Masri v Consolidated Contractors International UK Ltd & Anor

This judgment resolves various issues of quantum, following my judgment on issues of liability as reported at [2006] EWHC 1931 (Comm) (“the Judgment”). I refer to the Judgment for a description of the parties and the full background to this matter. In summary, I found as follows.

The 1992 Agreement was made on 6 November 1992 between Mr Masri on the one hand and both CCIC and CC (Oil & Gas) on the other. It provided for Mr Masri to benefit from a 10% share of CCC’s 10% interest in the Masila Oil Concession in South Yemen. The interest was essentially a proportionate share save that the 1992 Agreement provided for CCC to retain a full 10% of Operating Cost recoveries without accounting to Mr Masri for any part of those recoveries.

By mid-November 1992, the parties reached an understanding that Mr Masri would benefit from the syndicated loan in that, once it was received, he would not have to provide actual funds in respect of his share of that part of development costs which the loan covered.

The understanding about the syndicated loan did not include any term requiring that Mr Masri provide a guarantee before he could benefit from the loan.

From November 1992 to February 1993, CCC made cash calls on Mr Masri, which Mr Masri did not pay, save for a single payment of US$ 1.5 million. In not paying, Mr Masri acted in breach of contract.

After 15 February 1993, CCC made no further cash call on Mr Masri. The reason for this was that an agreement was reached that Mr Masri need not pay further amounts, and that the US$ 1.5 million would be returned to him, provided that Mr Masri provided a bank guarantee in favour of CCC.

Mr Masri did not want to tie up such unencumbered funds as were at his disposal either by paying the cash calls or by providing a guarantee and this is why he was repeatedly requesting the return of his funds and relief from having to pay his share of development costs.

By April/May 1993, Mr Masri’s consistent failure to pay cash calls amounted to repudiatory breach of the 1992 Agreement.

In or about late May 1993, Mr Khoury decided to waive Mr Masri’s continued failure to pay his cash calls and put up a guarantee, and instead to accede to the suggestion to debit Mr Masri’s continuing obligations to a running account, together with interest thereon, with a view subsequently to reaching some sort of amicable compromise to bring Mr Masri’s interests in both the Concession and CCC’s North Yemen projects to an end. The principal reason for the waiver was that Mr Khoury did not wish to upset or fall out with Mr Masri.

Even if there had been a decision on the part of CCC to terminate the 1992 Agreement, this was never communicated to Mr Masri.

By Order dated 28 July 2006, it was declared that:

the parties to the 1992 Agreement were Mr Masri, CCIC and CC (Oil & Gas);

the 1992 Agreement remained in existence;

Mr Masri was not entitled to share in operating cost recovery; and

(as was common ground) the claim was time barred in respect of any sums accruing due before 8 October 1998.

The Order of 28 July 2006 also made provision for a hearing of consequential matters to take place on 19 September 2006.

On 19 September 2006, Mr Masri applied for the costs of the liability trial, directions for dealing with quantum, an interim payment on account of damages, an interim payment on account of costs and interest and the release of security for costs monies in court. CCC applied for permission to appeal. I dealt with these matters in the following way:

I ordered CCIC and CC (Oil & Gas) to pay 2/3 of Mr Masri’s costs of the liability trial, and all the costs of the other defendants.

I gave directions for a two-day hearing, to deal with all the issues of principle as to quantum.

I indicated that I would not order an interim payment on account of damages in a substantial sum before resolving the issues of principle in relation to quantum. Through counsel, Mr Masri accepted that the issue of an interim payment should be deferred pending such resolution. The interim payment application was not referred to in the Order as drawn up by the parties, but it should have been formally adjourned to the quantum hearing.

I ordered that the costs incurred to date were to be assessed, but payment was to be stayed pending CCC’s application for permission to appeal to the Court of Appeal and any subsequent appeal.

I also ordered that the sum of £350,000 paid into Court by Mr Masri as security for the Defendants’ costs was to remain pending CCC’s application for permission to appeal and any subsequent appeal.

At the hearing, Mr Masri offered to provide a bank guarantee to support his repayment of any interim payment ordered on account of damages. This offer became irrelevant in the event because of the view which I took that the issues of principle as to quantum needed to be determined before interim payment. Immediately after the ruling was given on staying any payment of costs or the payment of monies out of Court, I stated that the ruling would be different if a guarantee were proffered in respect of those items, saying “I would make an interim order for payment of costs, and I would not make a stay if there was a guarantee.”

I refused CCC’s application for permission to appeal.

On 29 November 2006 the Court of Appeal gave CCIC and CC (Oil & Gas) permission to appeal.

At the time of the previous hearing on 19 September 2006, the parties had identified five issues of principle for determination following the judgment on liability and these were set out at paragraph 8 of the Order. However their formulation has somewhat changed since that date, and the relevant issues may now be stated as follows:

Whether CCIC (as well as CC (Oil & Gas)) is liable as a judgment debtor.

What was the duration of the running account and when would the parties be entitled to be paid out thereunder.

The method for calculating interest in relation to the balances standing at any time to the credit of the running account: in particular whether on a simple or compound basis.

The appropriate rate of interest to be applied to sums due to each respective party in the taking of the account.

The extent to which the Claimant is entitled to receive the benefit of the syndicated loan in the taking of the account.

