Cullen Investments Ltd & Ors v Brown & Ors

These consolidated proceedings, seeking an account, damages and other relief, have been brought in the wake of the breakdown of a business relationship between the Second Claimant, Mr Eric Watson (“Eric” (Footnote: ¹)) and the First Defendant, Mr Julian Brown (“Julian”), which had been built on a friendship between the two men.

Eric is the founder and executive chairman of the First and Third Claimant, Cullen Investments Limited ("Cullen"). Cullen is a private investment company incorporated in New Zealand.

The Second Defendant, Mr Quentin Brown (“Quentin”), is Julian's brother, and worked alongside Julian in the business to which the proceedings relate.

The Third Defendant, Kauri Investments Limited ("KIL"), was incorporated in England on 22 March 2005 as the corporate vehicle for a joint venture which had been agreed between Eric/Cullen and Julian (“the JV”). Cullen and Julian are 50:50 beneficial owners of KIL, whose directors were Julian, Quentin and Eric. Julian was the CEO and an employee of KIL until mid-2012.

The breakdown in the relationship occurred as a result of Julian making a personal investment in a joint venture with a partner in Germany, Mr Hagen Kahmann (“Mr Kahmann”). This venture involved the establishment of a Berlin-based property management company and the redevelopment of residential sites in Germany, particularly in Berlin. The German joint venture was described during the trial as “the German Opportunity”.

In these proceedings Eric and Cullen contend that Julian’s personal investment in the German Opportunity was impermissible under the terms of his contractual relationship with Cullen/Eric, and/or constituted or resulted in a breach of Julian’s and Quentin’s obligations as directors of KIL and/or a breach of fiduciary duty owed by Julian to Eric/Cullen. It is also alleged that Julian and Quentin are guilty of an unlawful means conspiracy. The claims are disputed by the Defendants.

On 13 March 2013 Cullen issued a claim in the Queen's Bench Division against Julian alone (“the QBD claim”), to which Julian filed a defence on 12 June 2013.

On 22 November 2013 there was a board meeting of KIL, called by Eric to consider whether KIL should commence proceedings against Julian. Julian and Quentin voted against such proceedings, and on 21 July 2014 Cullen commenced derivative proceedings in this Division against Julian and Quentin on behalf of KIL. Eric was also a claimant in those proceedings in his personal capacity.

The QBD claim was transferred to this Division on 12 August 2014. Following a hearing on 15 and 16 January 2015 before Mr Mark Anderson QC, sitting as a Deputy Judge of the High Court, by orders dated 27 February 2015, permission was granted to continue the derivative action, to amend the QBD claim to add Quentin as a defendant, and to consolidate the various proceedings.

The final position is therefore that there are claims by Cullen and by Eric against both Defendants, and a derivative claim by Cullen against both Defendants.

More than 2,200 pages of written material were introduced in evidence. In addition, six witnesses were called to give evidence on behalf of the Claimants, and both the Defendants also gave evidence. The following paragraphs contain a short account of the scope of each of the witnesses’ evidence.

Eric John Watson: Eric, the Second Claimant, is the founder, executive chairman, de facto controller and/or beneficial owner of Cullen, through a private trust. He provided a witness statement and was cross-examined over three days. I consider that he was an honest witness. However, his evidence was surprisingly vague at times, even allowing for the passage of time. It was clear that he was generally content to leave the detail of arrangements to those who worked for him in the Cullen organisation, and only focussed on specific issues when it was necessary for him to take a decision or when he became concerned about a particular matter. In cases where emails had been sent to him, he several times stated that he did not recollect having read or having received them. He did not appear to have reviewed any of the key documents before giving evidence – including those written by himself or sent to him. This had the effect of rendering his evidence less helpful than it might otherwise have been. He was clearly embittered by what he saw as misconduct on Julian’s part.

Leslie Watson Archer: Mr Leslie Archer (“Mr Archer”) joined Cullen in 2000 and has held a number of financial management positions in the organisation, including that of investment director between 2007 and 2009. He left Cullen in the latter year but retains a consultancy role with the company. He provided a witness statement and gave oral evidence, including in cross-examination, over a VCF link from an office in New Zealand. He stated that Eric’s views, as the owner of Cullen, were very important, and that if he wanted something done then, after discussion, it would be done. He did not appear to have been at all close to the details of the operation of KIL or the JV, and he frankly acknowledged that he was happy to remove himself still further from the detail once Ms Andrea Scown (“Ms Scown”) came onto the team at Cullen, with the specific responsibility of monitoring the JV on Cullen’s behalf. As a result, his familiarity with the details of the arrangements for the JV and the documents was limited. His understanding was that KIL employed Julian and Quentin and earned management fees, and that any equity interests were held in special purpose vehicles (“SPVs”), with the ultimate beneficiaries being Julian’s and Eric’s off-shore trusts. His evidence on two important issues of fact (what was said at a meeting with Julian in New Zealand in December 2008, and during a telephone conversation with Julian on 19 or 20 January 2009) was vague in the extreme.

Although I consider that Mr Archer was in general doing his best to assist the court, on several occasions in cross-examination he was slow to accept manifestly correct propositions based on the documents. One particularly striking example was his reluctance to accept that in an email sent to him by Julian on 13 January 2009 Julian was asking a straightforward question. I will need to return to Mr Archer’s evidence about this and other related emails. Overall I did not derive much assistance from his evidence.

William Gerald Gibson: Mr William Gibson (“Mr Gibson”) is a chartered accountant and the senior financial executive of Cullen. He has been with the group in one financial and/or management role or another since 1997. He is a participant in his personal capacity in various investments along with Eric and Cullen. From 2005 to 2010 he was special projects manager for Cullen, in which position he looked after various “non-corporate” interests of Eric/Cullen, including an estate in New Zealand, restaurants and sports interests. From 2006 he acted as the CFO of KIL, in which role he worked alongside the Browns in KIL’s open-plan London office throughout all or most of the period relevant to the proceedings. He frankly accepted in cross-examination that in this regard he was “the eyes and ears” of Eric. However, notwithstanding the absence of privacy and the ability to overhear office conversations, he does not refer to anything which he heard or saw in the office which caused him concern, until the events of March 2012 to which I will refer in due course.

One issue with which he dealt at length in his written and oral evidence was the timing of Julian’s commitment to Mr Kahmann to make a personal equity investment in the German Opportunity, and whether, as Julian contends, it was not made until April 2009 or, as the Claimants argue, it was made earlier.

Mr Gibson also gave evidence of his discussions with Julian and his investigations after the disclosure of the latter’s personal investment in the German Opportunity, and of his analysis of the income and expenditure of KIL in connection with that venture. Mr Gibson was responsible for calculating that a sum of €300,000 (referred to in the particulars of claim) is the net amount due to KIL in respect of expenses and time incurred by Julian and Quentin on the German Opportunity, after allowing for what Mr Gibson considered to be a fair allocation in respect of work and expenses properly incurred on behalf of KIL. He was cross-examined extensively on his methodology in arriving at this sum, and generally. Mr Gibson was in my view an honest witness who did his best to assist the court.

Bruce Allan Armitage: Mr Bruce Armitage (“Mr Armitage”) is a commercial lawyer by training but no longer practices as such. After a variety of management roles in the commercial sector he became a consultant in connection with acquisitions, dispositions and IPO's. Since 2002 he has fulfilled a general commercial management role for Cullen, working as an independent consultant. Mr Armitage provided a witness statement and gave oral evidence from New Zealand over a VCF link. He was cross-examined. His evidence dealt primarily with his involvement with KIL, his knowledge of the German Opportunity, of which he had very little, and the December 2008 meeting with Julian in New Zealand, which he attended together with Messrs Archer and Mark Flay (“Mr Flay”). Mr Armitage confirmed that Ms Scown was not present even though she was the person at Cullen involved in the day to day dealings with Julian in relation to the German Opportunity. He said that it was he who had drafted the Multi-Option Facility Agreement to which reference is made below, and that he was involved in the “tidying up” exercise in relation to current investments of the JV, to which reference will also be made later. As far as the New Zealand meeting was concerned, Mr Armitage did not have a very detailed recollection of it. He was very busy at the time and took away no action points from it. I shall refer again to his evidence of what he remembers about the meeting. Mr Armitage was an honest witness who did his best to help the court.

Mark Peter Flay: Mr Flay held various financial and governance roles at Cullen from August 2002 to July 2015 and currently works as a finance director at a New Zealand based financial services company. From January 2006 to February 2012, he was Cullen’s CFO, in which role he was responsible for all financial matters and was involved in the oversight of various group investments, including KIL. Mr Flay provided a witness statement and gave oral evidence from New Zealand over a VCF link. He was cross-examined. His evidence dealt with his role as Cullen’s CFO and his involvement with KIL. Mr Flay was first involved with KIL in mid-2006, when he met Julian and Quentin during a trip to London and was given an overview of KIL and its investments. From that time, his focus with regard to KIL was on monitoring its cash flow requirements to the extent that they would need to be filled by Cullen. He noted that Julian provided regular email updates on KIL’s cash flow situation to Eric. Until June 2008, KIL-related information came to him through Julian. From June 2008, he was in touch with Ms Scown, who had day-to-day management of dealings with KIL, and, sometimes, with Mr Gibson.

Mr Flay’s evidence mainly related to the role he played in advising Eric on what Cullen’s reaction should be to Julian’s requests for shortfall funding by Cullen of the German Opportunity. In this regard his evidence took the matter little further than the position revealed by the contemporaneous documents. He was an honest witness.

Andrea Mary Scown: Ms Scown was commercial manager and director of operations at Cullen from April 2008 to January 2010 (and worked for Cullen subsidiaries both before April 2008 and after January 2010). In both roles she was responsible for the day-to-day management of dealings with KIL. Ms Scown provided a witness statement and gave oral evidence from Australia over a VCF link. She was cross-examined. In her evidence she dealt with her responsibilities in relation to KIL, which included implementing the “tidying up” arrangements to ensure transparency of the JV’s investments. She also advised Eric on the financial position of KIL as she saw it, both generally and in the light of Julian’s requests for shortfall funding for the German Opportunity. Her evidence detailed the correspondence and negotiation that took place between her and Julian/Quentin in the months following the shortfall funding offer from Eric/Cullen. While she was at times overly defensive of the Claimants’ case, she was an honest witness who was trying to help the court.

Julian: gave evidence and was cross-examined extensively. His evidence on salient issues is referred to throughout this judgment.

Quentin: Quentin’s evidence is also described in detail in the body of the judgment.

Before considering the Claimants’ allegations, it is appropriate to give an account of the circumstances leading up to these proceedings. Where the account touches on factual disputes between the parties, I will identify the parties’ respective positions and, in the next section, indicate my findings on those issues which appear to be of importance. I emphasise that it is not my intention to refer to each and every matter raised by the parties during the trial, but only those which I consider helpful to mention in order to explain my findings. Similarly, I do not intend to resolve every issue of fact that has arisen, but only such as are necessary to determine the claims.

Eric is a highly successful businessman from New Zealand. It appears to be accepted that, as well as being Cullen’s founder and executive chairman, Eric controls the company and is closely associated with its ultimate beneficial owner. Cullen is a private investment company incorporated in New Zealand, but with substantial interests in several other countries, including the United States, the United Kingdom, and Australia. The company has offices in London and other cities, and its business interests are in fashion retail, financial services, agriculture, real estate, bloodstock, sports and entertainment.

Julian and Eric met in New Zealand in the mid-1990’s. They became friends. Julian stayed with Eric in London and worked in the latter’s business in the period 2001-3. Julian next worked for a property development company, before becoming self-employed in the property acquisition and management sector. In the course of that work he acquired shares and other interests, direct or indirect, in properties in London (Westbourne House), Berlin (Zeppelin Park) and Poland (DHL terminals).

In October 2005, following discussions which took place over several months, Eric and Julian reached agreement on the JV. It is common ground that this arrangement was embodied in a document entitled "Draft Heads of Agreement" expressed to be between Julian and Cullen (“the HoA").

In very general terms, the purpose of the JV was to exploit property development opportunities in the UK and Europe, the ultimate benefit of which would be shared 50:50 by Eric and Julian.

So far as relevant to the issues in these proceedings, the main terms of the JV, as contained in the HoA, (and without reference to any variations that may have come about thereafter), were broadly as follows:

Cullen and Julian wished jointly to invest in the UK and European property markets using KIL as a vehicle to do so.

Cullen and Julian would put equal equity into KIL.

Julian would be employed as the full-time CEO of KIL, with the duties of implementing existing projects, providing “deal flow” (ie sourcing and implementing commercially attractive and profitable property deals), and running the operation on a day to day basis.

“Any funding for future property deals will be sourced, wherever possible, from third party funders. Where funding for a property deal cannot all be obtained from third party funders and the parties are not able to provide debt or equity funding on a pro rata basis to make up any shortfall, then Cullen will consider providing any shortfall funding that is required by way of debt funding”.

Where Cullen agreed to provide shortfall funding for an investment in UK or European property, the funding “will be on terms approved by each of [KIL] and Cullen and it is intended in particular that any such funding would earn an interest rate of 9% above the UK 90 day bank bill rate” such interest to be capitalised and treated as an expense of KIL to be repaid together with the principal before distribution of profits.

“If Cullen decides not to invest in a deal then [Julian] will, subject to the other terms of this heads of agreement, have the right to undertake the deal in his own capacity.”

Julian “will not be prohibited to enter into UK and European property transactions in his personal capacity or otherwise as long as he has given [KIL] first right of refusal and [KIL] has declined and as long as the transactions concerned will not materially affect his duties as CEO of [KIL] or result in a conflict with [KIL], or with the prior written consent of Cullen. In the event [Julian] wishes to undertake other non-property related business activity in the UK and Europe, he must first obtain the prior written consent of Cullen, such consent not to be unreasonably withheld.”

“It may be beneficial for [Julian] to hold interests in certain UK property in his own name to minimise taxation liability for [KIL]. In such instances, [Julian] shall hold such interests in trust for [KIL]”

Julian “will earn a salary commencing at £85,000 per annum.”

“All transactions between [KIL] and either party or their associates requires the prior written approval of the other party.”

It is not in dispute that the essential shape of the JV is reflected in the HoA, and that there were additions and/or variations to those terms which were not reduced to a formal document in the same way. However, the nature and extent of such additions/variations was not common ground before me. In particular, although the parties agree that the JV aimed to hold any investment in the most tax efficient way, which might well have entailed putting investments into SPVs controlled and held by Julian on behalf of both himself and Cullen, as distinct from putting them into KIL, Julian’s evidence was that soon after the HoA was signed, the parties decided that all investments should be held by SPVs. The Claimants, on the other hand, dispute this, and contend that whether to use an SPV was always a decision for the shareholders of KIL (Cullen and Julian) to make on a case-by-case basis. However, it appears to be common ground that in fact KIL held none of the property interests in the investments made under the JV arrangements.

As to Julian’s right to enter into a property deal in his own capacity, it is clear (and there appears to be no dispute): (1) that, where Cullen had decided “not to invest in” a deal, Julian was entitled to do so, subject to the other terms of the HoA; and (2) that the effect of “other terms” was that Julian was permitted to enter into a UK or European property transaction in a personal capacity if he had the prior written consent of Cullen (in reality of Eric) or if: (i) he had given KIL first right of refusal; (ii) KIL had declined; and (iii) the transactions concerned would not materially affect his duties as CEO of KIL or result in a conflict with KIL.

The Claimants submit that a decision by Cullen not to provide shortfall funding for a proposed deal, either on a pro rata basis or by itself, within the meaning of the earlier provisions of the HoA, is distinct from a decision by KIL to decline the deal. The Defendants submit that there is no distinction between those two decisions. I will need to revert to this point later.

Following the HoA in October 2005, on 21 December 2006 KIL and Cullen entered into the so-called Multi-Option Facility Agreement ("the Facility”), which recited that Cullen “has agreed, at the request of [Julian] to make available to” KIL a loan facility of €300,000 and £75,000. The Facility provided: in clause 2.3, that KIL would use the loan “for working capital purposes”, in clause 4.1, that advances would be made by Cullen to KIL at the latter’s request if (inter alia) KIL had satisfied any conditions precedent which Cullen reasonably required to be satisfied prior to any part of the loan being advanced, and, in clause 5.1, that the rate of interest applicable to an advance would be 15% per annum. The Facility contained other provisions, including (in clause 20) a provision for “Events of Default”. That clause included a stipulation that should Cullen consider that a material change had occurred in the financial condition or operations of KIL or any guarantor, then Cullen could declare its obligations to be terminated, and all amounts advanced together with interest to be immediately due and payable.

Also on 21 December 2006, KIL created fixed and floating charges in Cullen’s favour securing any lending by that company (“the Debenture”). Such lending was also the subject of a personal guarantee given by Julian (“the Guarantee”), together with agreements whereby Julian provided Cullen with security over certain Guernsey companies in which Julian’s interests in the DHL and Zeppelin Park projects were held (“the Securities”).

Between 2005 and 2008, several property investments were made pursuant to the JV arrangements between Julian and Eric/Cullen. In the case of each investment, an SPV was employed to hold the interest on behalf of the ultimate beneficial owners, who, it is common ground, were Julian’s and Eric’s respective trusts, namely, for Julian: the Spirit Valley Trust (registered in Guernsey), and for Eric: the Summit Trust (registered in Jersey). (Footnote: ²) KIL was involved in sourcing, arranging and managing the investments, but did not hold any of the interests. In relation to the funds available under the Facility, all the £75,000 and about €103,000 had been drawn down by 2008. At least part of the £75,000 drawdown was used in 2007 for shortfall funding of a specific property investment (Britannia). Julian’s intention, as expressed at that time, was to use the Euro amount in the Facility “for further contributions towards the next deals.” (Footnote: ³)

In view of the central role in these proceedings played by the German Opportunity, and by the parties’ discussions over several months about the funding for this venture, it is necessary to describe subsequent events in some detail.

