Pagel & Anor v Farman

This has been the trial of disputes between the two partners in the Second Claimant, Gradient Capital Partners LLP, once an exceptionally successful hedge fund. At the end of the first week of trial the First Claimant, Mr Pagel, discontinued his claim for some £5.2 million which he said the Defendant, Mr Farman, owed him for excess drawings and a loan. That left the counterclaim by Mr Farman against Mr Pagel for about £3.85 million comprising mainly a claim for return of a gift (“the Gift”), an issue requiring application in a commercial context of the recent Supreme Court decision of Futter & anr, Pitt & anr v. Revenue & Customs Commissioners [2013] UKSC 26.

As the trial was in the end only of the Counterclaim the number of witnesses was reduced. The two parties gave evidence as did Mr John Gunn who has been Chief Operating Officer of the fund since 2006. In addition I had ten bundles of documents to consider of which only a small number were directly relevant to the remaining issues.

The written arguments in this case rely more than usual on citation from the witness statements and oral evidence of the parties. Before considering that evidence it is useful to set out the facts that are agreed or which emerge from the contemporaneous documents.

In 2000 Mr Pagel and Mr Farman were both working for the same fund manager, Adelphi Capital Partners, and had previously been at Goldman Sachs. In early 2001 Mr Farman, Mr Pagel and a Mr Wall decided to leave to set up a hedge fund. Mr Farman left in May 2001 followed by Mr Wall in August. Mr Pagel joined them in September.

Mr Farman and Mr Pagel were to be equal partners in Gradient Capital Partners LLP (“the LLP”) with Gradient Capital Limited also being a member. Both Mr Farman and Mr Pagel put capital into the LLP of £135,000.00 each and agreed to invest their own money into the fund. Their agreement was set out in the LLP Partnership Agreement dated 9 October 2001.

The LLP managed a number of funds each of which paid annual management and performance fees to the LLP. The management fees were paid monthly and the majority of the performance fees were paid in December and January. The LLP’s financial year ran from 1 August to 31 July. Once management fees and performance fees had been paid into the LLP’s accounts, Mr Farman and Mr Pagel would withdraw their drawings from the relevant account directly. Until autumn 2006 both Mr Farman and Mr Pagel had to sign confirmations for all withdrawals, thereafter they had to sign confirmations for all withdrawals over £5,000. So each knew what the other was taking out.

At first the fund was not successful. Mr Farman and Mr Pagel shared responsibility for marketing and investing. As time went by Mr Farman concentrated more on investing the funds and Mr Pagel more on marketing and client relations. This division of responsibility between Mr Farman and Mr Pagel became a source of friction as the former came to feel that he was generating most of the profit. Mr Farman considered that the 50/50 split of profits applied to the years ending 31 July 2002, 2003 and 2004 was unfair.

The LLP made a profit of £709,792 in the financial year ending 31 July 2004. Those profits were split 50/50 between Mr Pagel and Mr Farman. By an oral agreement between the parties around October 2004 (“the October 2004 agreement”) the partnership profit splits were changed from 50/50 across the board to 66.67/33.33 in Mr Farman’s favour for the performance fees, but with Mr Farman agreeing to pay the costs of fixed employee bonuses from his share of those fees; and 50/50 for the management fees.

The investment funds performed extremely well in the years to 31 July 2005 and 31 July 2006 and enjoyed strong growth through to April 2006. The profits for the year ended 31 July 2005 were divided in accordance with the 2004 Agreement. Those profits were £13,596,297.34, of which Mr Farman received £8,030,015.91 (59.06 %) and Mr Pagel £5,566,281.43 (40.94%). The profits for 2005/06 were £94,321,359.46, which were split as to £58,956,001.37 to Mr Farman (62.51%) and £35,365,358.09 to Mr Pagel (37.49%).

Mr Wall resigned as COO in the summer of 2006 and was replaced by Mr Gunn.

By 29 June 2007 the LLP had accrued performance fees amounting to £52,947,354 which would be payable to it on 31 December 2007 if the performance of the funds held up. The profit split for that financial year was £59,255,331 to Mr Farman and £35,658,228 to Mr Pagel. In November and December 2007 the performance of the investment funds deteriorated sharply resulting in the funds recording losses for the 2007 calendar year. This resulted in the previously considerable accrued performance fees expected at the end of June 2007 being lost and written back to the fund shareholders.