At trial it was common ground that the assignment from CCIC to CC (Oil & Gas) had taken effect in equity, as between CCIC and CC (Oil & Gas) before the November 1992 Agreement was made, but that it had not taken effect in law as at that date. Accordingly, it was agreed that, although CCIC remained the legal owner, CC (Oil & Gas) was the beneficial owner of the Concession. In paragraph 73 of the Judgment I said:

Both sides have somewhat changed position on this issue. Mr Mark Hapgood QC, on behalf of Mr Masri, pointed out that CCC had previously contended that the only proper defendant to this claim was CCIC, but now that the Court has found that both CCIC and CC (Oil & Gas) were party to the 1992 Agreement, CCC seeks to argue that, although a party, CCIC has no liability thereunder. He submitted that the correct interpretation of the Agreement is that the term “CCC”, where it appears, means “CCIC and CC (Oil & Gas)” and that that straightforward construction is consistent with both the judgment and the form of the Agreement itself. He argued that, by contrast, CCC’s case seems to be that the Agreement should be treated as two separate agreements in one of which “CCC” meant “CCIC” and in the other of which the same term meant “CC (Oil & Gas)”; he points out that is something which would have been open to the parties to provide, but it is not what they actually did provide; and, he contended, that would have been a very odd thing to have done. He further pointed out that, as the Judgment makes clear at paragraph 73, neither Mr Masri nor Mr Khoury were actually concerned with bothering about the precise legal entities within the CCC group. Accordingly, he submitted that it was inconceivable that Mr Khoury would have sought to limit Mr Masri’s recourse to a particular legal entity in respect of a particular payment, or that Mr Masri would have understood him to be seeking to do so. Had he sought to do so, then it would have been necessary for Mr Khoury to disclose to Mr Masri what the true position was as between CCIC and CC (Oil & Gas). That was never done. He countered CCC’s argument that the effect of Mr Masri’s construction was (wrongly) to give him the benefit of cross-company guarantees which were never intended, by emphasizing that the commercial reality was, as I had stated in paragraph 73 of the Judgment, that “Mr Khoury was agreeing on behalf of ‘CCC’ and that was enough”; he submitted that the involvement of two entities arises only because of the assignment, of which Mr Khoury was aware, but Mr Masri was not, and for that reason “CCC” was for this purpose two legal entities rather than one; in the result, two entities agreed that the agreed payments would be made and that was all consistent with CCC’s stated position that the various companies in the group supported each other. He emphasized that the 1992 Agreement had to be construed as at the time when the legal and beneficial ownership was split between the two companies and that accordingly references to “CCC” must have been a reference to both of them. He also referred to the information memorandum given by CCC to the financing banks in October 1992, which showed the financial support given by the group holding company, CCG, to all group companies.

Mr Charles Aldous QC, on behalf of the Defendants, on the other hand, submitted that, although the Judgment held that the 1992 Agreement was entered into on behalf of both CC (Oil & Gas) and CCIC, it did not follow that both were liable to pay the sums due to Mr. Masri under the Agreement; that question depended on the construction of the Agreement, and neither the Judgment nor the Order specifically addressed the question which of the two CCC parties should be liable in respect of payments due to Mr. Masri under the 1992 Agreement. He therefore contended that, as CC (Oil & Gas) was the only company in fact which received (and will receive) any of the revenues in respect of the Concession, it was likewise the only party liable to make any payment to Mr Masri. He contended that, under the 1992 Agreement, Mr. Masri is entitled to payment by CCC of sums “when and if received by” it; and he pointed out that, when defining the sums due to Mr. Masri, the Agreement further talks of those sums being “based on actual net receipts by CCC”, and being equivalent to 10% of “CCC’s share of Contractor oil entitlements” and “Development Cost Recovery received by CCC”. All this, he said pointed to CC (Oil & Gas) alone having a liability to pay. He argued that it is clear from the Court’s reasoning at paragraph 73, that if the assignment to CC (Oil & Gas) had already become effective at law (as well as in equity) at the time of entry into the 1992 Agreement, the only party to the 1992 Agreement would have been CC (Oil & Gas). In fact, he argued that, since the legal assignment was completed in February 1993, from which time onwards CCIC retained no rights in relation to the Concession, and since this occurred prior to the time when oil revenues started to be received (September 1993), the reality was that the company that had actually received all of the revenues from the Concession was CC (Oil & Gas); although CCIC thereafter remained a party to the 1992 Agreement, there was no sense in its having a liability to pay to Mr. Masri a proportion of sums received by CC (Oil & Gas), and not by it, when CC (Oil & Gas) is itself also a party to the 1992 Agreement. Moreover, he argued, if the construction of the 1992 Agreement now suggested by Mr. Masri were correct, the obvious consequence would be to provide Mr. Masri with a guarantee from CCIC in respect of CC (Oil & Gas)’s obligations under the 1992 Agreement and there was nothing in the Judgment nor in the language of the 1992 Agreement to support this conclusion. On the contrary, he argued that, applying the approach set out at paragraph 73 of the Judgment to this question, if the parties had been asked at the time which of the companies would be liable actually to make payments to Mr. Masri, the answer would obviously have been: “the company that receives the revenues from the Concession”. He also referred to the fact that Mr. Masri has never advanced any case to the effect that it was understood (either by him or by CCC) that he required two companies in the CCC group to be liable to him or that he required a guarantee of his counter-party's obligations.

Mr. Aldous underlined the fact that previously Mr. Masri’s case had always been that it was only one member of the CCC group that was liable, albeit that his primary case previously was that the relevant company was CCUK not either of CCIC or CC (Oil & Gas); that, by the time of the trial at least, his case had become that if CCUK was not the contracting party, then his contract was with CC (Oil & Gas), with the alternative claim against CCIC only being relegated to the end of the list after Mr. Khoury and CC Holding. Accordingly, submitted Mr. Aldous, an order should be made confirming that, although CCIC is a party to the 1992 Agreement, it has no liability to Mr. Masri either to pay him anything thereunder or to ensure that CC (Oil & Gas) does so.