Julian’s evidence was that, prior to the commencement of the JV with Eric, and as a result of his own investment activities, including the DHL deal, he had become acquainted with Mr Kahmann, whose primary business was a real estate brokerage company, CAB Invest GmbH (“CAB Invest”). Julian states that he conceived the idea of the German Opportunity after hearing about the Berlin residential market in conversations with Mr Kahmann, who owned a number of residential investment properties there. Having raised with Eric the possibility of investing in Berlin in his November 2007 “Kauri update”, Julian states that he then worked on selling the concept to Eric/Cullen, as being, in Julian’s opinion, KIL’s best chance of survival through earning management and other fees.

Julian again raised the topic with Eric in an email on 16 February 2008. He explained the proposal in more detail, and referred to the involvement of CAB Invest as a potential German joint venture partner with some experience in the market in question. Having received an encouraging reply from Eric, it appears that in early 2008 Julian and Quentin began seriously to consider the framework for a possible joint venture between KIL and CAB Invest to exploit the German Opportunity by acquiring and refurbishing residential properties there; they sounded out prospective equity investors, and obtained advice on how the venture might be structured in terms of the corporate entities that would hold the interests to be acquired.

By an email sent on 7 March 2008, Julian provided Eric and Cullen with an update on the German Opportunity. The email stated that the concept was “continuing to take form”, that a presentation to a potential investor (Capmark Equity) had been made, and that Capmark would be visiting Berlin in the near future to meet “our JV partners CAB-Invest" and to view the first target properties. A draft investor presentation was attached to the email “for your information”, which referred to a 50:50 joint venture between KIL and CAB-Invest, called “Kauri-CAB”. This document identified Julian, Quentin, Mr Kahmann and certain others as being the “Kauri-CAB team”.

A further progress report was sent to Eric/Cullen on 4 April 2008. In this email Julian reported inter alia as follows:

Progress with “our new joint venture, Kauri-CAB”, was good.

Capmark were interested in investing 85% of the required equity, with the balance of the equity required for the 5 initial projects (forecast as €650,000) to be funded equally by KIL and CAB Invest.

KIL’s contribution of c. €325,000 would generate fees of c. €125,000 and a forecast profit share of €1.3m for KIL over 36 months.

The first equity contribution was likely to be needed in 5-6 weeks.

The email then continued:

There followed several months of discussions and negotiations between Julian and Eric/Cullen concerning this request for funding and the German Opportunity generally, but also involving wider issues of the JV between Julian and Eric. It is appropriate to set out the main features of these events.

At about this time Ms Scown, the commercial manager at Cullen, became more directly involved in seeking details of the proposal from Julian and in briefing Eric. On 17 April 2008 she sent a request for further information about the German Opportunity, and Julian provided a full response the same day, including a detailed cash flow model. Ms Scown reported the information to Eric, who responded that it was essential, given the request for additional capital, that Cullen had a full picture of “the current and future returns and risk."

On 22 April 2008, Julian enquired about, "process & timing moving forward in relation to drawing down further funds from Cullen". Ms Scown responded on 24 April, seeking further financial analysis in respect of the "carried interests" in the existing investments. Julian provided financial models the next day. In an email to Ms Scown on 30 April 2008, Julian again asked about the timing of his requested draw down of the c.€200,000 remaining in the Facility. Similarly, in a "Kauri update" emailed to Eric and Cullen on 2 May 2008, Julian referred to the plan to use this fund for the initial investment in the German Opportunity. On 12 May 2008 Julian again asked Ms Scown for an update on his funding request. He was told that it was with the Cullen board.

On 13 May 2008 Mr Flay, a director of Cullen, emailed Eric, stating that whilst "[t]hey do have a facility with Cullen that they can draw on", "[r]ight now I have better places (or more needy places) to put the €197k so I want to say NO to them. What I will say is that we will be in a position to consider in August/September. Any Issues?" These emails elicited a question from Eric to Ms Scown on 14 May 2008: “What are we charging for this facility if we continue to provide it? Are we confident there is a good future?” And in another email to her the next day, copied to Mr Flay and others at Cullen, Eric stated: “If we decide further investment is not optimal what is the best alternative in terms of running the business down over time”. Mr Flay responded on 18 May: “I am not suggesting further investment is not optimal, just in my view we have many more important places to allocate cash right now.” He suggested deferring the German Opportunity until later that year and in the meantime seeing whether the JV could be made “cashflow neutral”. On 22 May, Mr Leslie Archer, the investment director of Cullen, (“Mr Archer”) asked Ms Scown and Mr Flay: “What have we told Julian re fresh investment? He is continuing negotiations…The sooner he knows how much support and when he may get it from Cullen the better.”

Julian sent a further email to Eric and Cullen on 23 May 2008, updating them on the progress in setting up the German Opportunity. This led Mr Flay to inform Eric: “I am going to deliver the message to Julian that Cullen cannot make a commitment to the equity for the German project until post 30 June (the initial EUR200k). I will say the equity is likely to be there for them but we do not want to be on the hook just right now. Any objections?" Mr Flay then emailed Julian on 23 May 2008, stating, "I cannot firmly commit to the equity (inc. the 200k residual in the facility) until post June 30, when I have a few things lining up. What is the drop dead date on your commitment?"

These responses from Cullen caused Julian to complain to Eric about what he considered to be lack of, and late, communication from Cullen, leaving him still in doubt as to the availability or otherwise of funds at a time when he was pushing forward on the German Opportunity. In an email to Mr Flay, Julian said: "In short, we're under pressure here to kick-start the Kauri CAB business. We need the €200k to do this and it feels like we've been treated unreasonably regarding being kept informed." After outlining the work that had been done to set up the German Opportunity and to satisfy Cullen’s requests for detailed information, Julian’s email continued: “It’s practically impossible to manage this with the responses and timeframes we’ve been given from you, and very frustrating to juggle deals involving tens of millions because we can’t confirm the availability of a €200k facility which we’ve spent time and money already negotiating…I have been working hard not to utilise this facility precisely so Kauri would have funds available for the next deal. The €200k underpins all business development.” The email ends with a plea for someone within Cullen to “take up the reins on this and keep us fully informed”. (Footnote: ⁴)

Pausing there, it seems clear from the contemporaneous documents that one of the reasons for Eric/Cullen’s somewhat lukewarm and indecisive reaction to Julian’s request to draw down the remaining €200,000 was the financial pressure Cullen found itself under as a result of the global financial crisis and credit crunch. This was confirmed by Ms Scown and Mr Flay in their witness statements. It also appears that Cullen were at least contemplating the option of cutting off all investment and “running the business down”.

Perhaps for the same reasons the advent of the German Opportunity prompted Eric/Cullen to embark upon a wholesale review and reorganisation of the arrangements with Julian and KIL. As part of this review, Eric asked a Mr Miles Leahy (“Mr Leahy”), a financial consultant, to assist Cullen in analysing KIL’s financial position generally and also the merits of the German Opportunity. The Defendants liaised with Mr Leahy in producing his analysis, which was sent by email to Eric on 9 June 2008, and included Mr Leahy's estimate of the returns that Cullen's investments in KIL might be expected to yield, on the assumption that the projected funds, including the €197,000, were invested.

Following a meeting between Eric and Julian on about 11 June 2008, and a revised forecast on returns to Cullen, emailed by Julian to Eric on 12 June, on 14 June Eric sent Julian by email (copied to Messrs Leahy, Flay and Archer, and Ms Scown) the following offer, which I set out in full in view of its importance:

A subsequent exchange of emails between Eric and Julian clarified that this offer would amount to a restructuring of all previous lending to KIL that had been made by Cullen, including an interest free loan of €260,000 advanced by Cullen for the purposes of earlier investments, and would replace the Facility. Thus, all existing and future advances would be subject to the new terms, and therefore to an interest rate of 27.5% per annum, rather than, for example, the rate of 9% above the UK 90 day bank bill rate specified for shortfall funding by Cullen under the HoA. Similarly, the requested €197,000 available under the Facility would be subject to the new rate of interest, rather than the rate of 15% charged under the Facility. As Eric put it at the time “All existing advances roll into the new one.” (Footnote: ⁵) The new terms would be triggered when the €200,000 was drawn.

In cross-examination, Eric accepted that this was the only basis on which the €197,000/€200,000 would be available. In other words, it was a package and there could be no draw down of this sum on the terms of the Facility. Eric also appeared to confirm that Julian did not formally accept these terms at any stage. (Footnote: ⁶) He later indicated that the terms must have been accepted, in the light of Quentin’s email of 20 August 2008 and Ms Scown’s of the same date (see below). (Footnote: ⁷) Julian’s evidence was that he did not accept the new terms, and hoped to persuade Eric/Cullen to provide the €200,000 under the terms of the Facility. (Footnote: ⁸) Mr Archer’s view was that the terms had not been agreed by Julian. (Footnote: ⁹)

In his witness statement Eric stated that at the time the offer was made, Cullen had no particular liquidity issues and generally had access to cash from asset sales or from its own undrawn credit facilities. It was thus in a position to provide the amount of funding KIL required.

In response to chasing emails from Cullen, on 25 June 2008 Julian asked Cullen to confirm whether the €200,000 could be released on 1 August 2008, or if not what would be the earliest date of release. He would then let Cullen know whether he wanted to proceed. Mr Flay confirmed that date “as long [as] we get everything documented and agreed prior to this date which should not be a problem.” Asked whether the funding was required on 1 August, Julian said “Now that I know funds are available I’m working to have a deal ready for completion in August.” (Footnote: ¹⁰) On 23 July Julian informed Ms Scown that he would give Cullen at least 2 weeks’ notice of the requirement for the funds. He also indicated that there had been a hiccup with the intended equity partner (Capmark). In a further update on 15 August Julian informed Eric and Cullen that they were close to finalising various deals in Germany and he would advise Cullen “of our intention with drawdown the €200k in the coming weeks.”

On 20 August Quentin emailed Ms Scown and others at Cullen with responses to various requests for cash flow information and forecasts. His email closes with: “Can you please let me know when the EUR 200,000 will be available – we would like to drawdown this now please.”

Ms Scown responded by an email sent the same day, copied to Eric and others at Cullen. She commented on KIL’s cash flow, and then stated:

In cross-examination, Eric reluctantly accepted that this requirement for the provision of “comfort” regarding cash flow amounted to a further condition of the draw down of €200,000, not contained in the 14 June offer. (Footnote: ¹¹)

In two internal emails to Eric and others at Cullen on 21 and 25 August, Ms Scown stated that “Our recommendation is that we say no to a further drawdown at this time…..They need to demonstrate that the business can be cashflow neutral at a minimum before we can seriously consider investing any further cash.” She indicated that she would “go back to them tomorrow with our refusal …unless I hear otherwise from you.”

In his evidence Eric said he did not recall this email or whether he replied to it. He accepted that he would have been content for Ms Scown to deliver that message to Julian the next day. (Footnote: ¹²) Mr Archer and Mr Flay could remember very little but accepted that they would have been party to discussions about this with Ms Scown and that her emails to Eric would have represented their view too. Mr Archer did not know whether KIL was ever cashflow neutral after this time. He agreed that at this stage the terms of funding offered to Julian by Eric had not been agreed by Julian. (Footnote: ¹³) When she gave evidence, Ms Scown had no recollection whether she received a response from Eric or sent the suggested message to Julian. (Footnote: ¹⁴)

On 12 September 2008 Quentin recorded in an internal email that Eric had informed Julian that Cullen was now only prepared to advance €100,000. The day before, Julian had sent to Eric details of two small proposed initial property deals in the German Opportunity. Julian said that KIL “requires c. €138,000 contribution…” Eric then wrote to Julian and colleagues at Cullen indicating that the company would be prepared to advance €150,000, but before it did so, he needed to see “how Kauri will look post transaction”; it was also necessary to ensure that the shareholding arrangements and security were satisfactory, and that compensation arrangements for management going forward were clarified.

These matters were put in Ms Scown’s hands, and on 17 September 2008, in a detailed email, she informed Julian of “a raft of outstanding issues” that needed to be resolved before any further advances by Cullen could be made. These included the following:

The ownership of the property portfolios needed to be restuructured, so that Cullen and Julian’s interests were held in "the Summit Trust" and the Spirit Valley Trust, respectively.

Additional documentation was required: including a shareholding agreement (with employment agreements attached) between Cullen and Julian in respect of KIL; a shareholder agreement between Eric’s and Julian’s personal trusts; funding agreements in respect of any loans by KIL for previous property purchases; an agency agreement for sourcing property deals between KIL and “the Kauri Guernsey entity”; and property management services agreements for individual properties.

Other documents in course of preparation needed to be approved.

Further information needed to be provided about the German Opportunity, and also about the valuation of each of the existing property portfolios.

Quentin provided a response to some of these issues the same day. He stated that “the timing of the receipt of the EUR 150k is very sensitive now as the ball is now rolling…” One of his responses, relating to a query of Ms Scown’s as to the ownership structure for interests in the German Opportunity, was that “[KIL] will now be the direct shareholder of the Kauri CAB investment.” This response appeared to contradict Ms Scown’s understanding that although “[KIL] was to initially own property directly … there turned out to be capital gains tax implications in having this type of structure.” (Footnote: ¹⁵) In her reply of 19 September 2008, Ms Scown appeared to correct Quentin’s statement: “Ownership of any equity in the property portfolios must be restructured, as per tax advice received so that Cullen’s interests are held in Summit Trust.” In his evidence, Quentin said that his original statement was an error. (Footnote: ¹⁶) Julian’s evidence was that there was no question of KIL holding property in the German Opportunity, and that any reference to KIL in draft documents relating to it was simply as “placeholder” for whatever SPV was ultimately decided upon in any particular case. (Footnote: ¹⁷)

Also in her 19 September email Ms Scown referred to the need to address "holes in the underlying structure" and "any security on our investment". Getting those matters finalised was "a condition precedent to any further advances”. Work then continued on the “tidying up” process, with Ms Scown reporting to Eric on 30 September that “… the basic proposal looks sound if the risks as outlined above are carefully managed and if deals cut with prospective equity partners are approved at board level. [KIL]’s cashflow problems remain…” Eric responded by requiring Ms Scown to carry out an analysis of the “profit and cash per annum” situation over the following 4 years with Cullen providing no additional capital, alternatively with Cullen providing the requested contribution.

On 1 October 2008, Quentin asked Ms Scown whether progress on the tidying up exercise was sufficient to enable confirmation of the drawdown of €150,000 to be given. In her response Ms Scown did not provide any confirmation and indicated, inter alia, that Cullen would require KIL to agree to pay an annual management fee of £30,000. That response elicited an email from Julian to Quentin saying “We need to discuss before we agree anything.” Quentin’s evidence was that Julian’s concern related to the size of the management fee. (Footnote: ¹⁸) Julian could not remember what he meant at the time, but denied that he was then considering taking a personal interest. (Footnote: ¹⁹) Quentin asked Ms Scown how the fee was calculated, and in the same email asked “where we stand regarding further requirements and timing for drawing down the €150k.” (Footnote: ²⁰)

Also on 1 October 2008, Eric queried with his Cullen team an increase in Julian’s salary which had been notified to Cullen in March 2007. Eric stated that it was unacceptable and should be renegotiated “prior to finalising the way forward for Kauri.”

In an email sent to Eric and Cullen on 14 October 2008, Julian referred to the tidying up and stated that the “process is protracted, somewhat repetitive, and requirements are growing. Of most concern was “that we have no clarity how these efforts relate to the loan.” He continued, that if the loan was “not going to be available” he should try “to extricate Kauri from the Kauri CAB venture and salvage some reputation/relationship.”

By email on 20 October 2008, Ms Scown informed Julian that “Cullen will not be in a position to advance [KIL] any cash until post 31 December. The board likes the Kauri CAB proposal, and I have personally supported it. It's unfortunate that current market pressures are squeezing liquidity."

On 28 November 2008, Julian informed Cullen that there was a "high likelihood" that they would be "in a position to notarise the first Kauri CAB deal before Christmas", and that a private investor and a fund, Arminius, had agreed to invest. If this was realised, KIL would need further investment of "c.75-100k" in February 2009.

Ms Scown sent an email to Julian on 3 December 2008 stating: "We have forecast funds for Kauri CAB in the New Year so there are no issues with your indication of February timing. Bruce and I have still to finalise new loan documents for the future funding which the board has previously discussed as a 5m year term, all current advances rolled into one loan etc. We are endeavouring to get this documentation completed by Xmas."

Julian responded by email the same day, stating: "I am concerned that the returns generated from the new funds and new terms will not benefit Kauri but only serve to service the new terms i.e. rolling all existing loans into one at 25% p.a." (25% presumably being an error, as the proposed rate was 27.5%). Ms Scown passed these concerns to Eric, with some calculations of her own which suggested that, on the basis of the new terms (which would also alter the terms of existing borrowing) in order to obtain an advance of up to €100,000, KIL would have to pay Cullen some £56,000 per annum. (Footnote: ²¹) Eric suggested to Ms Scown that the amortisation might be reduced, but that suggestion does not appear to have been communicated to Julian. (Footnote: ²²)

Julian provided a further email updating Ms Scown on progress with the German Opportunity on 9 December 2008. After indicating the level of investment funding that would be required from Cullen, he repeated his concern about the proposed lending terms, the cost of which he argued that the new venture would not support. In particular, he requested that the €260,000 and previous earlier loans be excluded from the proposed rolled-up loan “with 25% interest rate” (presumably an error, as the proposed rate was 27.5%).