By January 2008 Mr Pagel and Mr Farman were in discussion but not agreement about some readjustment of the allocation of profit between them. At this time the funds were down approximately 25% for the financial year and tensions were running high between Mr Pagel and Mr Farman. Mr Pagel blamed Mr Farman for the poor performance of the investment funds between November 2007 and January 2008. Both Mr Pagel and Mr Farman had to pay income tax at the end of January 2008. Mr Farman needed cash to enable him to meet his liability. Mr Farman was reluctant to redeem a substantial sum of his investments from the fund on a falling market and so requested that he be allowed to draw £10 million from the LLP which would include a partial excess draw. Mr Pagel was unhappy about this. In the end, to facilitate the drawing of £10 million required to settle his tax liability Mr Farman agreed not to take any share of the performance fees which had been crystallised by client redemptions from the funds within the calendar year 2007 and to reduce his share of the management fees from 50% to 33.3%. Mr Pagel accepted this and allowed Mr Farman to draw the £10 million he required from the LLP. Mr Farman sees these arrangements as concessions and estimates that Mr Pagel gained some £8 million as a result of them.

Mr Farman had a balance of £3,906,117 available to him in the LLP’s accounts at the time when he drew £10 million in January 2008 which left Mr Farman with an overdrawn balance of £6,039,883. (Mr Farman repaid £6m. on 30 July 2008 leaving an overdrawn balance of £39,883 which has appeared in the LLP’s accounts ever since.)

In March or April 2008 Mr Pagel (a US citizen) informed Mr Farman that he had US tax problems. Tax was not just a concern for Mr Pagel. On 1 April 2008 Mr Farman emailed Mr Gunn saying that he was “flirting with insolvency every five minutes with huge tax liabilities”. Mr Pagel’s liability had arisen as a result of the unforeseen generation of a large amount of short-term capital gains within the investment funds in the fourth quarter of 2007 which had negative tax implications for US taxable investors. He had an unexpectedly large tax bill despite losing money in the investment funds. Mr Farman thought that Mr Pagel blamed him for these problems as Mr Farman’s email to Mr Gunn of 16 April 2008 states: “…having been in a total state of depression for six months I really didn’t need Scott blaming me for his tax problems and then becoming aware of this problem”.

In June 2008 the value of the investment funds fell 18%. Mr Farman says that Mr Pagel again voiced complaints about his personal tax position, stating that he had a substantial unforeseen tax liability associated with his investment in Gradient Discovery Fund (“GDF”). Mr Pagel’s tax liabilities in relation to GDF and potential future liabilities were referred to in internal strategy meetings held at the LLP’s offices on 19 and 25 June 2008. Minutes record “IF/SP asked about Discovery tax and PFIC” (“PFIC” is a form used by the IRS) and “IF/SP asked about Discovery tax - JG is requesting Daiwa/E&Y to give summary to the end June ASAP”.

It is common ground that losses that occurred over the Summer and Autumn 2008 were largely attributable to the funds being heavily exposed to illiquid Norwegian stocks chosen by Mr Farman. Mr Pagel says that he had for some months been urging Mr Farman to reduce the level of the funds' concentration and exposure to Norway. Contemporaneous emails confirm this.

Losses exacerbated the relationship between the partners. In an email dated 3 July 2008 Mr Pagel informed Mr Farman that “Today really is a tipping point for me, and after June I simply have no capacity left for personal losses …”. On 8 July 2008 Mr Farman sent Mr Gunn an email about profit split calculations for the year ended 31 July 2007 stating “am desperately trying to work out my own tax liability situation to see if I can help scott out more with his tax situation for calendar year 2007 earnings”.

Later on 8 July Mr Gunn sent Mr Farman an email copied to Mr Pagel stating:

“I tried to call, spoke to Scott and he is going to tax meeting on the basis of what was agreed at your previous meeting on this i.e.”

In July 2008 Mr Pagel had a £5.5 million tax liability. As a result of the £10 million loan to Mr Farman, there was insufficient available cash in the LLP from which he could make a withdrawal. Mr Pagel was unwilling to redeem his investments in circumstances where the main fund had fallen by 9% on 3 July 2008 after having fallen 18% in June. Accordingly, on 30 July 2008 Mr Farman redeemed £18.5 million from the funds. He used £6 million of that to pay off the loan, bringing the outstanding balance owed to the LLP to £4 million and the remainder to make his second tax payment on account for 2007-2008, £12,103,938.

In an email dated 15 July 2008 Mr Farman advised Mr Pagel “I know it’s distressing for you too Scott - and if the sh*t hits the fan will do whatever I can to look after you …”.

In an email dated 16 July 2008 Mr Pagel informed Mr Farman “As I said last week which was the tipping point for me, I could not afford any more losses and all that has happened is 1300 basis points of NAV destruction in 3 days from Norway this week with no sign of potential recovery …”. In an email dated 4 August 2008 from Mr Pagel to Mr Farman, Mr Pagel informed Mr Farman “Last month was already past the tipping point, but this is now (not even including what will happen tomorrow) past the breaking point for me”. By the end of July the funds had fallen 34% for the year.

