Interactive Technology Corporation Ltd v Ferster & Ors

This is an application by the claimant, Jonathan Ferster, to amend the petition he has brought under s.994 of the Companies Act 2006 against his two brothers, Stuart and Warren, and the company of which they are joint shareholders in equal one-third shares, Interactive Technology Corporation Limited (‘ITC’). Section 994 of the Companies Act provides that the court can grant relief in favour of a member of a company where there is unfair prejudice in that the manner in which the affairs of the company are being conducted is unfairly prejudicial to the interests of members or some of them, including the petitioner.

In fact, as between these brothers, there are two sets of proceedings currently on foot, namely that the proceedings arising from the petition for unfair prejudice and also an action brought by ITC at the instigation of the brothers, who are now in control of it, against Jonathan for breach of his fiduciary duty to the company. These proceedings have been described as very acrimonious, with serious allegations being made by ITC and the brothers against Jonathan.

In the course of the proceedings by ITC against Jonathan, freezing order relief, including the usual provisions directing disclosure of assets was granted as against Jonathan, first on a without notice basis and then continued after an inter partes hearing. I have seen the judgment of Asplin J in refusing to set aside the freezing order (neutral citation [2015] EWHC 393 Ch 97) in which she refers to there being a very strong prima facie case of wrongdoing by Jonathan in his dealings with ITC’s business. I have not formed any view as to the merits of the litigation between these parties, other than in relation to the matters which arise strictly in this application.

As I have said, ITC is owned equally by the three brothers and they are all directors, although it is said by Jonathan that until late 2014 Stuart and Warren played no active part in the affairs of the company. It is contended that this is a quasi-partnership so that there are duties of trust and confidence between the members of the company. The unfair prejudice petition presently alleges that Stuart and Warren sought to intervene in the affairs of ITC contrary to an earlier agreement between them that Jonathan would run it. It is also alleged in Jonathan’s petition that the brothers have procured ITC to pursue the breach of fiduciary duty proceedings against Jonathan for an improper purpose, namely to pressure him into buying their shares in ITC at an inflated price. If he establishes that then that would be an abuse by the brothers of their fiduciary duties towards ITC.

There are a number of amendments sought to be made to the petition and some of them are not contentious. They need to be included in the pleaded case and I will need to set a timetable for a possible amended defence and reply. The cases are due to be heard together in June of next year and the next key date is 5^th February 2016. That is the date by which standard disclosure must be given and it is expected that if the amendments are permitted now then disclosure in relation to them can properly be accommodated in the existing timetable.

The proposed amendment which is contentious alleges that in April 2015 Stuart and Warren sought to extort a ransom price from Jonathan for their shares in ITC by threatening to cause the company to make wholly improper and unwarranted threats to commit him for contempt and cause criminal proceedings to be brought against him unless he agreed to purchase their shares at an inflated price. The particulars of the allegation then refer to the mediation which took place in the litigation brought by the company against Jonathan on 20^th January 2015. At the mediation the brothers offered to sell their shares to Jonathan at a specified sum. The proposed amendment then refers to an email sent on 29^th April 2015 by the mediator to Jonathan’s solicitors, Herbert Smith Freehill. It is said that this email contained an unambiguous threat that the company would bring committal proceedings against Jonathan unless he paid the brothers a higher sum.

The dispute giving rise to this ruling is whether that email of 29^th April 2015 is admissible or whether, as the brothers argue, it is protected by without prejudice privilege. The brothers say that the email is part and parcel of the mediation and protected from disclosure. Jonathan argues that it is admissible because it falls within the exception to the without prejudice privilege rule because it comprises an unambiguous impropriety.

At this point I will set out the full text of the email, sent by the mediator to Jonathan’s solicitor, because it is important to see the whole thing to understand its flavour. The parts that appear in bold are in a different font from the top and tailing of it and the figures have been redacted for reasons of confidentiality.

