QOGT Inc v International Oil & Gas Technology Ltd

In this action the Claimant claims US$3,322,577 for the wrongful termination of an investment management agreement under which it was appointed as one of two joint managers to manage the investments of a private equity fund on behalf of the Defendant. The Defendant resists the claim on the grounds that it lawfully terminated the agreement in accordance with its terms, and counterclaims approximately US$13.5 million for alleged breaches of contractual or fiduciary duty in performing the management agreement.

The Claimant (“QOGT”) is a company which was registered in Ontario, Canada, as a special purpose vehicle for the purposes of the management of the fund. It is an indirect subsidiary of Quorum Funding Corporation (“QFC”), a partnership established in 1987 to create and manage private equity funds, headquartered in Canada. Wanda Dorosz was the founder, managing partner, and chief executive officer of QFC, and has at all material times been the principal moving spirit of the group of companies directly and indirectly owned by QFC (“the Quorum group”), including QOGT.

The other investment manager was Quorum European Partners LLP (“QEP”), an English limited liability partnership established on 4 June 2004. By the time of the events in issue in these proceedings, the majority partner was David Sefton and the minority partner, Quorum Growth Funding Limited (“QGFL”), a Quorum group company incorporated in Bermuda. QEP has changed its name, first to Sefton Partners LLP and subsequently to Linton Capital LLP.

The Defendant is a company incorporated in Guernsey on 20 November 2007 for the purposes of holding a fund of private equity investments in oil and gas technology companies. It is a public company listed on the London Stock Exchange and subject to the regulatory regime applicable to such companies. I shall refer to it, as it has been referred to by the parties throughout the proceedings, as “the Fund”, whilst referring to the assets under management more generally as the fund. At all material times it had three directors, one of which was Ms Dorosz, the other two being independent non executive directors. At the relevant time the independent directors were Thomas Price and Christopher Hill.

QOGT and QEP were jointly appointed to manage the fund under an investment management and advisory agreement dated 27 December 2007 (“the IMAA”). The fund raised initial capital investment of about US$43 million on its launch in January 2008. It raised further capital investment of about US$19 million in July 2008, about US$10 million in October 2009 and about US$10 million in February to April 2010.

Mr Sefton and Ms Dorosz fell out, which came to the attention of the two independent directors at the beginning of April 2010. There followed a period of almost two months during which Mr Price and Mr Hill were heavily engaged in investigating and handling the dispute, and endeavouring to resolve matters in the best interests of the continued management of the fund. The dispute between Ms Dorosz and Mr Sefton became acrimonious and entrenched. The independent directors concluded that relations between Ms Dorosz and Mr Sefton had deteriorated to the point where it was likely that the management of the fund could only continue with one or other of the two managers, or a new one. On 28 May 2010, the Fund gave notice of material breach of the IMAA, requiring remedy within 30 days (“the Notice of Breach”). The Notice of Breach, the terms of which are considered more fully below, alleged that the IMAA required the two investment managers to act jointly to provide the investment management services to the Fund and that they had ceased to do so. It required them to re-establish a proper working relationship so as to be able to work together constructively and amicably in the best interests of the Fund. On 1 July 2010, the Fund served notice of termination of the IMAA on the grounds that the breach had not been remedied (“the Notice of Termination”). QOGT disputed the validity of the termination, and purported to accept it as a repudiation. On termination, the Fund appointed QEP as sole manager for an interim period, pending an EGM to determine who should manage the fund. At the EGM in September 2010, QEP narrowly won out over QOGT as the permanent replacement.

In these proceedings QOGT contends that the termination was invalid because:

The Fund takes issue with each of these contentions, and further submits that if the termination was invalid, the Fund would have been entitled to terminate shortly thereafter, and would have done so, as a result of an agreement reached by QOGT and QEP with an investor, James Estill, in the autumn of 2009, which came to the attention of the independent directors in August 2010. This point goes to the quantum of the claim.

The Fund’s counterclaim against QOGT alleges mismanagement of the fund in a number of respects during the currency of the IMAA.

At the heart of the issues is a dispute over the construction of the IMAA, and in particular over the nature and scope of the obligations generated by QOGT and QEP being appointed jointly as investment managers. It is convenient to address this issue of construction before examining the course of events and communications in the critical period between April and July 2010.

QEP was created by a limited liability partnership agreement in October 2004 (“the QEP LLP Agreement”). The original parties were QGFL, Mr Sefton and Alex O’Cinneide.

Mr O’Cinneide and Mr Sefton were friends. Mr O’Cinneide worked in the private equity division of KPMG. Mr Sefton had trained for the Bar, and then worked for a short period at an American law firm. In 2003 he joined a division of the Lukoil group, then Russia’s largest independent oil company, working on sourcing and completing international acquisitions for the group. Mr O’Cinneide and Mr Sefton conceived the idea of setting up a fund to invest in technologies which would assist in increasing extraction rates in the oil and gas industry.

Neither Mr O’Cinneide nor Mr Sefton had any previous experience of managing funds. Mr O’Cinneide had known Ms Dorosz since 2000, and suggested bringing in Quorum as a business partner. Mr Sefton was introduced to Ms Dorosz, and a collaboration agreed which was reflected in the QEP LLP Agreement. The partnership included the Quorum name, for so long as QGFL remained a partner, which was an important part of the benefit which Mr O’Cinneide and Mr Sefton derived from the agreement. QGFL would essentially be a sleeping partner, but with a power of veto over investment decisions (clause 3.1). Mr O’Cinneide and Mr Sefton were to play the main executive role as the Designated Partners (clause 2.8). Mr O’Cinneide and Mr Sefton made capital contributions of £10,000 each; none was required from QGFL (clause 5.1). Income was to be allocated 50/50 between Mr O’Cinneide and Mr Sefton, subject to QGFL being paid £20,000 per annum as a first charge on receipts (clause 6.2). The partnership interests of Mr O’Cinneide and Mr Sefton were 35% each and that of QGFL 30%.

