Avonwick Holdings Ltd v Webinvest Ltd & Anor

This is an application made at the pre-trial review of a case which is listed for trial for five days commencing on 20 October 2014. The proceedings were commenced by a claim form issued on 16 July 2014 and have been brought to trial under an accelerated timetable directed by Peter Smith J on 15 July 2014 in circumstances which I shall describe below.

The application is made by the claimant, Avonwick Holdings Limited (Avonwick), that certain correspondence between the parties and their solicitors in April-May 2014 should be admissible as evidence, notwithstanding that most of it is headed “without prejudice and subject to contract”. The application is opposed by the defendants, Webinvest Limited (Webinvest) and Mikhail Shlosberg (Mr Shlosberg).

The background to the proceedings and the principal issues in it may briefly be described as follows. Avonwick is, on its case, beneficially owned by Mrs Olena Gayduk and Webinvest is beneficially owned by Mr Shlosberg. Mr Shlosberg was a family friend of Mr and Mrs Gayduk.

In early 2010 Mr Shlosberg approached Mr Gayduk with a business proposal. Following discussions, Avonwick agreed to make a loan of US$100 million to Webinvest, to enable that company to make a total advance of US$200 million to a company (the sub-borrower) owned or controlled by a business associate of Mr Shlosberg.

The terms of the loan agreement between Avonwick and Webinvest were negotiated and drafted in April 2010, with Allen & Overy acting for Avonwick and a Ms Julia Mutieva, an advisor to Webinvest, acting on its behalf. The Loan Agreement provided that the loan was repayable in full on 17 May 2012, with interest accruing at a rate of 24% pa, payable as to 5% each quarter and as to the balance on the repayment date. The obligations of Webinvest were guaranteed by Mr Shlosberg in a deed of guarantee also dated 23 April 2010.

Interest payments totalling approximately US$9.63 million were made in the period up to April 2012 but Webinvest did not pay the principal and further accrued interest on 17 May 2012. In July 2012 Ms Mutieva sent to Avonwick a proposed loan agreement which would reschedule Webinvest’s liabilities by capitalising the principal and outstanding interest, extending the maturity date until 17 May 2013 and reducing the interest rate to 15%. Avonwick was not prepared to accept these terms and required the provision of security. Offers of security were made in November 2012 and information provided regarding the assets which would be the subject of the security. No agreement was reached and there were further discussions between the parties from August 2013 and into 2014. The hiatus in discussions in the first half of 2013 was as a result of Mr Shlosberg’s understandable pre-occupation with his son, who was suffering from terminal cancer and died in June 2013.

On 3 April 2014, Avonwick served demands on Webinvest and Mr Shlosberg in accordance with the written terms of the Loan Agreement and the guarantee. These were followed by the service of statutory demands under the Insolvency Act 1986 on Webinvest and Mr Shlosberg. By agreement, the time for compliance with the statutory demands was extended, with the final extension expiring on 30 May 2014. On that day Webinvest issued an application to restrain Avonwick from presenting a winding-up petition and Mr Shlosberg issued an application to set aside the statutory demand served on him. These applications were supported by a witness statement of Mr Shlosberg dated 29 May 2014, in which he alleged that it had been agreed between the parties at the time when the loan was made that the obligation of Webinvest to repay it and accrued interest, and hence his own obligations under the guarantee, were conditional on the receipt by Webinvest of repayments of the loan made by it to the sub-borrower. This has been referred to in the hearing as the “pay when paid” term.

Avonwick denies that any pay when paid term was ever agreed or discussed. It says that the Loan Agreement sets out all the terms of the loan to Webinvest. It says that the first time that any allegation of a pay when paid term was made was in the witness statement of Mr Shlosberg dated 29 May 2014. It is the defendants’ case that the pay when paid term was orally agreed between the parties at the time of the Loan Agreement and they point out that the Loan Agreement does not contain an entire agreement clause. They have not produced any written evidence of a pay when paid term pre-dating Mr Shlosberg’s witness statement of 29 May 2014.