Ms Scown’s response the next day was to suggest a meeting with herself and Mr Archer while Julian was in New Zealand, to which Julian assented. However, the Cullen witnesses made clear in their evidence that “Cullen was not at this point willing to provide more capital unless the existing facilities were "rolled up" into this restructured financing with the 27.5% interest rate reflecting the cost to Cullen of providing the capital to Kauri and market rates at the time." (Footnote: ²³)

The meeting was held in Auckland on 15 December 2008. Although Ms Scown had been expected to attend, in the event she was ill and did not. Julian and Messrs Archer, Armitage and Flay were present. No notes or minutes appear to have been taken. Certainly none have been disclosed by either side. It is common ground that there was discussion of the German Opportunity and its funding. Julian’s evidence is that the terms on which Cullen was offering to provide funding were discussed, together with the consequences and alternatives if funds were not forthcoming from Cullen. Julian states that in that context he also mentioned the possibility of him investing personally, outside the JV.

As to the Claimants’ witnesses, Mr Flay has little or no recollection of the meeting. Messrs Archer and Armitage do not accept Julian’s account in its entirety. Mr Archer’s recollection of what was discussed is clearly very poor. He remembers there had been some discussion about the German Opportunity “in general terms” but could not recall, for example, the details of the partner or third party investors that Julian was lining up. On several occasions he said that “he could be wrong” on certain issues, and that, unlike Ms Scown, he was not “across the detail” of the negotiations with Julian. One of the issues on which he accepted he could be wrong was whether it was a “hold up” of agreement on funding that KIL was not yet cash neutral. He accepted that there had been discussion about what would happen if Cullen did not provide shortfall funding for the German Opportunity, and thought that he recalled Julian referring to the need in that event to find another private investor. However, he did not accept that Julian had objected to the roll-up of the existing loans, or that Julian had mentioned the possibility of investing himself. (Footnote: ²⁴) In his witness statement he had stated that if personal investment by Julian had been mentioned he would have remembered it, as it would have been unusual.

In his witness statement, Mr Armitage stated that there “was no countenance at that meeting that Julian Brown could invest in the German Opportunity himself…We did not provide that confirmation, of that I am certain.” (Footnote: ²⁵) In that statement, he does not say whether or not the possibility of personal investment was mentioned by Julian. However, in cross-examination, he did not accept that it was mentioned: “If it had been raised it would have been straight back to Eric for a response.” (Footnote: ²⁶) Unlike Mr Archer, Mr Armitage did not accept that the subject of what would happen absent funding by Cullen was discussed at all. His reason was that he remembered thinking at the time that the German Opportunity was a good one, in the light of the presentation Julian gave at the meeting. Mr Armitage accepted that he would have been the one to whom the task would have fallen of preparing draft agreements for a new “rolled up” loan to KIL, but he could not remember making a start on such a draft. This led him to believe that loan terms had not been agreed with Julian. Mr Armitage did not have a detailed recollection of the meeting.

Following the Auckland meeting, Julian sent two emails to Mr Archer, each of which came under considerable scrutiny during the trial.

On 13 January 2009, Julian sent this to Mr Archer:

This was, in effect, the same request made by Julian to Ms Scown on 9 December, which had led to the 15 December meeting – a request that the “roll-up” of existing loans, to bring them within the June 2008 terms, should not be a precondition of a new loan for the German Opportunity. However, Mr Archer in his witness statement said that he considered the email “bizarre”. He elaborated:

Mr Archer was cross-examined on his reaction to the email, and he appeared to be saying that he was concerned that Julian was implying that at the Auckland meeting he (Mr Archer) had agreed that Cullen would consider offering funding without the roll-up.

Mr Archer forwarded the email to Ms Scown the same day, with the simple message “FYI”. Mr Archer’s and Ms Scown’s evidence was that she too found the email “a huge surprise” and “extremely strange”. In cross-examination Ms Scown could not really provide an explanation for her reaction to the email. (Footnote: ²⁷) It is clear that they discussed it and decided that no response should be sent. Mr Archer considered that for either Ms Scown or him to respond to the email would be unwise in case it was taken as implied acceptance of its contents.

I find Mr Archer’s and Ms Scown’s reaction to the email curious, given that Julian’s objection to the “roll-up” of existing loans had prompted Ms Scown to suggest the meeting in the first place, and that Julian’s objection was known to Mr Archer. (Footnote: ²⁸) Be that as it may, no written response was sent to Julian. However, Mr Archer made an entry in his diary for 13 January 2009 “Call Julian Brown”. He told me that he did not believe he had called that day because the entry had not been crossed through by him. He made other diary entries on 14 January: “Kauri email” and “Kauri update for [Eric]”. These too were not crossed through, and on that ground Mr Archer said he could not be sure he had updated Eric. He may have done, but could not recall doing so. (Footnote: ²⁹)

What is clear is that Ms Scown emailed Eric on 16 January (copied to Mr Archer and Mr Flay) to say that Mr Archer would be contacting him about the Auckland meeting and Julian’s email of 13 January. She told Eric that Julian was asking for the new terms not to apply to existing loans, and that although the German Opportunity looked sound, "it was another draw on cash at this time with no prospect of any cash return in the short term". Eric did not recall seeing the email from Ms Scown or speaking to Mr Archer. (Footnote: ³⁰)

Mr Archer’s diary shows an entry “Call Julian” for 19 January 2009, which had been crossed through, indicating that he had done so. Mr Archer’s evidence was that he did not send Julian a text or an email. He believed he had had a telephone conversation with Julian on that day or the next, but could not recall what was discussed:

In relation to the communication from Mr Archer after Julian’s email of 13 January, Julian originally referred to having had an email or text from Mr Archer which he remembered reading. (Footnote: ³²) Later, in his witness statement, Julian said:

In cross-examination he said:

Before the trial the Defendants had filed a witness statement by Jason Butler, who was the driver of the car in which Julian was travelling to the airport. The statement said that Mr Butler recalled Julian informing him at that time that he had just been told that Cullen was not going to invest. In the event Mr Butler was not called to give evidence, and his statement was withdrawn.

It was therefore, ultimately, not contested by Julian that a conversation took place between himself and Mr Archer on or about 20 January, although the content of the conversation, and in particular whether Julian was told by Mr Archer that Cullen would not be investing and/or that he could invest personally, remains in dispute.

On 22 January 2009, Julian sent an email headed "German residential deals" to Mr Archer, copied to Eric, Ms Scown and Mr Gibson, as well as Quentin. This email states:

Neither Mr Archer nor any of the other recipients replied to the email. In his witness statement Mr Archer said:

Cross-examination of Mr Archer took the matter little further. He accepted that Julian’s email was in effect saying that he had told Julian that Cullen could not provide the funds because of its own financial position. However, “another version” was that Cullen was able to provide funding on the 14 June 2008 terms but Julian didn’t want to accept those terms, and the result was that Cullen did not provide the funding to KIL. (Footnote: ³⁴) Mr Archer accepted that if, as Julian said, another private investor was going to invest, then “it was going to be difficult for Kauri to expect to have an equity share…I don’t know how realistic any sweat equity might have been, but I did understand that there was still the prospect of, as he says there, recovering start-up costs and receiving management fees, and …to invest later on.”

Ms Scown, in cross-examination, agreed that the wording of the email was consistent with Julian having been told by Mr Archer that funding would not be available from Cullen without the roll-up of existing loans. (Footnote: ³⁵) She understood the email also to be indicating that Julian was going to proceed with the German Opportunity which would not be a Kauri venture, which she explained as “not an Eric or Julian venture.” (Footnote: ³⁶)

Eric’s evidence was that he did not recall seeing the email, and had not replied to it or telephoned Julian. He did not believe anyone else had done so, and did not know why no one had corrected the statement in the first paragraph about Cullen not being able to provide funds. In his view Julian had made that up. Eric stated that Julian would know that Cullen would understand the reference to raising capital “privately” to be to finding “other investors”, and not as a reference to Julian himself investing personally. Eric took “outside Kauri” to mean not outside the JV, but outside KIL and in an SPV, as with the other investments. Eric considered that this wording was intended to “mislead us.” (Footnote: ³⁷)

In an email of 24 November 2010, Mr Gibson appears to have characterised the non-funding of the German Opportunity by Cullen as “the Cullen loan facility being withdrawn”. He also said: "… the reason the additional loan wasn't advanced was due to market conditions at the time and that the equity positions in the assets the Kauri loans were advanced to were in danger of being lost or underwater…" On a later occasion Mr Gibson stated: "…I can appreciate how difficult things were at the time and the frustration and inconvenience of the funding facility being withdrawn". (Footnote: ³⁸) In a report to Eric, copied to Julian on 24 May 2012, Mr Gibson said that "In January 2009, Cullen advised Julian that it would not be in a position to provide the funds for the venture." The next day, having received comments from Ms Scown, Mr Gibson informed Julian that “Whilst Cullen was responsible for the initial hold-up, due to cashflow constraints, the decision for Kauri not to be funded was ultimately yours, as you weren’t prepared to accept funding under the new terms.” Mr Gibson stated in oral evidence that his characterisation of the situation in the earlier statements were based on what Julian had told him.

The following account of how the German Opportunity was to be structured reflects Julian’s and Quentin’s evidence, and does not seem to be disputed in the main. Reference can be made to the dramatis personae at the start of this judgment for further details of the various corporate entities and participants.

Had the JV taken an equity interest in the German Opportunity this would have been held through a company that had been established by Julian/KIL in Guernsey, called Kauri Guernsey 1 Ltd (“KG1”). This company was owned by Julian through his trust, the Spirit Valley Trust, and had Cullen participated, Eric would have been granted a 50% beneficial interest in KG1, through his own trust, the Summit Trust. The interest of KG1 was, in turn, to be held through a Luxembourg subsidiary, Kauri Holdings Sarl, which, confusingly, had previously been called Kauri Capital 6 Sarl, (“Kauri Holdings”). Kauri Holdings would own part of Kauri CAB German Residential Properties Sarl (another Luxembourg company incorporated by KIL, and formerly known as Kauri Capital 7 Sarl); the other part was to be owned by Mr Kahmann's company, AVEY GmbH (“AVEY”). Kauri CAB German Residential Properties Sarl itself would own a share of the ultimate joint venture between it and a significant equity investor. That investor was eventually Arminius Property Limited (“Arminius”). The joint venture vehicle, in which each of Kauri CAB German Residential Properties Sarl and Arminius would acquire a 50% interest, was called Kauri CAB Arminius Sarl. 80% of the funding was provided by Arminius, and 20% by Kauri CAB German Residential Properties Sarl.

Julian accepted in cross-examination that in presentations to potential investors in the German Opportunity, in updates to Eric/Cullen, and in other documents prepared with a view to setting up a structure for the project, there are references to KIL as a participant/shareholder. He also accepted that at one point tax advice was taken in relation to the possibility of KIL becoming a shareholder of a German GmbH participating in the project. However, Julian maintained in evidence that use of KIL to hold such interests was never on the cards and was a flawed concept. In that regard he also prayed in aid Ms Scown’s querying of Quentin’s 17 September 2008 email, referred to earlier in this judgment.

In his witness statement, Julian states that he met Eric on two occasions in January 2009, and that on each occasion they discussed the German Opportunity and Julian’s plan to raise funds privately to invest in it. Julian states that Eric offered to contribute €40,000, on the basis that this would have to be discussed with his team in New Zealand. Julian states that he pursued this with Eric’s representatives, but it became apparent that such funding would still have to be on the terms that had been proposed in the 14 June 2008 email, i.e. all the lending rolled up into a new facility at 27.5% interest. Julian considered that this was not a viable option for KIL and was therefore unacceptable.

Eric’s evidence was that although he met Julian in January 2009 and discussed the German Opportunity and the possibility of bringing in private investors, Julian did not mention that he was going to invest personally in it, and he (Eric) was not aware of his intention to do so. Eric said he would have recollected it if Julian had mentioned it, and would have had many questions to ask, including how his full-time employment with KIL would be affected. Eric confirmed that he had offered to put some money in “to help”. (Footnote: ³⁹) Mr Gibson recalled being told by Eric in either December 2008 or January 2009 that Eric had offered €60,000 to top up the third party funding which Julian was seeking for the German Opportunity. Mr Gibson explained that this was the same as the figure of “40k” to which he had referred in an email to Julian on 25 May 2012, which he thought was a reference to £40,000. (Footnote: ⁴⁰)

It is Julian’s case that, although he had given serious consideration to taking a personal interest in the German Opportunity while still in New Zealand at the end of 2008, and although work on taking the venture forward with Mr Kahmann had continued throughout the relevant period, he was not committed to any personal investment until April 2009 when he signed a share transfer agreement re-acquiring from Mr Kahmann’s company, AVEY, the interest in Kauri Holdings which he had earlier sold to AVEY for one Euro. (Footnote: ⁴¹) Julian’s case is that the transfer to AVEY was necessary because, following the withdrawal of Cullen, he was not in a position immediately to commit to a personal investment and so steps had to be taken to enable Mr Kahmann to proceed alone, so that the project with the third party investors was not jeopardised. Until he reacquired the shares his understanding with Mr Kahmann was simply that he (Julian) was going to try to invest.

Whilst accepting that Julian’s funds were introduced in April 2009, the Claimants contend that there was an earlier agreement between Julian and Mr Kahmann committing Julian to make an investment. In his evidence Mr Gibson stated that Julian and Quentin appeared to have been negotiating with Mr Kahmann to take such an interest in late 2008/early 2009.

In this regard Julian was asked in cross-examination about numerous documents, including the following email exchange with Mr Kahmann: on 13 February 2009 Quentin wrote that “AVEY GmbH as ultimate beneficial shareholder, will be providing all required equity….”. Mr Kahmann queried this on 16 February, saying “AVEY will carry 90%”. Julian then responded with “Is the balance (10%) coming direct from you as PPL [said to mean profit participating loan]?”, to which Mr Kahmann replied “I thought the other 10% are [sic] coming through “your&/mine” Kauri Holding Sarl?”. Julian responded “Yes 10% via “your&/mine” via Kauri Sarl but if AVEY owns Kauri Holding Sarl they might expect AVEY letter to cover 100% of the equity.” Julian’s explanation for this interchange was not clear, and he indicated at one point that Quentin would have a better idea of its meaning. (Footnote: ⁴²)

Julian’s evidence about these and the other documents put to him was essentially that they, and the underlying corporate and financial structure being put in place for the German Opportunity, had been in preparation without reference to whether Cullen, or Julian personally, or a third party ultimately became an investor, and that the features which the Claimants regard as indicating his commitment to an investment of his own would have been the same in any event. This is encapsulated in the following responses of Julian in cross-examination to questions about inter alia a “funds flow” statement dated 5 February 2009 which bore his name as an investor:

It is clear that at this time (mid-February 2009) Julian transferred his shares in Kauri Holdings to AVEY for 1 Euro – apparently with a view to re-acquiring them in due course - and that notarisation in respect of the first two property investments in the German Opportunity was only days away. (Footnote: ⁴⁴)

By email sent to Eric and others at Cullen on 20 February 2009, Julian stated:

The Claimants contend that this email was untrue, in that Julian had found a “suitable replacement shareholder” (himself) without even looking, and that CAB (ie Mr Kahmann) was not going to provide all the equity. Julian accepted in cross-examination that the email was "not fully transparent" (Footnote: ⁴⁵) and justified this as “reasonable” by reference to threats which he said Eric had made to close KIL down. His evidence was that:

On 5 March 2009 Kauri CAB Management GmbH was incorporated in Germany by Mr Kahmann as a vehicle for the management function of the German Opportunity. The company was owned by Kauri CAB German Residential Properties Sarl.

There is no dispute that on 7 April 2009 Julian (through KG1) re-acquired ownership of Kauri Holdings, which then had a 50% interest in Kauri CAB German Residential Properties Sarl. Julian accepts that at this point, but not before, he had a personal investment in the German Opportunity, and that he did not inform Eric or Cullen of his investment. Julian also accepted that the funds of c. €100,000 which he contributed were paid into Kauri Holdings via AVEY, so that like Sascha’s company Witec GmbH (the other investor on the Kauri CAB side of the German Opportunity), Julian’s interest would sit behind AVEY and would not readily be visible to the outside world. (Footnote: ⁴⁷)

The Claimants contend that the share transfer was not the point at which Julian became committed to Mr Kahmann, and was effected for tax reasons, as indicated in an email by Quentin on 7 April. They submit that on Julian’s own admission, his agreement with Mr Kahmann on their profit split was oral and informal, (Footnote: ⁴⁸) and that their arrangements had been in place from mid-February 2009 at the latest.

On a number of occasions thereafter Julian informed Cullen of property investment opportunities in Germany, and encouraged them to invest. However, no further investments were made pursuant to the JV.