In my judgment, Mr. Hapgood’s submissions on this point are to be preferred. The natural conclusion, derived from my finding in the Judgment that both CCIC and CC (Oil & Gas) were parties to the Agreement, and from its construction against the factual matrix that the ownership was split as between the legal and the beneficial owners, is that CCIC as legal owner at the time was agreeing to ensure that Mr Masri’s entitlement would be paid out of oil revenues, as was CC (Oil & Gas) as beneficial owner. As at that date both had to agree, in reality, not only because of the possibility that, in theory at least, legal ownership of the Concession revenues might never pass to CC (Oil & Gas), but also because, once it did, anyone in Mr Masri’s position would not want there to be any dispute as to whether CC (Oil & Gas), as the new legal owner, took with notice of, and subject to, Mr Masri’s entitlement. In my judgment, had he known the true position, a reasonable person in Mr Masri’s shoes would have assumed in the circumstances that both were assuming a liability to him for the payments. I do not in the context of the structure of the CCC group consider that there would have been anything financially surprising in CCIC also agreeing to be liable for such payments, or to ensure that they were made by CC (Oil & Gas), once the latter became the legal owner of the interest in the Concession. Mr. Aldous’ submission that the party “CCC” should be construed as either one company, or the other, depending upon which company at any relevant time was the legal owner of the Concession rights, I found commercially unrealistic because it was too sophisticated. Nor was I impressed by the submission that this was not the way in which Mr Masri originally argued the case. I was told that the only consequence of my decision on this point was a reputational issue for CCIC, which did not want to have a judgment against it, but that there were no adverse limitation consequences so far as it was concerned.

In paragraph 108 of the Judgment I concluded as follows:

In paragraph 110 I said:

During the course of the hearing, both sides somewhat shifted ground in relation to the issue of the duration of the running account, such that by end of argument it had effectively become non-contentious. Thus it became common ground between the parties that the new running account arrangement was one that could be brought to an end by either party on reasonable notice, although this point had not been accepted by CCC in their quantum defence nor in their original written skeleton argument. It was also accepted by Mr. Aldous during the course of oral argument that, if I concluded that compound interest accrued due on both sides of the account (that is to say, both in favour of Mr Masri and in favour of CCC), then compound interest was payable in favour of Mr Masri on such sums as were standing to his credit on the running account from 8 October 1998 to the date of judgment. Moreover, as it had been accepted by Mr Masri at the liability hearing that his claims in respect of any sums which accrued due from CCIC or CC (Oil & Gas) prior to 8 October 1998 were statute barred (as reflected in paragraph 1.4 of my order dated 28 July 2006), it was not in the event argued by Mr. Hapgood that limitation did not start to run even in respect of sums accruing due prior to this date, because no demand had been made.

It is convenient to deal with these two issues together as many of the arguments overlap.

The first issue that arises under this head is whether, as Mr Masri contends, there was an agreement that simple interest at the rate of 5% per 360 day “year” would be charged to the running account. Mr. Hapgood submitted that such an agreement was established by a course of dealing evidenced by the parties’ communications between October 1992 and May 1993, prior to the running account arrangement having been agreed. Even if there was no express agreement to such effect, Mr. Hapgood contended that the course of dealings established that such an agreement should be implied.

It is common ground that Mr Nakhleh sent statements of account to Mr Masri in October 1992, December 1992 and February 1993, which all showed simple interest accruing at the rate of 5% per 360 day year and that Mr Nakhleh prepared calculations showing the same rate of interest on 29 April 1993, although these last were not sent to Mr Masri. Mr Masri never suggested that he disagreed with these calculations, even when he paid the sum of US$ 1.5 million to CCC in December 1992 on account of the sums claimed by Mr Nakhleh. Mr Nakhleh’s calculations show that after Mr Masri paid his US$ 1.5 million to CCC on 17 December 1992, simple interest was notionally credited on that sum in exactly the same way as it was debited on the amounts outstanding from him in respect of cash calls. However, when he was repaid the US$ 1.5 million in June 1993, no additional sum was paid to him in respect of interest – perhaps not surprisingly, given what was then owed by him.

In my judgment, however, as Mr. Aldous submitted, the course of dealings relied upon (all of which communications occurred prior to the time that the running account agreement was reached) are not sufficient to establish a course of dealings capable of founding an express agreement between the parties to charge simple interest at 5% per annum on the running account going forward. Nor are they sufficient to establish that such an agreement should be implied. For a term to be implied into an agreement on the basis of a previous course of dealing, the parties must have adopted that particular course of dealing “consistently on former and similar occasions”: see Chitty on Contracts §13-022. I accept Mr. Aldous’ submissions that the circumstances of calculating the sums due from Mr. Masri in the period prior to the end of May 1993, were not analogous to those applicable in the period post-May 1993 when the decision was taken to establish a running account (as I have held). During this earlier period Mr. Masri owed an immediate debt in respect of 10% of each of the development cash calls, which he was required and expected actually to pay when demands were made of him. He was chased for actual payment on numerous occasions, and his failure actually to pay constituted a breach of contract. The funding provided by CCC to Mr. Masri by reason of his failure to pay the cash calls was on a short-term basis, and quite different in character from the type of arrangement envisaged under the running account arrangement, where demands would not be made of Mr Masri to pay his cash calls, but rather his liability would be rolled up until the oil revenues started to come in and his share of the Concession showed a profit. Accordingly I reject Mr. Hapgood’s submission that the evidence shows that it was the parties’ intention that the interest arrangements which “had been in force on this very account should continue”. In my judgment, the prior period demands for cash calls and interest cannot be regarded as one continuous “account” leading seamlessly into the running account; because the basis of the financial arrangements between the parties changed at the time it was established.