“Dear Catherine, 

Thank you for returning the call. I am setting out below the 11 points of communication that I have discussed with you following written and telephone communications with DAC. The messages from the claimant are as follows:

1.

We withdraw our existing offer to sell the shares of Warren and Stuart for the sum of [redacted].

2.

We make a revised offer to sell the shares of Warren and Stuart to Jonathan for the aggregate sum of [redacted]. The revised offer is made subject to contract and without prejudice as part of a global compromise incorporating all the parties to the proceedings and the petition. The sale price is to be settled on completion in cash and also by the transfer to Warren and Stuart by Jonathan at market value of his share in any assets which the three brothers own jointly. Any settlements will contain amongst other provisions, confidentiality provisions. 

3.

We have increased our offer because we have become aware of further wrongdoings by Jonathan. Jonathan knows the extent of his wrongdoings and our client believes that Jonathan is in very serious trouble which will also have serious implications for Jonathan’s partner (Jonathan Seeds) by reason of Jonathan’s actions.

4.

It is for Jonathan to assess the reasonableness of the offer we are making. Jonathan ought to realise that the offer is beneficial to him and Jonathan Seeds and HSF should take his instructions. 

5.

The claimant has information that Jonathan does not only hold bank accounts in England (as per his affirmation) and various additional offshore accounts are held by him or on his behalf (and/or now Jonathan Seeds).

6.

It is clearly in everyone’s (and particularly Jonathan’s) interest to wrap this up speedily and quietly. If it is not settled within 48 hours there is a real risk that such a settlement may no longer be possible- the concern being that others will become aware of it. 

7.

Mr Watts is expected to take his client’s instructions as a matter of urgency as a settlement will obviate the need of further steps such as committal proceedings being issued. 

8.

If this offer is not accepted the company also proposes to accept third party funding. The amount of the company’s claim will be amended and the amount required by Warren and Stuart for the purchase of their shares will be considerably higher than (by at least another £3m) in light of the third party finder’s share of sums recovered. Jonathan will also face the repercussions detailed below. 

9.

If Jonathan has misled HSF and sworn false evidence Alan Watts will be well aware that Jonathan will face charges of perjury, perverting the course of justice and contempt of court and is likely to be imprisoned. If Jonathan Seeds is implicated he may likewise be investigated and/or charged. 

10.

In the above circumstances, Jonathan’s credibility and reputation will be destroyed barring him out of the online gaming business in the future. He will also have no prospect of succeeding in this case. 

11.

Furthermore and hypothetically, if a substantial judgment is entered against Jonathan and it is not satisfied by assets in Jonathan’s name, we will pursue third parties, such as Jonathan Seeds, as regards claims against them where Jonathan has sought to put assets out of the reach of his creditors. 

If you wish me to convey any message back once you have talked to Alan and taken your clients instructions I am happy to assist. I do however have a very busy 48 hours coming up so do have limited time.”

I should add that Mr Seeds is Jonathan’s life partner rather than a business partner. Mr. Hollander QC, who appeared before me for the brothers, points out that the email is not sent by ITC or by the brothers but by the mediator, although he assured me that it is not said that there was an issue as to the mediator’s authority to pass this on.

There was some dispute initially between the parties today as to whether my task is to decided simply whether it is arguable that the email is admissible, applying the test for the amendment of the pleadings that the contention that it is admissible is not fanciful, or whether my task is to decide whether the email is admissible or not. Mr. Hollander, for the brothers, argues that I should decide now whether it is admissible or not. The brothers do not want to put in evidence on the question of its admissibility, although Mr. Hollander urges caution as to what inferences can be drawn from their failure to serve evidence. That submission comes against the background of a CMC that took place on 25^th November 2015, when this application was adjourned because it was thought at that time that the brothers would want to put in evidence on this issue. But the brothers do not oppose the amendment sought to be made by Jonathan on any ground other than the inadmissibility of the email. I consider that I am able to decide the issue now and that it is important to decide it now so that the parties know where they stand for the progress of the trial.

