearing.

The witnesses called on behalf of the Liquidator (Mr Saunders, Mr Waller, Mr Jollie and Mr Elders) and the Liquidator’s agent himself (Mr Russell) were all straightforward witnesses, seeking to do their best to recall the events in question. The recollection of the FCL witnesses was sometimes assisted by Minutes of meetings; and it was not significantly coloured by the fact that they were former employees of FCL which, as the major creditor in ODL’s liquidation, stands to gain if the action succeeds. As I shall note, some of the evidence at trial differed from evidence given on an earlier occasion: but I have given due weight to that. Despite being well tested in cross-examination I find their evidence generally reliable.

The Liquidator’s agent (Mr Russell) could, of course, not speak directly to the events in question: but he dealt fairly with the points put in cross-examination and in general presented a balanced view. Thus, even though it is the Liquidator’s case that there was wrongful trading from about 1 July 2004, Mr Russell readily said in cross-examination that he could not say that, as at 30 June 2004 ODL should have been wound up because the company was solvent on a balance sheet basis and provided that it did not make commitments which it could not fund on a cash flow basis then it would remain solvent. Again, in the liquidation he did not admit the whole of FCL’s claim to proof, but exercised an independent scrutiny. So it would not be right to treat the Liquidator simply as FCL’s stooge.

Mr Frohlich is a qualified accountant with extensive experience of acting as a director in property companies (going back to 1968). He has previous experience of the development of industrial property units. He produced an impressive CV. He did not come to Court to mislead me: but his recollection was of little assistance and generally unreliable. He denied knowledge of much, denied receipt or sight of many of the key documents, denied responsibility for the creation of significant financial documents and asserted that he did not avail himself of the opportunity to examine the documents in ODL’s files or to speak with Mr Spanner (on what was really the only currently active project on which they were together engaged). On the other hand he professed recollection of events of which there is no trace in the contemporaneous documentary material. Mr Frohlich said that at the end of 2001 he had been involved in an accident; that in 2002-2003 he was taking medication and having treatment and (at trial and for the first time) that he was at times “illucid” and would not have trusted his own judgment; and in 2005 underwent a severe neck operation. This, he said, would account for vagueness during the relevant period. I do not accept that the events which Mr Frohlich identifies had the impact upon him which he asserts: had it been so he would surely have said so earlier so that the truth could be tested. But even on his own account his evidence is flawed. In those circumstances I have found myself unable to place much reliance on Mr Frohlich’s recollection and have been driven to rely on the inherent probabilities as disclosed by the contemporaneous documents and aided by any reliable oral evidence from others.

Mr Spanner had a background in civil engineering. Since 1967 had been involved in property development, being chairman or chief executive of sundry property companies, and latterly creating SPVs to develop (either alone or in partnership) various commercial property projects. Two or three of those had been with Mr Frohlich: and none had so far yielded a cash profit. He made a plainly honest attempt to assist me, engaging with the questions put and giving frank, straightforward answers (including acknowledgements that parts of his witness statement could not be correct). Understandably his grasp of chronology was weak. But it was apparent to me that at times he confused his assessment of what it would be good for ODL to happen with a confident belief as to what would indeed happen, and then to confuse his belief of what would happen with his recollection of what had in fact happened: a move from aspiration to actuality. So, straightforward as he was, I felt I had to approach his evidence with care and to look for support. Where his evidence does not accord with the documents or with inferences properly to be drawn from them, I have relied on the documents and an assessment of what was likely.

Mr Towning’s evidence in support of the Defendants was loyally given. But it was quite evident that he was not fully informed of the precise detail of the project to which Brantridge was lending money, and that from his own perspective he was (naturally) only interested in whether his participation would yield a benefit (payment of his “entrance fee” and a gain from a share purchase by Easier). His assessment of the position from time to time and his recollection of events is therefore ultimately dependent upon what he was told by the Defendants. He was, for example, under the impression (until the Easier deal collapsed) that the project was throughout “fully funded” and that there was a fixed price contract available. Whilst he gave me his honest recollection it was necessary for me always to bear in mind from what it derived.

These are the facts as I find them. In the narrative of events there are three interweaving themes: (a) the arrangements for bank funding; (b) the arrangements for building the development: and (c) the arrangements concerning the ownership of ODL. Each bears upon the analysis of the wrongs alleged to have been done by each of the defendants.

Mr Frohlich and Mr Spanner had been considering an acquisition of the Site since the Autumn of 2002. The existing planning consent permitted the construction of business units totalling 62,000 square feet: but Mr Frohlich and Mr Spanner intended to seek an enhanced permission for 82,000 square feet. Before building could commence the Site had to be levelled, a site access had to be constructed, and s.106 works to the adjacent highway costing £250,000 had to be completed. All these works (to which I will refer as “the enabling works”) required a heavy initial capital commitment before a single unit could be sold. Cash flow was therefore always going to be an issue. It was the intention of Mr Frohlich and Mr Spanner (as expressed in a memorandum of October 2002) to prepare the Site whilst the section 106 works were in hand, to construct the spine road and then to construct the first units, which would themselves be “pre-sold”. They envisaged a rolling development programme: and it was their intention never to be exposed to more than two units unsold. A cash flow forecast founded upon these assumptions (and postulating the first sales within six months of the acquisition of the Site and a total build out in 12 months) showed a peak funding requirement of just under £1,000,000 if the costs of the enabling works and of the construction itself could be kept to £3.5 million.

The basis for that estimate of the construction costs was a casual conversation between Mr Spanner and Mr Patrick Fitzpatrick (the then current Chairman of FCL) at a meeting concerning another project in which the two of them were together personally involved. Mr Fitzpatrick had said “Sheds we could build at £32 per square foot all day”. Mr Spanner treated this as if it were a quotation for business units.

Armed with this proposal Mr Spanner set about finding funding. After an unsuccessful approach to the Bank of Ireland (his own bankers) he approached Mr Dakin at the West London Business Centre of HBoS. In his letter dated 18 February 2003 he described the project in these terms:-

“You will see from my preamble that we have several pre-sales lined up which we are unable to conclude until we have arranged funding and it is not our intention to build speculatively but build to order. …Fitzpatrick have priced the works and will build both infrastructure and buildings on a fixed price basis which I trust will give you confidence as it does for us”.

The attached memorandum confirmed that the scheme as proposed had been costed by FCL who (it stated) had entered into fixed price contract for construction of the units on an “as and when” basis (reiterating that the intention was to build for sale and not on a speculative basis). The memorandum identified six potential purchasers who were said to have confirmed their interest at purchase prices in the range of £80 to £85 per square foot; and it restated:-

“It is not intended to build any units speculatively other than works to infrastructure and access”.

