British Sky Broadcasting Group Plc & Ors v Digital Satellite Warranty Cover Ltd & Ors

This is the trial of a preliminary issue as to whether these proceedings have been settled by an agreement between the parties. The Third, Fourth and Fifth Defendants (who I will refer to individually as Mr Freeman, Mr Sullivan and Mr Marrow and collectively as “the Personal Defendants”) have applied for a stay of the proceedings on the ground that they were compromised by an oral agreement reached during the course of a telephone conversation on 13 September 2010. The Claimants (who I will refer to collectively as “Sky”) deny that any such agreement was concluded. In the alternative, Sky contend that any agreement which was reached during the course of that agreement was merely an agreement in principle which was impliedly subject to contract.

Sky is the well-known pay television satellite broadcaster and communications service provider. The first two defendants, Digital Satellite Warranty Cover Ltd (“DSWCL”) and Nationwide Digital Satellite Warranty Services Ltd, have in the past traded in the provision of maintenance plans for satellite television reception equipment supplied by Sky to Sky's customers. So too have Mr Freeman and Mr Sullivan, trading in partnership under the name Satellite Services.

Sky's claim in these proceedings concerns the use by those defendants of customer data which Sky contends was unlawfully taken from Sky's customer databases for the purposes of marketing extended warranty service plans for Sky satellite equipment, and in the course of such marketing infringing Sky's trade marks and passing the defendants off as connected with, or authorised by, Sky. The Personal Defendants were variously shareholders and officers of the first two defendants while they were trading, who are alleged to be jointly liable for the acts of the first two defendants.

For present purposes I do not consider it necessary to say anything more about the general background of the action or the claims made.

The proceedings were begun by an application by Sky for a search order, which I granted on 16 April 2010. It is material to note that shortly afterwards, by order of Morgan J dated 26 April 2010, the defendants were ordered to identify the sources of customer data which they were using. On 10 May 2010, Mr Freeman and Mr Sullivan made witness statements in purported compliance with that order.

By August 2010, Sky had become dissatisfied with the information provided by Mr Freeman and Mr Sullivan in their witness statements of 10 May 2010 and were taking steps to investigate and to challenge that evidence. That led to an order being made by Peter Smith J on 20 August 2010 for cross-examination of Mr Freeman and Mr Sullivan on those witness statements.

It was shortly before that order was made that the first relevant contact between the Personal Defendants and Sky took place. On 16 August 2010, Mr Freeman telephoned Simon MacLennan, who is a solicitor employed by Sky and who has been their Head of Intellectual Property since March 2006. He has responsibility for this litigation on behalf of Sky and it is not disputed that he had ostensible authority to conclude a settlement agreement with the defendants. Mr MacLennan's response to Mr Freeman's telephone call in the first instance was to say that he needed to check that he was able to speak to Mr Freeman, given that the defendants were represented by solicitors. Accordingly, nothing of substance was said during the first conversation on that day.

Having confirmed via Sky's solicitors that there was no objection to his speaking directly to Mr Freeman, Mr MacLennan called Mr Freeman again later that day. Subsequently, Mr MacLennan prepared an attendance note of both calls, the accuracy of which has not been challenged. The key points that emerge from Mr MacLennan's attendance note are that Mr Freeman made it clear that the defendants were looking to settle the case and that there was discussion about the defendants providing information as to the source of the Sky customer data that they had obtained. At the end of the discussion Mr Freeman said that he would come back to Mr MacLennan, probably via his solicitors.

Following Peter Smith J's order, Mr Sullivan attempted to call Mr MacLennan on 24 August 2010, but did not succeed in speaking to him and left a message to say that he would call again a couple of days later. That conversation took place on 26 August 2010. Although Mr MacLennan again prepared an attendance note of that conversation, it is not necessary to rely upon that note because it subsequently emerged that, since Mr Sullivan was calling on a landline used by DSWCL, the telephone call was recorded. That recording has been transcribed and an agreed transcript is before me.

It is not necessary for present purposes to recite the entire conversation. It is sufficient to note the following points. First, Mr MacLennan made it plain that Sky's primary concern was to obtain information as to the sources of the Sky customer data being used by the defendants. Throughout these proceedings, it has been a concern of Sky that customer data has been leaked by one or more employees of Sky and Sky has been concerned to attempt to identify all such employees. Sky has also been concerned to identify any other sources of its customer data.

Secondly, Mr MacLennan observed to Mr Sullivan, that Mr Freeman had said during the previous conversation that he (Mr Freeman) did not expect to get away with nothing so far as costs and damages were concerned, but there was uncertainty about the number of subscribers the defendants had and the valuation on that (i.e. the quantification of damages). This led to the following exchange (at page 3 of the transcript):

“(Mr Sullivan): Erm, yeah it has, erm, would it be possible for like our solicitors to speak to your guys and slash that part of it out?