I was referred to a number of authorities on the test for when without prejudice privilege is lost by material which comprises unambiguous impropriety. The authorities make clear that the policy behind the without prejudice privilege is to encourage frank discussions and negotiations, but the privilege cannot be used as a cloak for blackmail. I was taken in particular to the relevant paragraphs of Mr. Hollander’s book on Documentary Evidence, 12^th Edition, particularly para.20.28 to 20.29 in which he helpfully sets out the background to the legal authorities.

Mr. Thompson QC, appearing with Mr. Shaw for Jonathan, took me to Forster and others v Friedland & anor (unreported) 10 November 1992 Court of Appeal (Civil Division) Transcript No 1052 of 1992. That makes clear that a party cannot use the without prejudice rule as a cloak for blackmail and cites two authorities in which the matter was considered. Hoffmann LJ (as he then was) states, at p.9 of the transcript:

“The value of the without prejudice rule would be seriously impaired if its protection could be removed from anything less than unambiguous impropriety. The rule is designed to encourage parties to express themselves freely and without inhibition. I think it is quite wrong for the tape recorded words of a layman. who has used colourful or even exaggerated language, to be picked over in order to support an argument that he intends to raise defences which he does not really believe to be true.”

I was referred also to the judgment of Robert Walker LJ in Unilever Plc v Proctor & Gamble [2000] 1WLR 2436, 2444, where he says that:

“One party may be allowed to give evidence of what the other said or wrote in without prejudice negotiations if the exclusion of the evidence would act as a cloak for perjury, blackmail or other “unambiguous impropriety”.”

He went on to refer to the cases which have warned that the exception should be applied only in the clearest cases of abuse of a privileged occasion.

It appears from the authorities that I have been shown that the courts draw a distinction between the blackmail cases and cases where the party is attempting to use admissions which were made in without prejudice discussions and which they want to rely on to show that the case being put forward to the court by the other party in the proceedings is fraudulent. Allowing material in without prejudice discussions to be used for that purpose clearly does directly undermine the policy of allowing the without prejudice rule to apply. The situation is somewhat different where it is a blackmailing threat; that is a more straightforward abuse of the occasion of privilege and that is what is alleged here. But I accept that the caution which the judges in the authorities express about the importance of not allowing the application of the exception unduly to erode the circumstances in which the privilege is enjoyed apply to both situations, although in a slightly different way.

In Boreh v Republic of Djibouti and others [2015] EWHC 769 (Comm) Flaux J described an issue that arose about threats made at a without prejudice meeting. It was conceded in that case that the threats fell within the exception of unambiguous impropriety even though it had not extended strictly to blackmail. The threat had been to bring terrorist charges against Mr. Boreh in order to pressure him into settling proceedings. The judge held that the concession had been rightly made because what had been said went beyond what was, as he put it, “permissible in settlement of hard-fought commercial litigation and was an unambiguous impropriety given the nature of the threats”.

In Dora v Simper, another unreported judgment of the Court of Appeal delivered on 15^th March 1999, the court was dealing with an appeal from a strike out of an affidavit. Further threat was made that if the claimant got judgment against the defendants the defendants would transfer the business of the company out of the company’s assets to make any judgment unenforceable. Aldous LJ held that it was an exception to the without prejudice rule because it was an unequivocal implication that they would move the assets out of the reach of the judgment creditor by improper means and he held that that went beyond the colourful or exaggerated language test. The reasoning of Aldous LJ has been respectfully criticised by the Court of Appeal in Berry Trade Limited v Moussavi [2003] EWCA Civ 715, but it appears to me that the criticism there is more to do with the situation where there is some dispute about what was said in the course of the without prejudice negotiations. Such a dispute about what was said raises difficulties for the court in arriving at a conclusion about what was said at an interlocutory stage, when it is really only once that conclusion has been arrived at that the court can properly determine whether there has been an unambiguous impropriety at all. In the instant case, however, there is no dispute about what was said, because it is all set out very clearly in the email, although, as I will describe shortly, there is a dispute about how that email should be construed. But I do not see that the problems described in para.42 of the Moussavi judgment arise here.