In these proceedings QOGT place particular emphasis upon the dispute resolution provisions in clause 12.4 of the QEP LLP Agreement as part of the factual matrix to the IMAA. It provided:

“12.

4 Dispute among the Designated Members

In the event that the Designated Members are in serious and consistent dispute (lasting for a period of at least six months) with respect to the running of the Partnership or the manner of the management of any funds established by the Partnership, such that any reasonable observer would conclude that the Designated Members are no longer capable of acting as an effective team to manage the business of the Partnership going forward, then QGFL shall be entitled to

(a)

give to the Designated Members a written notice stating that it considers (and any reasonable observer would consider) that the Designated Members are, due to their being in serious and consistent dispute with each other, no longer capable of acting as an effective team to manage the business of the Partnership; and

(b)

elect, provided that thirty days of the above notice having been sent have elapsed and the Designated Members have not resolved their issues of dispute to the reasonable satisfaction of QGFL, (and further provided that such election is made within 60 days of the written notice referred to in Clause 12.4(a) having been delivered and on one weeks written notice) that (i) QGFL’s number of votes at Members’ Meetings and on the Investment Committee shall be increased to 3, and (ii) QGFL shall assume strategic and day-to-day operational control of the Partnership (including the right to appoint the Chief Executive Officer of the Partnership) Should QGFL elect to assume operational control of the Partnership, the Designated Members shall (on written notice to QGFL) have the right to sell their Interests to QGFL, and QGFL shall be obligated to purchase the Designated Members’ Interests, for fair market value, to be determined by agreement among the Members and in default of agreement within 30 days of QGFL assuming operational control, to be referred for determination by the London office of KPMG accountancy firm (or its successor entity), subject always to the selling Member or Members retaining his or their right to the Net Income received in respect of Carried Interest from funds under management on the date of purchase of his interest (and at the percentage entitlement that he or they had immediately prior to the purchase), which Net Income shall be paid to the former Member or Members as and when it is received by the Partnership. The Members hereby undertake to do all things and execute and deliver all documents necessary or desireable (sic) to effect such sale and purchase of the relevant Interest

“Fair market value” in the context of this Clause 12.4(b) shall mean the capital contributions made by the relevant Member, together with such goodwill and future prospects for the Partnership as would be taken into account by a willing third party buyer, but shall exclude any consideration of the management fees payable in respect of funds under management (which management fees shall at all times be retained by the remaining Members to compensate them for the expense, time and effort of managing the funds).”

Mr Sefton arranged for QEP to receive authorisation from the FSA to undertake regulated activities, including acting as an investment manager. Work started to try to raise capital in early 2005, but did not come to fruition until late 2007 when the Fund was established, together with the IMAA, as the structure governing the fund. In the meantime Mr O’Cinneide had taken up a job in Abu Dhabi and been bought out of the QEP partnership, leaving QGFL and Mr Sefton as the sole partners with a 48% and 52% interest respectively, and the latter entitled to 100% of the income, subject to the £20,000 annual fee payable to QGFL. One of the consequences of the reduction to two partners was that QGFL became a Designated Member by operation of law (s.8(2) Limited Liability Partnerships Act 2000), although this was not appreciated by anyone at the time. The result was that the dispute resolution mechanism in clause 12.4, which had previously applied to resolve potential deadlock between Mr Sefton and Mr O’Cinneide, now applied to potential deadlock between Mr Sefton and QGFL.

In 2006 Mr Sefton had initially instructed Messrs Dechert LLP to advise on the legal aspects of setting up the fund, but in 2007 Dechert was replaced by Norton Rose Fulbright LLP. When in the autumn of 2007 it became apparent that an oil and gas technology fund could be established, it was on the basis that Mr Sefton and Ms Dorosz would both be actively engaged in its management. The structure agreed upon was for the Fund to be a Guernsey company with two independent non-executive directors. One was to be Mr Price, who was an old friend of Mr Sefton from university days. He too had trained for the bar, and worked in law firms. His experience had been in the legal, regulatory and tax aspects of investment funds. He had no personal experience of investment management itself, and it was appreciated that his role would be a non executive one. He had neither the necessary experience nor the desire to become involved in day to day management of the fund. The other independent director was Jeffrey Burton, a Guernsey resident with experience of providing corporate services. Mr Burton, like Mr Price, was not expected to play anything other than a non executive role in governance of the Fund. Mr Burton and Mr Price were to be remunerated in an amount commensurate with such a non executive role. The day to day management of the Fund was to be undertaken by QOGT, as a Quorum special purpose vehicle, and QEP, pursuant to the terms of the IMAA. Mr Burton died in a boating accident in June 2008 and was replaced by Mr Hill. Mr Hill’s background included 16 years of fund management for a subsidiary of Barings prior to 2005 and involved a number of non executive directorships. Ogier Fiduciary Services (Guernsey) Ltd (“Ogier”) acted as the administrators of the Fund.

The IMAA was signed on behalf of the investment managers by Ms Dorosz and Mr Sefton respectively. On behalf of the Fund it was signed by Mr Burton, but insofar as its terms were the subject of negotiation, the interests of the Fund were looked after by Norton Rose and the sponsoring broker, as is usual. Neither Mr Price nor Mr Burton were involved. The management structure and fee had of course to be disclosed in the Prospectus, and therefore to be acceptable to investors if the fund were to be established successfully.