(Mr MacLennan): Yes.

(Mr Sullivan): Would that be alright?

(Mr MacLennan): Yeah, no.”

Thirdly, immediately after that exchange, Mr Sullivan said:

“As long as we can agree in principle what you want and what we're gonna provide for ya, erm, Paul Lunt our solicitor said something to do with like a condition of sale or something where obviously we've got to give you the correct information and if it wasn't correct information you could come back to us I think what that was the correct legal term.”

Mr MacLennan's response to this was to make it clear that he was not interested in an agreement containing a condition precedent. Instead, what he wanted was for the defendants first to voluntarily provide the information as to their sources, and then for that to be followed by a negotiation over the other matters.

Fourthly, after some discussion on that point, there was the following exchange (at page 5 of the transcript):

“(Mr MacLennan): My motivation is to find out ….

(Mr Sullivan): Yeah?

(Mr MacLennan): All there is to find out on the data sources and to do something reasonable on the money.

(Mr Sullivan): OK. That sounds, so long as its reasonable on the money and you are happy and we are happy I think there can't be any problem can there.

(Mr MacLennan): Well, you know, I need, I think, cos, I do not really wanna do ...

(Mr Sullivan): Do you want us to come down or do we do it through our solicitor, what do we do?

(Mr MacLennan): Maybe its easiest to do it through your solicitor ...”

At the end of the conversation, Mr Sullivan said that he would speak to Bernie (that is to say, Mr Freeman) and then he would speak to Paul Lunt (that is to say, the responsible partner in the defendants' solicitors) and that they would, as he put it, “get it rolling from there.”

The next development was that on 31 August 2010 Brabners Chaffe Street LLP (the defendants' solicitors, “Brabners”) wrote to Herbert Smith LLP (Sky's solicitors) in a letter marked “Without Prejudice”. The letter begins:

“We understand that our respective clients have spoken directly on the question of whether the above Proceedings are capable of settlement

Our understanding is that, in principle, there is a broad agreement along the following lines:-

….“

There are then set out five numbered paragraphs, setting out what Brabners understood to have been broadly agreed. Despite what Mr MacLennan had said to Mr Sullivan, paragraphs 1 and 5 proposed that the defendants would provide information as their sources as part of the agreement and that Sky should then have the chance of verifying the accuracy of that information. After the five numbered paragraphs, the letter concluded:

“At this stage, we would be grateful if you could confirm your clients' instructions with regard to the above. As and when we have confirmation of agreement in principle, we would then seek to refine the terms within a suitable legal document/settlement agreement.”

It is plain from that letter that what was contemplated was a two stage process whereby, first, agreement would be reached in principle, and secondly, that agreement would be reduced into a written contract.

Herbert Smith replied to that letter on 2 September 2010 in a letter marked both “WITHOUT PREJUDICE SAVE AS TO COSTS” and “SUBJECT TO CONTRACT.” Herbert Smith began by confirming that Sky's' primary objective and purpose in pursuing the litigation was to ascertain the ultimate provenance, and any onward supply, of all Sky data used by the First and Second Defendants. They went on to say that their clients did not consider that any kind of condition precedent, such as suggested by Brabners in paragraphs 1 and 5 of their letter, was workable or appropriate.

The letter went on:

“Our clients instead consider that the best way forward is for your clients first to make full disclosure of all sources and routes of supply on an open basis, to allow our clients to make necessary investigations and take any appropriate actions ... If the information provided by your clients is accurate and comprises or results in, admissible evidence pertaining to the relevant sources and data routes, the main objective of our clients claim will have been met. In terms of monetary relief under the settlement, our clients seek reasonable compensation for the infringement of its rights and for costs. We invite your clients to make a proposal to our clients in this regard. For your information, our clients' legal costs in these proceedings to date are in the region of £420,000 plus VAT.”

Two points are clear from that letter. The first is that Sky was not prepared to entertain an agreement of the kind that had been suggested by the defendants. Rather, Sky was insistent upon disclosure by the defendants of their sources prior to settlement of the proceedings. Secondly, the letter from Herbert Smith, like the letter from Brabners to which it was responding, plainly contemplated a two stage process involving an agreement in principle first and a written contract subsequently. That, after all, is the conventional meaning of the words “subject to contract”.

Brabners replied “Without Prejudice” on 3 September 2010, saying inter alia as follows:

“Your letter offers our clients no certainty and no mechanism for the conclusion of the Proceedings. We invite your clients to do so.

As to the question of costs, we are instructed that, subject to other terms being agreed, the first defendant is willing and able to offer a payment of £100,000.”

Herbert Smith replied on 9 September 2010, again in a letter marked “WITHOUT PREJUDICE SAVE AS TO COSTS” and “SUBJECT TO CONTRACT.” The letter includes the following passages:

“Our clients are disappointed by the stance being adopted by your clients, which fails to progress matters further.