Evidence was filed on behalf of Avonwick on the applications issued on 30 May 2014 and further evidence was filed on behalf of Webinvest and Mr Shlosberg. The applications were listed for hearing before Peter Smith J on 15 July 2014. Having read all the evidence, he indicated his view that Webinvest and Mr Shlosberg had raised an issue which could not be determined on the applications before him, in view of the conflict of evidence between the witnesses as to what was said to have been an oral agreement. He was however willing to give directions for a speedy trial of the issue and, on Avonwick’s undertaking to issue a claim form, he gave the directions necessary to bring the matter to trial in October 2014.

The correspondence to which the present application applies began with an email sent on 3 April 2014 by an assistant manager at Pricewaterhouse Coopers in Cyprus on behalf of Avonwick. The email was addressed to Ms Mutieva and was headed “Without Prejudice & Subject to Contract”. Draft heads of terms were attached. The covering email stated:

“Please find attached, without prejudice, the Heads of Terms, which set out the primary terms, subject to contract, upon which Avonwick Holdings Limited is willing to agree a restructuring of the obligations of Webinvest Limited and Mr Mikhail Shlosberg under the Loan Agreement and the Guarantee and is based on proposals already made by Mr Mikhail Shlosberg in his capacity as guarantor under the Guarantee as well as in his capacity as ultimate beneficial owner of Webinvest Limited.”

The attached Heads of Terms were also marked “Without Prejudice & Subject to Contract”. They provided for the provision of security, the repayment of US$40 million by 15 May 2014 to be applied against accrued but unpaid interest, and the extension of the maturity date to 17 May 2015.

The evidence filed on behalf of Avonwick states that its solicitors, Dechert LLP, were involved in drafting these Heads of Terms and it is clear that they have been professionally drafted. The reasonable inference is that the rubric “Without Prejudice & Subject to Contract” was included in the draft by Dechert. Judging by the terms of the covering email, I would think it likely that it too was drafted by Dechert but, whether or not that is so, the use of the same rubric in the email is likely to derive from the draft Heads of Terms provided by Dechert.

On the same day, Pricewaterhouse Coopers on behalf of Avonwick also sent the demand for repayment of the loan, under cover of an email which was also headed “Without Prejudice & Subject to Contract”. It is agreed that this was a mistake and that this email is on any basis not without prejudice. Again it is likely that it was included in the email because that is the phrase which Dechert had used in the draft Heads of Terms.

The defendants’ solicitors, Fladgate LLP, replied on their behalf in a letter dated 7 April 2014 which was also marked “without prejudice and subject to contract”. They wrote:

“We also acknowledge receipt of your without prejudice and subject to contract proposals. Our clients are most grateful for your understanding and readiness to consider an amicable restructuring of the position.”

Dechert replied in a letter dated 10 April 2014 marked “Without prejudice & Subject to contract”. They wrote:

“If your clients wish to avoid respectively being wound-up and made bankrupt they should now engage with us and our client to determine whether a restructuring of your clients’ obligations can be achieved as outlined in the without prejudice heads of terms provided to you on 3 April 2014.”

The reply to this letter came from Ms Mutieva in a letter dated 13 April 2014 marked “without prejudice and subject to contract”. The letter began:

“We acknowledge receipt of your letter of 10 April 2014 with enclosed copy Statutory Demands. Our solicitors Fladgate LLP will be responding separately in open correspondence in respect of those documents from Webinvest Limited and Mr Shlosberg respectively.

We are responding in this letter to the proposed restructuring of arrangements between Avonwick Holdings Limited and Webinvest Limited. Your letter raises specific questions on which we are answering.

We would like to assure you that we desire to achieve a settlement agreement as soon as possible. Since the overall structure of any settlement is not likely to differ substantially from your proposals, we would invite you to prepare draft documentation for our consideration.”