The Prospectus, issued in January 2008, set out the nature of the investments which it was intended to make and identified the strategy of the fund. It was, as its name suggested, “to provide expansion capital to companies which own and/or are developing proven proprietary technology which may have a potentially significant effect on the oil and gas industry”. As the Prospectus explained this was “not a blind pool offering. The Investment Managers have spent over 2 years developing a pipeline of potential investments, including the Initial Investments, on which they have conducted due diligence and engaged in discussions with management.” Three “Initial Investment” target companies were identified by description in Part III of the Prospectus. The fund was to be invested in medium size companies with the “potential for long term capital growth”. One way in which this was to be achieved was by exploiting co-investments: “the Company will look to make investments in companies where there are opportunities for the synergistic combination of technologies across companies within the Portfolio, and the Company will actively pursue joint ventures and consolidations among its Portfolio companies.” Another aspect identified was that “The Investment Managers will actively seek to create local joint ventures or sales licensing platforms [for investee companies]… in regions such as the Middle East”. Investments were to be made in the form of secured convertible debentures, which would provide an interest income stream but would put the Fund in the position of influential or controlling shareholders because of the right to convert to equity.

The anticipated investment activity was therefore not simply buying or selling shares on listed markets or investing in other funds. Nor was the function of the managers to be confined to decisions as to whether to invest or divest in target businesses. The fund was to be invested in businesses which would be driven and directed by the managers of the fund as the de facto influential or controlling shareholders. The task of an investment manager of a fund of this nature involves day to day involvement with the investee companies, including approving, appointing or replacing senior management and giving management clear and firm guidance on matters relating to the direction and development of the business, including what ideas to pursue or prioritise and how to go about it. It involves regular contact with the CEO and other senior executives of the investee companies. This was all the more necessary if there were to be synergistic combinations of technologies between the investee companies. This is an important aspect of the factual matrix in determining the nature and scope of the rights and obligations under the IMAA.

The IMAA contained a provision that it might be terminated by the Fund on three years notice (amongst other things). Ms Dorosz’s evidence was that she had asked for a five year period, but agreed to accept the three year period. She said that she insisted on this notice period because she was determined to ensure that QFC/QOGT could recoup at least part of the monies they had spent to set up the fund in the event that the Fund terminated the IMAA. She did not suggest that this subjective motivation was discussed or shared with anyone else, and there is no contemporaneous documentation or other evidence to suggest that it was. This was evidence of subjective intention which is not available as an aid to interpretation of the IMAA.

The IMAA defined QEP and QOGT as “the Investment Managers” and included the following provisions:

“RECITALS

(A)

The Company is an investment holding company the investment objective of which is to provide long term capital gains through investing in growth companies which provide technology to the oil and gas industry. In addition, the Company aims to provide regular dividend yield (after expenses and management fees) due to its strategy of investing through interest bearing secured convertible debt.

(B)

The Company wishes to obtain from the Investment Managers for itself, and the Investment Managers are willing to provide to the Company certain discretionary investment management and investment advisory services on and subject to the terms, conditions and provisions of this Agreement.

(C)

The obligations of the Investment Managers under this Agreement are joint and several

1.

In this Agreement, including the Recitals, unless the context otherwise requires:

1.1.

the following terms shall have the following meanings:

..........

“Key Executives” means Wanda Dorosz, Richard Dole, Michael Goffin, David Sefton and Mickie Abougoush,”

APPOINTMENT

3.2

The Company appoints the Investment Managers to act as its investment advisers and managers in relation to the Fund on and subject to the terms, conditions and provisions of this Agreement and the Investment Managers agree to manage the Fund and to act as an investment adviser to the Company in relation to the Fund, on and subject to the terms, conditions and provisions of this Agreement.

3.4

The obligations of the Investment Managers under this Agreement are joint and several

INVESTMENT MANAGEMENT SERVICES

5.1

Subject to Clause 3.3, the applicable obligations of the FSA Rules regarding suitability and best execution, and the following provisions of this Clause 5, the Investment Managers, acting as agents, will have complete discretion in relation to the Fund to buy, sell, retain, exchange or otherwise deal in the Investments and Assets and any other investments and assets, take all day-to-day decisions and otherwise act as the Investment Managers acting reasonably judge appropriate in relation to the management of the Fund for the account of the Company (without prior reference to the Company), and shall render to the Company any advice in relation to the Fund the Company may from time to time require in connection with buying, selling, retaining, exchanging or otherwise dealing in any investments and other assets (including, without limitation, the Investments and Assets) and generally in relation to the management of the Fund and the day-to-day decisions to be taken in connection with management in the manner agreed between the Company and the Investment Managers from time to time.