You maintain that your clients do not know the ultimate source(s) of the data acquired by them, but could discover this information by simply making the 'necessary efforts' to do so. You will appreciate that until your clients are actually in a position to confirm that they possess and can share this information with our clients, there is little merit in the parties discussing the detailed terms of any settlement.

.... we suggest your clients reconsider their position, and make any necessary further investigations as soon as possible.”

Again therefore, Herbert Smith were making it plain that Sky required disclosure of the sources prior to any settlement agreement being entertained. Furthermore, Herbert Smith were again proceeding on the basis that the discussions were subject to contract.

The next development was a telephone call on 10 September 2011. On that day, Mr Freeman called Mr MacLennan. For reasons that Mr MacLennan has explained, the conversation was brief and he did not make an attendance note. There is, however, a record of the substance of the conversation in the form of an email sent from Joel Smith of Herbert Smith to Mr MacLennan later the same day. Mr MacLennan was rightly cautious in his evidence as to how accurate a record the email is, but it is not suggested that it is substantially inaccurate. For present purposes, it is sufficient to note that there was discussion of Mr Freeman revealing the source and on the questions of costs and damages. It was left on the basis that Mr Freeman would consider the position and come back to Mr MacLennan.

It is against that background that the critical telephone call falls to be considered. That took place on the morning of 13 September 2010. Mr Freeman called Mr MacLennan. Once again there is a transcript of the recording which, subject to one very minor point, is agreed. Since this is the critical conversation, I must deal with its contents in a little more detail.

The first material passage is on page 2 of the transcript::

“(Mr Freeman): Erm, what erm. How can I start? We'll get you the name. I've spoken to people on the weekend and we'll do that.

(Mr MacLennan): Ok.

(Mr Freeman): We'll pay the money to get the name for you.”

…

(Mr Freeman): And, er, we'll give you the, the other names of course,

(Mr MacLennan): Yep.

(Mr Freeman): going back, historical names.”

…

(Mr MacLennan): Well we'll just have to see what happens but at least you know if you can tell us who you believe it is and then you know obviously we'll need to keep absolutely schtum about what's going on ...

(Mr Freeman): Yeah.

(Mr MacLennan): And give our security guys a chance to look at it.”

Pausing there, it can be seen that Mr Freeman was agreeing to provide Sky with the names of the defendants' sources of Sky data and Mr MacLennan was saying that Sky's “security guys” would want to investigate that information.

On pages 3-4 of the transcript, the conversation turned to the question of costs, as follows:

“(Mr Freeman): OK. Erm, right, costs, erm, the ... we have got put aside the £150,000 plus VAT, erm, for ...

(Mr MacLennan): You don't need to worry about the VAT.

(Mr Freeman): We don't need to worry about the VAT, ok, well we've got that put aside anyway, erm, what can we agree on, on the court case ...

(Mr MacLennan): Well there's costs and there's the compensation isn't there ...

(Mr Freeman): Yep, we'll do them both separately, if we can, can we do that?

(Mr MacLennan): Yeah, no that's fine, but I think, you know, at this stage, my opening price is absolutely minimum of half our costs which I think is a little over £200,000 at the moment, and I'm not I think going to be able to move off that unless everything else is going absolutely swimmingly ...

(Mr Freeman): Ok.

(Mr MacLennan): You know, if, if you give us just a fantastic, erm, situation on the data ...

(Mr Freeman): Mmm ...

(Mr MacLennan): Erm, then, you know, I think we have a much better chance of being accommodating on the ...

(Mr Freeman): Ok ...

(Mr MacLennan): on the financial stuff. …. ”

Pausing there, it is not suggested that in that passage there was an agreement with regard to costs. More to the point, in my view, it is clear from that passage that Mr MacLennan was saying that Sky's attitude to settlement on the financial terms would depend on the quality of the information provided by the defendants.

A little later, on page 4 of the transcript, the conversation turned to the subject of damages, as follows:

“(Mr Freeman): That's, that can come straight away, and the others, erm, the damages side, if we can agree a figure, we're losing customers hand over fist because of the FSA and everything else and you know we're coming out of it anyway ...

(Mr MacLennan): Yeah.

(Mr Freeman): So, we would need just a little bit of time on that one, erm, what can we just, er, what can we say on damages ...

(Mr MacLennan): Why don't you start off by saying how many you've got, what revenue you've got in total but particularly as a kind of average revenue per user and then you know what kind of costs do you have, just so I know what kind of, you know I don't know what your acquisition cost is, I don't know what your servicing costs are …”

It can be seen both from that passage and what follows that Mr MacLennan was essentially asking Mr Freeman for information that would enable damages to be quantified. There was further discussion on that topic, and I should pick it up at page 5 of the transcript:

“(Mr MacLennan): What kind of costs do you have and you know what your profit figure is?