The letter continues by giving details of assets over which security could be given and comments on the draft Heads of Terms.

There was also during April 2014 an exchange of correspondence between Mr Shlosberg and Mr Gayduk. This correspondence was not marked without prejudice but it is common ground that it forms part of the correspondence referred to above and, if that correspondence is to be treated as without prejudice and therefore inadmissible, so also is the correspondence directly between the parties. Mr Shlosberg also sent a more formal request in a letter dated 22 April 2014 marked without prejudice, requesting Mr Gayduk on behalf of Avonwick to extend the term of the statutory demand to 9 May 2014. Revised draft Heads of Terms were prepared on 9 May 2014. It is again agreed that these and a few other documents stand or fall with the main correspondence.

For a document to be inadmissible on the grounds that it is “without prejudice”, it must form part of a genuine attempt to resolve a dispute. There needs to be both a genuine dispute to be resolved and a genuine attempt to resolve it. If there is no dispute about a liability, but only a negotiation as to how and when it should be discharged, the negotiations, and documents produced in the course of them, are not covered by the “without prejudice” exception to the admissibility of relevant evidence. That was the situation in Bradford & Bingley plc v Rashid [2006] 1 WLR 2066, [2006] UKHL 37. Lord Mance said at [81]:

“The existence of a dispute and of an attempt to compromise it are at the heart of the rule whereby evidence may be excluded (or disclosure of material precluded) as “without prejudice”. … the rule does not of course depend upon disputants already being engaged in litigation. But there must as a matter of law be a real dispute capable of settlement in the sense of compromise (rather than in the sense of simple payment or satisfaction).”

In that case, the relevant correspondence was not marked “without prejudice” and it was common ground that there was no dispute as to the existence or amount of the defendant’s liability. The documents which the defendant sought to have excluded on the grounds that they were impliedly “without prejudice” contained attempts to agree terms as to the repayment of the liability, in other words a restructuring of the defendant’s debt. The House of Lords rejected the submission that the without prejudice exclusion could apply in such circumstances, Lord Brown saying at [72]:

“If the without prejudice rule is to apply not merely to attempts to resolve a dispute about the existence or extent of a liability but also to discussions as to how an admitted liability is to be paid, that would seem to me a very substantial enlargement of its scope.”

It is an important difference from the circumstances in Bradford & Bingley plc v Rashid that in this case the relevant communications were marked “without prejudice”. Moreover, it was Avonwick and its solicitors, the party now saying that they are not properly to be regarded as without prejudice, that first marked the documents “without prejudice”.

The express marking of documents as without prejudice is a highly material factor in determining their status, but is not conclusive. There must be a genuine dispute and a genuine negotiation. See South Shropshire District Council v Amos [1986] 1 WLR 1271 at 1277 H, Unilever PlcvT V Procter & Gamble Co [2000] 1 WLR 2436.

There was a difference in view between Lord Brown and Lord Mance in Bradley & Bingley plc v Rashid as to the significance of the express marking of a document as “without prejudice”. Both acknowledged its importance but Lord Brown went further when he said at [63] that:

“Generally speaking, such communications will attract the privilege even without the public policy justification of encouraging parties to negotiate and settle their disputes out of court.”

At [87] Lord Mance took issue with this formulation, and expressed his own view at [84]:

“Even where there is a dispute, not every offer of compromise is necessarily intended to be without prejudice, and the express use of the phrase not only puts the matter beyond doubt in a situation where there is an offer to compromise an existing dispute, but is also capable of throwing some light on the answer to the objective question whether such a situation existed. But its use is by no means inclusive. Neither a dispute nor a concession or offer to compromise can be conjured out of mere words.”

This was not of course an issue in that case and I do not consider that any of the other speeches can be read as agreeing with one or other of these formulations.