5.4

Subject as provided in Clause 5.3 above, the services to be provided by the Investment Managers under this clause shall without prejudice to the generality of Clause 5.1, include the following

5.4.1

seeking out and evaluating investment opportunities for investment by the Company,

5.4.2

determining the manner in which any money raised by the Company may be invested taking into account the Company’s particular requirements, the Investment Objective, Policy and Restrictions,

5.4.3

determining the manner in which any money required for outgoings of the Company should be retained or realised,

5.4.4

providing any advice and recommendations to the Company the Board may reasonably require on matters related to the Assets, the Investments, the Fund and the Investment Objective, Policy and Restrictions,

5.4.5

keeping the Board informed of any future proposed developments or changes relevant to the Investment Objective, Policy and Restrictions of the Company and advising the Board on any changes to the Investment Objective, Policy and Restrictions which the Investment Managers, acting reasonably, consider advisable,

5.4.6

determining whether and in what manner all rights conferred by the investments of the Fund should be exercised and advising the Board on their determinations,

5.4.7

providing material for inclusion in the annual or other reports of the Company and reports to the Board on any matters the Board may reasonably require,

5.4.8

analysing the performance of the Investments and advising the Company generally in relation to investment trends, market movements and all other matters likely, or which the Investment Managers acting reasonably, believe might reasonably be considered likely, to affect the Investment Objective, Policy and Restrictions of the Company,

5.4.9

providing to the Board any information it may reasonably require for the purpose of calculating from time to time the Net Asset Value per Share,

5.4.10

approving the calculation of the Net Asset Value of the Company and the Net Asset Value per Share as performed by the Administrator so as to enable the Administrator to publish the same in accordance with any agreement from time to time in force between the Administrator and the Company,

5.4.11

providing to the Company and any other party the Company may specify a list of transactions concerning the Fund as they may from time to time reasonably request, but not less frequently than once every quarter,

5.4.12

advising the Company (insofar as is reasonably practicable and on request by the Board) of income expected from the Investments over the immediately following 12 months,

5.4.13

providing all information which is within the power of the Investment Managers to provide so as to enable the Company to comply with the provisions of the Listing Rules (if and so long as the Shares are admitted to trading on the London Stock Exchange and listed on the official list of the UK Listing Authority) and any other obligations deriving from the listing of securities of the Company on the official list of the UK Listing Authority and/or the admission to trading of any securities on the London Stock Exchange,

5.4.14

instructing the Administrator regarding the transfer of any funds relating to expenses reasonably and properly incurred,

5.4.15

liaising with and providing to the Administrator any information and documentation (in whatsoever form) it may require from time to time in order to perform its role under the administration agreement (the ‘Administration Agreement”) dated the same date as this Agreement between the Company and the Administrator,

5.4.16

keeping or causing to be kept on behalf of the Fund at the Administrator’s offices all books, records and statements as may be necessary to give a complete record of all transactions carried out on behalf of the Fund and any other books, records and statements as may be required under any Applicable Rules and shall permit the Company and its agents to inspect those books, records and statements at all reasonable times,

5.4.17

supervising, regulating and directing the activities of the Administrator to ensure compliance with its contractual obligations with the Company under the Administration Agreement,

5.4.18

liaising with the Custodian, the Administrator and the Auditors and as and when requested by any of the Board, the Custodian, the Administrator, the Auditors or any other agent of or material service provider to the Company, supply them (subject to Clause 24) with any information they may reasonably request in connection the Company, and

5.4.19

performing all other duties which are normally performed by the investment manager or investment adviser of an investment company the shares of which are admitted to trading on the London Stock Exchange (if and so long as the Shares are admitted to trading on the London Stock Exchange and listed on the official list of the UK Listing Authority)

5.5

In managing the Fund, the Investment Managers shall have regard to, and at all times act in compliance with

5.5.1

the Investment Objective, Policy and Restrictions as altered or amended from time to time by the Board and any policies or restrictions determined by the Board (in each case as notified in writing to the Investment Managers) and any other lawful orders and decisions given from time to time by the Board,

5.5.4

any other matter to which a prudent investment manager or adviser to an investment fund acting with reasonable skill, care and diligence should reasonably pay regard in the discharge of its duties,

5.7.5

All activities engaged in by the Investment Managers under this Agreement shall at all times be subject to the control of and review by the Board,

15 FEES

15.1

Without prejudice to clause 15.3, the Investment Managers shall receive management fees for their services as set out in item 4 of the Schedule. Unless otherwise jointly instructed by the Investment Managers in writing, the management fees shall be paid as to 25 per cent to [QEP] and as to 75 per cent to QOGT.

15.2

The Investment Managers shall be entitled to charge and to retain for its own account a Transaction Fee in relation to each Investment.

15.3

Subject to reimbursement of disbursements as provided in item 6 of the Schedule, to payment of the fees referred to in Clause 15.1 and to clauses 5.7.4 and 20, each of the Investment Managers shall render the services referred to in this Agreement at its own expense and shall be responsible for the fees, costs and expenses of any investment advisers, consultants, attorneys, accountants and other agents and advisers appointed by them. Notwithstanding the foregoing provisions of this clause 15.3, but subject to Clause 15.4 the Company shall be responsible for the fees and expenses described in Part V of the Prospectus entitled “Fees and Expenses”.

15.4

If the initial expenses of the Company necessarily incurred in connection with the Placing (as defined and more particularly described in the Prospectus) shall exceed 2.5 per cent of the gross proceeds of the Placing (the “Excess”), the Investment Managers jointly and severally undertake to reimburse the Company on first written demand the amount of that Excess.

18 NOTICES, NOTIFICATIONS AND INSTRUCTIONS

18.1

Instructions from the Company shall be given to Wanda Dorosz, with copies to David Sefton and Stephen Li, on behalf of both Investment Managers and receipt of instructions by QOGT shall be deemed to be in receipt by both Investment Managers. Either Investment Manager may provide advice to the Company and the Company shall be entitled to rely on the advice so received notwithstanding that conflicting advice may subsequently be received from the other Investment Manager. The Company shall not be obliged to request any clarification where it has received conflicting advice although it may, in its absolute discretion, decide to do so.