Throughout autumn 2008 the performance of the investment funds continued to deteriorate. So did Mr Farman’s relationship with Mr Pagel. Lehman Brothers collapsed on 15 September 2008. In the ensuing financial crisis the main fund lost over 40% of its value in September and over 30% in October. This provoked $71 million of redemptions in November (3 months after $120 million of redemptions in August and 6 months after $711 million of redemptions in May).

The collapse in the funds seems to have caused Mr Farman a crisis of confidence in his stock picking abilities. His emails expressed his dismay at the performance of the funds, that he had “totally lost the mandate to run money” and that he needed to “get out of Norway as fast as I can”. In candid emails in September Mr Farman lamented events stating on the 16^th “I have been monumentally wrong in my view for reasons I don’t understand”.

On 8 October Mr Farman said he wished to resign and Mr Gunn urged him not to. By the end of the month Mr Farman believed that Mr Pagel wanted him to leave the LLP. On 20 November Mr Pagel asked for a partners’ meeting on 25 November. These meetings often involved one party being present by telephone not face to face discussion. Further, while Mr Pagel preferred to work from the LLP’s office in the City, Mr Farman generally traded from his home in Surrey. By this time most of the communication between the partners was through Mr Gunn as they were not speaking to each other very much. The stress of the financial crisis will not have been lessened by the isolation of the partners.

There is no written record of the partners’ meeting of 25 November, if it occurred. Discussions were occurring of some kind and it seems clear that Mr Pagel still wanted Mr Farman to leave the LLP and Mr Farman wished to go while Mr Gunn was trying to keep them together. On 27 November 2008 Mr Gunn informed Mr Farman that Mr Pagel was looking for a couple of million pounds in financial assistance and Mr Farman stated that he would try to help Mr Pagel. The expression ‘goodwill gesture’ must have been used. On 28 November Mr Gunn sent Mr Farman an email setting out the terms under which Mr Pagel was prepared to continue with Mr Farman as a member of the LLP. The email states:

“As regards Scott wanting you out, he has agreed to consider your response on the five points i.e.”

“Veto

“No Economic Interest

“No trading

“Goodwill gesture (I think he is looking for circa £5m into partnership)

No mention of past going forward

“I accept that you may find it hard to accept these terms but at least there is an olive branch from Scott to work with you and u both can pick stocks etc with Scott having the final say if necessary.

“The 5m I think is Scott’s price to see if u did mean u would sort him out because of his situation considering he has lost over 10 times this via Norway etc.

“I personally would like to see the Partnership continue and feel the business is better with both u in it albeit under a new risk controlled arrangement. Scott expects to hear your response by next Friday otherwise he will expect you to leave amicably after admin issues are squared e.g. EBT, Aker/Discovery.”

A response from Mr Farman some 20 minutes later included: “As for the “goodwill” gesture well that just seems to be a moving target having just doubled already in the past 24 hours. As I explained I more than earned every penny I have taken from this business through to last July and to a degree everyone needs to grow up here because whilst I accept our losses are horrendous in magnitude losses are part of the investment business … And to further remind you Scott’s personal issues relate largely to his tax issues as evident by the fact that I still have some investment within this business. I have a high regard for Scott and clearly don’t want to see him suffer as he is suffering … If Scott wants to get out of the situation he is in he should have considered working with me rather than working against me … I clearly want to see scott work out his problems”.

On 2 December Mr Gunn sent an email to Mr Farman in which the demand for goodwill gesture of a £5m. gift was repeated “to alleviate his losses, tax situation and make up for you ignoring his commercial direction requests until the business has lost all of its assets. He believes this gesture acknowledges in action your concerns to him, nothing else will suffice”. Mr Gunn stated that the payment would be into the LLP.

On 3 December 2008 Mr Farman spoke to Mr Gunn and offered Mr Pagel, through Mr Gunn, a gift of £5m in the form of an illiquid holding of shares in a Norwegian company called Aker Exploration (“Aker”). Mr Gunn forwarded this offer to Mr Pagel in an email dated 3 December describing it to Mr Pagel as a “goodwill gesture”.

On 4 December 2008 Mr Farman emailed Mr Gunn referring to a brief conversation with Mr Pagel in which he had advised him that he would not be guaranteeing the worth of the Aker shares at £5m. Mr Farman advised Mr Gunn that the result of the conversation was that “I think we won’t be able to get something together sadly. Personally I think it is enormously difficult for scott to say yes to this and I don’t blame him … the likelihood of this akx share price holding up is absolutely zero to be honest - anyway I will see you just after midday tomorrow to do the resignation letter as agreed and we will just have to move on I am afraid …”.