The terms of this letter and memorandum overstated the true position. They recorded Mr Spanner’s aspirations, but did not accord with reality. FCL had not priced the works. Mr Fitzpatrick had in a casual conversation indicated at what price FCL could in general build basic units. But he knew nothing of the Site or its particular features or of the proposed building programme. By February 2003 preliminary discussions had been held with FCL’s contracts team. Those discussions had produced some indicative figures, but there was a great deal of uncertainty both about the ground conditions at the Site and the permitted development itself. FCL had not agreed to enter into fixed price contract on an “as and when” basis. Indeed, Mr Spanner acknowledged in cross examination that FCL was never asked in writing or orally to build only against pre-sales. All its indicative figures were put forward on the footing that FCL would determine the build programme. FCL had not prepared a project appraisal or any costings (indeed the enhanced planning consent had yet to granted, the design was not fixed, the site conditions had not been examined and the structure had not been engineered). Mr Spanner further acknowledged in cross examination that he could not have justified to HBoS the statements he had made, and would have had to say that there was no basis for them. But, he explained:-

“I am the developer putting this package together, and at the end of the day the package came out exactly as that says…I believed that we would get there…I do believe it was achievable”.

The confusion between aspiration and actuality was apparent at many points during the course of the evidence. But for present purposes it is important to underline that this was the shape of the project as seen by Mr Frohlich and Mr Spanner from its inception – the undertaking of the enabling works, followed by construction of the units under a rolling programme driven by demand, the contractor acting under a fixed price contract. The project was not otherwise viable.

On 20 February 2003 ODL was incorporated as a special purpose vehicle to undertake the development. Mr Frohlich and Mr Spanner were its two directors, and each held one of the two issued £1 shares. Neither Mr Frohlich nor Mr Spanner was prepared to put any more risk capital in. Mr Spanner told me that it was his policy and that of Mr Frolich not to invest by way of equity in SPVs although they would, to some extent, lend money (as he did in relation to architects’ fees in connection with the planning application). In fact, in the instant case, neither he nor Mr Frolich was prepared readily to lend to ODL. The Site was available at £525,000 in respect of which a 5% deposit of £26,250 was payable on exchange of contracts. Neither Mr Frohlich nor Mr Spanner was prepared to lend that relatively modest sum to ODL in order to obtain the contract. Instead they arranged with Mr Towning for his Jersey company (Brantridge) to contract to purchase the Site for £525,000 (paying the £26,250 deposit), for Brantridge to sub-sell the Site to another Spanner/Frohlich company (“XCo”) for £625,000 and for XCo to assign the contract to ODL. The commercial effect of this convoluted arrangement was that ODL managed to borrow £26,250 from Brantridge for the period from exchange until completion for a fee of £100,000. If neither Mr Frohlich nor Mr Spanner was to put their own money in, it was the best they could do for ODL.

On 24 March 2003 Mr Spanner renewed his approach to the Bank. He asked for “a maximum loan to value advance on the acquisition and infrastructure and modest assistance with the build costs against specific pre-sales”. He supported his approach with a revised appraisal and this time with a detailed cash flow forecast. Whilst Mr Spanner accepted that the appraisal would have been his work, both he and Mr Frohlich disclaimed responsibility for the cash flow. In my judgment it is likely that it was prepared by Mr Frohlich in consultation with Mr Spanner (since this would be a natural deployment of their respective skills, and I was given no other credible account of its possible authorship).

On the appraisal the purchase cost of the site was now shown at £625,000 (the arrangement with Brantridge having been negotiated): the enabling works were shown as amounting to £840,000: and the construction costs were shown at £3.6 million (excluding professional fees and financing costs). The cash flow assumed a 12 month build period, with usable deposits being received for the first units in the third month. On these assumptions there was a peak funding requirement of £2.2 million in the fifth month of the project. As Mr Spanner’s renewed letter of application stated:-

“The construction costs will be based on a fixed price contract with Fitzpatrick with cost overruns guaranteed…At 80% of cost, probably 60% of value, a loan of £500,000 secured upon the site with consent would seem appropriate and 65% of building costs against architect’s certificates and only drawn down against pre-sales…”.

This application produced indicative terms from HBoS. Since these remained constant (being strengthened in one respect) I will deal with the terms at the point when the formal offer is put. The terms related to a Site purchase loan in a sum of £437,000 (being 70% of the inflated price that ODL would be paying Brantridge, but still leaving a shortfall on the sum due at completion of the purchase of the Site); and to a development loan of unspecified amount. That was because the Bank could not work out the amount of the development loan being sought. In that regard the Bank requested a more detailed cash flow.

At trial the Liquidator’s agent Mr Russell produced an undated cash flow apparently commencing in May 2003 which he said had been provided to him by Mr Frohlich and Mr Spanner in January 2007. Both Mr Frohlich and Mr Spanner denied doing so. But Mr Russell’s recollection is supported by a contemporaneous note and an apparently genuine contemporaneous manuscript endorsement on the document itself. I find that it is a genuine document, produced in answer to HBoS’s request and being part of ODL’s papers that were either created by or available to Mr Frohlich and Mr Spanner in connection with their consideration of ODL’s affairs (and which was in January 2007 handed over by them to the Liquidator). It is probable that it was created by Mr Frohlich from data and assumptions provided by Mr Spanner and in consultation between the two of them. Once again, there is no other credible provenance, and this is a likely deployment of their respective skills. In this cash flow the construction costs were now assumed to be £3.2 million (exclusive of fees) and the project period 20 months, with deposits of £194,000 on pre-sales of £1.9 million (amounting to about a quarter of the development) being received in the third month. Mr Frohlich acknowledges that this last assumption was (with hindsight) “excessively optimistic”: but he did not see it that way at the time. On these revised assumptions the peak funding requirement was £1.5 million.

The cash flow cannot be treated as a representation to HBoS: it was not a statement of what would happen. It represents a set of assumptions which Mr Frolich and Mr Spanner must be taken to have thought were a reasonable basis upon which to assess ODL’s cash requirement for the project.

Being confident that HBoS would make a sufficient offer (although it had not yet done so) and being pressed by the vendors of the Site to exchange contracts Mr Frohlich, Mr Spanner and Mr Towning arranged for Brantridge to exchange contracts on 23 June 2003 (with completion on 18 June 2004) for the purchase of the Site, and the contractual arrangements for its ultimate acquisition by ODL were put in place.

The HBoS offer for the Site Loan of £437,000 was made on 27 June 2003. It was in the sum of £437,000. Apart from standard security terms (including the ordinary debenture over ODL’s undertaking and assets) the following conditions are material:-

On 30 June 2003 HBoS made a written offer relating to the Development Facility in the sum of £1.5 million. The purpose of the loan was identified in these terms:-

“You may only use the Development Loan for the development of the [Site]…please note that a maximum of £590,000 is allowed against the costs relating to clearing the site, site preparation and installation of services and access roads. The remaining facility is for unit build costs only, against pre-sale agreements”.