20 DELEGATION

The Investment Managers may not perform their obligations under this Agreement through or delegate any of their functions under this Agreement to any other person other than each other

22 TERMINATlON

22.1

Either the Company or the Investment Managers acting through QOGT, may terminate this Agreement by QOGT on behalf of the Investment Managers giving to the Company (in the case of the Investment Managers) or the Company to the Investment Managers (in the case of the Company) not less than three years written notice (or any shorter period of written notice that the other party in writing may otherwise accept).

22.2

It shall be a breach of this Agreement by the Investment Managers, and the Company shall have the right summarily to terminate this Agreement by notice in writing to QOGT on behalf of the Investment Managers if any of the following events shall occur.

22.2.1

If the Investment Managers or either of them shall commit any material or persistent breach of or shall fail to observe or perform any of the material obligations on the part of the Investment Managers to be observed or performed contained in this Agreement and (if the breach is capable of remedy shall have failed (within 30 days after having been required in writing by the Company so to do) to remedy the breach to the satisfaction of the Company acting reasonably,”

22.2.6

if any three of the Key Executives ceases to be full time officers, partners or employees of a member of the Quorum Group or ceases to participate as members of the investment committee of the Investment Managers with responsibility for the management of the Fund and have not in each case within three months been replaced by individuals satisfactory to the Board,

26 EXCLUSIVITY OF APPOINTMENT

26.1

The appointment of the Investment Managers as investment managers and advisers to the Company is exclusive and subject to Clause 20, the Company may not call in or appoint any other investment manager or investment adviser during the term of this Agreement in relation to any of the Services to be provided by the Investment Managers to the Company in relation to the Fund.

26.2

Each of the Investment Managers covenants with the Company that neither it nor any of its Associates or affiliates will, without the prior written consent of the Board either on its own account or in conjunction with or on behalf of any other person or persons whether directly or indirectly, provide or be engaged, connected or interested (except than as a holder of securities listed on a regulated, regularly operating, recognised open market where that holding shall not exceed five per cent, of the class of securities of which the holding forms part) in the provision of investment management or advisory services to any other investment trust or investment company the shares of which are admitted to trading on the London Stock Exchange or its AEVI market, the investment policy of which is substantially similar to that of the Company or which might otherwise reasonably be regarded as competing for Target Investments with the Company.

Schedule

4 MANAGEMENT FEE AND OTHER FEES

The investment Managers shall be entitled to receive from the Company a management fee paid monthly in arrears to the Investment Managers, at one-twelfth of two per cent of the Net Asset Value of the Company per month, together with any VAT.

The Investment Managers shall be entitled to charge and to retain for its own account a Transaction Fee in relation to each Investment.

6 COSTS

Subject to Clause 15.4, the Investment Managers shall be entitled to be reimbursed on invoice for all commissions, transfer fees, registration fees, stamp duty and similar liabilities properly incurred in the observance and performance of its obligations under the Agreement and with the prior written consent of the Board, any other costs incurred. Subject to clause 5.7.4 the Investment Managers’ travel and administration costs shall be for their own account.”

Businessmen would aptly describe QOGT and QEP as joint investment managers and advisers, with joint responsibility to perform the services required under the IMAA. The dispute in this case is over what is meant by “joint” so far as concerns the legal content of the obligations. Before turning to that question, I should address an argument of QOGT that the Fund did not have any entitlement to joint services even in the limited sense of being entitled to the participation of two investment managers. QOGT submitted that clause 20 permitted the managers, if they so agreed amongst themselves, to delegate the entire performance of the management services to be provided pursuant to the IMAA to one or the other of them, such that the Fund was not entitled to performance by more than one of the two managers. I am unable to accept that submission. Clause 3.2 appoints them both to manage the fund, and to act as “an investment adviser” (singular) in giving advice. Clause 5 identifies the investment management services. It is couched in terms that they are to be performed by the investment managers (plural). Clause 3.4 and Recital (C) provide that their obligations will be joint and several. This identifies the obligations as being joint, not merely, as QOGT submitted, that the liability for the performance of such obligations is to be joint. The background to the IMAA is that there were two investment managers chosen, not one, with different individuals concerned in each, in particular with QEP representing Mr Sefton’s involvement. There would have been little point in the Fund having two investment managers if the managers were entitled to reduce the number to one. The agreement required the services of two managers, who were both to be involved, at least to some extent. It is true that had Mr Sefton agreed with Ms Dorosz to be bought out of QEP and of any involvement in management of the Fund, the result would have been that there would have been little difference between QEP and QOGT as legal vehicles through which the investment management services were to be provided. To that extent, the key man termination provisions in clause 22.2.6, requiring three of the Key Executives to leave before a right to termination arose, were insufficient protection for the Fund. But that is not what happened; and for so long as QEP and QOGT remained entities under different control, as they were at the time of the IMAA and remained throughout the relevant period, the Fund was entitled to look to them both to provide the services jointly.

Clause 20 does not require a different construction. It does not provide that one investment manager may delegate to the other the entirety of the investment management services. It is negative in form, and is designed to prohibit delegation to third parties. In doing so, it is framed as a prohibition on any delegation to anyone subject to an exception that it shall not operate as a prohibition on delegation to each other. The saving proviso recognises that some delegation between investment managers is allowed; but it says nothing about the extent of delegation allowed.