Mr. Hollander relied in particular on the case of Savings and Investment Bank Limited (In liquidation) v Fincken [2003] EWCA Civ 1613. That is a particular useful authority because it cites all the relevant case law. I accept his submission that the principles that emerge from that case and the authorities cited to me show that the threshold for overcoming the without prejudice privilege is a high one. The courts are alive to the practical problems that arise unless a high threshold is set. A party asserting privilege in a document is faced with a dilemma if he is also at risk of adverse inferences being drawn from his failure to put in evidence in answer to the allegation that privilege has been lost because there has been unambiguous impropriety. In Fincken the defendant allegedly admitted non-disclosure of assets during a without prejudice discussion. The claimants sought to amend their pleading to include the allegation. The Court of Appeal decided that matter on the basis of material before the court, even though no evidence from the defendants had been put in. Patten J had held that it fell within the exception to the privilege and allowed the allegation to be made. The Court of Appeal, at para.43 onwards, set out the relevant authorities. These included a passage from the judgment of Simon Brown LJ in Fazil-Alizadeh v Nikbin, an unreported judgment of 25^th February 1993. That referred to the powerful policy reasons for admitting in evidence as exceptions to the without prejudice rule only the very clearest of cases: per Simon Brown LJ

“Unless this highly beneficial rule is most scrupulously and jealously protected it will all too readily become eroded. Other judges have referred to the need to establish that the protection afforded by the rule has been unequivocally abused and the need for a very clear case of abuse of the privileged occasion to be shown before the privilege is overridden.”

Applying those authorities, I am in no doubt that this was an attempt at blackmail which falls firmly within the exception and that the email is admissible. The applicant is not trying to bring into evidence any discussions that genuinely took place in the mediation. Indeed, they have redacted the figures being discussed from the email. The impropriety consists, in my judgment, of threatening to pursue contempt proceedings, including a committal to prison, unless Jonathan pays the brothers a much higher price for their two-thirds share, an extra 25%, I am told, on the price previously considered. It is on the basis of the supposed discovery of wrongdoing by Jonathan and also threatens not only him but his partner, Mr. Seeds.

Here there is no lack of clarity in what is being said. This is not an instance where a party is trying to pick up exaggerated or colourful verbal statements made during a long, heated meeting between lay clients. This email appears to have been drafted by lawyers and is forwarded to Herbert Smith by the mediator. There is no ambiguity in the purpose of the threat, namely to pressure Jonathan to pay more for their shares. So it is quite clear that the increase in price is nothing to do with any increase in the value of the shares or of the company’s business, but rather is the price being exacted for the brothers who are now in control of the company, not causing the company to take action to deal with the supposed wrongdoing which they claim to have uncovered. That wrongdoing is that Jonathan is alleged to have withheld information when complying with the freezing order directions granted to the company that Jonathan disclose his assets.

I agree, therefore, with Mr. Thompson, that the impropriety arises from the nature of the threat. Mr. Thompson says that it would be wholly improper, even if there were some basis for the threat. In fact, he argues that I can infer from what has happened that there was no genuine belief on the part of Stuart and Warren for the basis of their threats. This is established, he says, because there has been no complaint in the proceedings between the company and Jonathan that Jonathan was in breach of the order made by failing to disclose documents. On the drawing of inferences in these sorts of cases, Mr. Thompson referred me to the judgment of Supreme Court in Prest v Petrodel Resources [2013] UKSC 34. For the present purposes I do not rely on any such inference. The email is wholly improper in my judgment whether or not there is a genuine belief in the substance of the allegations against Jonathan.