(Mr Freeman): Costs and profit.

(Mr MacLennan): Yep.

(Mr Freeman): Ok. Erm and will we, will we talk about this erm at a later date, is that what you're saying?

(Mr MacLennan): Erm, well I'm ... its capable of being sorted now but I mean everything's ...

(Mr Freeman): Yeah.

(Mr MacLennan): gonna be conditioned on the data anyway, so ...

(Mr MacLennan): Yes, sure.”

Again, it is plain from that that Mr MacLennan was saying that settlement depended upon the data that the defendants were going to be supplying.

On page 6 of the transcript the conversation proceeded as follows:

“(Mr Freeman): Erm, you know we'll do that today, get that out of the way, erm, and then we're on a truss for damages, we've sorted out the costs, erm, so we'll just be on a truss for how much damages. I mean I had a figure in mind, but erm ...

(Mr MacLennan): By all means tell me a figure at any point and I have said on the costs that my opening price is half our costs ...

(Mr Freeman): Yeah ok, well I'll accept that ...

(Mr MacLennan): We're not quite there ...

(Mr Freeman): I'll accept that on the costs ...

(Mr MacLennan): and you know on my calculation half will be a moving feast ... if, you know, I really hope we don't have any more costs , and ...

(Mr Freeman): No.

(Mr MacLennan): hopefully we've got a big enough time window that we can ...

(Mr Freeman): Yeah.

(Mr MacLennan): wrap this thing up.”

Counsel for the Personal Defendants submitted that in that passage Mr MacLennan and Mr Freeman had agreed that a term of the settlement would be that the defendants would pay half of Sky's actual costs. I do not accept that submission. I accept that Mr Freeman indicated that paying half of Sky's costs was something that he was prepared to accept, but Mr MacLennan made it clear that they were “not quite there”, and that half “would be a moving feast”,. In my view, he was making it perfectly plain that, while the parties were close in principle, the details remained to be sorted out. That interpretation is, in my view, confirmed by a later passage in the transcript, to which I will come.

The conversation then reverted to the subject of damages, as follows:

“(Mr Freeman): Yep. Well erm, I mean, if we've got sort of 6 months or so to pay, I think erm damages of round about, I don't know 150, 200,000, 250,000.

(Mr MacLennan): Yeah, we're going to need to look that that in the context of your subs cos it just I think that probably just doesn't make any sense in terms of the ...

(Mr Freeman): Its just what we can afford really ...

(Mr MacLennan): Well yeah, but we'll need to open that up a little bit ...

(Mr Freeman): Ok

(Mr MacLennan): Cos there's, I think there's a discrepancy, because that's like erm, 2, £2.50 a sub isn't it ...

(Mr Freeman): Something like that.

(Mr MacLennan): Yeah. So taking out the higher side divided by 70 you know that's 3 and a half percent of the revenues you are getting which is very low …”

Mr MacLennan went on to discuss the defendants' profit margins. A little later, on page 7 of the transcript, the conversation resumed as follows:

“(Mr MacLennan): So, we're not looking, you know, we're not looking to bite the whole thing ...

(Mr Freeman): No.

(Mr MacLennan): But if you give me a number which looks like 10% of one year's profit, I think it seems to be in the wrong ball park. Your pitch to make I think on that really.

(Mr Freeman): Right, ok. Well, well let us look at it today then. And we'll come to that ...”

Counsel for the Personal Defendants submitted that in that passage Mr MacLennan and Mr Freeman had agreed as a further term of settlement that the defendants would pay damages, capped at 10% of one year's profit. I do not accept that submission. Before explaining why, I need to resolve two disputes regading the passage in question.

First, in the transcript before me, the key sentence from Mr MacLennan reads with a comma between the words “one year's profit” and the words “I think it seems to be in the wrong ballpark”. The Personal Defendants contend that that punctuation is wrong, and there ought to be a full stop there to reflect the fact that there is a pause audible on the recording. Counsel for Sky submitted that, at most, the pause would be correctly reflected by a semicolon. To my mind, the correct punctuation does not matter.

What does matter is the further dispute as to what Mr MacLennan would have been understood to have been referring to when he said “it seems to be in the wrong ballpark”. Counsel for the Personal Defendants submitted that “it” referred back to the figure of 3.5% of the revenues to which Mr MacLennan had referred almost a minute before on the recording (the last bit of the transcript on page 6 quoted in paragraph 36 above). I do not accept that submission. It seems to me to be plain that Mr MacLennan would have been understood to be referring to “10% of one year's profit”, being the figure which he had just mentioned.