The sum of £590,000 which was to be available for the enabling works was 70% of the estimated costs of those works (which had been put by Mr Spanner at £840,000). The funding proposal therefore assumed that ODL would itself find 30% of the cost of the enabling works (but it did not make clear if this had to be done at each drawdown). The Development Facility was itself to be repaid out of the proceeds of any disposal of any unit: that would indeed be an ordinary consequence of the debenture which ODL was required to grant. But it did mean that deposits taken and funds received on completion of the sale of a unit could not be used for any purpose other than permanently reducing the balance on the Development Facility. Strictly, they were not free cash that could be used to fund the next tranche of building. In addition to the standard security condition the following conditions are material:-

For the project to be viable (i.e. to have a sufficient prospect of profit to justify ODL embarking upon it) the assumptions on which the Development Facility of £1.5 million were thought to be sufficient would have to remain sound; and the terms on which the £1.5 million was available and could be drawn would have to be workable.

At the beginning of July 2003 Mr Spanner gave instructions to FPD Savills Development Department to undertake a valuation of the Site for the benefit of HBoS. On 18 July 2003 Savills produced an estimated market value for the Site of £900,000. This figure was reached primarily by adopting a residual approach based on stated assumptions. The workings were set out in a development appraisal which incorporated a cash flow. The cash flow assumed a five year project period with construction in three identified phases. The Liquidator called no-one from Savills to explain its genesis. I regard this appraisal and cash flow as a theoretical exercise undertaken by Savills to support their residual valuation of £900,000. I am not satisfied that either Mr Frohlich or Mr Spanner told Savills that the project would take that form: in particular, I do not regard a three phase construction programme as ever having been under consideration by Mr Frohlich or Mr Spanner. I am satisfied that their intention throughout was to have a rolling development programme with FCL remaining on Site throughout. (On that approach to the project it would, of course, be absolutely essential to reconcile FCL’s build programme with ODL’s sales programme if the commitment to HBoS only to build such units as were pre-sold was to be honoured).

On 22 July 2003 ODL accepted the HBoS financing offers and held a meeting with FCL to invite FCL to put forward their formal and best bid to be based on drawings and specifications intended to be issued. FCL’s bid figure was to be discussed with ODL’s quantity surveyors (Castons), in particular with Mr Turner. Over the following weeks it was agreed that Mr Turner would develop a cost plan for the project together with FCL, with a view to FCL entering into a “design and build” contract. Whilst a “design and build” contract will frequently be on the basis that the client (ODL) would pay the contractor (FCL) a fixed price, Mr Spanner acknowledged that this was by no means always the case. The intended form of contract does not, therefore, of itself provide a guide as to whether FCL was being invited by ODL to tender for a fixed price contract or, as an alternative, a “cost plus” contract (under which FCL would be paid the cost of building the development plus a percentage for profit and overheads). On the other hand, the fact that FCL was, together with Castons, to draw up a cost plan does not of itself indicate that the ultimate contract was contemplated to be a “cost plus” contract.

FCL’s commercial manager was Mr Saunders. His clear evidence (unshaken in cross examination) was that whilst he was supervising FCL’s negotiations with ODL and with Castons he did not commit FCL to enter into a fixed price contract. He acknowledged that a fixed price contract was, of course, a possibility; but he was clear that FCL could not commit to entering into a fixed price contract unless and until the work required by ODL had been specified and FCL had firm and binding prices from its sub-contractors for that work (since plainly FCL would not assume the risk that sub-contract prices might rise). This is reflected in a letter which Mr Saunders wrote on 30 September 2003 informing ODL that FCL were preparing a tender price and that their bid would consist of lump sums (i.e. fixed prices) for preliminaries and for sub-contract trade packages with “provisional sums for any works [on] which we are unable to finalise costs”, adding a percentage for head office overheads and profits. The ultimate “contract sum” would therefore consist of a mixture of fixed prices and provisional sums and contingencies uplifted by a percentage for overheads and profits. But the status of the “contract sum” itself remained to be determined.

The nature of the process then in hand (and which would constitute the basis of negotiations unless and until the parties agreed that “the contract sum” should become a fixed price) was further clarified in an e-mail which Mr Saunders sent to Mr Turner of Castons on 27 October 2003. This stated:-

“Our tender is based on an open book negotiation on all sub-contractor costs, a fixed lump sum for preliminaries and a percentage recovery for overhead and profit”.

In essence, this declared that the contractual foundation was a “cost plus” basis but that FCL, as the intended main contractor, was making full disclosure of all sub-contractors’ quotations so that ODL could accept them, or reject them, or require revisions. This machinery (described as “open book”) meant that even though FCL was entitled to payment of the costs which it actually incurred plus a margin for profits and overheads, ODL was not writing a blank cheque, but could exercise cost control. I have no reason to think that Mr Turner of Castons, acting as ODL’s quantity surveyor, operated in a vacuum, and I regard it as probable that he reported FCL’s proposals, the basis upon which they were advanced, and his own proposed revisions to the cost plan, to Mr Spanner and/or Mr Frohlich, and that such became known to both. The total build costs (based on sub-contractors’ then estimates, a significant number of provisional sums, and a 6% mark up on the whole to FCL for overheads and profits) then stood at £5.19 million (excluding the cost of the estate road and professional fees). This was significantly in excess of the appraisal that Mr Spanner had submitted to the Bank. It therefore led to a further revision by Castons of the cost plan, and I regard it as highly probable that these further reductions were formulated in consultation with Mr Spanner (since it is clear from the documents that Castons had been instructed not to make contact with the architect, had no structural engineer’s drawings available, had not received any Site investigation report, and were therefore wholly dependent upon Mr Spanner for any input). Mr Saunders of FCL regarded the revised cost plan as understated. He expressed his concerns to Mr James Elders, the managing director of FCL. This led to a meeting between Mr Elders and Mr Turner of Castons during November 2003.

The Defendants did not call Mr Turner to give evidence. I therefore have only the account given by Mr Elders. It is his evidence that he told Castons that there was no way that FCL could go forward on the basis of the revised cost plan and that “after some discussion we agreed that we would go forward on a cost plus basis and “value engineer” the scheme to make it an acceptable cost”. In his witness statement he explained the practical consequence of proceeding in this way:-

“This meant that ODL would pay the costs of the build and external works plus preliminaries and a profit at 6%. The contract would operate on an open book basis with full transparency as to the costs that were being incurred at each stage. ODL would therefore have control over the process and at each stage Castons would have the ability to try to identify savings that could be made”.