It was common ground between counsel that, if the course of dealing argument were rejected, then it was an implied term of the running account arrangement that interest would be added to the account at a reasonable rate and that in this context, a reasonable rate is a rate arrived at by a method that is objectively a reasonable method for CCC and Mr Masri to have adopted in May 1993. However there was no agreement as to what that reasonable rate was and this gave rise to the second sub-issue under this head.

As Mr. Aldous submitted, the standard of reasonableness must, in keeping with the general approach of the law as to formation and construction of contracts, be an objective one, rather than one dependent upon an investigation into the subjective, uncommunicated views held privately by one of the parties at the time. It requires the Court to assess the position as at May 1993 by way of objective inquiry. However, whilst I accept Mr. Aldous’ point that, strictly speaking, what was reasonable must be determined by reference to the objective commercial matrix as at that date, rather than by reference to the post-May 1993 documents on which reliance is now placed in Mr. Masri’s skeleton (at paragraph 28(b)), such documents may nonetheless be helpful, by way of a reality cross-check, in relation to the issue as to what would have been a reasonable rate for the parties to have agreed at the time.

As to what was the objectively reasonable rate, on the one hand, Mr. Hapgood argued that, even if I rejected his previous course of dealing argument, I could, nonetheless, in deciding what the parties would have considered to have been a reasonable rate, have regard to the various interest rates that were used or in play between the parties both prior to and after May 1993. In addition to the rates which were the subject of Mr Nakhleh’s calculations prior to May 1993, Mr. Hapgood referred to what he called a number of further pointers in the evidence as to the types of interest rates which the parties in fact considered reasonable, including the following:

before the May 1993 arrangement was made:

the fact that in relation to North Yemen, Mr Masri was charged interest at the rate charged to CCC by Arab Bank on the financing of the North Yemen projects;

the fact that in mid-November 1992, in relation to the Concession, Mr Nakhleh recorded an instruction from Mr Khoury that interest was to be charged to Mr Masri “until we receive the loan from the bank then actual will be charged.”

the fact that the JOA provided at clause 6.2(b) for interest to be paid if cash calls were paid late, at a default rate of US$ 7 day LIBOR plus 5%, compounded monthly;

the fact that the syndicated loan agreement provided for interest to be paid by CC (Oil & Gas) to the banks at the rate of LIBOR plus 1.5%;

after May 1993:

when Mr Nakhleh instructed his staff “as instructed by the President” to keep a record for Mr Masri’s account in August 1993, the rate of 5% was amended to 4.5% (per 360 day “year”), for the entire period from 30 April 1992 to 31 July 1993;

the fact that when settlement talks took place on 27 November 1995, CCC presented figures to show the capital value of Mr Masri’s stake in the Concession. For this purpose, they estimated future cash flows to which were applied a variety of discount rates from 6% to 10%, even though it was in CCC’s interest to apply the highest arguable rate;

CCC instructed Arthur Andersen to value Mr Masri’s stake, which resulted in the report of 21 February 1996. In their report, Arthur Andersen assumed that CC (Oil & Gas) would pay interest on borrowings from the CCC group at the rate of 6.6% per annum, and applied a discount rate of 16% per annum to convert cash flows into a present value.

Mr. Hapgood also submitted that the running account should be regarded as short term funding (and therefore subject to a simple interest rate in the region of 4.5 to 5% per annum), in the same way as the cash calls made on Mr Masri, because Mr. Khoury hoped to reach agreement as to the value of Mr. Masri’s interests and settle with him in the near future. He argued that, if the intention of the parties at the time of the establishment of the running account arrangement was for a fairly short term arrangement, then it might well be the case that, based on Mr Nakhleh’s approach, the rate to be charged would have been fixed at 5% or 4.5% or something similar.

If that submission were not accepted, then he submitted that, in the light of the written and oral evidence of the experts and all the surrounding factual circumstances:

the only reasonable rate of interest to apply to the running account was to apply to both sides of the account the same variable borrowing rate based upon the syndicated loan rate of US$ Libor + 1.5%; and

given the agreed position of the experts, namely that, if the rate is to be calculated according to normal commercial practice, because the running account contains monthly movements in credits and debits, monthly compounding is appropriate, interest should be compounded on that rate with monthly rests.

Mr. Aldous, on the other hand, on the basis of the evidence given by CCC’s expert accountant, Mark Vincent Hughes (“Mr Hughes”), submitted that the most appropriate measure of a reasonable rate of interest for the long term funding provided by the running account was the appropriate cost of capital for CCC for the Concession. That in turn, he submitted, was to be calculated by reference to a weighted average cost of capital calculation (“WACC”) for the Concession, a calculation which combines equity and debt funding as appropriate, the equity funding component being calculated by reference to a widely used methodology known as the Capital Asset Pricing Model (“CAPM”). He submitted that such an approach reflected the objective reality of three critical facts: first, that in May 1993 CCC’s funding of Mr. Masri would have to be repaid from the credits applied to the running account, and was therefore dependent upon the success of the Concession; second, that in May 1993, there were real risks associated with the Concession, and as to whether it would ever be profitable; in particular, as Mr Masri was aware, in late 1992 and early 1993, oil prices were falling (which meant that the outlook for oil prices in 1993 was highly uncertain) and development costs were escalating, there had been significant budget increases in December 1992, and there were political uncertainties associated with, and consequent risks of, doing business in Yemen; and third, that no-one required in May 1993 to fund Mr. Masri’s cash calls for such a running account would have placed any weight on being able to recover any shortfall from him personally. Accordingly, he submitted that the proper approach to interest was to regard the funding of the running account by CCC as CCC agreeing to “carry” Mr. Masri’s interest in the Concession, rather than as a loan to Mr Masri, with CCC taking the risk of Mr. Masri’s participation, without the potential reward of a successful investment (which would go to Mr. Masri), and to calculate the appropriate rate of interest accordingly, based on the return required for an “investment” of this type. That rate had to be recalculated from time to time, as and when the risks involved in the calculation changed, but its advantage was that it was sensitive to reflect, and take account of, the perception of risk as it changed over time. Mr. Aldous therefore contended that the rate charged to Mr. Masri’s debits on the running account should reflect the investment risk that CCC was effectively thereby running on Mr Masri’s behalf. He also submitted that, as and when Mr Masri’s account went into credit, when his percentage of the oil revenues had wiped out the debit balance on his account, the rate of interest that should thereafter be charged as against CCC should not be as high as that charged against Mr Masri, so as to reflect the much lesser credit risk that he took in affording credit to CCC.