In my judgment, the contention that Mr MacLennan made an offer to accept damages capped at 10% of one year's profit is simply untenable. In my judgment, he made no such offer. On the contrary, he said the exact opposite, that it would not be acceptable. Furthermore, the contention that Mr Freeman accepted that offer I regard as equally untenable. His response was not to say, “Yes, we accept the liability to pay damages capped at 10% of one year's profit”. Rather his response was, having said “Right, okay”, was to go on to say, “Well, well let us look at it today then. And we'll come to that”. In my view, it is plain from those words that Mr Freeman would have been understood to mean that the defendants would want to consider what sum to offer in the light of the financial information which Mr Freeman was agreeing that they would obtain and provide.

I can move on to the penultimate page of the transcript, page 8, and the following passage:

“(Mr Freeman): Ok. Ok. So to sum up then, erm, I'll get these across to you today, the names.

(Mr MacLennan): Yep.

(Mr Freeman): Erm, we, we've roughly agreed on costs for erm, the Court.

(Mr MacLennan): We're not too far apart.

(Mr Freeman): Nope. And we will do some homework on the customers and put you some, some costs, some costs as well erm, on erm, on how much we can erm actually come to on you know, agreement with yourselves and us on how much the actual damages will be.

(Mr MacLennan): Yep.

(Mr Freeman): Yeah? Er, and that will ...

(Mr MacLennan): That's a fair summary.

(Mr Freeman): And then the court erm court action will be suspended until such time as you've got all your information.

(Mr MacLennan): Erm, yeah, I won't let go of that date with the cross-examination unless I'm comfortable on the data stuff but if you're, you know, if stuff's coming today.

(Mr Freeman): Yep.

(Mr MacLennan): And we can follow that up then we're making really good progress on that.”

In my view, that passage of the transcript confirms, if confirmation were required, that no concluded agreement had been reached between Mr MacLennan and Mr Freeman. With regard to the question of costs, even Mr Freeman said no more than that they were agreed “roughly” on costs. Mr MacLennan's response was to say, “We're not too far apart”. That is not the language of a concluded agreement. So far as damages is concerned, the position was that Mr Freeman was agreeing to provide information that would enable a damages calculation to be provided. There was nothing close to a concluded agreement. Furthermore, Mr MacLennan reiterate in that passage his consistent message that everything was dependent upon the quality of the information provided by the defendants as to the sources of their data.

The next development was a further telephone conversation on the afternoon of the same day, 13 September 2010. Again, Mr Freeman called Mr MacLennan. Again, the telephone call was recorded. It is not necessary to review this transcript in detail. It suffices to say that, during the course of the conversation, Mr Freeman disclosed to Mr MacLennan the names of a number of sources of data that the defendants had used.

Nevertheless, the following passage (at pages 7-8 of the transcript) should be noted:

“(Mr MacLennan): I mean, it's really helpful for you to tell me on the phone, do you wanna to talk to your lawyer and kind of work it up into a letter or something so ...

(Mr Freeman): Yes, yes, I've told him that after I've spoken to you...

(Mr MacLennan): Yep.

(Mr Freeman): I'll go back to him and then he'll put it in writing to you, to your erm, lawyers, er the only thing he did ask me to erm get right with you was erm we, we haven't done the damage part of it yet I have to wait for erm the accountants to be in tomorrow and I'll do it tomorrow for you...

(Mr MacLennan): Yeah, no that's, that's fine...

(Mr Freeman): That, that ones away.

(Mr MacLennan): Yeah.

(Mr Freeman): And I'm quite happy with that, but the costs, can we just hit a figure now erm on the costs.

(Mr MacLennan): Well, in principle, yes but not in...

(Mr Freeman): No, in principle...

(Mr MacLennan): Well half our costs ... what I've always said and as I say if we're doing brilliantly on the data and stuff like that I'm not gonna be, er awkward over over the money, you see you feel Mr Freeman like you've just finished with it and you know, got the load off your shoulders which you have...

(Mr Freeman): I do.

(Mr MacLennan): But I've only just picked it up.

(Mr Freeman): [Laughs]

(Mr MacLennan): Do you know what I mean...

(Mr Freeman): Yes, of course.

(Mr MacLennan): So I've got quite a lot of checking to do and stuff like that.”

To my mind, that passage confirms that the parties were not agreed as to costs, let alone damages. At best, there was a recognition that they were close to an agreement in principle. Furthermore, it confirms that agreement both on costs and damages had to await Sky's checking of the information on sources provided by the defendants. It also had to await the financial information which the defendants were going to provide.

The same message appears from a further passage of the transcript at page 10. It suffices to read the last few lines:

“(Mr MacLennan): Ok. Good stuff. Ok well I should probably get cracking with this stuff the sooner we kind of verify it or not the quicker it all goes ...”

…

Well, thank you very much, I'll get cracking on that, you'll be in touch with the written confirmation via your lawyers and...

(Mr Freeman): Yes.

(Mr MacLennan): On the accountancy piece.

(Mr Freeman): And on the accountancy piece I will probably ring you tomorrow.”