Mr Pagel accepted the gift of shares. Mr Farman tried to turn the illiquid gift into money and, to the surprise of the parties, on 5 January 2009 received an approach from a broker for the purchase of the Aker shares. Mr Farman put the offer to Mr Pagel who accepted it even though it was for less than £5 million, realising in the end £3,822,991. Mr Farman advised Mr Gunn of this by email on 5 January 2009 and proposed that he would transfer that sum to the LLP “and then we adjust the splits for that [2007] financial year accordingly to reflect this”. Mr Gunn advised Mr Farman the same day that Mr Pagel accepted the sale sum and that he would have to pay tax on it. Mr Farman replied to that acknowledgement stating “I want a tax shield on this”.

Correspondence then ensued on the tax treatment of the Gift and the implications for Inheritance Tax which, as I see it, casts no light on the central issue in this case. It is however relevant to a minor claim I refer to below.

Mr Gunn sought the advice of Mr Meadows and Grant Thornton on the IHT issue and on 26 January 2009 forwarded to Mr Farman an email from Grant Thornton which advised that it would be prudent to insure against the possibility of Mr Farman not surviving the gift by the requisite seven year period and attaching a draft letter to document the gift. This draft letter is addressed to Mr Pagel from Mr Farman and states “Please accept this unfettered cash gift of £3,800,000 made on [insert date] as a sign of our enduring friendship …”.

On 28 January 2009 Mr Gunn asked Mr Farman to transfer the gift directly to Mr Pagel to avoid delays because, he incorrectly claimed, Mr Pagel was “depending on” the gift to pay his tax liability at the end of January. Mr Farman replied: “this is my gift and it gets done on my terms”.

Payment of the gift was made to Mr Pagel on 30 January 2009. Mr Gunn confirmed to Mr Farman that Mr Pagel “has told me and confirmed he is happy to acknowledge in writing that he has full liability on any tax consequences with a gift from you, taking full account that your thresholds and allowances will not be affected if a tax event arose in the 7 year period and that you and your estate have no liability whatsoever should your demise occur in this period. I will get the necessary documents in place ASAP. Scott as you are aware will explore the possibility to mitigate this liability with appropriate insurance cover which has not been fully looked into but we know this type of cover is available for such eventualities”.

On the same day Mr Farman advised Mr Gunn that he no longer wished to work with Mr Pagel and that he would be resigning from the boards of the investment funds immediately and from the LLP as soon as he could redeem his remaining investments stating: “I have asked and asked and asked for clarity on the tax situation but haven’t got it, and there has been precious little effort on Scott’s part to assist with this, and moreover a complete and total lack of gratitude. Consequently I feel I have been pushed to the edge now and therefore wish you to submit redemption requests for all my funds for the next redemption window, and I will stay on to assist in the continued deleveraging and cease to be a partner in Gradient Capital as soon as I can withdraw all my funds. In the meantime I will resign from the board of directors of both funds effective Monday … I am sorry it has come to this but I am sick and tired of the stress and have no further desire to want to see us make a success of this.”

On 3 February 2009 Mr Gunn forwarded to Mr Farman emails between himself and Mr Risorto of Grant Thornton regarding the IHT liability for the gift attaching a draft letter for Mr Pagel to sign. The draft letter stated “Thank you for your kind cash gift in the sum of £3,822,911” and acknowledged liability for the IHT consequences of the gift. Mr Gunn stated that he would pass it on for review by lawyers and then get Mr Pagel to sign it.

The Gift is described in writing by the parties subsequently. Thus in an email on 12 March 2010 Mr Farman described the gift as “meant to facilitate his payment of tax bills and prevent him from the distressed sale of his apartment in London”. On 18 March 2010 Mr Farman stated “as I have said many many many times I made the gift in all good faith to assist my partner Scott with his various tax liabilities and prevent the distressed sale of his house etc. …”. On 15 June 2009 Mr Gunn forwarded a copy of a letter drafted by Ernst & Young signed by Mr Pagel and dated 12 June 2009 which stated that the gift was in recognition that Mr Pagel had suffered financially as a result of Mr Farman’s investment approach. Mr Farman objected to the wording of this letter on numerous occasions. Relations between the parties did not improve and in time the action was brought.

Against this background Mr Farman seeks repayment of the Gift principally on the grounds that he made it by mistake and following misrepresentations by Mr Pagel. By the end of the trial Mr Marshall QC relied primarily on mistake rather than misrepresentation. I next summarise the relevant legal principles.

Mr Marshall QC and Mr Moran for Mr Farman summarised, in terms with which Mr Elliott QC and Mr Burdin did not disagree, the law as follows in their written closing.