Mr. Aldous also submitted that, whatever the appropriate rate, interest should be calculated on a compound basis. The experts agreed that, to the extent that the Court held that interest should be calculated according to normal commercial practice, interest should be applied to the running account on a compound basis, with monthly rests.

I reject Mr. Hapgood’s submission that the running account should be regarded as short term funding (and therefore subject to a simple interest rate), in the same way as the cash calls made on Mr Masri, simply because Mr. Khoury hoped to reach agreement as to the value of Mr. Masri’s interests and settle with him in the near future. Although I held in paragraph 108 of the Judgment that Mr. Khoury’s intention was to reach some sort of amicable compromise with Mr Masri which would operate so as to bring the running account to an end, as at May 1993, when the running account arrangement was entered into, there was no certainty that any such compromise could be reached or, if it could, when that might happen. Therefore, as Mr. Aldous submitted, it must have been within the parties’ contemplation that the running account could well be a long term arrangement. If they had in fact directed their minds to that problem, they would no doubt have appreciated that the terms of the running account agreement, including as to the rate of interest to be applied, needed to extend to the long term, in which case simple interest would not be appropriate.

Accordingly I conclude that interest should be calculated on a compound basis, with monthly rests, as agreed between the experts.

The real battle between the experts, and indeed the parties, was whether, in the circumstances, the “investment”, or WACC approach, incorporating the CAPM element, was the correct one (as Mr Hughes opined), or whether (as Mr Inglis opined) the borrowing rate approach was the correct one. They agreed that, if an investment approach were the correct approach, then the method should be based on a WACC calculation, including CAPM for the equity element. Mr Hughes submitted four written reports and Mr Inglis two. There were two joint memoranda, in relation to those issues where they were in agreement, together with a lengthy schedule setting out in detail their respective positions in relation to the issues where they disagreed. I heard oral evidence from both. I found Mr Inglis to be the more logical and impressive witness. I found Mr Hughes to be somewhat academic and unworldly in his approach.

In my judgment, the “investment”, or WACC approach, incorporating the CAPM element, would not have been objectively a reasonable method for CCC and Mr Masri to have adopted in May 1993. My reasons may be summarised as follows.

First, I did not find Mr Hughes’ characterisation of the running account as involving a free standing “investment decision” on the part of CCC convincing, either when tested against Mr Inglis’ approach, or as a matter of factual analysis. The reality was that, even before the running account arrangement was agreed, CCC was subject to the risk that it itself would have to fund 100% of its 10% share of the development and operating costs, which it was obliged to its Concession partners to pay. That risk it had taken on in 1986, when it purchased a 40% interest in the Concession; that was both an “investment decision” as Mr Hughes called it, and an “investment” in the ordinary sense. From that point on, CCC had obligations to meet certain payments in relation to the Concession and was at risk of not recovering those payments from profit oil. CCC’s interest of 40% was reduced by the farmouts to 10%. Although Mr Hughes would characterise this as an ‘investment decision’, it was not an investment, but rather a divestment. After the farmouts (ignoring any risk of default by farmout partners), CCC was at risk as regards its Concession partners for 10% of development and operating costs but hoped to recover 10% of profit oil, and of exploration, development and operating cost recoveries. Indeed, after some hesitation, Mr Hughes accepted in cross-examination that the effect of the November 1992 Agreement was not that CCC had made an investment, but rather that CCC had sold a 1% interest in its investment to Mr Masri. As a result of the November 1992 Agreement, CCC remained at risk for 10% of the development and operating costs, which it was still obliged to pay vis a vis the Concession partners; but CCC now hoped to recover 1% of those costs from Mr Masri, 9% of profit oil and development cost recovery (the other 1% having been sold to Mr Masri) and 10% of exploration cost and operating cost recovery. When Mr Masri did not pay his cash calls, CCC’s risk in relation to its 10% share of development and operating costs had not changed. What changed was that CCC now had to consider what to do about the recovery of the 1% share of costs payable by Mr Masri. Mr Hughes accepted that this was not comparable to the kind of investments or freestanding loans the subject of the reports, because CCC's protection under this arrangement was its ability to terminate the 1992 agreement if Masri did not pay, and, upon termination, reacquire the 1 per cent interest. Thus, as Mr. Hapgood submitted, the essential difference between CCC and a genuine investor is that CCC was already on risk for its 10% share and was already on risk that Mr Masri would not pay his 1% of development and operating costs, once it entered into the 1992 Agreement. The latter risk could have been turned in to a certainty if CCC had terminated the Agreement, but it could not have been eliminated by CCC taking some other ‘investment decision’. This is in stark contrast to any third party, who had the option of not taking any risk on the Concession, or on Mr Masri, at all.