What, then, is the legal content of the obligation to provide the investment management services jointly? I have little doubt that at the least it requires the investment managers to work constructively and cooperatively together to provide the services required. Of course this does not require every task or decision to be undertaken jointly. It does not require duplication, nor does it prevent delegation, which was expressly recognised as permissible to some degree by clause 20. Tasks and responsibilities can be allocated between the two managers as they think is in the best interests of the efficient management of the fund. Major decisions, such as those involving whether or how much to invest in an investee company, or whether and to what extent to divest, would be expected to be undertaken by agreement with input from both managers; less important decisions and administrative tasks might be delegated to one or the other pursuant to clause 20 subject to no more than agreement on the administrative framework, or subsequent information and oversight. Responsibility for particular investee companies or areas of business might be allocated to one or the other, provided it was pursuant to a cooperative collaboration in which what was done was what both reasonably judged to be in the best interests of the Fund. It is not necessary to identify what the minimum level of involvement of each manager was for the purposes of deciding this case. They were engaged as a team and had to act as a team.

The obligation to work constructively and cooperatively together in providing the management services does not involve the managers having the same view about everything. They could be expected to disagree about things from time to time, and one of the benefits of having two investment managers, rather than one, is that two different perspectives will be brought to bear. But where there is disagreement, performing the services jointly requires the investment managers to cooperate to resolve differences of view and work cohesively by agreeing on the course to be adopted. This requires the give and take which is a necessary feature of many aspects of business governance, and takes place in board rooms every day of the week. As Mr Hill put it, in my judgment accurately, they were entitled to hold different views, but in order to provide the joint management services they needed to resolve those views and come up with a single approach.

QOGT submitted that there was no need for the managers to cooperate to reach agreement on any particular investment services, provided they were acting as they “reasonably judge(d) appropriate in relation to the management of the Fund” as required by clause 5.1. It was said that this interpretation need not give rise to any practical difficulty because there was a mechanism for resolving disagreements between the managers.

Although by the end of the case this was not in the forefront of his argument, Mr Ashworth QC relied in this respect on clause 12.4 of the QEP LLP Agreement as important factual matrix. I do not find it of assistance in relation to the current dispute. The QEP LLP Agreement was an agreement between Mr Sefton and QGFL, not between QEP and QOGT. If QEP and QOGT could not agree about some aspect of the services required under the IMAA, clause 12.4 could not be invoked by either. When one of the disagreements arose in this case between Mr Sefton and Ms Dorosz, as to payment of the 25% of the management fee directly to QEP under the IMAA, it was a dispute between QEP and QOGT. Mr Ashworth submitted that in practice QFC as parent of both QGFL and QOGT could have invoked the clause against Mr Sefton so as to gain control over QEP. There are a number of difficulties with this analysis. First, clause 12.4 only applies to disputes between “Designated Members” ie QGFL and Mr Sefton; and clause 12.4 only applies to a “dispute (lasting for a period of at least six months) with respect to the running of the Partnership or the manner of the management of any funds established by the Partnership”. A dispute between the managers under the IMAA would not fall within the scope of the clause. Secondly, clause 12.4 is one sided: it gives QGFL an option to buy out Mr Sefton; it confers no right on Mr Sefton to be bought out. He cannot invoke the clause, only QGFL can. It is not therefore a mutually available mechanism for resolving disputes. Thirdly, in any event clause 12.4 would not have provided satisfactory practical protection of the Fund’s interests if the disagreement between the managers reached deadlock with neither party willing to work with the other. It required six months of material and consistent (not persistent) dispute and a thirty day notice thereafter. It was not a solution to a lack of cooperation in managing a fund which involved hands on management of investee companies. The simple fact is that clause 12.4 was not carried over into the IMAA, nor did the IMAA contain any other dispute resolution mechanism between the investment managers. To be fair to Ms Dorosz, this was a lawyer’s point taken on her behalf, not by her; in her evidence she candidly said she thought clause 12.4 was irrelevant.

She did, however, regard clause 18 of the IMAA as the mechanism by which all disagreements between the investment managers fell to be resolved, and this was the main provision relied upon by Mr Ashworth in this context. He argued that if the managers could not agree on an investment decision, they were to provide their conflicting advice to the independent directors of the Fund, who were to make a decision resolving the disagreement.

This is to put more weight on clause 18 than it will bear. Clause 18 does not purport to oblige the Fund to make investment management decisions. It is concerned with advice, not management services as such. Advisory services are only to be provided under clause 5.1 or 5.4.4 if the Fund from time to time requires advice. There is no obligation on the Fund to seek advisory services, and it is entitled to leave the managers to manage the fund. If and when the Fund seeks advice, clause 18 is permissive (“the Company shall be entitled to rely on the advice so received….”). Clause 18 does not purport to impose an obligation on the Fund to carry out investment management functions where the managers cannot agree on them. In my view it does no more than make clear that the joint and several liability of one manager for advice given by the other under clause 3.4 is not ousted by conflicting advice which is not preferred by the Fund.

This conclusion is reinforced by two aspects of the factual matrix. First, the investment management services which fall to be performed are not simply binary decisions of whether to make an investment or not, despite this oversimplification which was employed during the course of argument. The management services require continuous management of the investee companies once the investment has been made, involving establishing relationships with the senior executives of investee companies and giving firm and clear guidance to them on the direction of the business. This hands on aspect of investment management cannot conveniently be provided by constant recommendations to, and decisions by, the board of the Fund. Secondly, even were one to assume that clause 18 were to be regarded as a mechanism for resolution of disputes between the managers, it can only have been intended to operate as such on an occasional and long stop basis. Everyone knew that the independent directors would be part time non executive officers, who lacked the time and expertise to do the management job themselves, and were not being paid to do so. It would be an uncommercial reading of the IMAA to treat it as allowing warring managers to earn the management fee by failing to perform the management services to any significant extent and requiring the independent directors to do so. That is plainly not what clause 18 was meant to achieve.