“The principles governing the recovery of a gift made under a unilateral mistake are as follows: a gift may be recovered by the donor from the donee where there is a causative mistake of sufficient gravity as to the legal character or nature of a transaction or as to some matter of fact or law which is basic to the transaction and where retention of the gift would be unconscionable. As regards the mistake pursuant to which the gift was made, it is irrelevant that the mistake was not known to, still less induced by, the donee or that the mistake was due to carelessness on the part of the donor.”

This summary derives from the judgment of Lord Walker (with which the other six justices agreed) in Futter. The following passages are particularly pertinent.

“114.

Some uncontroversial points can be noted briefly. It does not matter if the mistake is due to carelessness on the part of the person making the voluntary disposition, unless the circumstances are such as to show that he deliberately ran the risk, or must be taken to have run the risk, of being wrong. (There is an illuminating discussion of this point in Lord Hoffmann’s speech in Deutsche Morgan Grenfell Group plc v. Inland Revenue Commissioners [2007] 1 A.C. 558, paras. 24-30). Nor need the mistake be known to (still less be induced by) the person or persons taking a benefit under the disposition. The fact that a unilateral mistake is sufficient (without the additional ingredient of misrepresentation or fraud) to make the gift voidable has been attributed to gifts being outside the law’s special concern for the sanctity of contracts (O’Sullivan, Elliott and Zakrzewski, The Law of Rescission (2007) para. 29.22):”

“It is apparent from the foregoing survey that vitiated consent permits the rescission of gifts when unaccompanied by the additional factors that must be present in order to render a contract voidable. The reason is that the law’s interest in protecting bargains, and in the security of contracts, is not engaged in the case of a gift, even if made by deed.”

“122.

… I would provisionally conclude that the true requirement is simply for there to be a causative mistake of sufficient gravity; and, as additional guidance to judges in finding and evaluating the facts of any particular case, that test will normally be satisfied only where there is a mistake either as to the legal character or nature of a transaction, or as to some matter of fact or law which is basic to the transaction.”

“124.

Lindley L.J.’s test in Ogilvie v. Littleboy, quoted at para. 101 above, requires the gravity of the causative mistake to be assessed in terms of injustice - or, to use equity’s cumbersome but familiar term, unconscionableness. Similarly Millett J. said in Gibbon v. Mitchell [1990] 1 W.L.R. 1304, 1310:

“Equity acts on the conscience. The parties [in] whose interest it would be to oppose the setting aside of the deed are the unborn future children of Mr Gibbon and the objects of discretionary trusts to arise on forfeiture, that is to say his grandchildren, nephews and nieces. They are all volunteers. In my judgment they could not conscionably insist upon their legal rights under the deed once they had become aware of the circumstances in which they had acquired them.”

“126.

The gravity of the mistake must be assessed by close examination of the facts, whether or not they are tested by cross-examination, including the circumstances of the mistake and its consequences for the person who made the vitiated disposition. Other findings of fact may also have to be made in relation to change of position or other matters relevant to the exercise of the court’s discretion. Justice Paul Finn wrote in a paper, Equitable Doctrine and Discretion in Remedies, published in Restitution: Past, Present and Future (1998):

“The courts quite consciously now are propounding what are acceptable standards of conduct to be exhibited in our relationships and dealings with others … A clear consequence of this emphasis on standards (and not rules) is a far more instance-specific evaluation of conduct.”

“The injustice (or unfairness or unconscionableness) of leaving a mistaken disposition uncorrected must be evaluated objectively, but with an intense focus … on the facts of the particular case …”

“128.

More generally, the apparent suggestion that the court ought not to form a view about the merits of a claim seems to me to go wide of the mark. In a passage in Gillett v. Holt [2001] Ch. 210, 225, since approved by the House of Lords … I said in discussing proprietary estoppel that although its elements (assurance, reliance and detriment) may have to be considered separately they cannot be treated as watertight compartments:

“… the fundamental principle that equity is concerned to prevent unconscionable conduct permeates all the elements of the doctrine. In the end the court must look at the matter in the round.”

“In my opinion the same is true of the equitable doctrine of mistake. The court cannot decide the issue of what is unconscionable by an elaborate set of rules. It must consider in the round the existence of a distinct mistake (as compared with total ignorance or disappointed expectations), its degree of centrality to the transaction in question and the seriousness of the consequences, and make an evaluative judgment whether it would be unconscionable, or unjust, to leave the mistake uncorrected. The court may and must form a judgment about the justice of the case.”