The running account was not in any meaningful sense an ‘investment’. Even if it could properly be characterised by Mr Hughes as an ‘investment decision’ the decision it represented was a choice to maintain the possibility of recovering 1% of operating and development costs from Mr Masri instead of terminating his interest and giving up that possibility. It did not represent a choice to take on the risk of Mr Masri’s 1% interest in the Concession as CCC already had that risk under the 1992 Agreement and remained subject to it. In the end, Mr Hughes accepted the fundamental point that the running account did not create new risks for CCC.

Second, leaving the expert evidence to one side for the moment, and looking at the matter objectively, I consider that the WACC or investment approach would have been far too sophisticated and complicated a methodology for Mr Masri and Mr Khoury to have decided upon as a means for calculating interest on the running account. It is simply unreal to think that the reasonable man in their position, and in the circumstances in which they came to agree the running account arrangement, would have considered the “investment”, or WACC approach, incorporating the CAPM element, to be the appropriate tool for the calculation of interest on the running account, even if they had been educated as to its attributes and as to what risks on either side of the line it could reflect. The experts agreed that the application of CAPM to a given set of facts and risk will give rise to numerous potential differences of opinion because of the various judgmental elements involved; moreover, on Mr Hughes’ approach, the CAPM rate has to be recalculated constantly, and a different rate will be obtained whenever one of the risks involved in the calculation changes. How often it ought to be recalculated would be a difficult question and likely to give rise to dispute. Furthermore, the level of uncertainty in (say) 1993, about what the CAPM generated rate might be at some future date, when the account went into credit, would be considerable, and of a different order of magnitude from that of an ordinary variable lending rate, which rises and falls with bank interest rates. Because the CAPM approach involves so many variables and unknowns that no useful assumption could be made of its likely movements over a long period, I find it unreal to suppose that it would have been an objectively reasonable interest rate to apply to the running account.

Third, the experts themselves agreed that they had never come across a situation in which contracting parties had been required to agree anything by reference to a CAPM calculation. In other words, both experts effectively agreed that it was not a recognised contractual tool for the calculation of an interest rate going forward.

Fourth, both in relation to this issue and the related issue as to whether, even on the hypothesis that the borrowing rate approach were the correct one, there should be a differential in the interest rate charged against Mr Masri when the running account was in debit against him, and the rate charged against CCC, when the running account was in credit in Mr Masri’s favour, Mr. Aldous placed great emphasis on the fact that no effective value should be attributed to Mr Masri’s personal liability for the purposes of determining the interest rate to be applied to the running account. He referred to the evidence adduced at the trial, which he submitted demonstrated that no-one being required in May 1993 to fund Mr. Masri’s share of the cash calls would have attributed any value to Mr. Masri’s personal liability. He referred to the following circumstances that he said supported this proposition :

Mr. Masri had not been prepared, or able, to put up funds when he was repeatedly required to do so under the 1992 Agreement in the period October 1992 to February 1993, apart from the US$ 1.5 million which he said he was trying his best to arrange and which he continuously asked to have returned.

In order to support the guarantees that he had to provide in relation to the North Yemen projects, Mr. Masri had to arrange blocked funds as security. Similarly, in order to obtain a guarantee in late 1992 and early 1993 to support his proportion of the syndicated loan (absent a formal share in the Concession), the evidence was that he would have had to put up funds in a blocked deposit, which he was not willing to do. It appears that banks (notably the Arab Bank, of which he was a Director) were not prepared to lend or afford other financial facilities to Mr. Masri on an unsecured basis.

Mr. Masri was not able, or was not prepared, to provide a guarantee to support his proportion of the syndicated loan.

As the Court held at the hearing on 19 September 2006, Mr. Masri had a history of holding his assets in ways which would make it difficult to enforce any judgment debt if legal proceedings had to be taken to enforce his debt, including: (a) Mr. Masri did not own in his own name the house in which he resided in London; and (b) funds which Mr. Masri claimed were his were largely held in a bank account in Switzerland in the name of Sociedad Deberana S.A., a bearer share company, which has since been wound up.

Other assets, such as his shares in the Arab Bank, were also liquid assets which could not be relied upon as continuing to be held by Mr. Masri so as to constitute potential assets against which to enforce the debt. In fact, by the time that it was agreed to enter into the running account, Mr. Masri had recently divested himself of the vast majority of his shares, transferring 42,000 of his 51,820 shares to his immediate family. It appears that this took place on 2 March 1993.

Although at trial Mr. Masri placed great weight on the value of his holding in the EDGO group of companies, no clear and consistent explanation of his holding or the structure of the EDGO group was ever provided. His holding in the EDGO group was not an asset against which enforcement could have been assured – not least because of the uncertainty of the identity of the company in which he held a share (whether a BVI company or a Luxembourg company), the nature and rights attaching to such share, and the extent (if any) to which it gave indirect rights to the underlying assets in any EDGO subsidiary.

In any event, the evidence at trial was that EDGO would not have been able to provide any funds or assets to enable Mr. Masri to meet his cash calls or support a guarantee, with the exception of the US$ 1.5 million which was paid, but the return of which was immediately, and repeatedly, sought.

The amounts of money that Mr. Masri kept in bank accounts in London were insignificant by the standards of the amounts he was indebted to CCC in the running account.