In response to an email from Ms Scown on 24 March 2009 informing him that Cullen intended to amalgamate its various advances to KIL within a blended interest rate, which would result in a charge to KIL of £5,385 per month, Julian emailed Eric and Cullen on 2 April 2009:

By email to Eric and Cullen on 5 June 2009, Julian provided information about the fees that it was anticipated KIL would earn for management services for the German Opportunity. He referred to the fact that negotiations were underway for a further round of investment, and said:

In an email to Eric and Cullen on 8 June 2009 Julian stated:

In an email on 8 December 2009 to Eric, Cullen and Mr Kahmann, Julian provided details of an investment opportunity called ‘Berlin IV’, which he appeared already to have discussed with Eric. On 6 February 2010 Ms Scown is suggesting to Eric and Cullen that “we should let [Julian] and Quentin go” and that in any event it should be made clear to Julian that “there will be no cash from Cullen.”

On 14 May 2010, Julian again raised the prospect of the JV making an investment in Berlin residential property. In September 2010 Julian informed Cullen of an investment opportunity, known as ‘Project Attila’, relating to a mixture of residential and commercial properties in Berlin. On 13 November that year Julian sent Eric an email relating to this deal, which involved Mr Kahmann and a company called Pramerica. Julian said that the capital needed was covered by Sasha, Mr Kahmann and “his family” (being Mr Kahmann’s family) but suggested that “Kauri” could put up one third of the equity (stated to be €1 million) for 20% of the profits.

In oral evidence Julian accepted that although he expected to be investing in this deal himself, he could not risk disclosing it, which was “a little bit misleading” but justified. He also accepted that the basis of the offer in the email would have involved a lesser return than he and Mr Kahmann would achieve. (Footnote: ⁴⁹) When Eric questioned why this was so, given “the clear commitment and hard work you have done Julian…what am I missing here?”, Julian responded that Mr Kahmann was “the one who has financed all of this…” In cross-examination Julian accepted that this was untrue, but did not consider that it would be fair to expect him to donate half his interest as Mr Kahmann’s joint venture partner to Eric/Cullen. (Footnote: ⁵⁰)

On 22 November 2010 Julian emailed Mr Gibson and Eric stating that KIL was “extremely low on funds” and had been unable to meet his salary for the previous three months. Mr Gibson replied suggesting a board meeting with Eric, one of the purposes of which would be to enable Mr Gibson and Cullen to obtain clarity on what the arrangements were between Julian and Mr Kahmann, and what the JV stood to get from them. On 3 December 2010 the meeting took place between Eric, Julian and Mr Gibson at Eric’s apartment in London. The same day Mr Gibson drew up a summary of what had been discussed and agreed. His note included at item 6: “Julian to negotiate/formalise Kauri’s arrangement with [Mr Kahmann].”

Eric responded to Mr Gibson on 5 December 2010: “Please ensure it is acknowledged kauri has all or any fees generated by Julian/kauri past and future and that any debt to Julian …is also extinguished.” Julian replied by email 30 March 2011:

Julian’s personal interest came to light following Mr Gibson’s querying a payment of £88,000 made by Julian into the bank account of KIL which he then sought to have transferred into his personal account. Mr Gibson emailed Julian on 12 March 2014 asking how the payment of £88,000 arose and why the monies were due to Julian personally when they appeared to be from an entity funded by KIL. Julian’s emailed response the same day stated that the source of the funds, KG1, was 100% his own entity and that "the money is loan to my Guernsey entity which I will use to re-pay another loan. It was sent to [KIL] by mistake (my own mistake)." A few days later Julian accepted that this was not true.

On 21 March 2012 Julian sent an email to Eric and Mr Gibson stating:

As already noted, Julian no longer maintains that he received an email or any other written authority from Cullen. His case is that authority was provided in the course of what he accepts must have been a telephone conversation with Mr Archer on 19 or 20 January 2009.

As for Julian’s original explanation for the £88,000, namely that it was a loan to KG1 to be used to repay another loan owed by Julian, in an email on 25 May 2012 Julian stated: “That that was a lie by me. I said this before I decided to disclose my investment.” The Defence also accepts that the explanation was false. (Footnote: ⁵¹) However, in cross-examination Julian gave an account which was more nuanced. He appeared to say that although his explanation was not accurate he was not aware or fully aware of its inaccuracy, and he maintained that his references in the email of 25 May to having lied, related to his failure to disclose his personal interest. (Footnote: ⁵²)

Julian has stated that his personal investment in the German Opportunity was about €100,000, which he borrowed, and that the return he obtained was €320,000. Out of this he has said that he paid back the initial loan, paid certain investors, retaining €110,000 himself out of which he gave Quentin €45,000 as compensation for his reduced salary.

The final breakdown in the relationship between Eric and Julian followed swiftly upon the disclosure of his personal investment. In about June 2012, Julian's salary from KIL was stopped, and the management fee that KIL had been receiving from one of the existing projects (Roebuck) ceased. Julian was informed that Cullen considered there to have been an Event of Default pursuant to the Facility so that KIL's ability to draw down was restricted. In effect, KIL ceased to carry on business.

On 18 September 2012 Mr Gibson emailed Julian requesting full disclosure of his participation in the German Opportunity, including details of the deals done and Julian's interest in them. Julian responded that Mr Kahmann would have to be involved in any disclosure.

In evidence Julian stated that from the beginning of 2009 he had sent at least four emails to Cullen specifically referring to the German Opportunity but that any reference to it was ignored by Cullen, and that despite all the consideration of it by Cullen and himself during 2008, after 22 January 2009 no one from Cullen ever asked him what had happened. Julian stated that the simple fact was that Cullen did not want to be involved in the German Opportunity, and that having told Mr Archer that he, Julian, would try to invest personally, he had never heard anything further from Cullen or Eric on this topic until years later.

In the light of the above, the following main issues of fact arise:

It is convenient to set out my conclusions on these factual issues at this stage.

It appears from the summary of the HoA’s main terms, set out earlier in this judgment, that the parties originally contemplated that KIL would be the vehicle for any investments by the JV. However, it is common ground that this never happened, and that in fact all investments were held outside KIL in separate SPVs, ultimately for the benefit of Eric’s and Julian’s respective private offshore trusts. This appears to have been partly as a result of tax and legal advice, and also because (according to Julian’s evidence) it was recognised as necessary to hold the interests, in which third party investors would also be likely to have shares, in a separate vehicle which would not be “contaminated” by the financial standing or particular ownership of KIL.

It appears that one result of tax advice received was Eric/Cullen’s insistence that Cullen (and therefore KIL) should not have a beneficial interest in an investment. In his witness statement, Eric said that although the HoA provided for KIL holding or being the vehicle for property investment,

At one point it was contemplated that an agency agreement might be entered into appointing KIL as agent to locate properties on behalf of Eric and Julian’s trusts, but it is common ground that no such agreement was ever finalised.

The way investments were arranged in practice was described by Quentin in his evidence as follows:

In his witness statement Julian does not assert that there was any formal agreement to vary the HoA in this respect. In his evidence he states that “it was never intended that [KIL] would directly own any interest in the investments.” Then, in the next paragraph, he says “…well before the German Opportunity came to my attention, [KIL] had ceased to be a vehicle that made the equity investments on behalf of the JV parties. Instead, [KIL] became a vehicle that was used for the purpose of arranging investment opportunities for the JV with third-party funders or partners and then managed those portfolios, including the relevant SPVs, post-acquisition.” (Footnote: ⁵⁵)

There is substantial consistency between Eric’s and Julian’s evidence, and I am satisfied that although there was no formal agreement to vary the HoA so as to exclude KIL as a vehicle for investments of the JV, the parties to the JV agreed, at least in part as a result of tax and legal advice, that the normal arrangement for offshore investments would be that the interests would be held in an SPV rather than in KIL, and that KIL’s role would be limited to identification, review and management of the investments. This was what was in fact arranged in every case. Had the advice been that the most tax efficient way of holding a particular investment was to put it into KIL, then subject to making arrangements for third parties’ shares in the interest, that is probably what the parties would have done.

I therefore find the overwhelming likelihood to be that an investment by the JV in the German Opportunity would have been held in an SPV and not in KIL. It was also well-established between the parties to the JV that any equity interests generated by the JV should ultimately be held on a 50:50 basis by Eric’s and Julian’s respective off-shore trusts. In the light of this I accept that where there was a reference, in draft documents relating to the German Opportunity or otherwise, to KIL as holder of an investment, this was likely to be simply as “placeholder” for whatever SPV would be decided upon in the particular case.

That does not mean that KIL was removed from the picture. It remained the corporate vehicle through which the JV operated: it was admittedly the vehicle through which deals were identified and brought to the JV, through which they were reviewed and structured, through which tax and legal advice was taken and financing for deals was sourced, through which the projects were coordinated and ultimately managed from the JV’s side. It would bear any abortive costs and also, of course, it was the vehicle through which Julian, Quentin and others were paid a salary for carrying out these functions. (Footnote: ⁵⁶) It is also common ground that in so far as any shortfall funding for a deal was provided by Cullen, it would be provided by way of a loan to KIL, in order to avoid diluting Julian’s 50% share in the JV. I accept Quentin’s evidence that the funds would then be “on-lent” by KIL to whichever vehicle was intended to hold the interests on behalf of the off-shore trusts.

In my view, therefore, if shortfall funding had been provided by Cullen for the German Opportunity it is more likely than not that the funding would have been provided to KIL by way of a loan, thereby increasing KIL’s indebtedness to Cullen. The funds would then have been on-lent as described above, to be used in whatever investment structure had been put in place for the deal(s) in question. It is highly unlikely that any equity and profit corresponding to that investment in the German Opportunity would have been held by KIL at any stage, and correspondingly likely that the beneficial interests in the investment would have found their way to Eric’s and Julian’s off-shore trusts by way of SPVs, by-passing KIL. The latter would be likely to have received fees for whatever services it had provided and continued to provide, including ongoing management fees.

The history set out above shows that Julian was seeking shortfall funding for the German Opportunity from early April 2008 until early 2009. It also shows that Cullen’s offer of funding in June 2008 was not on the terms of the Facility, as requested by Julian, but on new terms which would require the new and all existing loans to be “rolled up” into a single loan with an interest rate of 27.5%. Thus, all existing loans, including an interest free loan of €260,000 advanced by Cullen for the purposes of earlier investments, would be subject to the new terms, and the Facility would be replaced. Therefore, neither the rate of 9% above the UK 90 day bank bill rate (shortfall funding under the HoA) nor the rate of 15% (advances under the Facility) would apply. The new terms would also apply to all future advances.

In evidence Eric was ambivalent as to whether these terms had ever been accepted by Julian. At first he thought not, then he changed his mind on the basis of the email exchange between Quentin and Julian on 20 August 2008. Julian said he did not accept the terms, and Mr Archer took the same view. Quentin’s email is a somewhat insubstantial basis on which to assert acceptance of such a fundamental restructuring of all KIL’s debt to Cullen. Quentin does not refer to any of the restructuring conditions, but simply to a drawdown of €200,000, which is the amount the parties had been negotiating since April 2008 – originally in the context of the amount still left in the Facility.

In the event it does not matter whether the terms were then accepted or not, as Cullen immediately attached a further pre-condition to any further funding, namely that KIL should provide “some comfort” to Cullen as to KIL’s cash position. This was later refined to be a requirement that KIL should be “cashflow neutral at a minimum”. Less than a month later the “offer” was apparently reduced from €200,000 to €100,000 and then increased to €150,000 in swift succession. However, the availability of the €150,000 was subject, in addition to the June 2008 terms, to the resolution of what was described in Ms Scown’s email of 17 September 2008 as a “raft of outstanding issues”. She later referred to this as “a condition precedent to any further advances.” In October 2008 an additional requirement, of payment of an annual management fee of £30,000, was attached to the availability of the €150,000. On 20 October 2008 Ms Scown told Julian that Cullen would not be in a position to advance anything until “post 31 December”. In December Ms Scown reiterated that the new funding would be on the June 2008 terms, including amortisation over 5 years and “roll up” of existing loans.

Julian expressed concern about the cost of the offered terms, and sought to persuade Cullen to exclude existing loans from them. This led to the meeting in New Zealand. No one suggests that at that meeting, or at any time thereafter, Cullen was willing to move from the new terms, or accede to Julian’s earlier request to exclude existing loans, or that Julian accepted the new terms. Mr Armitage thought that he had not done so. Mr Archer’s evidence, and the request in Julian’s 13 January 2009 email tend to confirm this.

In my view, it is clear that Julian did not accept the terms on offer at any time, and in particular did not accept the roll-up of existing loans into the new terms.

On the other hand, I do not accept that, at the meeting in New Zealand or in the subsequent telephone conversation between Mr Archer and Julian on 19 or 20 January 2009, Cullen refused funding outright, as might be implied from one reading of Julian’s 22 January 2009 email. It is more likely than not (and I so find) that on each of those occasions Mr Archer simply reiterated that funding would only be on the terms already stipulated by Cullen in the negotiations, including the roll up of existing debt. Neither Mr Archer nor Mr Armitage would have felt able to say otherwise without reference to Eric, and there is no evidence that Eric authorised a change of approach in that regard. Nor is there any reason to believe that it was likely to have occurred.

Whether the various pre-conditions for funding imposed by Cullen were ever actually accomplished to Cullen’s satisfaction, and/or whether funding would actually have become available, is open to doubt. Although in her email of 3 December 2008 Ms Scown stated that “We have forecast funds for Kauri CAB in the New Year…” this was subject to the new terms, which Julian indicated were not viable for KIL. Ms Scown herself calculated that to borrow €100,000 would cost KIL £56,000 per annum. It is not clear whether the annual management fee was included in that figure. Further, notwithstanding Ms Scown’s assurances in the same email about the ongoing preparation of loan documents by Cullen, Mr Armitage did not remember taking any of this forward at all in the pre-Christmas period.

In my assessment, the evidence shows on the balance of probabilities that Cullen were not at all enthusiastic about lending any more money to KIL, and that the June 2008 terms, together with the variations on those terms offered from time to time thereafter, were not calculated to be attractive to Julian, and indeed were such that Cullen must have appreciated that he would probably reject them. I find that they did not much care whether he accepted them or not, and that if anything they preferred that he did not. One bears in mind that these events occurred in the midst of the global financial crisis and at a time when Cullen was admittedly subject to cashflow constraints and when there had been substantial investment by Cullen into KIL with little by way of return.

The lack of enthusiasm of Cullen emerges from the evidence generally, including:

Cullen’s prevarication and the protracted nature of the negotiations following Julian’s initial request to draw down the remaining balance of the Facility, and again following the initial offer of funding;

various internal emails, including Mr Flay’s of 13 May 2008: "[r]ight now I have better places (or more needy places) to put the €197k so I want to say NO to them”; Eric’s email the next day: “If we decide further investment is not optimal what is the best alternative in terms of running the business down over time”; the emails of Ms Scown dated 21 and 25 August 2008: “Our recommendation is that we say no to a further drawdown at this time…..”; her email to Eric of 16 January 2009: "it was another draw on cash at this time with no prospect of any cash return in the short term"; Ms Scown’s suggestion to Eric and Cullen on 6 February 2010 that "we should let [Julian] and Quentin go" and that in any event it should be made clear to Julian that "there will be no cash from Cullen."

the unattractive terms of the June 2008 offer, and Cullen’s unwillingness to modify them in any significant respect;

Cullen’s reaction (or rather lack of reaction) to Julian’s email of 22 January 2009 recording his disappointment that “Cullen cannot provide the funds”, that he would seek “to raise capital privately to allow the deals to be acquired outside Kauri”, and that “This means that Kauri will not participate in the initial deals directly…” Cullen’s willingness to allow the first sentence of the email to go unchallenged is significant; and

the absence of any serious attempt to re-engage with Julian on the funding issue after that email – Eric’s offer of €40,000 was clearly not likely to be any more attractive, given that (as I find) it was only available on the same terms as the larger sums discussed during 2008.

To offer terms which are known to be so unattractive that they are likely to be unacceptable to the recipient of the offer, amounts in practice to a declining of funding. Under the terms of the HoA Cullen were perfectly entitled to decline to fund, and that, in my view, is what Cullen’s conduct, taken as a whole amounted to. Therefore, I find that they declined to provide shortfall funding for the German Opportunity. Whether, under the HoA, that amounts to a decision by Cullen “not to invest in a deal” and/or whether as a result KIL “has declined” after being given “first refusal” are questions to which I will turn in due course.

Even if Cullen were to be judged not to have declined to provide shortfall funding, the funding offered was not “on terms approved by each of [KIL] and Cullen” as specified in the HoA; nor was it on the “intended” interest rate set out therein.

I would add that I do not consider that Cullen’s conduct in the negotiations amounted to “bad faith” or a breach of the HoA or wider JV arrangements, as the Defendants have argued. At the time, neither Cullen nor Julian thought fit to take technical points about the terms of, for example, the Facility, or to raise the question whether there had been an “Event of Default”. Cullen took a hard-headed, commercial approach to further lending to an entity in which its confidence was wavering to some extent in the light of the general economic climate, and which admittedly had a cashflow issue.

It will be recalled that this meeting was held at Ms Scown’s suggestion following Julian’s strongly worded objections to the terms on which shortfall funding for the German Opportunity was being proposed. It is clear from both sides’ evidence that Julian gave a compelling presentation of the project at the meeting. Despite the fact that none of the Cullen witnesses (Messrs Archer, Armitage and Flay) had a clear recollection of the discussion, and although it is probable that there was some discussion about alternative investors if Cullen did not provide funding, I do not accept that Julian brought to their attention the possibility of him investing personally. I accept the evidence of Mr Archer that if this had been mentioned he would have remembered it as it would have been unusual, and of Mr Armitage that “it would have been straight back to Eric for a response.”