Mr. Hollander says that I should take account of the fact that this was sent by a very eminent mediator and she must have concluded that there was nothing improper about it. It was also supported by a reputable firm of solicitors. I do not accept that this is a factor that should sway me; I have to form my own view. I do not know how this email came be constructed by the mediator, whether she typed the whole thing out or cut and pasted the relevant paragraphs from some other document. I do not know what went through the mind of the solicitors or the mediator, although I note that she refers to having a very busy time coming up.

Mr. Hollander also refers to the initial benign response from the recipient to the mediator. However, by that time Mr. Watts, the partner at Herbert Smith Freehill dealing with the matter on behalf of Jonathan, had already written to DAC Beachcroft, the brothers’ solicitor, in forthright terms once the mediator had passed on the message. He asks for full details of the serious allegations of non-disclosure and contempt that have been made in the email. The next day DAC Beachcroft wrote to Herbert Smith. In the DAC Beechcroft response there are no further details of the allegations, as requested, but rather they urge the parties to enter into a confidential settlement. The DAC Beechcroft email also says:

“Contrary to your emails of yesterday, our client neither said nor intended that committal proceedings would be issued or allegations of perjury made if their offer was not accepted. Contrary to the suggestion in your email, our client did not make, and to be clear does not make, any threats as to what will happen if the parties do not reach a settlement agreement. Their position as to possible future procedural steps in the event that a settlement is not achieved is, however, reserved.”

Mr. Hollander says that this is a ‘clarification’ of the content of the email, making it clear that no threat was intended. I do not accept that. Rather, I read that as DAC Beechcroft recognising the impropriety of what has been said in the email and trying to repair matters.

Mr. Hollander went through the email trying to explain away its content. Despite the eloquence of his submissions, there is no disguising, in my judgment, what was going on here, namely that the brothers were using the threat of causing ITC to instigate committal proceedings in the other litigation (brought by the company against Jonathan for breach of fiduciary duty) in order to make a personal gain for themselves by increasing the payment for their shares. If, in fact, they have real evidence that Jonathan has assets which would be available for satisfying a judgment obtained by the company ultimately in the company’s litigation, I do not consider that that provides any excuse for this email. On the contrary, if they had that genuine belief what they appear to be saying here is that they will cause the company to refrain from pursuing those monies if Jonathan pays them personally more money for their shareholdings. I do not agree that the assets of the company are automatically reflected in the value of the shares in the hands of the shareholders so that they are just claiming their share of the monies that the company might win in its claim. The company may have creditors and may want to use the money from any judgment against Jonathan for expanding its business rather than paying out to the shareholders.

In Mr. Hollander’s book there is a discussion about whether there is a separate species of mediation privilege. This is dealt with in para.20.32, where he refers to the importance of treating mediation as a facet of without prejudice privilege. He refers to a discussion among the mediation community about whether mediation has or should have some independent protection that goes beyond without prejudice protection. From the authorities I have been referred to there is currently no support for a submission that there is a separate species of protection. The same exception applies, as least as regards the position between the parties. There may be a need for protection of communications between one party and the mediator, but that is not relevant here because the mediator was doing no more than passing on the message from one party to the other.

Mr. Hollander argues that there may be serious consequences of allowing this email to be admitted. It might mean that other material from the mediation will have to be explored. If the court limits the waiver of privilege only to this email, that may prevent Stuart and Warren from leading evidence of the surrounding circumstances of the mediation as to the background. I do not accept, however, that that is a danger which arises here. This email came sometime after the mediation in January 2015. It is not related to the content of the action in which that mediation took place, but to the different dispute between Jonathan and his brothers over the price that Jonathan would pay if he buys out their shares. I cannot see how anything that occurred during the mediation could be relevant in this case, particularly since the impropriety alleged is not some inconsistent admission made in the course of the without prejudice negotiations.