Mr Marshall says that the relevant enquiry is therefore as to Mr Farman’s state of mind when making the gift. The question whether he was induced into a mistaken belief by anything said or done by a third party is not a requirement (but if established would establish an a fortiori case). As I see it the enquiry is more elaborate than that as paragraph 128 makes clear. Nonetheless the emphasis is on Mr Farman’s state of mind when he made the gift and not on what was represented to him although of course it is for him to prove what that state of mind was. Mr Elliott does not seek to rely on broader considerations surrounding the parties and the transaction submitting simply that on the facts Mr Farman did not have the state of mind alleged.

Mr Farman’s case and Mr Pagel’s defence is broadly as follows.

Mr Farman says that at the end of the first quarter of 2008 and again in about June and July 2008 Mr Pagel represented to him that he had significant tax problems with the IRS. Mr Pagel says that there was a tax issue over his investments, which resulted from his status as a US citizen (and taxpayer for the purposes of capital gains tax). This came nowhere near to an insolvency problem and it was never represented as such.

Mr Farman says that in June or July 2008 Mr Pagel represented that his assets were invested in the investment funds which were decreasing in value but his tax liabilities remained constant. Mr Pagel denies that he represented this but it is common ground that it was true.

During June and July 2008 the investment funds suffered heavy losses and Mr Farman says that Mr Pagel represented to him that he was in financial distress and that he would be at risk of insolvency if the losses continued for much longer. Mr Pagel denies this, points to a lack of documentary support and asserts that Mr Farman would have known what Mr Pagel’s investment in the fund was worth and that he was solvent.

Mr Farman says that these representations were made in the context of commercial discussions and Mr Pagel could foresee that he would rely on them. Mr Pagel denies this asserting that, unsurprisingly at this point, both parties used gloomy language when discussing and arguing about investments in the funds.

Mr Farman says that he informed Mr Pagel that he would be prepared to assist him financially in any way he could and the basis for this offer and the gift subsequently made was Mr Pagel’s financial difficulties. If Mr Farman had been aware that Mr Pagel was not in financial difficulties he would not have made the gift. Mr Pagel denies the difficulties and claims that the gift was not made for the reason claimed but was a goodwill gesture arising from poor investment performance for which Mr Farman was very much to blame.

Mr Farman says that when, in September and October 2008, the investment funds suffered severe losses Mr Pagel demanded that Mr Farman assist him financially. Mr Pagel says that there were demands but arising only from the losses caused by Mr Farman’s insistence on continuing to maintain and increase the funds’ exposure to Norway in the face of Mr Pagel’s opposition. Mr Pagel says that Mr Farman was fully aware of his concerns about the funds’ exposure to Norway and of his requests to reduce that exposure. Mr Farman accepted that by September/October 2008 Mr Pagel would not have expected to receive any performance fees from the LLP for that year. In that context, Mr Pagel says he sought compensation from Mr Farman. Mr Farman accepted in cross-examination that that was broadly correct and that because he had drawn some £74 million from the LLP in the financial year 2006/07 (of which at least £9 million had been kept by him personally rather than having been reinvested into the funds), Mr Pagel’s perception was that he (Mr Farman) was better off.

Mr Farman alleges that in November 2008 Mr Pagel again demanded money claiming that: (a) he had lost over $100m. on his holdings in the investment funds; (b) his tax liabilities alone relating to GDF now exceeded the value of his investment in that fund; (c) he was now at real risk of insolvency; (d) he was now having to resort to selling family assets to alleviate his situation; (e) the sale of his home in London was now a real possibility; and (f) his wife might have to return to work as his financial position was so bad. Mr Pagel denies this and points to the contemporaneous documents which he says are consistent only with a goodwill gesture not with a response to representations.

On 28 January 2009 Mr Gunn, acting on behalf of Mr Pagel, represented to Mr Farman in an email of that date that Mr Pagel was “depending on that to cover his tax bill” for January 2009. Mr Pagel accepts that Mr Gunn’s statement was not true (and says that he was unaware at the time that it had been made) and points out that by then the payment had in effect already been made and Mr Farman accepted that he did not rely on it.

In his pleading Mr Farman says that in reliance on these representations he gave Mr Pagel the gift of £3.8m. Had he known that they were false he would not have done so. Alternatively he says that he made the gift under a mistake of fact that: (a) Mr Pagel needed the funds to cover his tax bill in January 2009; and/or (b) Mr Pagel needed the funds to cover his U.S. tax liabilities; and/or (c) Mr Pagel was impecunious and was at risk of becoming insolvent. As I have pointed out at the trial the issue was mistake rather than misrepresentation.

In summarising the competing positions I have also set out the substance of the evidence of each party. Some flavour of the evidence of each comes from the following extracts from their witness statements.