The Claimants’ evidence about the period between Julian’s email of 13 January and the receipt of his email of 22 January is not particularly satisfactory. Mr Archer and Ms Scown both seem to have had an odd reaction to the first of those emails, which they could not properly explain; Mr Archer could not recall whether he had contacted Eric about the meeting or Julian’s email; although Ms Scown had emailed Eric updating him about Julian’s request that funding be provided without the roll up of existing debt, Eric could not recall receiving her email or speaking to Mr Archer; finally, Mr Archer had only the dimmest recollection of the telephone conversation he believed he had had with Julian on 19 or 20 January.

Notwithstanding these deficiencies, I do not accept Julian’s evidence about the communication from Mr Archer. I have already found that, contrary to Julian’s testimony, Mr Archer did not tell him on 19 or 20 January that Cullen would not be providing funding (see above). I am also satisfied that Mr Archer did not, as Julian asserts, tell him then or at all that he was free to go ahead with the investment in a personal capacity. Because, as I have found, Julian had not brought that possibility to his attention at the meeting, investment by Julian in a personal capacity would not have been in Mr Archer’s contemplation. Also, I am satisfied that Mr Archer would not have authorised this without reference to Eric. If it had been raised with Eric, Eric would have been very unlikely to grant authorisation, as he confirmed in his evidence. It is clear that Eric did not do so. Of course, whether Julian needed authorisation is a separate issue.

There is, in fact, a considerable tension in Julian’s evidence, between his assertion that he raised the possibility of personal investment with the Cullen representatives in New Zealand, and his case that he did not disclose his personal interest to Eric or Cullen through fear of how Eric would react – a fear which on the evidence appears well-founded.

Further, although it is likely that at their meetings in London in January 2009 Julian and Eric discussed Julian’s raising capital “privately” for the German Opportunity, in the light of the material before me I accept Eric’s evidence that Julian did not mention that he was considering a personal investment in the project.

It is Julian’s evidence that his e-mail of 22 January 2009 was important and that he had sent a draft to Quentin for his consideration. He contends that in it he was referring to the fact that at the meeting in New Zealand the attendees had discussed the prospect of him raising capital privately and himself investing in the German Opportunity outside the JV. He points to the fact that he received no comment or questions about the contents of the email, or any indication that Cullen opposed the course of action proposed.

Ms Scown said that she understood the email to be indicating that Julian was going to proceed with the German Opportunity, which would not be a Kauri venture ie “not an Eric or Julian venture”. Mr Archer’s evidence, though less specific, appeared to be to the same effect. Eric’s evidence was that he did not recall seeing the email, had not responded to it, and did not believe anyone else at Cullen had done so. He said the statement about Cullen not being able to provide funds was inaccurate, and that Julian had made it up. He also said that the email’s wording was intended to mislead: Julian would know that Cullen would not understand the reference to raising capital “privately” to be a reference to Julian himself investing personally. Further, Eric did not understand “outside Kauri” to mean outside the JV, but simply outside KIL and in an SPV, as had occurred with the other investments.

The email was clearly carefully worded. It is ambiguous in several respects. The first sentence is more readily understood as stating that Cullen is not able to provide funds, in the sense of not having funds available. However, read in the context of the negotiations, including the email of 13 January, it could also perhaps be taken as recording that Cullen is not willing to fund on terms which are acceptable to Julian. It is clear that Julian had not succeeded in his request for funding to be provided without the roll up, and I have found that in the circumstances this was tantamount to a failure or refusal to fund. Alternatively, Julian did not approve the terms of funding, as required under the HoA. Notwithstanding Eric’s protestations in his evidence, the fact that no one at Cullen challenged the statement in the email tends to confirm that Cullen did not really take issue with the proposition as put by Julian, whichever interpretation was placed on it.

Another ambiguity is in the words “I will try to raise capital privately to allow the deals to be acquired outside Kauri.” Whilst it is possible, with emphasis on the “I”, to interpret this as meaning that Julian would be raising funds for his own personal investment, I do not consider that to be the natural meaning in the context. Nor do I accept that that is how Julian expected or wished the Cullen recipients to understand it. I accept Eric’s evidence that he understood it to be a reference to Julian raising shortfall funding from a third party investor. Had Eric or Cullen understood it in the first sense, it is inconceivable that there would not have been questions and quite probably objections from them long before March 2012 – Julian’s own evidence is that he did not disclose his personal investment in order to avoid “a bust up”. At the very least, Cullen would have wanted to know how conflicts of interest would be avoided or managed, as Julian must have appreciated. Had Julian wished to make his intentions clear he could easily have done so by using, for example, the words of the HoA: “in his own capacity” or “in his personal capacity”. The way in which he intended it to be understood is confirmed in his email of 20 February 2009: “We were not able to find a suitable replacement shareholder…CAB must now provide all equity…” Julian accepted that this was misleading, and that he could not risk disclosing his real intention to Eric.

The third ambiguity relates to the words: “outside Kauri”. The problem here is that all those involved in this case have tended to use “Kauri” as meaning the JV or KIL or a combination of the two. I do not accept that in the context of this email it would be reasonable to read the phrase as meaning within the JV but outside KIL, as Eric suggested. It is common ground that none of the equity interests of the JV had ever been held within KIL, and so for Julian to be meaning “outside KIL” would make little sense. It seems to me that, read with the rest of the email, the phrase “outside Kauri” should be taken to mean (and was intended to be understood as) “outside the JV, save to the extent that KIL is able to keep its foot in the door by providing services and generating management fees.” This is consistent with Julian’s email of 20 February 2009, and also seems to be aligned with the interpretation of Ms Scown and Mr Archer, who both appear to have understood “outside Kauri” to be a reference to the JV.

It follows that in this email Julian was informing Cullen that he would try and raise shortfall funds from a third party investor to enable the initial deals in the German Opportunity to go ahead without the JV acquiring a share in the equity, while preserving the possibility of equity investment by the JV in the future; start-up costs would be recovered by KIL and there would be some (at first, minimal) management fees by KIL being appointed to manage the deals. The email did not inform Cullen that Julian was contemplating an investment on his own behalf.

In the light of the evidence, including the material discussed earlier in this judgment, it appears that, although there is no evidence of any formal agreement between them, by at least about mid-February 2009 Julian and Mr Kahmann had a fairly advanced understanding of what Julian’s contribution to the first deals of the German Opportunity was going to be and what form it would take. It was at about this time that the institutional investor (Arminius) became committed and various other formalities were dealt with. However, it is reasonably clear that up until at least the 22 January email, and probably for longer, Julian kept open the option of Cullen participating in the form of shortfall funding, if Eric had a change of heart. Provided the money came from someone there is no reason to believe that Mr Kahmann would have cared much.

I accept Julian’s and Quentin’s evidence that many of the preparations for structuring and implementing the German Opportunity were continuing in the background in parallel with his negotiations with Cullen, and without regard to the identities of the ultimate investors, and that the draft documents which refer to Julian would be likely to have borne his name either as placeholder or nominee even if Cullen had provided funding. It is clear on the evidence that from Mr Kahmann’s (and Arminius’s) point of view Julian, and not Eric or Cullen, had been the point of contact with the Kauri side of the Kauri CAB venture from the start, and would have continued to be so if Cullen had funded it. This had also been the case with earlier projects: Julian was very much the front man and Eric/Cullen had been in the background.

It is also clear that Julian was keeping his options open, one of which (increasingly the main one) was that he would invest his own funds. That had not been his original intention or preferred option, otherwise he would not have strived as hard and as long as he did to persuade Cullen to invest. I do not accept the Claimants’ suggestion that in his email of 14 October 2008 Julian was encouraging Cullen not to proceed with the proposed investment. On the contrary, in my view this was aimed at pressurising Cullen to come up with the shortfall money.

In these circumstances, and despite the points forcefully made by the Claimants in their written closing submissions in reliance upon various preparatory and other documents originating in January and February 2009 and put to Julian and Quentin in cross-examination, I am not satisfied on the balance of probabilities that Julian was legally committed to invest in, or acquired a personal interest in, the project at any time before April 2009, although, as I have said, he and Mr Kahmann do appear to have had a joint expectation before then, and Julian was very much keeping his options open.

It is appropriate to consider at this stage two further specific issues, each of which raises questions of construction, namely, whether Julian was entitled under the terms of the HoA to make a personal investment in the German Opportunity, and whether he was under a contractual duty to disclose any such interest.

As already mentioned, the question whether Julian needed authorisation from Cullen to make a personal investment in the German Opportunity is a separate issue from whether he received authorisation – which I have found he did not – and must be considered in the light of the express terms of the HoA, set out earlier in this judgment. The Claimants submit that Julian was not permitted to participate in the German Opportunity in a personal capacity; the Defendants submit that he was.

The HoA provides that if Cullen “decides not to invest in a deal” then Julian has the right to “undertake the deal in his own capacity" subject to the other terms of the HoA. Those other terms, so far as relevant, state that Julian is permitted to enter into property transactions “in his personal capacity or otherwise as long as he has given [KIL] first right of refusal and [KIL] has declined and as long as the transactions concerned will not materially affect his duties as CEO of [KIL] or result in a conflict with [KIL], or with the prior written consent of Cullen.”

It is clear from the positioning and context of these provisions within the HoA itself, and from their wording, that a decision by Cullen not to provide shortfall funding for a deal represents a decision by Cullen “not to invest in” that deal, and creates a potential for Julian to enter the deal in his own capacity subject to the other terms. I do not understand either side to have argued otherwise.

Under “the other terms” KIL must be given “first right of refusal” and must have declined. Is a decision by Cullen not to invest (ie not to provide shortfall funding) the same thing as, or does it inevitably involve, KIL declining to involve itself in a property transaction of which it has been given first right of refusal? In other words, are these in reality one and the same decision? The Defendants contend that they are, and therefore that KIL must be taken to have “declined” if Cullen did not in the event decide to provide shortfall funding. They submit that there was no scope for any separate decision by KIL in respect of the same opportunity. In my view this analysis is not correct.

Although the decision-maker in Cullen’s decision not to invest by providing shortfall funding was in reality Eric, and although Eric as owner/controller of Cullen would also have a de facto role in a decision by KIL, they are distinct decisions. Cullen and KIL are different entities with different roles. Moreover, the HoA does not envisage that KIL/the JV will participate in a property project only where Cullen provides shortfall funding. On the contrary, the HoA expressly provides that funding “will be sourced, wherever possible, from third party funders.” It was not suggested by the parties that that provision had been removed or varied. So, the HoA envisages that deals in which KIL participates will, wherever possible, proceed without shortfall investment by Cullen. Cullen is given an untrammelled discretion whether to provide shortfall funding or not. It is in my view clear that such a decision is distinct from a decision by KIL that the JV should not participate in a property deal.

The questions then arise: (1) whether KIL was given “first right of refusal” of the German Opportunity; and (2) if so, did KIL decline?

The Claimants submit that Julian did not give KIL first right of refusal in respect of the terms on which he ultimately made the investment in a personal capacity. In particular, they argue that the investment required of Julian was significantly more modest than he had led Cullen to understand would be the case. I do not accept that this means that a first right of refusal was not given. The German Opportunity was a project which appeared to be evolving during the lengthy period when Julian was seeking to interest Cullen in funding it. In the light of all the evidence, I find that over that period KIL (and Cullen/Eric) were given sufficient information by Julian to make a reasonably informed decision as to whether the German Opportunity was one in which they wished KIL to participate, and that KIL was given first right of refusal within the meaning of the HoA.

On the other hand, in the light of the evidence I am unable to conclude that KIL can be taken to have “declined” to participate, as the Defendants (relying in the main upon the circumstances relating to Cullen’s shortfall funding decision) contend. As I said earlier, Julian’s emails of 22 January and 20 February 2009 should be read as proposing to Cullen that although the JV would not at first be taking an equity interest in the German Opportunity, KIL would be involved to the extent of providing services, lending its name to the project and earning management fees. This proposition was not rejected or opposed by Eric or Cullen, and was to all intents and purposes implemented with their concurrence. The parties’ communications and conduct in the following weeks and months confirm their acceptance that KIL was participating in the German Opportunity to that extent: see for example the communications in November and December 2010 referred to earlier in this judgment, in which it is recognised that there existed a fee-generating relationship between KIL and those involved in the German Opportunity, which Eric was anxious to see formalised in an agreement with Mr Kahmann and his companies.

This conclusion that KIL did not “decline” the German Opportunity is sufficient to preclude Julian’s entitlement under the HoA to make a personal investment in the project without Cullen’s prior written consent. However, the HoA contains further conditions which I will now consider.

It was a further condition that a property deal in which Julian wished to involve himself in a personal capacity “will not materially affect his duties as CEO of [KIL] or result in a conflict with [KIL]”. Although the Claimants formally allege that Julian’s duties as CEO of KIL were affected by his personal investment in the German Opportunity, their argument in that regard was not developed and their submissions centred on the conflict of interest issue. They contend that through his personal investment Julian (and also Quentin) was clearly in a position of conflict.

The Claimants refer to the fact that both took management positions in the German Opportunity’s structure and expended significant time on its interests. They submit that having an interest in a competitor (Kauri CAB Management GmbH), and the fact that Julian was in partnership with Mr Kahmann, created a conflict when it came to their introduction of particular property deals and other opportunities from which, for example, management and/or other fees might be derived. Further, the Claimants point to the fact that Julian and Quentin procured that KIL continued to provide services, expended costs, and lent its name for the benefit of the German Opportunity. This, the Claimants submit, advanced Julian’s (and Quentin’s) own interests rather than KIL's.

In order to demonstrate that the conflict of interest caused Julian (with Quentin’s assistance) to act in his own rather than in KIL’s interests in pursuing the German Opportunity, the Claimants point to the following: his failure to inform Cullen or KIL of his ability to find the necessary funds to invest personally; his failure to offer to invest pro rata with Cullen - an option expressly envisaged in the HoA; his failure to seek third party funding to enable the JV to invest itself; his use of KIL to make payments towards the German Opportunity (on occasions without apparent reimbursement, eg the Confiance Limited invoices in respect of KG1 (Footnote: ⁵⁷)), thereby enhancing his own interest in the project; transferring to the German Opportunity corporate vehicles paid for by KIL (including KG1, Kauri Holdings, Kauri CAB German Residential and Kauri CAB Holdings GmbH); his procurement of KIL's management, structuring and other services, and use of its name, without obtaining any agreement or guarantee of payment, but rather in return for whatever fee Kauri CAB chose to pay (with such fees being in any event used to pay Julian’s and Quentin’s salaries, so that KIL could continue in business to safeguard Julian’s visa); his failure to seek to negotiate some form of profit or “carry” interest for KIL, to reflect its work for the benefit of the German Opportunity.

The Defendants reminded me that I am here dealing with “conflict” in the context of a specific contractual provision, which involves a question of construction, so that the analysis is not necessarily the same as in, for example, s.175 of the Companies Act 2006 (“the 2006 Act”). That is theoretically correct, but Mr Davies did not really point to any specific factor which persuaded me that the distinction is material in the present case.

The Defendants contend that no conflict arose, and that KIL’s interests were substantially aligned with Julian’s. They pray in aid Mr Gibson’s acknowledgment in cross-examination that for Julian to spend time assessing property deals for Kauri-CAB was “a proper thing … to be doing”. Their submissions may be summarised as follows: it was in the best interests of KIL for Julian to be working to identify and promote further property projects for the German Opportunity, as these were a source of opportunities for the JV to invest and/or earn fees. Julian’s personal involvement in the German Opportunity represented the best chance for KIL to stay afloat. This was because: it enabled the costs of incorporating and maintaining SPVs acquired for existing investments, as well as other sunk costs incurred by KIL, to be reimbursed or transferred, thereby relieving KIL of what were, in effect, liabilities; it allowed KIL to charge management fees for services provided for the German Opportunity, generating a much-needed income stream; it preserved a relationship with Mr Kahmann and other investors, and allowed the “Kauri” name to remain in use in connection with the German Opportunity, thereby promoting the prospect of future investment opportunities.

With regard to the latter point, the Defendants point to the fact that in his evidence Mr Gibson accepted that "bridges would have been burnt" with Mr Kahmann if Julian had not proceeded with his investment, and that Mr Gibson also agreed that Julian did generate further investment opportunities for the JV through his relationship with Mr Kahmann.

The Defendants also contend, both here and in the context of their response to the Claimants’ allegation of breach of director’s duty under s.175 of the 2006 Act, that no conflict of interest arose because the German Opportunity was not an opportunity for KIL, that company not being in the business of acquiring equity interests in property investments, and being in effect no more than a management company. I reject this argument for the reasons set out later in this judgment when I come to consider the Claimants’ primary case, based on alleged breach of director’s duties.

Finally, in relation to the HoA, the Defendants submit that the mere fact of Julian holding a personal interest could not constitute an impermissible conflict for the purposes of the HoA, as if that were so, there would be no scope for the operation of the contractual provision which enables him to take such an interest.