It is convenient to record at this juncture that counsel for the Personal Defendants submitted to me that everything that had happened after the telephone call on the morning of 13 September 2010 was irrelevant to the issue as to whether there was a concluded agreement between the parties arrived at during the course of that telephone conversation. He was constrained to accept by the decision of the Court of Appeal in ED&F Man Commodity Advisers Ltd v Fluxo-Cane Overseas Ltd [2009] EWCA Civ 406 that subsequent events were admissible evidence on the question of whether an agreement had been concluded or not. But he submitted that, given that there was a transcript of the conversation in question, all that was necessary was for the court to interpret the words used in that conversation and that all subsequent events were irrelevant to the question. I do not accept that contention. While I entirely agree that the primary evidence is the transcript of the conversation in question, I consider that the subsequent events are not merely capable of throwing light on whether a concluded agreement was reached during that conversation, but do so. I note that in the ED&F Man case the Court of Appeal held that subsequent events were not merely admissible, but relevant: see the judgment of Waller LJ at [19] to [ 22].

Returning to the chronology, the next development was a letter from Brabners to Herbert Smith dated 16 September 2010 marked “Without Prejudice save as to Costs”. In that letter Brabners said as follows:

“We refer to the above matter and the conversation between our respective clients earlier this week.”

They went on to confirm in writing the information as to the sources given by Mr Freeman on the telephone in the second conversation on 13 September 2010. The letter concluded:

“We are instructed that our respective clients have agreed the basis of settlement and that we are to hear from you further once your client has been able to follow up and verify the accuracy of the names provided.”

It will be noted first that it is clear from that letter that it was written on the basis of instructions from at least Mr Freeman. Secondly, Brabners do not suggest that there has been a concluded agreement to settle the proceedings. On the contrary, the most that is suggested is that the respective clients have agreed “the basis” of settlement. Thirdly, the letter supports the interpretation that I have placed upon the telephone conversations, namely that further progress of the settlement discussions was dependent upon Sky's verification of the accuracy of the information provided by the defendants as to their sources.

Mr Smith of Herbert Smith replied to that letter in an email to Mr Lunt of Barbners marked “without prejudice” dated 22 September 2010, as follows:

“Further to your conversation with Christopher Sharp yesterday, as part of our client's wider discussions about resolving the dispute, our client requires Mr Freeman and Mr Sullivan to confirm their accounts about the source of the data and imports of data in short witness statements to be verified by a statement of truth. This should be produced to us at the latest by lunchtime tomorrow.”

Mr Lunt replied by email on 23 September 2010 with a draft second witness statement of Mr Sullivan verifying the information that had been supplied about the sources of data sent on a without prejudice basis. The statement was signed later that day.

On the same day there was a further conversation between Mr Freeman and Mr MacLennan. It is not necessary for present purposes to go into the details of the conversation, save to note that there were further discussions over settlement terms. That, of course, would be unnecessary if there had already been a concluded agreement.

On 5 October 2010 Herbert Smith wrote to Brabners in a letter marked “WITHOUT PREJUDICE SAVE AS TO COSTS”, as follows:

“We refer to your without prejudice e-mail of 23 September 2010 (Lunt/Smith) and the without prejudice discussions that have taken place between our respective clients. As you know, our clients agreed to adjourn the cross-examination hearing on the basis of your clients providing a witness statement dealing with all of the outstanding issues.”

The letter went on to say that more information should be provided.

On 7 October 2010 there was a further conversation between Mr Freeman and Mr MacLennan in which it was agreed that it would be useful to meet to document the sources of data and to agree the financial terms between the parties. Again, that is inconsistent with there having been a concluded agreement previously.

Later the same day Mr Lunt replied to Mr Smith’s email, saying:

“My understanding is that our respective clients have been in discussions direct as above and they are planning to meet up next week to seek to resolve any loose ends. Can you please clarify?”

Again, that is inconsistent with any suggestion that there had already been a concluded agreement.

On 8 October 2010 Christopher Sharp of Herbert Smith replied to Mr Lunt’s email in the following terms:

“Our clients are still seeking the further information as mentioned in our WP letter. However, the delivery of this is something that can be discussed at a meeting. I have been instructed by Sky to invite you and your clients to a WP meeting at our offices to discuss this and other settlement terms. Are you and your clients available in the latter part of next week or the early part of w/c 18 October? I would be grateful if you could let me know as soon as possible.”

It is plain from that e-mail, as from the earlier communications, that Sky are looking to discuss settlement in the light of the information provided. It is once again inconsistent with the suggestion that there has already been a concluded agreement.

There was then a final telephone conversation between Mr Freeman and Mr MacLennan on 11 October 2010. It is not necessary to go into the details of this since it does not add anything material to the story.