Mr Elders was not shaken in cross-examination on this evidence. He had covered the same event in a statement he had prepared for some adjudication proceedings and had given a rather more elaborate account. In this action he resiled from some of those elaborations. His willingness to put his name to a witness statement in the adjudication proceedings which contained more than the truth must be balanced by the credit he earns in this action for admitting his error and being willing only to swear to the truth of matters as he recalls them (even if that involves some loss of face). I regard his present evidence as reliable: and I accept it. The process resulted in a cost plan priced as at December 2003: and that cost base did not alter in the subsequent negotiations, the further revisions all assuming December 2003 prices.

It is at the end of November and during December 2003 that Mr Frohlich and Mr Towning begin negotiations with the chairman and managing director of Easier plc with a view to putting the ODL project into a joint venture with Easier. Easier was an AIM listed cash shell, and negotiations appear to have opened on the footing that Easier may provide funding for some of ODL’s needs within the structure of a 50/50 joint venture, with Easier buying into the venture on the basis that the Site (then contracted to be purchased from Brantridge at £625,000 but with ODL only having funding of £437,000) was worth £900,000. Such a joint venture arrangement would have enabled Brantridge to recover its investment of £126,500 and would have given an immediate profit to Mr Frohlich and Mr Spanner as the shareholders in ODL.

It was the benefits accruing to Mr Frohlich, Mr Spanner and Brantridge which provided the focus of the negotiations over the following months. As is demonstrated by the contents of a draft board minute of Easier dated 19 March 2004 (which were certainly seen by Mr Towning and Mr Spanner and probably also by Mr Frohlich), the original proposal for a joint venture had matured into a takeover of ODL by Easier (with Messrs Frohlich, Spanner and Towning receiving cash and shares in Easier). The basis on which the takeover was to proceed was that HBoS had provided a Site acquisition loan of £437,000 and a facility of £1.5 million which would finance all of the development works, that the industrial units would be sold and financed “off plan”, that a fixed price build cost of £3.2 million had been received from FCL, that these costs would be funded by the HBoS facility which could be drawn down on a unit by unit basis secured on a contract for sale of the unit, that another Spanner/Frohlich company would be engaged to manage the project for a fee, and that Mr Frohlich and Mr Spanner had undertaken personally to guarantee £1.97 million (sic) of bank debt to HBoS (for which they would need to be indemnified). In essence, therefore, in place of a joint venture it was now intended that Easier should step into the shoes of ODL and take over the benefit of the arrangements which ODL had negotiated and which appeared (on the recited facts) to constitute a self funded project. This is most clearly demonstrated by the summary which was in these terms:-

“Current market values indicate a value for the fully developed Site of £7 million. Overall, having deducted project manager fees, [Easier] should generate a revenue return of £1.64 million, a minimum profit of £670,000 on a cash outlay of £213,000. Although [Easier] has a total downside capital employment of £2.47 million, this exposure is mitigated by the value of the improved Site and prospective unit sales already in hand”.

The reference to “a cash outlay of £213,000” demonstrates that Easier was not expecting to inject any further cash. The reference to “a total downside capital employment of £2.47 million” (being the exposure on the HBoS loans of £437,000 and £1.5 million, plus the cash and shares payable to Mr Frohlich Mr Spanner and Mr Towning/Brantridge) demonstrate that Easier did not think it would be exposed to any further demands. This understanding can only have derived from Mr Frohlich and Mr Spanner (and possibly Mr Towning).

That is confirmed by the fact that in April 2004 Easier’s general manager sent to those three a cash flow prepared after a visit from Mr Frohlich (and probably Mr Spanner). This, far from showing a need for Easier to inject additional funds over and above those available to be drawn down from HBoS, produced such a positive cash flow picture that the general manager wrote:-

“I agree with [Mr Frohlich] and [Mr Spanner] that there should be plenty of headroom with the planned facilities from [HBoS]. In fact, if the income numbers are to be believed as to timing one should negotiate hard for low or no unused facility fees and no penalty for early repayments”.

The whole cash flow forecast was (as Mr Frohlich acknowledged in cross examination) “very optimistic”, not least because it contemplated the sale of the entire development within 9 months of the commencement of the project, something which no professional had ever indicated was achievable.

By way of contrast to the optimism of Mr Frohlich and Mr Spanner, Mr Towning (on behalf of Brantridge) was more cautious. On 13 April 2004 he e-mailed Mr Spanner to inform him:-

“…my concern is still that we don’t have all our ducks in a row as per the bank”.

He requested a meeting to ensure that “the transaction” (by which he meant the acquisition and the development project) and current status were clear.

It is in my judgment no coincidence that on 21 April 2004 Mr Turner of Castons wrote to Mr Spanner to confirm the construction costs for the development. The probability is that Mr Towning’s request for clarity prompted Mr Frohlich or Mr Spanner to request an update on the current position (as the conclusion of Mr Turner’s letter, in which he expressed the hope that he had provided the information required, suggests). The terms in which Mr Turner wrote are crucial:-

The reference to a “target figure” and the “open book” basis (note the words “… also on an open book basis”), the explicit reference to an uplift for profit and overheads and the careful contrast drawn with the “lump sum” agreed for the enabling works to be undertaken by P J Brown show that according to Mr Turner’s expressed understanding FCL was not then agreeing a fixed price contract. The letter was copied to FCL: they did not dissent from its terms. Mr Frohlich said in evidence that he had no doubt that Mr Spanner had seen the letter: and Mr Spanner acknowledged as much, telling me that when he saw the letter it came as a shock to him because he had given instructions to Castons only to negotiate a fixed-price contract and nothing else. Mr Spanner says that he went back to Mr Turner saying that his instructions were and always had been that the contract had to be “fixed price or nothing”; and that he went no further with the proposal for a “costs plus” contract operated on an open book basis with a target figure.

Mr Turner (although apparently available) was not called to confirm this account of events. I therefore have the evidence of Mr Spanner alone; and I disbelieve it. I have already accepted evidence that FCL had made plain to Castons that there was no question at this stage of them being willing to enter a “fixed-price” contract. There is no documentary record of any instructions to Castons to negotiate only a fixed-price contract. There is no record of any complaint to Castons that the negotiations were (contrary to express instructions) being conducted on an “open book” basis. Far from disputing or disregarding the content of the letter of 21 April 2004 Mr Spanner and Mr Frohlich appear to have accepted it and conveyed its contents to Easier, for a draft memorandum for the Easier board records:-

“The construction will be carried out under an open book contract by [FCL] with an agreed target price whereby [FCL] receive bonuses upon completing the contract below budget but having an agreed upon price which they are under penalty not to exceed.”