I do not accept the Defendants’ contention. In my view an obvious conflict of interest arose in Julian becoming a personal investor in the German Opportunity in circumstances where KIL itself (and through it the JV) was going to remain involved as a service provider and as a source of certain payments towards that project. This meant that Julian was capable of benefiting (other than through his shareholding in, and employment by, KIL) from services provided by KIL, viz through the enhancement of his personal equity interest. Further, the size of that personal interest was capable of being affected by the level of charges made for services provided by KIL to the German Opportunity, thus providing an incentive for Julian to be less protective of KIL’s interests, for example in seeking to obtain the most advantageous fees and commercial arrangements generally, than would be the case if no such personal investment existed. An additional element of conflict arose through Julian’s interest in Kauri CAB Management GmbH which, as its name suggests, provided similar services and therefore competed with KIL in obtaining, for example, management fees in relation to property deals introduced into the German Opportunity. On any view, Julian’s loyalties and interests were clearly liable to be affected by factors unrelated to his position of CEO and shareholder of KIL. In these circumstances Mr Gibson’s recognition that it was “proper” for Julian to spend time assessing property deals for Kauri CAB does not assist the Defendants, since Cullen were aware and had accepted that he would be carrying out that role within KIL, in accordance with the 22 January and 20 February 2009 emails, and generally.

The fact that KIL and the JV may have benefited, in one or all of the ways urged by the Defendants, from continued participation in the German Opportunity misses the essential point that a clear conflict of interests still existed. This is not to say that it might not have been capable of being managed in such a way that consent might possibly have been given by Cullen. However, no such possibility arose as a result of Julian’s concealment from Cullen of his personal investment.

As to the Defendants’ argument that if merely holding a personal interest constitutes an impermissible conflict for the purposes of the HoA there would be no scope for the enabling provision to operate at all, this fails to take account of the fact (as I have found) that KIL remained involved in the German Opportunity in the ways described. The HoA only permitted Julian to acquire a personal interest if, in addition to the other conditions, KIL was not participating in (had declined) a particular deal. In such a case the risk of a conflict arising, although still possible, may well be much less.

In reaching these conclusions I have not found to be proved on the balance of probabilities any of the allegations said by the Claimants to be actual manifestations of the adverse effects of Julian’s conflict of interest. For example, it is quite possible that, by the time Julian had abandoned hope of obtaining funding from Cullen, it may have been too late to seek third party funding. Furthermore, his transfer of certain companies to the German Opportunity (with reimbursement of incorporation costs) may well have been beneficial to KIL by relieving it of unwelcome liabilities.

In the light of these conclusions, under the terms of the HoA/JV agreement Julian was not entitled to make (and was prohibited from making) a personal investment in the German Opportunity without Cullen’s consent.

It follows from my earlier conclusions that, contrary to Julian’s evidence, at no time did Cullen give consent, whether oral or written, express or implied, to Julian taking a personal interest in the German Opportunity. In those circumstances Julian was in breach of contract in so acting.

I now consider whether Julian was under a duty by virtue of the terms of the HoA (and quite aside from any statutory or fiduciary duties, which are dealt with later in this judgment) to disclose to Cullen and/or to KIL his personal interest.

An implied term of good faith is pleaded by the Claimants, who argue that this would encompass a requirement of disclosure of his personal interest. The Defendants object on the basis that this is to seek to introduce fiduciary obligations through an inappropriate mechanism of implication: either there was a fiduciary relationship, along with whatever obligations that would entail, or one should apply orthodox contract principles to the implication of an obligation of good faith in respect of specific aspects of the contractual relationship. In the Defendants’ contention, the only scope for such an implication is to imply an obligation on Cullen to negotiate shortfall funding in good faith, of which obligation they say Cullen was in breach, thus releasing Julian from his obligations under the HoA and entitling him to pursue a personal interest regardless of the contractual terms.

On the last point, I have already found that Cullen was not guilty of bad faith or any other breach of contract in its conduct in negotiating shortfall funding for the German Opportunity.

In view of my conclusions below on Julian’s fiduciary duties as a director of KIL, I can deal relatively briefly with the issue whether he was subject to (and in breach of) a contractual duty to disclose his interest. In my judgment, whether or not a broader obligation of good faith is to be implied into the JV agreement/HoA, the well-established conditions for the existence of an implied term are satisfied at least in respect of the narrower disclosure aspect that such an obligation might well include. In order to give business efficacy to the contractual provisions and the criteria relating to Julian’s entitlement to enter into a deal in his personal capacity, it is necessary that he should inform Cullen and KIL (in practice, Eric) of his intention to make such a personal investment. Were he not required to do so then, unless and until his personal interest came to light, he would be the sole judge of whether his duties as CEO were affected and whether a conflict of interest for the purposes of the HoA had arisen. I do not consider that the parties could possibly have intended that to be the case.

I therefore conclude that the HoA/JV agreement was subject to an implied term requiring Julian to disclose his personal investment interest, of which he was in breach.

In these circumstances Cullen is, in principle, entitled to an award of damages for breach of contract against Julian. On a normal approach to quantification this might be of little more than academic interest to Cullen, since it is not clear that the latter has suffered any loss by reason of the breaches. With that in mind, the Claimants point out that in exceptional cases the court may award damages for breach of contract on an alternative basis of disgorgement of profits, in reliance on A-G v Blake [2001] 1 AC 268, or on the basis of an hypothetical bargain, such as referred to in Experience Hendrix LLC v PPX Enterprises Inc [2003] EWCA Civ 323, at paragraphs 44 and 58.

However, the Claimants have not made detailed submissions on the criteria for adopting one or other of such alternative modes of assessment of damages. They have indicated the likelihood that, if successful on their primary case of breach of directors’ duties, they would elect for an account to be taken for the benefit of KIL. I therefore say no more about contractual damages at this stage. Should it be appropriate, further submissions may have to be made in due course.

I have dealt with certain issues that have arisen in relation to Julian. At this stage it is convenient to outline Quentin’s involvement in KIL, to refer to specific matters which were put to him in the course of his cross-examination, and to make certain findings on the evidence.

Quentin qualified as a lawyer in New Zealand. He worked for KIL from October 2005 until May 2010 through his consultancy company, Praxus Consulting Limited. From May 2010 he was employed by KIL in a personal capacity until August/September 2010 when his employment ceased and he started full-time work with a well-known High Street bank. It is Quentin’s evidence that he has an intimate knowledge of what happened at KIL over this period, and that his work was central to the setting-up of the various subsidiary companies, SPVs and trust structures utilised by the JV.

Quentin was appointed as a director of KIL in April 2007, when Julian and Eric were already directors. In their pleadings the Claimants assert that Quentin remained a director of KIL and took part in the management of KIL after September 2010. However, his evidence is that from then on he had no further involvement in KIL’s business, was no longer receiving any salary from the company, and had no reason to remain involved after becoming employed full-time by a High Street bank. He states that at the time he left KIL he had asked Julian to remove him as a director but this was not done, and he remained on the record as a director although he no longer had anything to do with the company. However, he accepts that in November 2013 he attended and voted at a board meeting called to decide whether KIL should bring legal proceedings against Julian and himself. Apart from that one instance, there is no evidence that he had any involvement with KIL after he left in September 2010, and I accept his evidence on that point.

Quentin described the management of KIL as being very informal, with no board meetings in the normal sense. When they did take place they were often conducted purely on paper, in order to deal with the execution of property transaction documents, for example, asset management agreements. All matters such as strategy, long term goals and planning were discussed and agreed between Julian and Eric as the two equal partners in the JV, along with input from the Cullen management team where necessary. He described how Julian and Eric discussed and agreed these matters by email, on the phone or in person, and stated that he was never directly involved in such discussions, although he was sometimes copied into their emails so that he could be kept in the picture as to what had been decided. Quentin said he could not recall Eric ever emailing or telephoning him directly, and only recalled him visiting the KIL office once while he worked there. He doubts whether Eric even knew he was a director until the legal dispute began. He stated that he was not invited to a board meeting held in December 2010, after he had left KIL, and gave an example of Eric using KIL to facilitate a deal without any disclosure to him.

Quentin states that his involvement in setting up the holding structure for the German Opportunity was mainly work of a legal and company secretarial nature, such as liaising with external legal and tax advisers, offshore trust administrators and others. He states that it was never part of his role to bring investment opportunities to the JV – that was solely Julian’s function.

Initially all his work on the German Opportunity was carried out on the basis that Julian and Eric would be the ultimate beneficiaries of the proceeds of the project through the vehicle which had been chosen to hold the JV’s interest in it, namely KG1. Beyond that vehicle was the structure which allowed the benefit to be transferred up to each of their respective trusts. Quentin said that that aspect of the structure had changed when it became clear that the JV was not going to take an equity interest and that Julian was planning to invest personally. However, he stated that had Eric changed his mind even at a late stage, that could have been accommodated within the arrangements.

Quentin’s evidence was that in January 2009 Julian had told him that Cullen had confirmed at the meeting in New Zealand that it would not be providing shortfall funding for the German Opportunity, and that Cullen had consented to him seeking to invest personally in the project. Quentin said that soon afterwards Julian had sent him a draft of the 22 January 2009 email to review. He understood it to be recording that there had been a discussion between Cullen and Julian, as a result of which Cullen were aware of his intention to try to raise the money so that he could invest outside the JV.

Quentin said he would have expected the recipients of the email to question the reference to “as discussed” if no such conversation had taken place or if there was any ambiguity about the content, in particular about the deals being acquired “outside Kauri”. As far as he knew no one had done so. Quentin stated that he had no reason to discuss Julian’s personal investment in the German Opportunity with Cullen, as he believed they were already aware of, and had approved, it. He knew that Julian had negotiated a provision in the HoA that would allow him to pursue opportunities that were rejected by Eric, and that was what he believed had occurred here.

Quentin was cross-examined at length about his belief that Julian had received a green light from Cullen to seek to invest personally. He remained adamant that this is what he had been told by Julian at about the time the latter returned from New Zealand, and said that the lack of any push-back from Cullen in response to Julian’s 22 January 2009 email reinforced that belief.

Having heard Quentin in the witness box over two or three days, and in the light of all the evidence, I do not conclude that Quentin is untruthful in this regard. Quentin’s role in KIL and the JV was different and distinctly subordinate to that of Julian, who was a co-owner with Eric of the JV/KIL. Generally speaking, Julian was Quentin’s source of information and instructions. Julian had the relationship with Eric and Cullen on all matters of company policy and strategy. Quentin’s role was very much that of a back-room worker who obtained legal and tax advice and who executed, in relative isolation from wider policy decisions, the legal formalities required to implement arrangements and transactions which had been agreed upon and framed by others. That he was told by Julian, and believed, that Cullen had sanctioned a personal investment, I find sufficiently plausible to accept his evidence on the point, notwithstanding the familial bonds that they may have had as brothers.

Quentin said that setting up the structure which it was originally envisaged would hold the interests of the JV in the German Opportunity, had involved taking advice on structure and tax. The invoices for this may have been made out to KIL, because part of KIL’s role was to set up the holding company on behalf of the intended ultimate beneficial owners, Julian and Eric, and because it was expected that KIL would receive management fees. Once it became clear that the JV was not going to take an equity interest in the German Opportunity, he and Julian had arranged for KIL to be reimbursed.

It is common ground that certain expenses incurred by KIL were reimbursed by Kauri CAB in about March 2010, including fees for the incorporation of a number of Luxembourg companies, originally brought into being for the purposes of an existing JV investment (the ABC Portfolio). This cost was transferred to the German Opportunity, along with the continuing financial liability of maintaining those companies.

It was established in the course of cross-examination that Quentin had approved for payment four invoices from Confiance Limited, a trust and corporate services provider based in Guernsey. Quentin acknowledged that the invoices in question, dated between about September 2009 and March 2010, were for services by Confiance on behalf of KG1, the vehicle for Julian’s interest in the German Opportunity. Quentin accepted that KIL’s bank statements appeared to show that these invoices had been paid by KIL. He stated that his endorsement on the invoices simply indicated that they were fit to be paid, in the sense that the services had been carried out and payment was due. He had not made the payments and was not able to identify who had actually done so. No documentary evidence has been adduced to show that KIL was reimbursed these particular amounts. Quentin’s evidence was that Julian had told him that everything had been reimbursed. Quentin’s endorsement on the March 2010 Confiance invoice was on 25 May 2010, and his work with KIL ceased altogether in September 2010.

Quentin was also asked about an email dated 28 January 2010 from Ms Scown to Julian, and copied to Quentin, in which Ms Scown queried two of the Confiance invoices. Julian’s reply, also copied to Quentin, stated that the invoices related to “our Guernsey holding SPVs”. Quentin accepted that Julian’s reply was not accurate given that Cullen had not, in the event, invested in the German Opportunity. Quentin said that he had no recollection of ever reading this email exchange, which was not directly addressed to him and with which he was not required to deal.

Neither the Confiance invoices, nor KIL’s bank statements recording the payments, nor the email exchange with Ms Scown appear to have been put to Julian when he gave evidence. The invoices and KIL’s bank statements recording the payments by KIL were not in the original trial bundles and were only introduced in evidence during Quentin’s cross-examination. The evidence is insufficient to establish on the balance of probabilities that Quentin must have taken note of the contents of this email exchange between Julian and Ms Scown, given that the query was directed to Julian and that Quentin was only copied in. I do not therefore conclude that he was aware of what appears to be an untruthful answer.

Quentin told the court that there was no question of he and Julian doing anything behind Cullen’s backs, as the Claimants allege. He said that Cullen had full access to their e-mails. He and Julian shared an office with several Cullen employees, including Mr Gibson, and openly discussed the work they were doing on the German Opportunity. Cullen were fully aware that they were working on that project as well as managing the JV’s various investments. No issue was ever raised about it. Quentin said that as a result of the financial crisis many of the existing JV investments were distressed and it was necessary to work long hours on a greatly reduced salary in order to salvage as much as possible for the benefit of KIL/the JV. He said that Cullen knew how hard both he and Julian were working to achieve this. From his perspective, it was hugely in his interest that KIL survived and did well, as it was his sole occupation. Therefore, he says he was strongly motivated to act in the best interests of KIL, which he believed he did at all times.

In the light of all the evidence I am not satisfied on the balance of probabilities that Quentin was consciously a party to Julian’s concealment from Cullen/Eric of his personal investment. In so finding I have taken account of the many points made by the Claimants which are said to indicate the contrary, including for example the following, which were emphasised by Mr Collingwood: the replacement of Julian’s name by a reference to Switzerland or “Swiss” in certain fund flow documents, the copying to Quentin of Julian’s emails of 22 January 2009, 20 February 2009 and 14 May 2010, and the location of Julian’s investment within the structure set up for the exploitation of the German Opportunity, ie. behind Avey. These, and the other points relied upon, whether taken together or otherwise, are not in my view sufficient to establish Quentin’s knowledge of Julian’s concealment of his investment from Cullen.

Quentin’s evidence was that in mid to late 2009, a few months after Julian had invested in the German Opportunity in April 2009 and well after Cullen had decided not to provide shortfall funding, Julian promised him 20% of his net profit from the German Opportunity, assuming that it made money, which was not guaranteed and would not in any event materialise for several years. He said that on 8 March 2012 he received €64,000 from Julian.

Quentin emphasised that at the time Julian invested personally in April 2009, Julian had not made him any such promise, and that this did not happen until months later. The promise, therefore, played no part in his decision to work on the German Opportunity. His sole motivation was that it was in KIL’s interest as it created a chance for KIL to survive.

Quentin insisted in cross-examination that all he had from Julian was a promise which he did not regard as legally binding on Julian. Nor did he regard this as an “interest in” the German Opportunity, still less as a direct personal interest in it. He considered there was no conflict of interest by reason of this promise, as his work for the project was in complete alignment with his obligations to KIL: his involvement in the project helped KIL obtain much-needed income through management fees from Kauri-CAB, as well as keeping alive the JV’s potential to invest in the project later.

Quentin accepted in cross-examination that as a fixed percentage, his promised share of profit would vary with costs incurred by KG1. He also stated that he had never asked for, or been given, authorisation to have an interest in the German Opportunity.

The Claimants contend (1) that the Defendants dishonestly conspired and combined together to injure KIL and/or Eric and/or Cullen by unlawful means by diverting to Julian an interest in the German Opportunity; (2) that, by their conduct in relation to the German Opportunity the Defendants both breached duties which they owed as directors and/or trustees of KIL, and Julian breached duties which he owed to KIL as an employee, and/or contractual and/or fiduciary duties which he owed to Cullen and/or Eric pursuant to the JV; (3) that by reason of the alleged wrongdoing, each of the Claimants has suffered unspecified loss and damage.

The prayer for relief as set out in the consolidated particulars of claim is extensively pleaded, but in his closing submissions Mr Collingwood, who appeared for the Claimants, explained that the relief sought was essentially an account of profits or damages/equitable compensation (with an enquiry as to damages) at the Claimants’ election, together with directions for the provision of such information by the Defendants as would enable the Claimants to make an informed election.

The Defendants, represented by Mr Davies, dispute the claims in their entirety.

The claims are complicated by the fact that the main protagonists wear more than one hat simultaneously. Eric is executive chairman and effective controller of Cullen, as well as being a director of KIL. Cullen owns 50% of the shares in KIL and is a party to the HoA. Julian is CEO of KIL, 50% owner of the company, and the counterparty to the HoA.

The claims of Eric and Cullen mirror each other, and are alternatives. It appeared at one point to be common ground (and is, in any event, clearly correct) that Cullen rather than Eric was party to the HoA and the wider joint venture arrangements, and that Cullen rather than Eric should be treated as the proper Claimant in respect of those claims which are brought by them in the alternative. Eric’s interests were held through his effective ownership and control of Cullen, which was the 50% shareholder in KIL and the contractual counterparty to the HoA which governed the JV. Despite his undoubted power and influence over and through Cullen, I see no real scope for Eric to be preferred to Cullen in respect of any of these claims. This means that Eric should not be regarded as a separate Claimant, and we are concerned only with Cullen’s derivative claims, and Cullen’s personal claims.