Similar considerations apply to the Fund’s power under clause 5.5 to give lawful directions from time to time. That is a long stop mechanism which may assist in resolving temporary difficulties. It imposes no obligations on the Fund, and certainly not an obligation which involves the independent directors taking over the management role because the warring managers delegate up to them the decisions which they are engaged and paid to take themselves.

One further dispute of construction of the IMAA pervaded the parties’ analysis of the issue whether the termination by the Fund was valid. QOGT argued that even if the position reached was that it was untenable to proceed with both investment managers, it was open to the Fund to give three years notice of termination, and to give an order pursuant to clause 5.5 that one manager should perform the entirety of the management services required by the IMAA, with the other being put on “gardening leave”. I was not persuaded by this argument. Each investment manager is entitled to be engaged as such, and to be involved in performing the management services during the course of the agreement. Each manager is prohibited from acting for any other comparable or competitive fund listed on the LSE or AIM by clause 26.2, and has a legitimate interest in being engaged in practice so as to have the opportunity of enhancing its skill and reputation as a fund manager. Just as the Fund had a right to receive joint services, that is services provided by both managers, so too each manager had a right to participate in providing the joint services. As I have said, it is not necessary to seek to define the minimum level of involvement required, but the IMAA does not entitle the Fund to deprive either investment manager of any participation at all. The position is not directly analogous to that of an employee who may be put on gardening leave, as is apparent when one considers the position of the remaining active manager as well as that of the ousted manager. The IMAA provides that 25% of the management fee is to be paid to QEP and 75% to QOGT, subject to any contrary agreement reached between the managers. Out of such sum they are to bear the expense of providing the management services. If Mr Ashworth’s argument were correct, it would enable the Fund to require QEP to provide 100% of the services required to manage the fund and bear 100% of the cost of doing so in return for 25% of the fee. This cannot have been what the parties intended.

Were I wrong in this conclusion, it would not assist QOGT in this case. If it be assumed that the Fund would have been entitled to give three years notice, direct QOGT to carry on as sole manager of the fund and put QEP on gardening leave, nevertheless it was not obliged to do so. Its ability (on this hypothesis) to do so is not, in my judgment, a reason for construing the IMAA in a way which would preclude the Fund from terminating for breach if deprived of the cooperative joint services of two managers. Even if the Fund had the right to carry on for three years with only one of the two managers, that would not provide the contractual benefit conferred by the agreement, which was for the joint services of two managers applying their different skills and perspectives.

I have not overlooked the evidence of Mr Price in his witness statement, confirmed when he gave his evidence, that the gardening leave solution is the course which the independent directors would have adopted had they not been entitled to terminate for breach in the way they did. For reasons which I explain when addressing the quantum of the claim, I am unable to accept this evidence at face value. But even were I to do so, it would not assist QOGT in this context. If the IMAA would not have allowed the Fund to adopt such a procedure, it is nothing to the point that he would have followed what would have been a misguided course. There is an element of chicken and egg about reliance on this evidence. It was put forward by Mr Price as what he would have done as the next best solution if termination for breach were unavailable. If termination for breach were unavailable as the remedy in the event of irreconcilably warring managers, that might be an argument in support of the gardening leave solution being permissible, because it is recognised by Mr Ashworth that some commercially effective solution for the management of the fund must be available in the event of the two managers being unable to continue to work together. But that some such solution must exist does not establish that it consists of three years notice rather than termination for breach.

The main witnesses who spoke to the events in the critical period were Ms Dorosz, Mr Sefton, Mr Price and Mr Hill. Some aspects were also covered by the evidence of Mr Huddart and Mr Abougoush.

Much of what happened between April and July 2010 was the subject of detailed written communications by letter and email, so that relatively little turns on unaided recollection of events, although the protagonists sought to put very different complexions on what they said and did at the time. The period prior to April 2010 was less fully documented in the material before me, but is of relatively minor significance in relation to the issues which arise on the claim. Bearing this in mind, and the well known strictures of Robert Goff LJ, as he then was, in Armagas Ltd v Mundogas S.A. (The Ocean Frost) [1985] 1 Lloyd’s Rep 1 at 57, I will record my impression of the witnesses.

Ms Dorosz was a combative witness. She was passionately attached to the righteousness of her cause. At the time of the events leading up to termination, she was convinced that she would be appointed to continue as sole manager, and felt betrayed that the IMAA had been terminated without QOGT at least being entitled to three years’ worth of remuneration by reason of the three year notice period. As a result her evidence lacked balance and objectivity, and was at times impossible to reconcile with the contemporaneous correspondence. She regarded herself as the manager under the IMAA, having had 20 years of experience in managing funds, and was dismissive of Mr Sefton’s value in managing the fund. I must make allowance for the fact that she was not in full health when giving her evidence. She was unable to give evidence as originally scheduled during the first week of the hearing through illness on the first day which required admission to intensive care. She gave evidence during the second week. On her first and third day she appeared to me well enough both mentally and physically to meet the strains in doing so. On her second day, however, she clearly struggled to maintain concentration. This was the result, she subsequently explained, of being on inappropriate medication. I have borne this very much in mind in assessing her evidence. Nevertheless I am bound to say that I found her evidence on occasions to be evasive, self contradictory, hyperbolic and unrealistic. She was inclined to rewrite history to fit a theory of events in which she had been, as she believed, deeply wronged and unfairly treated.

Mr Sefton was, by his own admission, prone to exaggeration, which coloured his evidence. Like Ms Dorosz, he lacked objectivity. He was at times argumentative and incautious in his answers. He believed in the righteousness of the position he had adopted at the time, no less than Ms Dorosz, and was concerned to justify it in his evidence. I was not inclined to place any more reliance on his evidence than that of Ms Dorosz where in either case it was not supported by the contemporaneous documentation or the inherent probabilities.