This formula (which can only have come from ODL’s directors or agents) was also repeated in the draft shareholder circular which Easier prepared in May 2004 in connection with its proposed acquisition of ODL. I am confident that if Mr Spanner had made known that a “cost plus” contract was not what was envisaged and that a fixed price contract was what he and Mr Frohlich envisaged (but not what FCL had agreed) then the shareholder circular would not have been prepared for public circulation in that form.

The reference to an “open book” contract is plainly grounded in the documents. The reference to a “target price” expresses what is implicit in Mr Turner’s letter. But the machinery for “overage and underage” comes entirely from Mr Spanner’s evidence; and he could not explain to me how it worked. I do not think it is a complete invention. It was probably a vague idea mentioned in a casual conversation between Mr Spanner and Mr Fitzpatrick well before June 2003 (in the same context as the “fixed price quote”) but never explored formally. It seems to me highly improbable that FCL’s contracts team would have refused to countenance a fixed-price contract and yet would have negotiated on the basis of a target price which they could not exceed. In my judgment the probability is that the explanation given to the Easier board is Mr Spanner’s contemporaneous attempt to square the circle - to reconcile (a) the “fixed-price” contract which was most plainly required by the bank funding (on which Easier was to rely) with (b) the “open book” contract that Castons were actually negotiating with FCL. It might reflect what Mr Spanner aspired to negotiate on a personal basis with Mr Fitzpatrick: but it did not reflect what had actually been proposed to or agreed by FCL.

The attempt was probably inspired by a routine up-dating letter dated 19 April 2004 and written by Mr Dring of Castons to Mr Frohlich which referred to having agreed with FCL “a maximum price of £4,121,951 for the remaining construction works based on the current design information”. But that single reference to “a maximum price” could not reasonably be read as meaning “a fixed price”: and I do not consider it likely that Mr Spanner genuinely read it that way. First, (as the accompanying breakdown made clear) the “maximum price” had been calculated on a “cost plus” basis which allowed 6% for overheads and profit (and nothing for the additional risk of fixing a price). Second, the letter itself (like that of 21 April 2004) drew a conscious distinction between the intended contract with P J Brown for part of the enabling works (which was described as “a fixed price” in the letter of 19 April and “lump sum” in that of 21 April) and that with FCL (which was described as “a maximum price” in the letter of 19 April and as a “target figure” in that of 21 April 2004). The letter cannot be treated in isolation: it has to be read in the context of the entire course of negotiations to date (and, of course in the light of what followed in relation to the Easier negotiations).

On 23 April 2004 Mr Frohlich, Mr Spanner and Brantridge (which had by this stage been allotted a share) entered into an exclusivity agreement with Easier whereby in consideration of a payment of £100,000 the shareholders in ODL undertook not to enter into negotiations with any other party for the purchase of ODL or its business and assets i.e. the benefit of the contract for the purchase of the Site and the benefit of the funding offers by HBoS to ODL which together constituted ODL’s assets. The £100,000 would (together with the Site Loan) be sufficient to enable ODL to acquire the Site (provided that Brantridge agreed to defer payment of the £126,500 to which it was entitled on completion). The period of exclusivity was 90 days (and would therefore expire on 22 July 2004, one month after the date fixed for the completion of the Site purchase). Within that period terms for the acquisition of ODL would have to have been agreed. A draft of the relevant documents already existed, and Mr Frohlich was grappling with the detail and criticising the solicitor’s drafts. It is sufficient for present purposes to note these matters:-

I can now put the Easier contract on one side and revert to the negotiations with FCL. Although Castons had been dealing with FCL’s commercial contracts team no draft contract had actually been presented to FCL for consideration. A meeting was held on 8 May 2004 between representatives of ODL, representatives of FCL and members of ODL’s professional team when “final details were discussed”. The discussion appears to have consisted of a consideration of the planning conditions and how each of them was intended to be addressed. It is clear that significant items continued to be under discussion or awaiting further information (so that it would not have been possible to fix prices even if negotiations had been proceeding on that footing). But the upshot was that Mr Spanner sent to Mr Saunders of FCL what he described as “a Letter of Intent”. Mr Saunders had indicated (given the imminent completion of the Site purchase and thus the proximity of the date on which FCL might be expected to commence work, and the absence of any contractual documents) that there would no question of FCL commencing work without a “letter of intent” (as to which see: Tesco Stores v Costain Construction [2003] EWHC 1487 (TCC)). Mr Spanner’s letter of 14 May 2004 (written on the note paper of “Onslow Investments”, not of ODL) said that:-

“[The] Letter of Intent is to give you the comfort of knowing that it is our full intention of appointing you as contractors to carry out the building contract…the form of contract will be a D & B contract with the agreed target figure as agreed with John Turner and contained within the contract document with an overage and under performance figure to be agreed between your Chairman and the writer…This development is funded by Bank of Scotland and will commence with immediate effect after signing contract documents with yourselves”.

Mr Saunders regarded this letter as inadequate for his purposes both because it did not amount to a contractual commitment of any sort and because it was too vague. Mr Spanner’s reference to “a target figure” is, of course, telling. But the reference to “an overage and under performance figure to be agreed” was a puzzle to Mr Saunders. So he consulted Mr Elders who confirmed that there was only a target figure for a cost plus contract conducted on an open book basis, and that FCL could not start work on the basis of the proffered letter.

(I should also pick up on the fact that the letter refers to the “overage and under performance figure” as having “to be” negotiated with “your Chairman and the writer”. Even on Mr Spanner’s own account it was not a concluded arrangement: and the whole tenor of Mr Spanner’s evidence was that this was a provision dependant upon his personal relationship with Mr Fitzpatrick, and not something for FCL’s mainstream contracts team. It would, of course, follow that if Mr Fitzpatrick ceased to be Chairman of FCL and lost the ability to override the normal commercial procedures of the contracts department, then an “overage and underage” machinery could never be incorporated in a contract between ODL and FCL. This Mr Spanner acknowledged. But that very event occurred in mid-May 2004, when Mr Fitzpatrick sold FCL to a Dutch construction group and resigned as Chairman of FCL: as Mr Spanner learned on 18 May 2004, four days after he sent his Letter of Intent).

Upon the rejection of the letter of 14 May 2004 as a basis for working a revised letter was prepared (probably by Castons using a form emanating from FCL) on 8 June 2004 and was signed by Mr Frohlich. This letter (on ODL note paper) confirmed “our intention to enter into a contract with yourselves…based on the scheme/works as defined on drawings sent to you”. But it now continued:-

“We agree to pay you the reasonable value for the works carried out pursuant to this letter to be agreed between yourselves and Castons, together with such costs reasonably incurred as a direct result of carrying into effect this letter. Any payments made under this letter shall be treated as payments on account under the formal contract and everything done by you or on our behalf under this letter shall be deemed to have been done pursuant to the formal contract”.