Mr Farman:

“I meant that if his financial situation continued to deteriorate as a result of the Investment Funds falling then I would try to assist him financially. For all our ups and downs he was still my partner in the LLP and I considered him a friend. We were both experiencing the same stress and turmoil caused by the deterioration of our business, and we were both losing a considerable amount of money. I wanted to help him in any way I could…

I recall other meetings in September and October 2008 in which Mr Pagel made further aggressive demands for financial assistance from me. It was clear that he blamed me solely for damaging our business and causing him devastating investment losses. However, I did not feel obliged to help him because of this. I wanted to help him because I had said that I would and I appreciated the tax difficulties he was experiencing. I repeated my earlier position that I would honour my pledge made to him in July 2008…I had decided that I wanted to continue to work at the LLP and try to re-establish the business and lost client goodwill, and had no desire to quit at the bottom. I also wanted to assist Mr Pagel financially, as I had said that I would. However, any help I gave him had to be given on terms which made sense for me and my family.”

Mr Pagel:

“In return for the goodwill gesture, I would forget the past (the last of my five points) and run a consensus portfolio with Ivor (by which I meant that all positions would be specifically discussed and agreed before being taken, in contrast to the earlier days of the LLP). Again, if this was unacceptable to Ivor I requested that he leave the business quietly, starting the process that day.

“ I may well have said something like ‘if the value of the funds keeps falling I may have to sell my house’, and this could have been true if we had had many more months like September and October 2008 (in which the value of the Main Fund had dropped over 40% and over 30% respectively). The point was, given these huge falls in my net worth and the unprecedented volatility in the funds, it was hard to know what the value of my investments in the funds might be. With most of my assets invested in the funds and therefore subject to these sudden and massive drops in value, the only ‘stable’ asset I had (apart from some cash) was my house. However, I was not prepared to let matters get far and I took effective control of the funds’ portfolio in October 2008, reducing the exposure to Norway, stabilising the funds’ performance and managing the prime broker’s margin concerns. …Ivor knew I was not on the brink of insolvency when he agreed to the gift because he knew what money I had invested in the funds and that I had made no redemptions…

I was furious with Ivor because he had known about my concerns regarding exposure and concentration in Norway for months and had either ignored them or deliberately increased them and his stubbornness was now destroying my wealth and the reputation of the business we had both built.”

The written closing submissions, assisted by the availability of the transcript, analyse the oral evidence with formidable ability and detail. Unsurprisingly the parties in cross examination at times gave answers which were inconsistent as to detail or which, taken in isolation, helped the other side’s case. Yet the case turns on dealings over a comparatively short period, the second half of 2008, between two parties which were to some degree witnessed by Mr Gunn. The difference between the recollections of the witnesses for the most part is of emphasis, tenor and degree. It is common ground that most of the claims relating to Mr Pagel’s tax and personal issues were mentioned to some degree, the difference is first whether they related to the current situation or referred to what might happen if markets got worse and secondly how far they would have been taken literally or seriously by Mr Farman.

Both partners were essentially truthful witnesses doing their best to assist the court.

Mr Pagel put forward a misconceived case, now abandoned, to claim money from Mr Farman. But his claim fell away partly because Mr Pagel readily accepted in evidence matters which were unhelpful to his case. I have no reason to doubt the truth of his evidence about the Gift but obviously recollection will have been hampered somewhat by the elapse of time, now five years since the main events took place, and the bitterness between him and his former partner. Nonetheless his recollection seems to me to be more reliable than that of Mr Farman.

Mr Farman’s recollection faced similar difficulties. He is a man of formidable intellect and self confidence (which words I do not use as a euphemism for arrogance) and, perhaps because of this, recalled matters in great detail and apparently with great certainty. His recollection was however over confident and in some respects inaccurate. For example Mr Farman confidently asserted on two occasions in evidence that he had not made any buy orders in relation to Norway after May 2008 his recollection was genuine but, as he later readily accepted, mistaken. Mr Farman also recalled in his oral evidence, for the first time, that the alleged representations had been delivered during conversations with Mr Pagel around the time of the 25 November board meeting and Mr Gunn’s 28 November email. But this was at a time when, on Mr Farman’s, case communications between the partners were largely through Mr Gunn because relations had become so bad. It was also surprising that no such emphasis had been given to such discussions in Mr Farmab’s carefully and ably prepared witness statements or earlier documents. Although Mr Farman was clearly a truthful witness his oral recollections are not reliable enough to enable me to resolve the fairly narrow differences between what the parties said to each other and or to conclude that Mr Farman would have had the state of mind for which his lawyers contend. Further, the contemporaneous written evidence and commercial probabilities do not assist his case either, as I explain below.