Mr. Hollander also argued that there may be issues as to legal professional privilege as to what advice the brothers got about the matters covered in the email. If they want to refute the allegation that they had no genuine belief in supposed wrongdoing by Jonathan then this may raise significant issues about waiver of privilege, for example, in reports that they had received as to what they had been told about Jonathan’s financial affairs. The amendment which is proposed to the petition does include an allegation that the brothers had no genuine belief in the supposed wrongdoing.

In my judgment, however, having caused the email to be sent in the terms I have described, it is fair to expect them to have to decide to what extent they want to justify what they said. In any event, the criticism that has been made by the applicant in the absence of evidence from the brothers relates to the existence of the information about the undisclosed assets and it is difficult to see how that could be covered by legal professional privilege.

The brothers also rely, as an alternative argument, on the terms of the mediation agreement. It is argued that the mediation agreement set up a separate prohibition on the use of this email, even if it does involve unambiguous impropriety. It is accepted that there is no authority dealing with the extent to which a mediation agreement can extend the scope of without prejudice protection. It has, however, been stated by Lewison LJ in Avonwick Holdings v Webinvest Limited [2014] EWCA Civ 1436 at para.17, that it is possible for the parties to extend the ambit of the without prejudice rule by contract. In that case it was sought to be extended to apply to discussions which took place in the absence of a bona fides dispute between the parties. However, Mr. Hollander fairly accepts that there will come a point where public policy will lead a court to decline to enforce a contract which takes such an extension too far.

The applicants say that the contract does not do what is suggested when properly construed. To achieve the extension of the without prejudice protection to cover this email as a matter of construction, the applicants say the clearest words would be needed to overturn the public policy behind the exception. Mr. Thompson referred me to HIH Casualty and General Insurance Limited & Ors v Chase Manhattan Bank & Ors [2003] UKHL 6. That concerned a fraud by an agent and the question of whether the contract excluded the principal’s liability for his agent’s fraud. The clause in dispute in that case was worded so as to exclude liability of any nature to the insurers for any information provided by other parties. The question arose whether that included information provided fraudulently by the agent of Chase. The House of Lords held that they did not need to resolve the public policy question of whether it is possible for a person to exclude his liability for the fraud of his agent. The clause did not achieve that on its true construction. Such an intention would need to be expressed in clear and unmistakeable terms on the face of the contract.

I accept the analogy which Mr. Thompson sought to draw, that where it is contended that the parties intended in a mediation agreement such an extreme consequence, namely removing the exception for unambiguous impropriety and imposing without prejudice protection on their mediation discussions even where they are used as a cloak for blackmail, there would need to be clear and unmistakeable terms.

I also agree that it is less likely that such a construction of the contract is warranted here. This was not a bespoke mediation agreement. Rather, the parties used the standard term contract published by the Centre for Effective Dispute Resolution (CEDR). The relevant agreement here between them is dated 20^th January 2015. The agreement is between ITC, Jonathan, the mediator and CEDR, so it does not involve the brothers themselves. The contract defines the mediation as what happens on the particular day, namely 20^th January 2015, at the offices of the solicitor where the mediation was conducted. Paragraph 1 provides that the parties agree to attempt in good faith to settle their dispute at the mediation and to conduct the mediation in accordance with this agreement and consistent with the CEDR model mediation procedure and the CEDR code of conduct for mediators current at the date of this agreement.

The only potentially relevant clause in the agreement is that cl.4.2. I find that that is not to be construed as overriding the public policy exception for the cloak of blackmail. The wording is not nearly clear and unmistakable enough for it to achieve that purpose. I do not accept that any objective assessment of the agreement would lead to the conclusion that that was the parties’ intention. The clause also has to be read together with the obligation to negotiate in good faith set out in para.1. The agreement does not, therefore, in my judgment, provide any alternative ground for rendering the email inadmissible. I do not, therefore, need to consider the public policy point as to whether if the agreement had clearly purported to extend a without prejudice protection to this email it would be unenforceable as a matter of public policy.

In the light of my findings I will permit the amendment to be made as I consider that the email on which it is based is admissible in evidence.