To this letter FCL responded on 10 June recording:-

This letter from FCL was copied to Castons. In my judgment it is plain that the temporary regime put in place by ODL’s Letter of Intent and FCL’s confirmation is that work done under it is done on a “cost plus basis”. Each party sought at trial to add something to this analysis.

Mr Spanner and Mr Frohlich sought to say that each of them believed that the only point of the Letter of Intent was to enable FCL to fix the price of the fabricated steel.

Mr Frohlich says that he was told by Mr Turner “that it was important to get the order placed….even though the steel did not need to be ordered for many months as the price of steel was going up and [FCL] wanted to keep to the price of the steel in the costs plan”. Mr Frohlich acknowledges that he intended to give comfort to FCL to place the steel order: but he says that he did not intend the Letter of Intent to form the basis for any work to be undertaken. His subjective intention is not relevant to a consideration of the legal effect of the letter according to its terms. But in any event I do not accept Mr Frohlich’s recollection as accurate. Mr Frohlich was quite unable to explain how the price of the steel could be fixed without an order being placed for it, and was equally unable to explain how (if an order for steel was placed by FCL) ODL could escape a contractual liability to pay FCL for it. Nor do I accept his evidence that he did not see the letter of 10 June 2004 or learn of its contents even though it was addressed to him at an office where he had secretarial assistance (and was copied to both Mr Turner and Mr Prime). The improbability of Mr Frohlich despatching his own letter on an admittedly crucial issue but not enquiring after or being informed of the response to it is too great to be given credence.

Mr Spanner says he was abroad at the crucial time, that he does not know the thinking behind the letter of 8 June 2004, that he never saw the letter of 10 June 2004, but that he did understand that the arrangement was that FCL would buy the structural steel. Since he had been the draftsman of the original Onslow Investments letter (which had been rejected) I cannot believe he was so disinterested in the form which the ultimate Letter of Intent took (given that, as he acknowledged in cross-examination, letters of intent are only sought when orders have to be placed and the contractor has to be assured that he will be paid). But Mr Spanner did acknowledge (which Mr Frohlich would not) that ODL was bound to pay the reasonable value of any work undertaken or materials supplied by FCL as authorised by Castons.

For its part FCL sought to argue that once a Letter of Intent in that form was in place then it must follow that the formal contract contemplated in the Letter of Intent would also be on a “cost plus” basis. I do not agree. I find and hold that there was still the theoretical possibility that the ultimate formal contract might be placed on a fixed price basis (though plainly that fixed price would, as Mr Spanner acknowledged in oral evidence, be higher than £4,361,273 to compensate for transferring the risk of cost increases from ODL, where it lay under a “cost plus” contract conducted on an “open book” basis, to FCL, where it would lie under a fixed price regime). I further find that on 8 and 10 June 2004 what was then actually contemplated was a formal contract on an open book “cost plus” basis (which was the footing upon which all negotiations had hitherto been conducted). Any amendment to make it a fixed price contract would have involved a very significant change of direction (in effect the abandonment by FCL of its established negotiating position), the provision of exact specifications for all those items that were still awaiting the provision of further information or further design, the negotiation of fixed prices for the term of the contract with all sub-contractors, and a revision to the then-current target figure to reflect the transfer of risk to FCL.

A snapshot of the position in the latter part of June 2004 would show:-

It was in this context that the Site Loan was accepted and drawn down and the purchase of the Site concluded in accordance with the convoluted arrangements to which I have referred (Brantridge agreeing to defer payment of its £100,000 fee). As at completion ODL had creditors of some £293,500. Brantridge had paid third parties about £42,500 and had deferred payment of its £100,000 fee. Mr Spanner had paid third parties about £26,000, and the balance represented financing fees, professional fees (for solicitors, architects, surveyors and engineers) and stamp duty due. Although solvent on a balance sheet basis, ODL had no funds out of which to discharge these liabilities, other than any available drawdown on the Development Facility. What was available was 70% of the costs of the enabling works (up to a maximum advance of £590,000). So theoretically ODL had to pay its existing creditors and at some point find 30% of the cost of the enabling works.

Once ODL became the legal owner of the Site it became possible for the enabling works that were to be undertaken by PJ Brown to commence; and it was envisaged that FCL would begin its part of the enabling works under the Letter of Intent in the week beginning 19 July 2004. A “pre-contract start meeting” was therefore arranged for 28 June 2004, which was attended by Mr Turner of Castons. The minutes prepared by FCL survive. So far as material they demonstrate that many subcontracting quotations had not been received and were being sought by FCL (some on a lump sum and some on a “measured” basis); that FCL had yet to see the revised planning approval and that there remained urgent planning matters to be addressed; that the professionals to be retained under the “design and build contract” remained to be appointed; that the form of contract remained to be finally determined; and that the parties were currently working to the cost plan which had been prepare by Castons in December 2003 (though a revised plan was produced at the meeting itself). Nothing in the material suggests that anyone present at the meeting thought that the formal contract (when entered) would be a fixed price contract: the production of revised cost plans (i.e. “target figures”) by Castons and the obtaining by FCL and the provision to Castons of subcontract quotations for the entire project (not simply for the work immediately to be done under the Letter of Intent) strongly suggest that the “open book” procedure hitherto followed was also contemplated to be the basis of the long-term relationship.

On 2 July 2004 Castons gave FCL written instructions to proceed with the design, fabrication and erection of the structural steelwork in accordance with a quotation from the fabricator dated 18 June 2004 in the sum of £406,771 and to proceed with certain of the enabling works. On 6 July 2004 Castons gave ODL instructions to proceed with the design and installation of metal cladding for the units in accordance with a quotation from the fabricator dated £643,851. The contract sums for the steel represented the total amount due over the entire course of the contract. What was in immediate contemplation was the design and fabrication: not everything would be delivered on Day 1. Each of these contract instructions bore the endorsement “if the above work does not proceed all costs in relation to abortive work will be reimbursed”. FCL was prepared to act on these instructions because it believed (as a consequence of something said by Mr Spanner to Mr Waller of FCL) that the development was “fully funded”: though FCL had not asked to see the funding documents. The instructions related to the building work (not the enabling works); and they related to all the units (not specified pre-sold units). Unless cancelled, the contracts so directed by Castons required FCL to commit to paying £1,050,622 in respect of the construction of the entire development. Mr Frohlich says he was not aware that these instructions had been given. Given that he was in charge of ODL’s finances, that ODL was under pressure from creditors, and that accordingly cash flow was a constant concern it seems to me inherently improbable that neither Castons nor Mr Spanner told him that instructions had been given: and it would be an extraordinary dereliction of duty not to have enquired what use had been made of the Letter of Intent.