In common with Arnold J in Williams v Hull [2009] EWHC 2844 (Ch) at [18] and Hollander: Documentary Evidence (11^th ed) at 20-04 to 20-06, I take the view that the correct approach is that stated by Lord Mance. Marking a document as “without prejudice” is a strong indication that there is a genuine dispute and a genuine attempt to settle the dispute, but it is not conclusive.

At first blush, one might assume that communications expressly marked “without prejudice” between parties, starting on the same date as the service of a contractual demand and continuing after the service of statutory demands, would attract the privilege. But it is the case of Avonwick that at the time of these communications there was no dispute at all about the liability of Webinvest to repay the loan, and hence no dispute as to the liability of Mr Shlosberg under his guarantee.

I have earlier remarked that there is no evidence of any document or written communication raising any doubt as to the liability of Webinvest until service of Mr Shlosberg’s witness statement of 29 May 2014, alleging the pay when paid term. Tellingly, there is no hint of it in the open correspondence from Webinvest and its solicitors following service of the contractual and statutory demands. This is all the more noteworthy as it is said by the defendants that the demands served on 3 April 2014 came as a major surprise because they were contrary to the pay when paid term. Nor, apart from the evidence of Webinvest’s witnesses that there was an oral agreement to this effect at the time of the Loan Agreement, is there any evidence of any oral discussion of the pay when paid term.

The furthest that the evidence goes is as follows. In the second witness statement of Mr Shlosberg dated 6 October 2014, he states at paragraph 5:

“I recall a telephone call in February or March 2014 from Mr Gayduk in which Mr Gayduk asked for $50 million to be paid. He was not asking Webinvest or me to pay regardless of receipts from the third party. Instead, I understood that he needed this money because the position in the Ukraine was very unstable at the time. I made clear that I would do my best to agree it with the third party but did not offer any more than this. I specifically deny that I ever acknowledged that Webinvest or I had any obligation to Avonwick or Mr Gayduk absent payment from the third party whether during this conversation or at any time before or after. I also explained what Webinvest was doing in attempting to recover payment from the third party and I understood from this call with Mr Gayduk that we still had a common understanding that the payment by Webinvest was dependent on recovery from the third party.”

In the second witness statement of Ms Mutieva dated 6 October 2014, she states at paragraphs 6 and 7

“6.

Sometime in March 2104 (sic), I was informed by Mr Shlosberg that Mr Gayduk needed $50 million for Avonwick from the Third Party as soon as possible. I informed Avonwick’s team (Mr Petrov and Mr Kravets) that we were doing all we could to recover from the Third Party. I asked them how we could combine our efforts for their benefit and ours. I definitely stated to them that payment would only be made once we received payment from the Third Party. At this point it was proposed that Avonwick obtain credit from banks if the funds could not be obtained from the Third Party. We were prepared to consider putting up some security to Avonwick’s bank in order to support his friend. It was for that reason that on 28 March 2014 I emailed Mr Petrov with details of the Elms, but this did not go further.

7.

The approach of the Avonwick team changed when a formal demand was made of Webinvest and Mr Shlosberg for payment on 3 April 2014. On this date we also received without prejudice proposals from them. Mr Shlosberg then asked me to call Avonwick’s team to discuss the position and why they had changed their position. At that point, it was clear that there was no dispute about the terms for payment agreed between Avonwick and Webinvest and Mr Shlosberg. Further proposals and negotiations with them after the service of the formal demand therefore took place without prejudice to that dispute. I contacted Mr Petrov as requested by Mr Shlosberg. I asked why they had changed their position. He said they could not wait any longer. They appeared clearly to understand that Webinvest would only pay after receiving payment from the third party and we had not changed our position, but they wanted us to pay anyway.”