I should record at this point that, as part of what had been discussed between Mr Freeman and Mr Freeman, the defendants, in addition to providing the names, have been providing copies of discs containing data obtained from their source. The purpose of that was to enable Sky to confirm that the source identified by the defendants was indeed the source of the data which had been obtained from Sky by seeding the data. To that end, the defendants had been providing discs on a weekly basis, and it is common ground that that carried on for a period of some nine weeks.

There was then a pause in the negotiations until 25 October 2010 when Mr Sharp sent Mr Lunt an email confirming a without prejudice meeting to take place on 1 November 2010. Mr Lunt replied on 26 October 2010 confirming the date of the meeting and discussing attendees. On 28 October 2010 Mr Sharp sent Mr Lunt an email saying that one of the Sky attendees was no longer able to attend the meeting on 1 November due to an urgent commitment abroad and therefore proposing that the without prejudice meeting be put off for a couple of dates. He also proposed that the cross-examination hearing, which was by then due to take place on 10 November 2010, be adjourned for a month to allow the parties sufficient time to reach settlement. Once again, the discussions between Mr Sharp and Mr Lunt in these emails are inconsistent with the suggestion that the agreement had already been concluded.

There were some desultory further communications about the proposed meeting, but in the event it never took place. The reason for that was that Sky made a complaint to the police about the key source of the data identified by the defendants, namely Steven Lee, who is now the Tenth Defendant in these proceedings. The police informed Sky that they intended to arrest Mr Lee. They also informed Sky that they intended to arrest Mr Freeman and Mr Sullivan on the basis that they might have been involved in a conspiracy with Mr Lee. Mr MacLennan's evidence, which I accept, is that in those circumstances Sky did not consider it prudent to pursue the without prejudice settlement discussions with the defendants.

Instead, what happened was that Sky applied without notice to Proudman J for an interim injunction on 5 November 2010 and that order was granted. On 10 November 2010 Messrs Lee, Freeman and Sullivan were arrested. On 16 November 2010 Newey J made an order on the application of the Financial Services Authority appointing provisional liquidators in respect of both the first two defendants in these proceedings and Satellite Services. On 19 November 2010 Newey J made an order continuing the injunction and regarding the use of data obtained by the provisional liquidators. On 1 February 2011 Briggs J made an order continuing the injunction and directing a case management conference. On 2 February 2011 Sky applied without notice to Briggs J for a domestic freezing injunction, which he granted. That injunction was extended by Mann J on 17 February 2011 to a worldwide freezing injunction. At no stage prior to 30 June 2011 did the defendants apply to discharge any of these injunctions on the ground that there had been a concluded agreement to settle the proceedings.

On 22 February 2011 Brabners wrote to Herbert Smith in a letter marked “WITHOUT PREJUDICE SAVE TO COSTS”. That letter includes the following passages:

“You are aware that certain of our clients had various conversations and dealings direct with representatives of your clients (including Mr McClennan) towards the end of last year. Those dealings are all recorded and can be evidenced.

Our clients had approached your clients direct in a genuine effort to resolve the dispute and on the basis that what your clients really wanted was assistance in identifying what they believed to be a source of data being leaked from their organisation. That is what was their stated aim and was repeatedly advised as such.

Having co-operated fully with your clients to do their bidding in this respect, it transpired that the intention of your clients was seemingly to entrap at least some of our clients into actions later reported to the police and used to encourage the police to arrest them.

Whilst our clients reserve their rights in full as against your clients personally in respect of such matters, the Proceedings remain live. If what Mr McClennan said to our clients can be believed, the discussions that had taken place had agreed the key areas for a settlement, at least in round terms.”

The letter went on to propose that there should be mediation.

That letter is flatly inconsistent with the suggestion that a concluded agreement to settle the proceedings had been arrived at the previous September. On the contrary, the letter states unambiguously that the proceedings remain “live”. The most it says is that the key areas for a settlement have been agreed “at least in round terms”. If there had been a settlement, there would be no need for mediation because there would be nothing to mediate.

Herbert Smith replied on 11 March 2011 stating that their clients did not consider it appropriate to enter into settlement discussions.

The next development was that on 7 April 2011 Sky applied for summary judgment. On 15 April 2011 Newey J made an order continuing the interim injunction that had been granted previously and making directions in particular for the hearing of the summary judgment application.

On 6 May 2011 Brabners wrote once again in a letter marked “Without Prejudice save as to costs”. The letter begins:

“We refer to the above matter and to your refusal to even enter into discussions with our clients following their invitation to ... at least narrow the issues at a mediation.”

Later in the letter Brabners say this:

“No doubt you will be aware that, prior to our client's arrest in November 2010, over a period of many weeks, our clients had various discussions with Mr MacLennan of your client with a view to resolving all the issues and drawing a line under the present proceedings.