I must now revert briefly to the Easier transaction. Immediately before completion of the purchase of the Site ODL’s solicitor had suggested (on 15 June 2004) to Mr Frohlich and Mr Spanner that they should reassess the takeover by Easier of ODL, because now that the planning permission had been granted and the value of the Site assessed at £900,000 it would be possible to refinance the project by raising £630,000 (sufficient to pay off HBoS and all pressing creditors and repay Easier’s exclusivity fee) and then to conduct the development themselves, keeping 100% of the profit. This proposition does not appear to have been considered seriously. In my judgment there are two possible reasons why that was so. Either Mr Frohlich and Mr Spanner put their personal interests before those of ODL and took the view that what they stood to gain personally from the Easier transaction (in cash, shares and the release of guarantees) exceeded their anticipated profit share if ODL undertook the development alone; or they took the view that refinancing the project and obtaining development funding for a sole venture was not as straightforward as their solicitor appeared to think (and possibly also that they doubted the sufficiency of the Site Loan and the Development Facility and saw Easier as a potential additional source of funding and as a means of repaying existing pressing creditors). At all events they pursued the Easier transaction.

On 30 June 2004 an agreement was entered into between Mr Spanner, Mr Frohlich and Brantridge (which was treated as an equal shareholder) on the one hand and Easier on the other for sale of the entire share capital in ODL to Easier for a parcel of cash (£113,000) and shares (£250,000) equal to the value of the Site (£900,000) less the Site Loan (£437,000) and the exclusivity fee already paid. At trial Counsel for the Liquidator was critical of the terms of this agreement and sought to highlight the extent to which it was to the personal advantage of Mr Spanner and Mr Frohlich and to the disadvantage of ODL. This did not form part of the pleaded case and I have disregarded this criticism in my assessment of the issues which I have to determine.

It is necessary to draw attention to five features. First, the agreement was conditional on a number of matters (including the production by the vendors of evidence in a form satisfactory to Easier of an offer by a reputable bank of a development loan in the sum of not less than £1.5 million) and upon the completion of due diligence enquiries. This would of necessity entail scrutiny of whether the conditions attaching to the HBoS Development Facility could be satisfied (since ODL had no other loan offer). Second, the conditions had to be satisfied by 31 August 2004 (extendable to 30 September 2004 at the option of Easier). Third, amongst the obligations undertaken by Easier was an undertaking that it would “procure completion of the Development on the most cost-effective basis reasonably possible” (clause 5.5). Fourth, as part of the transaction it was agreed that Easier would pay identified creditors of ODL as at 30 June 2004 (including Mr Spanner and Mr Towning) within a defined period after completion of the takeover. Fifth, at the signing of the contract there was specific disclosure of the existence of unsigned draft JCT contracts (the form of which was not readily apparent from the trial bundle, but which were probably uncompleted blank standard forms sent to ODL on 19 May 2004) and an express statement that there existed “a side agreement with [FCL] in respect of savings on the target sum under the building contract to be shared equally between the parties”. No such document actually existed,

During the course of July it became apparent that all was not well with the Development Facility. The enabling works were in hand and needed to be paid for. Castons certified work to the value of £150,000 and ODL drew two cheques for that sum. HBoS met the cheques to avoid embarrassment, but protested at having to do so. The bank’s view was that it was providing 70% of the funding for the development so that ODL was required to contribute 30% of each certified sum. Mr Spanner and Mr Frohlich said that the position had been misunderstood, and the difficulty was smoothed over (in part because they said the value of the enabling works undertaken was in fact £400,000, only part of which had been certified for payment). However it prompted the bank to state that it would require evidence of the fixed price contract from FCL as well as a copy of the collateral warranty (by FCL in favour of HBoS) “before we fund the build”: and to a ban on the issue of any further cheques, so that ODL was starved of cash.

Fulfilment of this requirement presented a real difficulty. ODL (through Castons) had already ordered over £1 million of steel as part of “the build”: that would eventually need to be funded. The only subsisting contractual arrangement with FCL was on a “cost plus basis” under the Letter of Intent (pending the entry of a formal contract). The only formal contract then under discussion was also on a “cost plus” basis (without even the comfort of any “overage and underage” arrangement negotiated with Mr Fitzpatrick himself). Mr Spanner did not tell the bank that there was no fixed price contract in place with FCL. He simply wrote on 11 August 2004 to express the belief that “all prerequisites are in place” thereby intending (as he acknowledged in evidence) to give the impression that there was a fixed price contract in existence or available.

That same day (11 August 2004) there was a project meeting with FCL attended by Mr Turner of Castons. According to the Minutes of the meeting (which Mr Turner subsequently approved as correct) Mr Turner explained ODL’s perspective on costing of the project as “a target cost of £3.7 million with FCL’s [preliminaries and percentage] on top”. He conveyed a request that there should be a meeting between Mr Spanner and Mr Elders. In my judgment the language used (the record of which was approved by Mr Turner) does not suggest that Mr Turner himself believed (or thought that the board of ODL believed) that a “fixed-price” or “lump sum” contract already existed or was under negotiation. In my view what Mr Spanner sought was a renewed opportunity to shift the FCL commercial contracts team from its established and known position of an “open book costs-plus” contract.

The evidence of Mr Elders was that there was a telephone conversation between himself and Mr Spanner sometime between the 11 and 25 August 2004 during which he made plain to Mr Spanner that a “cost plus” basis was the only way forward. Mr Spanner could not recall this conversation. I am satisfied that the recollection of Mr Elders is accurate. It is confirmed (first) by the FCL Minutes of a meeting on 25 August 2004 which record:-

“Jim Elders has spoken with Godfrey Spanner to explain and confirm agreement to open book basis (cost plus contract). [Mr Turner] advised however that Client still has a target cost for the project. [Chris Prime of Castons] to issue cost plan to Godfrey Spanner”.

These minutes themselves record that they were to be sent to Mr Spanner: and there is no record of any protest from him that they were not so sent or that they were not an accurate record of his meeting with Mr Elders or that Mr Turner’s understanding of his client’s position was inaccurate. The Minutes of 25 August 2004 were approved as correct on 9 September 2004. It is confirmed (secondly) by the first Interim Financial Report which Mr Prime of Castons prepared on 25 August 2004. This shows (a) the entire development costs calculated on a “cost plus” basis: and (b) indicates that FCL’s “contract sum” had increased from £4,784,000 to £5,084,000 (something that simply would not be possible under a fixed-price contract). It follows from this that I reject the assertion (first made in a solicitor’s letter dated 22 December 2004) that FCL’s representatives said on or about 25 August 2004 that a fixed price contract was acceptable and that documents circulated by Castons had been sent to Holland for signature. I am satisfied that such was not the arrangement then in place for the signature of contracts, and that in any event the assertion as to the acceptability of the arrangement conflicts with much more reliable accounts and with the documents.