The Claimants’ primary case, as developed in their written and oral submissions, is that the German Opportunity was an opportunity for KIL; and that Julian and Quentin acted in breach of their directors' duties to KIL by personally exploiting and enjoying the profits of the project without the fully informed authorisation of KIL or Cullen, thereby placing themselves in a position of conflict of interest, and by failing to disclose the same. Second, and in the alternative, (Footnote: ⁵⁸) the Claimants contend that the relationship between Julian and Cullen and/or Eric was one of trust and confidence, such that it gave rise to fiduciary duties owed by Julian to Cullen and/or Eric, which were infringed. Third, the Claimants allege breach of the HoA by Julian (a claim with which I have, of course, already dealt); and fourth, unlawful means conspiracy between Julian and Quentin to divert the German Opportunity away from KIL for their own benefit.

The Claimants submit that the apparent complexity and interwoven nature of the claims as pleaded are the result of the approach taken by the Defendants during the investigation and proceedings, by raising legal technicalities to create confusion. However, the Claimants state that in essence the claims are simple. Broadly speaking, in relation to Julian they contend that he was not authorised (whether by KIL, Cullen or Eric) to take a personal interest in the German Opportunity, nor was he permitted to do so under the terms of the HoA. The precise terms taken by Julian were not offered to KIL, Cullen or Eric. None of KIL, Cullen or Eric declined to invest: rather they offered terms and sought to invest. Julian did not offer to fund the project on a pro rata basis. He did not disclose (and in fact took steps to conceal) his personal investment, the taking of which gave rise to a conflict of interest.

In relation to Quentin, the essence of the Claimants’ case is that through Julian he took an indirect personal interest in the German Opportunity, which he was not permitted or authorised to do, which placed him in a position of conflict with respect to KIL, and which was an interest resulting from his position as a director of KIL. Quentin also had an indirect interest through his brother's interest in so far as it affected his loyalty to KIL. Further, Quentin assisted Julian in taking and concealing Julian’s personal interest.

It is the Claimants’ contention that, as directors, Julian and Quentin each owed a number of duties to KIL under the relevant provisions of the 2006 Act and prior to that in largely similar terms under the general law:

to exercise their powers only for the purposes for which they were conferred (s.171);

to act in a way that was considered by them (in good faith) to be most likely to promote the success of KIL for the benefit of its members as a whole, including having regard to the likely consequences of any decision in the long term, the need to foster KIL's business relationships with suppliers, customers and others and the need to act fairly as between members of KIL (s.172);

not to place themselves in a position where their (direct or indirect) interests conflicted or might conflict with their duties to, or the interests of, KIL (s.175); by virtue of subsection 175(4)(a), there is only a position of conflict where that can reasonably be regarded as likely to arise;

not to accept benefits from third parties conferred by reason of their being a director or doing (or not doing) anything as a director (s.176);

to disclose to the other directors of KIL any direct or indirect interest in a proposed arrangement or transaction with KIL (s.177); and

to exercise reasonable care, skill and diligence (s.174).

It is common ground that Julian also owed KIL a duty of fidelity and loyalty as a senior employee, namely CEO.

Both sides acknowledge that these duties were capable of being modified by the overarching contractual relationship between Cullen and Julian, which governed the JV.

The Claimants submit that the “carve out” from the general director’s duties is at most a very limited one for present purposes, since the ability of Julian to invest in a personal capacity in property deals within the scope of the JV was circumscribed by the terms of the HoA, which retained the duty to avoid conflicts of interest with KIL unless there was express consent.

The Defendants submit that, since both Julian and Eric (Footnote: ⁵⁹) considered KIL to be an aspect of the broader JV, then provided the conduct of the Defendants as directors of KIL was in accordance with the over-arching JV agreement, or was otherwise approved or acquiesced in by Julian and Eric/Cullen, such conduct would not give rise to an actionable breach of duty claim on the part of KIL.

The Claimants contend that, with at most the very slight modification referred to above, the full panoply of directors’ duties apply. They submit that in the light of the case law (Footnote: ⁶⁰) the duty of good faith under s.172 includes a duty to make proper disclosure to the company and looks at the subjective intention of the director. Thus, in order to establish a breach by reason of a failure to make such disclosure, a company must establish that the director subjectively concluded that disclosure was in the company’s interests, or that he would have so concluded had he been acting in good faith. The Claimants submit that here Julian and Quentin were under a duty, of which they were in breach, to inform KIL of Julian’s intention to take a personal investment and of their own alleged breaches of duty in failing to do so.

As to s.175 of the 2006 Act, the Claimants submit that this comprises the well-established principles described in the case law as the “no conflict” rule and the “no profit” rule. In reliance upon the decision of Roskill J (as he then was) in IDC v Cooley [1972] 2 All ER 162, they argue that the no conflict rule requires a director to account to the company for any benefit obtained by him where there existed a conflict between his personal interest and his fiduciary duty to the company, or a significant possibility of such conflict; and that, as made clear in the well-known case of Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134, at [144], the no profit rule requires a director who makes an unauthorised profit by the use of his position as a director, or by use of an opportunity or knowledge resulting from that position, to account to the company for the profit, whether or not he acted in good faith.

The Claimants point to s.175(2) of the 2006 Act, which makes clear that it is no defence to an alleged breach of these rules that the company was not able to exploit the opportunity. They also refer to Premier Waste Management Ltd v Towers [2012] 1 BCLC 67, at [10], and Regal (above) as establishing respectively that it does not avail a director to argue that the company had decided bona fide not to try to acquire the opportunity in question, or that the company suffered no loss by virtue of the director acquiring it. Further, relying upon Re Allied Business and Financial Consultants Ltd [2009] 2 BCLC, at [55] – [60], the Claimants submit that it is no defence for a director who personally exploits a business opportunity to claim that it was outside the scope of the company’s business. The company’s fully informed consent must be obtained to avoid a breach of duty.

The Claimants contend that by taking an unauthorised personal interest in the German Opportunity the Defendants were in breach of the duty in s.175 and in breach of the no conflict and no profit rules, and are liable to account to KIL for the benefit obtained.

In response to these contentions, the Defendants submit that in relation to the German Opportunity Julian’s director’s duties were simply not in play. The case law relied upon by the Claimants, including IDC v Cooley, and Re Allied Business and Financial Consultants Ltd, is argued to be distinguishable in that in those cases there existed simply a company, with no higher level of legal relationship between the parties. That meant that the business opportunity in question came to the defendants in their one and only capacity of directors. Mr Davies submitted that in such circumstances, where the company relationship was the only context in which any duties could be owed, one could understand why the court had applied the “no conflict” rule in very strict terms to the directors, for otherwise they could make a profit out of something which came to them in their capacity of directors, simply because it was outside the scope of the company’s business. In the present case, by contrast, Julian acted in several capacities including as a joint venture partner, a director, and an employee. Mr Davies submitted that the relevant information about the German Opportunity came to Julian pursuant to his contractual obligation under the HoA/JV agreement to look for and introduce opportunities, and had nothing to do with his position as a director of KIL. In those circumstances it was wholly artificial to suggest that the opportunity came to Julian in the latter capacity. Therefore, directors’ duties are simply irrelevant.

Those submissions were linked to some extent with another limb of Mr Davies’ argument, which recurred in a number of separate but related contexts. The argument was that the proposition that KIL would have taken the equity interest in the German Opportunity which was therefore a business opportunity for KIL, is fundamentally misconceived. The Defendants’ reasoning can be summarised as follows: it is clear, on the basis of the evidence as a whole, that if an investment had been made in the German Opportunity on behalf of the JV, the equity interest, together with any profit or ‘carry’, would have been acquired and held, not by KIL, but by an SPV for the ultimate benefit of Julian’s and Eric’s respective off-shore trusts. Julian and Eric, as the ultimate beneficial owners of the JV, were entitled to any interests acquired on a 50/50 basis, and it was to their order that such interests were acquired and held. For a variety of reasons, including tax considerations, and the commercial necessity of keeping the equity holding structures separate from the operating entity, KIL had never acquired any interest in any of the investments previously undertaken by the JV. These considerations would have been equally applicable in the context of the German Opportunity. Further, any argument to the effect that the German Opportunity would, or might, have been held to the order of KIL, in the sense of it being for KIL to decide for whom the beneficial interest in the opportunity would ultimately be held, was also flawed. Such decisions were made by Eric and Julian, and KIL did not exercise any independent decision-making function. Thus, it is submitted that in reality KIL was merely a vehicle to fulfil a management function for the JV.

On these grounds, the Defendants submit that the Claimants’ primary case based on the alleged failure of the Defendants as directors of KIL to obtain its informed authorisation for Julian’s participation in the German Opportunity, is misconceived as this was not an opportunity for the company itself. Therefore, the contention that KIL has suffered loss or is entitled to an account of profits by reason of the alleged diversion of the German Opportunity, is unsustainable. Further, for the same reasons Julian’s personal investment in the German Opportunity did not amount to a conflict of interest, either under the HoA or under the director’s statutory and fiduciary duties head. In the latter regard the Defendants pray in aid the words of subsection 175(4)(a) of the 2006 Act: “the situation cannot reasonably be regarded as likely to give rise to a conflict of interest”.

I do not accept the Defendants’ submission that the director’s duties relied upon by the Claimants do not apply to the circumstances in which Julian made a personal investment in the German Opportunity. It is, of course, true that Julian, like Eric, wore a number of hats, including as a joint venture partner, a director, and an employee. However, it is in my view a wrong analysis to regard Julian’s day to day work in seeking out business opportunities, reviewing them, and if appropriate structuring and implementing them, as not carried out in his capacity of CEO of KIL, merely because those actions at the same time discharged his contractual obligations under the HoA. In this respect Julian’s several capacities were not, as it were, hermetically sealed from each other. On the contrary, it was the HoA which installed Julian as full-time CEO of KIL with the duties of implementing existing projects, sourcing and implementing commercially attractive and profitable property deals, and running the operation on a day to day basis. Absent a specific provision in the JV arrangements, there is no reason in principle why the ordinary director’s duties should be disapplied in respect of Julian. There is no such provision, and the HoA is expressed in very general terms.

Nor, whilst acknowledging the skill with which Mr Davies presented his argument, do I consider that the distinctions which he sought to draw between the present case and IDC v Cooley, Bhullar v Bhullar [2003] 2 BCLC 241, and Re Allied Business and Financial Consultants Ltd, assist the Defendants. In the former case, Roskill J was simply confirming that an opportunity which came to the defendant “while he was managing director” could not be regarded as coming to him “privately” so as to enable him to avoid the fiduciary duty he was under as a director. Similarly, in Bhullar v Bhullar the Court of Appeal was dealing with inter alia an argument that, because the opportunity had come to the defendant’s attention when he had taken a few days off work, it was acquired by him “privately” and outside the scope of his director’s fiduciary duty. Unsurprisingly the Court of Appeal rejected this argument. In Re Allied Business and Financial Consultants Ltd the issue was whether, in considering an alleged breach by directors of the no conflict and no profit rules, it was relevant that the business opportunity in question was outside the scope of the company’s business. Distinguishing Aas v Benham [1891] 2 Ch 244, which concerned the obligations affecting a partnership, the Court of Appeal held that it was not. Rimer LJ, with whom the other two members of the Court agreed, considered the authorities defining the two rules and stated:

I can see nothing in these or any of the other decisions to which my attention was drawn to support the disapplication of Julian’s normal fiduciary duties as a director simply because he was appointed CEO pursuant to the HoA and/or because that joint venture agreement identified in very general outline the scope of the work he would be doing in that capacity. Julian was paid a salary by KIL for performing functions which included sourcing and implementing attractive property deals. It is simply not sustainable to suggest that in those circumstances the German Opportunity did not come to Julian in his capacity of a director of KIL.

I agree with Mr Davies (and have already found in an earlier part of this judgment) that, as a result of tax and legal considerations, if an investment had been made in the German Opportunity on behalf of the JV, any equity interest together with any profits would in all probability have been held, not by KIL, but in an SPV for the ultimate benefit of Julian’s and Eric’s respective off-shore trusts. I have found that there was no formal variation of the HoA in that regard but rather a common understanding that, at least for non-UK property investments, this would normally be the case depending on the specific circumstances.

However, in my view the Defendants are incorrect in arguing on that ground that the German Opportunity was not an opportunity for KIL. That argument ignores the central role played by the company in the operation of the JV throughout the relevant period. It was in every sense the manifestation and operational arm of the JV – the vehicle through which the JV acted, through which deals were identified, reviewed, structured, financed, coordinated and ultimately managed. KIL employed and paid salaries to Julian, Quentin and others to perform these functions, and would bear any abortive costs. In so far as any shortfall funding for a deal was provided by Cullen, it would be provided by way of a loan to KIL (thereby increasing KIL’s indebtedness to Cullen) and the funds would then be “on-lent” by KIL to the particular SPV structure created by KIL for that purpose. KIL would be likely to receive fees for whatever services it provided. KIL, through Julian, would deal with third party investors and partners. Thus, subject always to the influence of Cullen (Eric) and Julian, its two 50% shareholders, KIL was the embodiment of the JV. This is reflected in the term of the HoA which expressly gave KIL the right of first refusal in relation to any specific deal.

In these circumstances, the German Opportunity was clearly an opportunity for KIL, as the embodiment and engine of the JV. The fact that for the reasons discussed above KIL was unlikely to have held any specific equity or proprietary interest is in my view immaterial when it comes to a consideration of whether the Defendants owed (or were in breach of) the normal fiduciary duties to KIL. Why should they not? On the authorities, and in particular Re Allied Business, it is no defence for a director to assert that an opportunity was outside the scope of the company’s business. In any event, the German Opportunity was clearly within the scope of KIL’s business. Indeed, it was the kind of project that was the company’s life blood. Furthermore, as described above, KIL actually participated in the German Opportunity over a lengthy period by providing services through Julian, Quentin and others, and by lending its name (and on occasions its funds) to the venture.

In the light of the above, I do not accept the Defendants’ submission that no conflict of interest arose within the meaning of s.175 or at all because the German Opportunity was not an opportunity for KIL. Nor is the present situation one which, in the words of subsection 175(4)(a), “cannot reasonably be regarded as likely to give rise to a conflict of interest”. As I have already found in the context of the contractual provisions of the HoA, a clear conflict of interest did arise in relation to Julian’s personal investment. Moreover, Mr Davies did not put forward any reasons which would persuade me that the finding of a conflict should be any different if the analysis is carried out under s.175.

I have found that Julian was in breach of his contractual obligations to Cullen by (1) making, without Cullen’s consent, a personal investment in the German Opportunity which gave rise to a conflict of interest between Julian and KIL, and (2) failing to disclose to Cullen and KIL (in effect to Eric) his intention to make a personal investment in the project.

In the light of the findings above it is clear that Julian was also in breach of his director’s duties to KIL under s.175 of the 2006 Act (and corresponding pre-existing common law duties) by reason of the conflict of interest, and was in breach of both s.172 and s.177 by reason of the failure to disclose that interest. If a director of a company has, or is planning to take, a personal interest which would or might give rise to a potential conflict, it is clear that he or she is under a duty to inform the company, for it is only with the informed consent of the company that such an interest could properly be taken up by the director. This proposition is well-established by a long line of authorities, including: Aberdeen Railway Co. v Blaikie (1854) 17 D. (H.L.) 20, Boardman v Phipps [1967] 2 A.C. 46, Industrial Development Consultants Ltd v Cooley [1972] 2 All E.R. 162, Bhullar v Bhullar [2003] EWCA Civ 424, Item Software (UK) Ltd v Fassihi and others [2004] EWCA Civ 1244, Re Allied Business and Financial Consultants Ltd [2009] EWCA Civ 751, and GHLM Trading Ltd v Maroo and others [2012] EWHC 61 (Ch).

In relation to the obligation under s.172, I do not accept that in concealing his conflict of interest from his co-shareholder (Cullen) and his co-director (Eric) over a substantial period Julian was acting in good faith as to what was in the best interests of KIL, in accordance with the requirements of that section. On any view he could not, if acting in good faith, have considered that such concealment amounted to “acting fairly as between” himself and Cullen, who were the only two shareholders. KIL was entitled to know that its CEO had a personal stake in a separate project for which the company (through the medium of work being carried out by that same CEO, as well as by other employees) was providing services and other benefits, and which was at least to some extent in competition with KIL. I am satisfied that Julian subjectively concluded (or would, had he been acting in good faith, have so concluded) that it was in KIL’s best interests to be informed of his personal interest.

For the sake of completeness I should say that in my view the same conduct amounts to a breach of Julian’s duty of loyalty and fidelity as a senior employee of KIL.

In reaching these conclusions I have taken into account the evidence and submissions of the Defendants as to the purported benefits to KIL of Julian’s personal investment and continued participation in the German Opportunity, and Julian’s evidence as to his motivation for the concealment of the investment. For the reasons given earlier, these matters did not prevent a clear conflict from arising in the circumstances of this case. Nor does the possibility that disclosure at the proper time would have resulted in a “bust up” between himself and Eric, even perhaps involving the ending of the JV as Julian suggested, legitimise Julian’s conduct and preclude a breach of duty on his part. There may well have been circumstances in which it would have been in the company’s best interests for it to cease business. Further, it is at least equally possible that disclosure at the proper time of Julian’s intention to invest personally would have resulted in an offer from Cullen of pro rata funding and thereby led to an equity participation by the JV, and a better result for KIL. (Had that happened, Julian would, of course, have shared the benefit of such equity interest with Eric’s off-shore trust.) I am satisfied that Julian essentially consulted his own interests in acting as he did.