I reject Mr. Aldous’ submission that the facts relating to Mr Masri’s personal net worth (or absence of) point to the conclusion that the “investment”, or WACC approach, incorporating the CAPM element, would have been objectively a reasonable method for CCC and Mr Masri to have adopted in May 1993. I also reject Mr. Aldous’ submission that those facts support the conclusion that, even on the hypothesis that the borrowing rate approach were the correct one, there should be a differential in the interest rate charged against Mr Masri, as opposed to that charged against CCC. Whatever the actual financial position of Mr Masri in May 1993 (and it was clearly not transparent as at that date), and even on the basis, which I accept, that, as at that date, he did indeed hold his assets in ways which would have made it difficult to enforce any judgment debt against him, the fact was that the perception which CCC, by Mr Khoury, had of Mr Masri’s ability to pay what was due from him, was that he was a indeed a wealthy man, but simply did not want to put money into what he considered to be a potentially losing venture; see Mr Khoury’s second witness statement at paragraph 86 and paragraph 99 of the Judgment. As Mr. Hapgood also pointed out, whatever the actual position, Mr Masri appeared to be a man to whom substantial funds were available, since the evidence disclosed (a) that he was the beneficial owner of a company, Deberana, which had assets worth some US$ 28,560,101 with UBS Geneva as at 31 December 1992 and (b) that he also owned jointly with Mr. Ayoubi the EDGO Group’s ultimate holding company, EDGO SA, whose audited accounts to 31 December 1992 revealed net assets of US$ 68,163,690, with much of this in liquid or readily realisable assets.

Given that perception, the long commercial relationship described at paragraph 3 of the Judgment, Mr. Khoury’s stated concern not to offend Mr. Shoman in his (Mr Khoury’s) dealings with Mr Masri, and also the fact that Mr Masri under the terms of the 1992 Agreement was not entitled to any share in operating cost recoveries, I conclude that objectively the parties would not have regarded it as fair or reasonable either for the “investment” approach to have been adopted to set the interest rate on the running account, or for there to have been any differential between the rate charged against Mr Masri and that charged against CCC. An “investment”, or WACC approach, incorporating the CAPM element, would (as the various schedules produced by the experts show) have resulted in CCC retaining, out of Mr Masri’s 1% share in the profits of the concession, a figure substantially in excess of its actual or notional costs of borrowing, which would not have reflected the “pass through” nature of the arrangement, nor would have been objectively regarded as reasonable in all the circumstances. Moreover, Mr Inglis, whilst recognising that CCC had access to more substantial assets than Mr Masri, and therefore that there was a greater risk in lending to Mr Masri, nonetheless concluded that, in the circumstances, it was fair and reasonable to impose the same rate of US$ LIBOR + 1.5% on both sides of the account. In so concluding he took account of the fact that, in substance, the loans by the bank syndicate to CCC, and by CCC to Mr Masri, were effectively secured primarily on the cash flows of the Concession, albeit that CCC had put up guarantees, and the fact that Mr Masri was not entitled to recover operating costs recoveries meant that CCC’s risks in relation to the Concession were thereby reduced.

Thus, in my judgment, the objectively reasonable rate in all the circumstances which the parties, if they had turned their minds to the question, would have been likely to have reached, is, as Mr. Hapgood submitted, a borrowing rate based upon the syndicated loan rate of US$ LIBOR + 1.5%, to apply to both the situation where Mr Masri was in debit, and where he was in credit. Whilst I have rejected any implied agreement based upon past course of dealings, the impression that one can deduce from the evidence is that the intention was that Mr Masri would have to compensate CCC for the cost of funding his cash calls; and that that cost was effectively CCC’s cost of borrowing the funds under the syndicated loan agreement to fund the Concession, namely US$ LIBOR + 1.5%. There was never any suggestion in any of the dealings between the parties that there would be any uplift in the rate to reflect a profit, or additional risk, element to CCC, on the basis that it was the actual lender to Mr Masri. That conclusion is further supported by the fact that, in cross-examination, Mr Hughes accepted that, if it was clear what CCC’s alternative use would be for the funds involved, then he would have no objection to the alternative use approach set out by Mr Inglis, and that the only alternative use which either expert can identify, and which is supported by the factual evidence, is that CCC could have borrowed less or deposited more. As Mr. Hapgood submitted, this approach points to the same final result as the primary approach adopted by Mr Inglis, namely selecting a reasonable borrowing rate of interest.

Accordingly, for these reasons, I conclude that the objectively fair and reasonable rate in all the circumstances to apply to both sides of the running account is a borrowing rate based upon the syndicated loan rate of US$ LIBOR + 1.5%, compounded with monthly rests.

During the course of the hearing I raised with counsel the question whether, although the 1992 Agreement was not a partnership agreement, any assistance might be obtained in relation to the question as to the rate of interest to be applied to the running account from authorities relating to the law of partnership. On 28 February 2007 I received further written submissions from counsel, for which I am grateful. However, although their respective analyses of section 24 of the Partnership Act 1890, such authority as there is on the rate at which interest is charged in a partnership context, and the various commentaries in The Law Commission Report No.88 on interest dated June 1978 and The Law Commission Report No.283 on Partnership Law dated 2003 were informative, in the event I did not regard the material as of any real assistance in the determination of the issues before me. The most that can be said is that the materials support the well-recognised proposition that the generally accepted approach to fixing a reasonable interest rate for accounts in commercial contexts is to do so by reference to bank base or lending rates.

In the light of my conclusion that there is to be no differential between the rate charged against Mr Masri and that charged as against CCC, and that the “investment”, or WACC approach, incorporating the CAPM element, was not appropriate, this point becomes, if not effectively moot, of very little numerical significance in the taking of the account. It would only have been of numerical significance if I had held that Mr Masri was to be charged with a higher rate of interest than US$ LIBOR + 1.5% on amounts outstanding from him. It may still have some slight impact on the taking of the account in a cash flow sense, since if the benefit of the loan is notionally taken into account, Mr Masri would be debited with the cash call due from him and then credited in the amount of 10% of the syndicated loan (namely US$ 5 million), when it was drawn down, and then subsequently debited with 10% of the interest payments and principal repayments as and when they were made, together with compound interest on any outstanding amounts at each month’s end. On the other hand, if the loan is not taken into account, Mr Masri would simply be debited with the cash call due from him, and charged interest at US$ LIBOR + 1.5% on amounts outstanding from him, likewise compounded monthly.