I have no doubt that it was by 25 August 2004 clear as between FCL and Mr Spanner that no fixed-price contract was or would be on offer (though Mr Spanner probably entertained an unfounded optimistic belief that something might turn up). Equally I have no doubt that Mr Turner then understood that what was on offer was a “cost plus” contract to be administered on an open book basis and with a target price (i.e. a price that it was hoped could be achieved by “value engineering” but which was not a fixed upper limit). I would regard it as incredible that Mr Turner should have conveyed to Mr Spanner the impression that a fixed-price contract was available (which each independently knew was not the case). I would equally regard it as incredible Mr Spanner should have kept to himself the crucial absence of a fixed-price contract and not communicated the fact to Mr Frohlich; or that Mr Frohlich himself should not have enquired. Mr Frohlich, Mr Spanner and Mr Turner all understood the reality: a fixed price contract had not been agreed in principle and all that was available was an open book “costs plus” deal. On the other hand I have no doubt that HBoS did think a fixed-price building contract was either in place or was available. As Mr Spanner was to say (in an e-mail of 24 November 2004 to Mr Elders): “our bank has always thought that the contract was in place”.

What was HBoS to be shown? On 16 August 2004 Castons’ Ipswich office sent by courier to ODL’s London office copies of completed contract documents (with copies also going to FCL and Mr Turner). The contract relating to the enabling works to be undertaken by PJ Brown was in the unqualified contract sum of £410,770. The building contract to be entered by FCL, however, was stated to be in the contract sum of “£4,784,731 and is a Priced Fixed Contract” (sic). The term “Priced Fixed Contract” is an unusual one. There was no disclosure of Castons’ file sufficient to show its origin: and Mr Prime was not called to say why he employed the term. If the document had been intended to provide for a “fixed price” or “lump sum” contract then one would think that such conventional terms would be used (or alternatively that the contract sum would be unqualified, as in the P J Brown contract). In fact the contract itself was by reference to Castons’ cost plan CP6A in which all the figures are described as “estimates”; and in the version of the contract which is said to be that current on 16 August 2004 Appendix 3 said that the Contract Sum Analysis was set out in the “Prime Cost Estimate”.

It was suggested on behalf of the Liquidator at trial that the term “Priced Fixed Contract” was deliberately obscure, and was promoted by Mr Spanner or Mr Frohlich in order to mislead HBoS. I am not prepared to find either of these men deliberately deceitful in this regard. But I can readily see that the draft might completely have misled a third party (such as HBoS) unaware of the train of negotiation between ODL and FCL: and it was certainly found to be unclear by FCL, who considered it might provide for a fixed price (Mr Saunders viewed it “an apparent fundamental change of ODL’s position”) and consequently sought amendment.

Both Mr Spanner and Mr Frohlich seized upon the terms of the contract as evidencing a continuing belief on their part and on the part of ODL’ s advisers that a fixed-price contract had been negotiated and would be available. I disbelieve their evidence (and Mr Turner of course did not give evidence). I am satisfied that paragraph 63 above is an accurate summation of the position.

Before reaching this conclusion I have, of course, had to reflect upon subsequent events: and I will briefly deal with such as bear on this issue before reverting to the main narrative.

On 7 September 2004 Mr Dring of Castons sent to Mr Spanner (and copied to Mr Turner) a commentary on the current contractual position. This stated:-

“The project is progressing in effect as a prime cost contract with the cost plan figures being used as provisional sums subject to an adjustment in accordance with the tender prices received. Whilst this is a perfectly acceptable way to proceed it clearly means that there is a reduced cost risk to the contractor for these packages and a higher cost risk to yourself compared to the situation at the time when preliminary negotiations were held with [FCL]. It would seem appropriate that this is taken into account in any forthcoming negotiations concerning [FCL’s] margins.”

The explanation of the position was clear and accurate. The reference to “negotiations concerning…margins” strongly suggests a “costs plus” structure is still contemplated. In general, this commentary accords with my own analysis.

At the project meeting on 9 September 2004 FCL’s contracts manager commented that the contract required amendment to make explicit “cost plus contract” provisions. No dissent is recorded. This is a Minute Mr Spanner would have seen: and its terms were approved as accurate at a subsequent meeting on 13 October 2004. That tends to confirm my analysis.

The Minute of 13 October 2004 itself (actually prepared by Castons) records:-

“An amendment to the contract is to be included for cost plus is still to be done and FCL to update and forward back to Castons”(sic).

The Minute then records a disagreement upon the amount of consultant’s fees (which was to be referred to Mr Spanner and Mr Elder). This Minute (which was approved as correct on 12 November 2004) also tends to confirm my analysis. But on the copy of this Minute in the trial bundle there is a manuscript note alongside that summary: “Not agreed”. The author of the note was not called to give evidence and to explain to what it related. The author may have been Mr Baldwin (an architect), who may also have been the author of a manuscript attendance note covering the meeting on 9 September 2004 (which was not circulated for approval). This attendance note says:-

“[FCL contract documents] need amending/changing to a cost plus basis. [Mr Turner] asked who agreed to this, not agreed to his knowledge. Robin [Brown the commercial property agent] will confirm contract fixed-price circa £4 million as agreed by [Mr Spanner] and [Mr Fitzpatrick] himself. [Mr Turner] would get [Mr Spanner] to confirm this direct with Mr Elders. [Mr Turner] said this is not agreed and he must revert unless Mr Spanner agreed to the change”.

The side note and the attendance note go against my analysis. On their face they suggest that Mr Turner was asserting agreement in principle on a “fixed-price” contract (albeit that the agreement was with the now-departed Mr Fitzpatrick). (In fact these notes may not themselves be an accurate record: Mr Turner may at most have been asserting a target figure with an “underage and overage” agreement). I have concluded that, in order to decide what probably happened, I should rely on the approved Minutes, some of which were prepared by Castons, (not the uncirculated attendance note of uncertain provenance); and upon the evidence given to me by Mr Saunders, Mr Jollie, and Mr Elders (rather than what might have been the evidence of Mr Turner, Mr Baldwin or Robin Brown had they been called); and to place reliance on the terms of Mr Spanner’s draft Letter of Intent (which did not, as at 14 May 2004, assert any existing agreement on capping the contract sum). The negotiations were not about a fixed price contract and FCL had never indicated a willingness to agree such. If Mr Turner’s assertions are correctly recorded he was seeking to secure (as Mr Spanner had earlier done) a fundamental shift in the arrangements hitherto under discussion.