Mr Gunn at first seemed an unsatisfactory witness. He displayed a certainty about matters, such as the litigation process, where most others would have been more cautious. For a while he declined to accept that £1.2 million was a large some of money. He has played an active role in assisting Mr Pagel, whom he still works for, in the litigation. He was also active in putting forward Mr Pagel’s misconceived claim for £5 million. On the second day of his evidence he seemed more straightforward. At the time of these events he was a genuine go between who was trying to keep the parties and the business together. He had a motive to keep the hedge fund going. I have no reason not to accept his account of how the Gift came about and it fits the correspondence. As he saw it the Gift was part of the deal to restore the LLP.

The correspondence seems to me more consistent with Mr Pagel’s case than with that of Mr Farman. The discussions prior to autumn 2008 are relevant only as background but there is also little contemporaneous documentation to support the alleged representations, except as regards tax, in that earlier period. The messages from July from Mr Pagel seem to me to be more consistent with his fury, justified or not, at what he saw as Mr Farman’s obduracy in dealing with the funds in a particular way with the market falling around him. The 15 July email offering assistance because things were bad “for you too Scott” is consistent with the approach I refer to below.

The contemporaneous documents in the autumn record the falling out between the parties. Contact is mainly through Mr Gunn. The emails show Mr Farman reproaching himself for the enormous losses and wanting to resign. Mr Pagel wanted him to go and Mr Gunn was trying to keep them together. In time Mr Gunn brings the parties together so that the partnership will continue on the basis of the five points, including the goodwill gesture. This takes the form of the initially illiquid shares which would not have been immediately available to pay debts. There is reference to Mr Pagel’s tax issues but not at that time to any of his other personal concerns. Once the parties are in dispute about characterisation of the Gift for tax purposes that gift has in practice (but I accept not in law) already been made. From then on the discussion is for a particular purpose casting little light on the real reasons for the Gift. At the end of January, with the shares sold and payment awaited, Mr Gunn incorrectly claims that funds are urgently needed so that Mr Pagel can pay tax. That misrepresentation does not seem material to the issue and it did not cause Mr Farman to do anything differently. Later exchanges about why the Gift was made are not really contemporaneous and may be self serving.

The picture from the documents is of a man making a gift recognising that his trading has fallen short of his own very high standards and caused very large losses to his partner as well as to himself. He responds partly out of honour but the timing shows that the Gift was so that Mr Farman could play his part in re-establishing the partnership as a joint business venture. As it turns out that reconciliation disintegrated almost as soon as it had begun.

Commercial probabilities are not straightforward when one approaches gifts as these are uncommon in commerce, or at least that which goes to litigation. But some factors seem pertinent. The scale of the wealth accumulated by both parties, the size of their holdings even when things were at their worst and Mr Farman’s knowledge of the value of Mr Pagel’s unredeemed holdings (recognising that redemption would of itself cause further falls in value) suggest that insolvency was not on the cards and that Mr Farman would have appreciated that. Mr Farman would, as he says, not have been aware of US tax in any detail but he would have had some idea of the scale of the liabilities from what he was told and from general knowledge. If there had been real insolvency the sale of a flat or a wife’s return to work would have been a drop in the ocean. This suggests that when these points were raised at some of many heated moments between the parties to which Mr Gunn testified they were probably commercial hyperbole of the kind deployed by Mr Farman himself from time to time. It is also more probable than not in a commercial context that a gift would form part of a bargain.

It is for Mr Farman to prove his case. While one tries not to decide cases on the burden of proof it is a factor when dealing with oral evidence about the nuances in discussions occurring some five years ago where the differences of recollection are limited but crucial. The frailties which I identified in Mr Pagel’s case at the end of the first week apply similarly but not to the same extent to that of Mr Farman. Mr Farman has not established his case and the counterclaim fails.

There is a further claim by Mr Farman for something over £4,000 said to be the cost of life insurance to protect him from the inheritance tax consequences of making the Gift. Mr Pagel agreed to pay for such insurance around the time of the Gift but Mr Farman declined to undergo the medical. Mr Marshall relies on Mr Pagel’s broad admission of the obligation in cross examination. Mr Elliott sets out set six separate defences to the claim. This squabble is unworthy of the parties who frequently during their partnership treated each other honourably and with consideration. Taking a pragmatic and proportionate approach to this claim as I would if dealing with it in its proper place, the Small Claims Track in the County Court, I direct that if Mr Farman wants the insurance for the short period remaining and will now undergo the medical, Mr Pagel should pay for it. On this issue there will be no order as to costs.

As I do not consider that Mr Farman made the Gift by mistake the Counterclaim, like the Claim by Mr Pagel, fails.

I shall be grateful if the parties will, not less than 72 hours before hand down of this judgment, let me have corrections of the usual kind and a draft order, both preferably agreed, and a note of any matters which they wish to raise at the hearing.

I am grateful to Counsel and solicitors for the admirable way this trial was presented and prepared.