We are now instructed that recordings of the conversations have been obtained. In those discussions, our clients agreed financial terms of settlement with Mr MacLennan. In this particular, our clients agreed that, in reliance upon Mr MacLennan's representations, they would take certain steps to seek to positively identify the ultimate source of data that Sky believed was emanating from a leak within its organisation. In reliance upon the discussions and Mr MacLennan's representations, our clients paid out several thousand pounds and took considerable risks in order to secure for Sky a name as the alleged ultimate supplier of data.”

The letter went on to say that these matters were subsequently reported to the High Court on the application for a freezing order in a manner that was not accurate or complete. It then says that the recordings had been reviewed by the defendant's criminal solicitors. It continues:

“We are now to review those recordings. It may well be that, once we have reviewed the recordings, an application to court is made with regard to the terms agreed between Mr MacLennan and Messrs. Freeman/Sullivan. Our clients are particularly concerned as to Sky's current stance given that it would appear the ultimate source of the leaked data that has now been identified (identifying the source being repeatedly said to be the primary concern of Sky by both Mr MacLennan and Sky's legal representatives) and yet, having assisted in achieving that goal in reliance upon Mr MacLennan's representations, it seems to be Sky's position that it will not even discuss options to settle the dispute or narrow the issues.”

The letter ends by inviting Sky to reconsider its position on mediation. Although that letter does refer for the first time to “terms agreed between Mr MacLennan and Messrs Freeman/Sullivan”, in context it appears that the application to court that was contemplated was an application to discharge the freezing order for material non-disclosure of the co-operative stance being adopted by the defendants with regard to the identification of Mr Lee.

Nowhere in the letter is it asserted that a concluded and binding agreement to settle the proceedings had been reached between Mr MacLennan and Mr Freeman on 13 September 2010. On the contrary, the protestation that Sky is declining “even to discuss options to settle the dispute or narrow the issues”, and the request that Sky reconsider its attitude to mediation, are inconsistent with any such suggestion.

The first time in which it was suggested by or on behalf of the defendants that there had been a concluded agreement to settle the proceedings was in paragraph 49 of a third witness statement of Mr Sullivan made on 20 June 2011 in opposition to Sky's application for summary judgment. Not until 30 June 2011 was the application made by the Personal Defendants for a stay of the proceedings and evidence in support of it adduced. It beggars belief that, if the Personal Defendants had really believed that a concluded settlement agreement was arrived at in the first telephone conversation on 13 September 2010, they should not have mentioned it until 20 June 2011.

Thus far, I have given my account of the negotations and my conclusions almost wholly by reference to the documentary evidence. I should say, however, that in addition to the documentary evidence I have had the benefit of witness statements and oral evidence from Mr MacLennan, Mr Freeman and Mr Sullivan. I am bound to record that I do not regard either Mr Sullivan or Mr Freeman as credible witnesses. They both admitted having lied in the first witness statements that they made in these proceedings, and a number of other aspects of their evidence were incredible or otherwise unsatisfactory. To the extent that there is any conflict of evidence between Mr MacLennan's evidence and the evidence of Messrs Freeman and Sullivan which is necessary to resolve, I have no hesitation in preferring the evidence of Mr MacLennan. Mr MacLennan’s evidence was clear that no agreement was concluded. As I have indicated however, it seems to me that one can deal with this application on the basis of the documentary evidence and one does not need the oral evidence as well.

For the reasons I have given, I have reached the firm conclusion that no concluded agreement was reached during the first telephone conversation on 13 September 2010. That is not the end of the Personal Defendants' difficulties on this application however. Even if I were satisfied that an agreement of some kind was reached during the course of that telephone conversation, I would still conclude that it was not a binding agreement settling the proceedings for two further reasons.

The first is that the terms supposedly agreed during that conversation are not, in my judgment, sufficiently certain. It is sufficient for present purposes to mention the following points. First, with regard to costs, as at what date were the defendants supposed to be paying half of Sky's costs? Secondly, with regard to damages, in so far as it is said that damages were to be capped at 10% of one year's profits, which entity’s profits and which year? There is no evidence that even begins to address that fundamental question. Furthermore, other aspects of settlement set out in paragraphs 13 and 14 of Mr Freeman's third witness statement in support of present application cannot be found in the transcript, in particular the term that Sky would discontinue the action against the First, Third, Fourth and Fifth (but not the Second) Defendants.

The second additional reason why I consider that there was no binding agreement is that, even if an agreement was concluded which was sufficiently certain, I regard it as clear that it was an agreement in principle only. That is apparent, first, from the inter-solicitor correspondence which formed the background to that conversation. Secondly, it is apparent from the references to agreement in principle in the course of the conversation itself. Thirdly, it is apparent from Mr Freeman's own evidence before me. He said on at least two occasions that there had been an agreement in principle during the course of the conversation. In my judgment, it is manifest that the parties’ intention was that a written contract would have to be executed in order for any agreement to be binding. That never occurred.

For all of those reasons I determine the preliminary issue by concluding that there was no agreement to settle the proceedings and I therefore dismiss the application for a stay.