It follows from the breaches of directors’ duties, including the no conflict rule and the no profit rule, that KIL is entitled to an account of profits against Julian.

I have summarised the Claimants’ allegations against Quentin in earlier sections of this judgment. In view of my findings, I approach this aspect of the case on the basis that Quentin was told by Julian, and at all material times believed, that Cullen/Eric had given the green light to Julian making a personal investment in the German Opportunity, and therefore that he was not aware that Julian wished to conceal the investment from them, and did not consciously assist in such concealment. I also approach it on the basis that the promise by Julian to pay him 20% of any profit accruing to Julian (a promise apparently made in an effort to retain Quentin, who in 2009 was admittedly considering seeking employment elsewhere, and did in fact leave KIL a few months later) was not made until several months after April 2009.

Quentin was at all material times a director of KIL, and for a short period was an employee, although the Claimants have not really placed any emphasis on the latter capacity. As director he was subject to the same fiduciary and other duties as Julian, as discussed earlier, including the duty under s.175 of the 2006 Act in relation to conflicts of interest. Further, subject to the point discussed in the next paragraph, I consider that by his acceptance of Julian’s promise Quentin was subject to a conflict of interest, for very much the same reasons as I have found a conflict to exist for Julian.

I have considered whether the fact (as I have found) that he was informed by Julian and believed that the latter was authorised to make a personal investment in the German Opportunity, and the fact that the source of any payment to Quentin would be Julian’s investment, means that Quentin should not fall to be treated as subject to the conflict of interest which would otherwise exist. I have not had the benefit of argument on this issue nor am I aware of any authority on the point. However, in my view it is clear that, notwithstanding those factors a conflict did exist for Quentin. The duties owed by Julian and Quentin respectively to KIL are independent and individual, as are any personal interests they may have. Quentin’s own duty, as a director, of undivided loyalty to KIL was potentially compromised by his personal interest in Julian’s investment. It is common ground that Quentin did not inform KIL of such interest and as such did not seek, and was not granted, authorisation to hold such an interest.

In these circumstances Quentin was in breach of his duty under s.175 of the 2006 Act, and of the no conflict rule. He was also in breach of his duties under s. 176 and s.177, and of the no profit rule. It is clear that he received the promise of payment by virtue of his position as a director, or by use of an opportunity or knowledge resulting from that position.

Although the Claimants submitted that Quentin was also in a position of conflict initially through Julian's interest and his loyalty to him as his brother, I do not accept that contention. If, as I have found, he believed that Julian’s investment had been authorised, then I do not consider that a position of conflict arose in respect of Quentin until the promise of a share of the profits was made and accepted.

In the light of these conclusions Quentin is under an obligation to account to KIL for the profit he received from Julian, (Footnote: ⁶²) albeit that he believed that Julian was authorised to invest personally and albeit that he was not a conscious party to the concealment of that investment from Cullen. As stated earlier, it is not a defence to a claim against a director for an account of unauthorised profits that the director was acting in good faith. Nevertheless, in view of my findings in relation to Quentin’s knowledge and belief at the material times, it would be inequitable for Quentin to be liable to account for any sum in excess of that which he is shown to have received from Julian in light of the latter’s promise.

The Claimants also contend that the relationship between Julian and Cullen/Eric as joint venture partners, pursuant to which Julian conducted affairs on behalf of his partner, was one of trust and confidence, giving rise to fiduciary duties owed by Julian to Cullen/Eric, which were infringed. It is submitted that these fiduciary duties supplemented those owed by Julian to KIL. The Defendants accept that fiduciary duties were owed to Cullen but submit that such duties were limited to the situation where Eric or Cullen in fact provided funding for an investment. They accept that in such a case a degree of trust was placed in Julian to secure the appropriate use of the funds and the appropriate disposition of Eric’s 50% interest through the designated SPV. Therefore, the main issue in this head of claim is the extent of the fiduciary relationship between the parties to the JV.

As already explained, this claim is said to be very much secondary to the claim for breach of director’s duties owed to KIL. In the light of my conclusions on the Claimant’s primary claim, I propose to deal with this aspect relatively briefly.

It is uncontroversial that “joint venture” is not a term of art, and that a particular joint venture may be treated as a fiduciary relationship, even when the parties have entered into a joint venture agreement, if, after careful examination of the facts, the requisite fiduciary expectation of mutual trust and confidence is found to exist. (Footnote: ⁶³)

However, leaving aside agency and partnership, if a joint venture is between commercial joint venturers, the existence of such a relationship will require special features. This is partly because in a commercial situation the joint venturers may well not enjoy the autonomy or freedom to determine how the interests of the other party are to be served, and it is that autonomy which requires the “fiduciary” not to use his or her position adversely to the interests of the other, and which justifies the supervision of equity. (Footnote: ⁶⁴) A further reason is because in such a situation it is normally inappropriate to expect a commercial party to subordinate his or her own interests to those of another commercial party. (Footnote: ⁶⁵)

In Murad v Al Saraj [2004] EWHC 1235 (Ch), Etherton J (as he then was) found that the defendant owed the claimants fiduciary duties in connection with a joint venture to acquire and run a hotel, and required the defendant to account for his profit. The features which demonstrated that the relationship was one of trust and confidence were that the defendant had run the hotel for some time, was the contact and negotiator with other parties, and acted as the claimants’ agent in that respect, and also in instructing professionals in connection with the acquisition. The claimants, on the other hand, lived abroad, had no experience of acquiring or running hotels, no knowledge of the nature of the arrangements made by the defendant with the vendor of the hotel, and allowed the defendant extensive discretion to act in relation to matters affecting their interests, including advising them on investments. The reality was that the claimants were “wholly dependent” upon the defendant for his advice and recommendations in relation to the hotel, for negotiating with the vendor, and for the arrangements with professionals including the structure of the transactions.

In that case there appeared to have been no contract in place between the parties governing their joint venture.

In the present case, the Claimants rely upon the following undisputed facts: that Julian and Eric had a long-standing and close personal friendship; that Julian agreed to act for the JV in bringing all opportunities in respect of property investment in the UK and Europe to the JV and making recommendations as to appropriate deals; that it was Julian who had the knowledge and experience of the relevant market, and was responsible for carrying out the day-to-day operations of the JV and KIL, with a broad discretion to negotiate deals and incur obligations and liabilities relating to the property investments affecting the interests of Cullen/Eric; and that Julian held or controlled the beneficial interest of Cullen/Eric in the SPV structures, and dealt with potential and actual joint venture partners such as Mr Kahmann, third party investors, and professional service providers.

The Claimants contend that Julian was allowed to undertake all this with minimal supervision from Cullen, and without extensive formal documentation; that Julian therefore enjoyed extraordinary autonomy in conducting the affairs of the JV; and that the relationship was based on trust and friendship and was not a purely commercial arrangement. This, it is submitted, gave rise to fiduciary duties upon Julian to act in good faith (including a duty to inform Cullen/Eric of matters of which he in good faith considered it was in their interests to be informed); not to place himself in a position of conflict; and not to make a profit from his position of trust without the fully informed consent of Cullen/Eric.

The Claimants submit that on the basis of the contentions already discussed, and in particular by taking a personal interest in the German Opportunity and thereby putting himself in a position of conflict, by using KIL's resources and funds for his personal dealings, and by misleading Cullen/Eric about his personal interest and failing to disclose it, he was in breach of these duties.

In response, Mr Davies submits that, notwithstanding their personal friendship, the JV was commercial in nature and was conducted in a commercial manner. Eric is a highly experienced and hard-headed businessman, who recognised that, despite their friendship, dealings between himself/Cullen and Julian should be conducted in a business-like manner and at arm’s length. Mr Davies points by way of example to the following: the protracted and tough negotiations for shortfall funding of the German Opportunity; the fact that to a large extent Eric delegated the conduct of his dealings with Julian to financial professionals; Eric’s installation of Mr Gibson in the position of the company’s CFO, embedded at KIL’s office as Cullen’s “eyes and ears”; the fact that although he was one of KIL’s directors, Eric always sought the best possible terms for Cullen (and, therefore, himself) – a factor exemplified in his very tough and uncompromising approach to the request for funding for the German Opportunity, and his proposal of terms which were highly favourable to Cullen, but hardly beneficial to KIL; and Eric’s insistence on completing the legal and documentary “tidying up” exercise to regularise Julian’s and Eric’s respective interests as a precondition to any shortfall funding. Reliance is also placed on Eric’s hostile attitude to an increase in Julian’s salary, and his demand that it be renegotiated away.

In these circumstances, save in the one limited respect referred to above (provision of funding for a specific investment), Mr Davies submits that there is no proper basis here for importing any fiduciary obligations into the arrangement as between Julian and Cullen/Eric.

In my judgment Mr Davies is correct. Although as CEO of KIL Julian was clearly at the helm in identifying and reviewing potential projects and was responsible for implementing them, his position was very far removed from that of the defendant in Murad v Al Saraj. Despite, or perhaps because of, their personal friendship, the arrangements governing the JV between Eric/Cullen and Julian, including the HoA and other agreements relating to funding, the role of KIL, and Julian’s role within that company, were formal, commercial and at arm’s length in virtually all respects. To the extent that in 2008 these arrangements were seen as requiring updating or revision, Cullen were insistent on matters being appropriately regularised. Such “autonomy” as Julian enjoyed existed within a contractual framework, and was also subject to his legal obligations to KIL and its members as a director. In my view there is no real scope, or need, for a range of supplementary fiduciary obligations owed to Eric/Cullen. The “special features” referred to in the case law, and found to exist in Murad v Al Saraj, are notably absent in the present case.

I therefore consider that this secondary, and alternative, basis of claim fails.

The final head of claim is that Julian and Quentin combined together to injure KIL (and/or Cullen/Eric) by diverting the German Opportunity away from KIL for their personal benefit and by using KIL and its resources to support their respective personal interests in the German Opportunity. The unlawful means alleged are the breaches of fiduciary duty by Julian and/or Quentin and breaches of the HoA by Julian.

Neither Mr Collingwood nor Mr Davies spent much time on this claim in their oral submissions. In view of my findings that, by virtue of breaches of directors’ duties, both Julian and Quentin are liable to account to KIL for their profit, it is probably unnecessary to determine it. However, I will state my conclusions.

According to Clerk & Lindsell on Torts (21^st edition), unlawful means conspiracy is committed where:

The elements of the tort were more expansively defined by Nourse LJ, giving the judgment of the Court of Appeal, in Kuwait Oil Tanker v Al Bader [2002] 2 All ER (Comm) 271 at paragraphs 108 and 110:

There are therefore four elements required for an unlawful means conspiracy to be made out:

In relation to the “combination”, the Court of Appeal in Kuwait Oil made clear that an express agreement, whether formal or informal, is not required. It is sufficient if two or more persons combine with a common intention, i.e. if they deliberately combine, albeit tacitly, to achieve a common end. (Footnote: ⁶⁸)

As to unlawful means, Mr Collingwood submitted that the Court of Appeal in New Zealand (Footnote: ⁶⁹) has been willing to contemplate for the sake of argument, and without deciding the point, that a breach of fiduciary duty might in principle constitute unlawful means for this purpose. I note, too, that in this jurisdiction Toulson J (as he then was) was of the same view in Yukong Line Limited v Rendsburg Investments Corporation (no 2) [1998] 1 WLR 294. Similarly, there is judicial support for the proposition that a breach of contract may constitute unlawful means: see, for example, Barretts & Baird (Wholesale) Ltd v IPCS [1987] IRLR 3, at 8-10, per Henry J.

Although the conspirators must intend to injure the claimant, it need not be their "predominant purpose". (Footnote: ⁷⁰) In Lonrho Plc v Fayed [1992] 1 AC 448, Lord Bridge explained at p. 465-466:

Therefore, the fact that the conspirators are motivated predominantly by factors unrelated to the injury to the claimant - typically by making money for themselves - does not afford a defence. However, there must still exist an “intention” to injure the claimant. In OBG Ltd v Allan [2008] 1 AC 1, (Footnote: ⁷¹) Lord Hoffmann (in the majority of the members of the House of Lords) expressed the test as follows, at paragraph 62:

In a similar vein, Lord Nicholls said this, at paragraphs 164-5:

As to damage, the case law establishes that the instruments by which loss is caused to the claimant must be the acts constituting the unlawful means, and that those acts must not be merely incidental or collateral to the damage: see OBG (above) at paragraphs 159-160 per Lord Nicholls, and Revenue and Customs Commissioners v Total Network SL [2008] 1 AC 1174, at paragraphs 95 - 96 per Lord Walker, and at paragraph 119 per Lord Mance. See also per Morgan J in Digicel (St. Lucia) Limited and others v Cable & Wireless Plc and others [2010] EWHC 774 (Ch), at paragraphs 70-71.

I consider that there was a combination between Julian and Quentin for this purpose. They agreed that Quentin would have a personal financial interest in the German Opportunity. I would also hold that since that personal interest was known by both of them to create a clear potential conflict of interest and to be unauthorised, thereby resulting in a breach of Quentin’s fiduciary and statutory duties to KIL as a director, the requirement of unlawful means is satisfied.

However, I am doubtful that the relevant combination and unlawful means would encompass Julian’s personal interest and breach of contract/fiduciary duties, since I have found that Quentin was informed by Julian and believed that Julian’s interest had been notified to Cullen and was authorised. In the absence of authority on the point, I would be very reluctant to hold that Quentin could be liable as party to a conspiracy to injure by unlawful means in circumstances where he was unaware of facts which were material to the unlawfulness, albeit that another party to the combination was aware.

The requisite intention is, in my view, established here. The effect of the Defendants’ combination was to create a conflict of interest for Quentin. The reason that a conflict of interest is impermissible without authorisation is because by its nature it is liable to result in damage to the interests of (in the present case) KIL. The fact that damage to KIL was not the predominant purpose of the combination does not, in the light of the authorities to which I have referred, assist the Defendants. If Quentin, faced with the conflict of interest, pursued his own personal interest by, for example, allowing KIL to pay for a service provided to a third party which increased the size of Julian’s (and therefore Quentin’s) reward from the German Opportunity, that would in my view amount to the intentional infliction of loss on KIL by unlawful means.

However, no actual injury or loss to KIL has yet been established. In the absence of established loss sounding in damages, the fact (as I have found) that Julian and Quentin are liable to account to KIL for the benefits they have received from the German Opportunity may well not be sufficient to complete the tort of unlawful means conspiracy. I would need to hear argument before deciding that point. The Claimants have indicated that they are likely to elect for an account of profits, and would only seek an inquiry as to damages as a secondary option. In those circumstances, it is unnecessary for me to say more at this stage.

In this judgment I have concluded as follows:

Cullen rather than Eric was party to the HoA and the wider JV arrangements, and Cullen rather than Eric should be treated as the claimant in respect of those claims which are brought by them in the alternative. Eric should not be regarded as a separate claimant. The case is therefore only concerned with Cullen’s derivative claims, and Cullen’s personal claims.

Julian was in breach of his contractual obligations to Cullen by (a) making, without Cullen’s consent, a personal investment in the German Opportunity which gave rise to a conflict of interest between Julian and KIL, and (b) failing to disclose to Cullen and KIL (in effect to Eric) his intention to make a personal investment in the project.

Cullen is therefore, in principle, entitled to an award of damages for breach of contract against Julian.

Julian was in breach of his director’s duties to KIL under s.175 of the 2006 Act by reason of the conflict of interest, and was in breach of both s.172 and s.177 by reason of his failure to disclose the interest giving rise to that conflict. He was also in breach of corresponding pre-existing common law duties, including the no profit rule and the no conflict rule.

By reason of the breaches of director’s duties, including the no conflict rule and the no profit rule, KIL is entitled to an account of profits against Julian.

By reason of his own unauthorised personal interest in the German Opportunity, Quentin was in breach of his duty under s.175 of the 2006 Act, and of the no conflict rule. He was also in breach of his duties under s. 176 and s.177, and of the no profit rule.

Quentin is under an obligation to account to KIL for the profit he received from the German Opportunity via Julian.

Julian did not owe to Eric/Cullen the further fiduciary obligations based on trust and confidence, relied upon by the Claimants. The claim based on such obligations therefore fails.

As to the claim for unlawful means conspiracy, there was a combination between Julian and Quentin in that they agreed that Quentin would have a personal financial interest in the German Opportunity, knowing that this created a potential conflict of interest for Quentin which, being unauthorised, resulted in a breach of Quentin’s fiduciary and statutory duties to KIL as a director. The requisite intention to injure KIL is established. However, no actual injury or loss to KIL sounding in damages has yet been proved.

As mentioned earlier in the judgment, Mr Collingwood has indicated that the essential relief sought by the Claimants is an account of profits, or damages/equitable compensation with an enquiry as to damages, at the Claimants’ election. The Claimants also seek the court’s directions for the provision of information by the Defendants to enable the Claimants to make an informed election.

For the avoidance of doubt, I record that because the parties did not address me in any detail on the relief to which the Claimants may be entitled on the basis of my findings, I have not felt it necessary to consider such relief other than in very general terms. A further hearing may need to be convened for that purpose.

I invite the parties to agree the terms of an order reflecting this judgment, including any directions considered appropriate, and to submit the same in draft to me for approval. Failing agreement, rival drafts should be supplied so that, if possible, I am in a position to make an order without need for a further hearing at this stage.