Thus the issue is not (as it was in November 1992, when the Judgment held that an understanding was reached about the syndicated loan) whether Mr. Masri was to benefit from the loan in the sense of not having to put up cash in respect of the first US$ 5 million (i.e. 10% of the US$ 50 million loan) of costs due from him. Rather, the issue between the parties is, as I have described above, whether, notwithstanding the new running account arrangement put in place at the end of May 1993 (as set out in paragraphs 108 and 110 of the Judgment), Mr. Masri is able to benefit from the syndicated loan, in the sense of a credit on the running account in the amount of 10% of the syndicated loan (namely US$ 5 million), against which he would subsequently be debited with 10% of the interest payments and principal repayments which subsequently had to be made.

In paragraphs 75-77 and 81 of the Judgment I concluded that an understanding was reached between Mr. Khoury and Mr. Masri in November 1992 to the effect that Mr. Masri would be entitled to receive the benefit of a 10% share of the syndicated loan. However, as Mr. Aldous submitted, my conclusion as to what was agreed as at that date went no further than an understanding that Mr. Masri would not have actually to put up funds (insofar as covered by his proportionate share of the syndicated loan), and did not extend to any understanding as to how interest would be charged. I said:

Although Mr. Masri also seeks to rely on Mr. Nakhleh’s handwritten note added to his note of 18 August 1992, where he wrote “charge interest until we receive the loan from the bank then the actual will be charged”, as evidencing an

Moreover, the November 1992 understanding was reached at a time when, as Mr. Aldous submitted, there had been no decision on the part of anyone on behalf of CCC that there would be a running account that would accommodate Mr. Masri’s payment obligations. On the contrary, even when the running account idea was floated by Mr. Masri in February 1993, I held in the Judgment that it was rejected at that stage. Furthermore, in November 1992, the parties clearly contemplated that Mr. Masri would be paying his share of the cash calls as they fell due, save for those that could be paid out of the proceeds of the syndicated loan.

I accept CCC’s submission that the understanding reached in November 1992 as to Mr. Masri having the benefit of the syndicated loan as recorded in paragraph 77 of the Judgment was superseded by the running account arrangement found at paragraphs 108 and 110 of the Judgment. At this point, the discussions about the loan became a matter of history only – under the running account Mr. Masri would not have to put up any actual funds, regardless of the ultimate amount of his share of the costs. In those circumstances, the “benefit of the loan” would no longer mean anything substantive because by reason of the move to a running account he would no longer have actually to pay at all. That position seems to me to be supported by the documents on which I relied in paragraph 108 of the Judgment as evidencing the running account, and in particular Mr. Nakhleh’s instruction to Mr. Abdo in August 1993, in which no mention is made of taking account of the syndicated loan, and with the schedule subsequently prepared in which Mr. Masri was not given the benefit of the syndicated loan. Once the running account was in operation, and ex hypothesi Mr. Masri was not actually paying his cash calls, but being debited with the principal of the amounts outstanding and interest thereon, it would have been unnecessarily complicated for the accounting process to have treated the draw down of a proportion of the loan as a notional payment by Mr. Masri, to be credited to the account, but with a debit for his proportionate share of the interest on the loan. All that needed to happen was for him to be debited with the amount of his cash call and interest to be charged periodically on that.

The submissions made to contrary effect by Mr. Hapgood in support of his argument that he was entitled to the benefit of the cash flows in relation to the syndicated loan take no account of the point that the discussions as to Mr. Masri sharing in the benefit of the loan took place against an assumption not of a running account, but of Mr. Masri actually paying what was due from him as and when it fell due under the 1992 Agreement (save for that amount covered by his proportion of the loan, i.e. US$ 5 million, as and when it was drawn down).

Further, as I held in paragraph 98 of the Judgment, in February 1993 Mr. Masri and Mr. Khoury reached an agreement that Mr. Masri need not pay the then outstanding amounts in respect of cash calls, and that the sum of US$ 1.5 million would be returned to him, if he provided a bank guarantee in respect of the amount of US$ 5 million to support the syndicated loan. Mr. Masri never provided this guarantee. In the circumstances, I accept Mr. Aldous’ submission that the subsequent return of the US$ 1.5 million without provision of a guarantee indicates that matters were by that stage being dealt with separately from the syndicated loan. However, the fact of the syndicated loan, and that it was to a considerable extent funding CCC’s participation in the Concession, were nonetheless important background factors to the parties’ dealings, as I have held above in the context of my decision on the appropriate interest rate to be applied to the running account.

Accordingly, in my judgment, Mr. Masri is not entitled to receive the benefit of being notionally credited with the proportionate share of the syndicated loan, and thereafter to be debited with interest payments and capital repayments in relation to the loan. As I have said, I doubt that this decision in the circumstances will have any substantial numerical consequences in the taking of the running account.

I shall hear counsel in relation to any consequential matters arising out of this judgment, and as to the precise form of the order.

Finally, I should like to I express my particular thanks to leading and junior counsel and the solicitors on each side for their helpful and detailed written and oral submissions. The manner in which the arguments were presented enabled the court hearing to be disposed of within two days, notwithstanding the complexity of certain of the issues.