These paragraphs are notable for not alleging that there was any discussion of the alleged pay when paid term. They state only that it was made clear to Avonwick that Webinvest would be able to repay the loan only when it received repayment from the sub-borrower. In circumstances where it appears that Webinvest’s only asset is its claim against the sub-borrower, this is no more than a statement of the obvious, in the absence of any agreement by its shareholders to provide further funds. This evidence cannot, in my judgment, support the submission that any dispute existed prior to 30 May 2014 as to the existence and amount of the liability of Webinvest to Avonwick.

Reliance is also placed on paragraph 15 of Mr Shlosberg’s witness statement dated 11 July 2014 where he stated:

“15.

Mr Gayduk is not correct in saying that the first time that I have raised the matter regarding the actual terms of repayment of the Loan was at the very end of May this year. These matters were discussed between us as I have explained at the time we arranged the Loan in the first place and has been mentioned or understood in numerous discussions since. I agree Mr Gayduk and Avonwick have been otherwise pressing for repayment, because they would of course wish Avonwick to be repaid. No doubt they think that if they put additional pressure on me/Webinvest, that will force Webinvest to turn to bring about payment by the third party sooner.”

The statement that terms of repayment have been “mentioned or understood in numerous discussions since” is in my view so vague as not to provide a proper basis for an allegation of discussions taking place between the date of the agreement and the end of May 2014.

The significance of the correspondence marked “without prejudice”, and in particular of course the correspondence from Webinvest and its solicitors, is that it proceeds quite clearly on the basis that there is an existing liability and that the whole purpose of the proposals is to arrive at an agreed restructuring of that admitted liability. There is no evidence that Avonwick believed, or had reason to believe, that there was any dispute about the liability until receipt of Mr Shlosberg’s witness statement on 30 May 2014.

The issue is whether at the time of the relevant communications there existed a genuine dispute, and in my view it is clear that none existed at that time. Communications made at a time when there is no dispute cannot, with retrospective effect, be made subject to the without prejudice privilege by subsequently raising a dispute.

As I have earlier mentioned, it is of course highly material that the relevant communications were not only marked “without prejudice” but were so marked by Avonwick’s solicitors and indeed by members of its litigation department. I do not have evidence from Avonwick or its solicitors as to why they chose to mark the communications in this way. Mr Berry QC for Avonwick told me that the view was taken, in the light of the observations of Crane J in Pearson Education Ltd v Prentice Hall India Private Ltd [2005] EWHC 636 (QB) at [15] – [22], that the test for determining the purpose of marking documents without prejudice is entirely objective and that the actual intention of the writer is irrelevant. In general, I would agree with that approach. However, in circumstances where the party who has initiated communications as “without prejudice” wishes to say that they are not without prejudice, I would hesitate before saying that evidence from that party as to their reasons for marking the correspondence without prejudice is not admissible. In any event, I must approach this issue on the basis that a litigation solicitor would deliberately use the term “without prejudice” in its usual sense. I do not find particularly convincing the possible explanation that it was intended to mean “without prejudice to the rights of Avonwick”.

But, for the reasons already given, even the use of the expression by an experienced litigator is not conclusive. If on analysis of the evidence the court is satisfied that there was no genuine dispute to which the proposals were directed, the only conclusion, itself not an impossible one, is that the solicitor made a mistake.

I am satisfied on the evidence that throughout the period of the relevant correspondence no dispute existed between the parties as to the liability of Webinvest and Mr Shlosberg. The negotiations were directed entirely at attempting to agree a restructuring of an admitted liability. It follows, in accordance with the authorities to which I have referred, that the relevant communications are not covered by the “without prejudice” privilege and are admissible as evidence at the forthcoming trial.

Objection had been taken by the defendants to the late service of a further witness statement on the part of Avonwick referring to and giving evidence about these written communications. The defendants have however been able to serve witness statements in reply and Mr Marshall QC on behalf of the defendants did not suggest that the admission of this further evidence would in any way delay or affect the conduct of the trial. In those circumstances, applying the approach of the Court of Appeal in Denton v T H White Ltd [2014] EWCA Civ 906, I shall direct that these further statements may be relied on at the trial.