Mr Price was a careful and impressive witness. He is no longer a director of the Fund. His evidence largely accorded with the contemporaneous documentation, and he was measured and realistic in conceding nuances in cross examination. I felt able to treat him as a reliable witness. His evidence, supported by the contemporaneous documentation, showed that he and Mr Hill had responded diligently and meticulously to the difficult situation in which the independent directors were placed in trying to manage the deterioration in the relationship between Mr Sefton and Ms Dorosz in the best interests of the Fund.

Mr Hill is now Chairman of the Fund. His grasp of the documents and recollection of the detail of events was less secure than Mr Price’s, perhaps as a result of his having had less involvement at some stages. He was kept busy at the time by a transaction on another of the funds in his portfolio, and was away on holiday from 13 to 24 May 2010. He impressed me as a competent businessman and an honest witness.

Mr Huddart was appointed by the Fund at the time of listing in the role of investor relations advisor. He was brought in by the independent directors in April 2010 to try to help resolve the dispute between Ms Dorosz and Mr Sefton. He was a careful, fair and honest witness, as both parties accepted. I felt able to rely on his evidence not only in relation to what happened during his limited participation in events, but also in relation to his perception of how the dispute between Ms Dorosz and Mr Sefton, might best be handled so as to minimise damage to investor relations and the Fund itself.

Mr Abougoush gave evidence by videolink. His evidence was predominantly relevant to the counterclaim. To the extent that it was relevant to the claim, it was largely uncontroversial.

A good deal of evidence was devoted to the investment history between 2008 and early 2010, largely for the purposes of the counterclaim. For present purposes the following summary is sufficient.

The Quorum side of the management was conducted from Canada, in Toronto where Ms Dorosz, was based, and to some extent from Calgary where Mr Abougoush was based. Apart from these two, the main individuals involved were Michael Goffin, Gary Mah and Stephen Li. On the QEP side, Mr Sefton was based in London. There were weekly meetings known as QEXEC meetings, in which Mr Sefton participated usually by telephone, as well as regular discussion outside these meetings.

An Investment Advisory Committee was established. Its function was to provide advice to the managers in carrying out their management functions under the IMAA. It was not an advisory committee to the board. It was chaired by Peter Lougheed, a prominent former politician and chairman of QFC, and included Mr Abougoush, together with a number of independent businessmen with experience in the oil and gas industry. It met on 21 occasions between December 2007 and May 2010 and considered a number of aspects of the Fund’s investments, but there is a dispute as to the extent to which it was able to give, or did give, fully informed advice, or approval of the investments.

In outline the main investments made were in the following companies or ventures:

Also of relevance are two investment projects which were under discussion during the period, named Project Cloud and Project Superdashboard. The concept of both was in different ways to combine technologies to provide a product or service greater than the sum of its parts. Superdashboard was under discussion from December 2008 and throughout 2009, as something which Wellpoint would spearhead. The concept was ambitious and involved combining technologies from investee companies to provide a unified asset management product for the oil and gas industry which would allow management of all aspects of the field in near real time; it was a broader concept than that envisaged for SQ5 of real time reservoir management in that it included above ground facilities.

Project Cloud was an idea of Ms Dorosz’s which grew in mid to late 2009 based particularly on the 3D modelling and visualisation software of Ambercore. By early 2010 it involved a proposal to combine the businesses of Ambercore and Alt Software Inc (“Alt”) whose business was as provider of embedded graphics in various industries outside the oil and gas sector.

Prior to early 2010 there had been no violent disagreements between Mr Sefton and Ms Dorosz, or anyone else, about investments. Mr Sefton sought to suggest in his evidence that there had been serious disagreements, but the written record belies this account, which Mr Sefton was concerned to exaggerate in his evidence. Nevertheless relations were not uniformly harmonious. Ms Dorosz’s evidence was that their relationship had begun to cool from September 2009 and had noticeably worsened in February 2010. Mr Sefton had agreed to the SQ5 project, which had turned out to be an expensive failure, but had had some reservations about it, which he had expressed. He had genuine doubts about the wisdom of QMENA, although not sufficient to prevent his agreement to the investments being made, and not as trenchant as his characteristically hyperbolic description of it as “garbage”. He disagreed about the merits of Project Cloud, which he did not see as something which could be achieved and which in any event Ambercore could not afford to develop without further investment which the Fund could not afford. As a result, by the latter part of 2009 he was less inclined to allow Ms Dorosz’s powerful personality and self proclaimed investment expertise to override his own judgments in relation to future investments in the way in which he had in 2008 when he trusted her judgment. An email of 4 December 2008 reveals that even at that stage he and Mr Goffin had been unhappy about her domineering managerial style although they did not complain at the time. An email exchange of 13 November 2009 shows Mr Sefton complaining of a level of bullying and rudeness which was inhibiting discussion and expression of opinions, a complaint which was treated dismissively by Ms Dorosz. Mr Goffin told Mr Price in early April 2010 that there had been communication difficulties for some time.

One incident which contributed to the deterioration in the relationship in March 2010 arose from financial difficulties faced by QFC, and in particular a shortage in cash flow necessary to service its debt financing by Canaccord. Ms Dorosz’s proposed solution was to ask the key executives, including Mr Sefton, Mr Goffin, Mr Li and Mr Mah, to contribute to the restructuring of QFC’s financing with Canaccord by providing personal guarantees and making available their management share options as security. Mr Mah was prepared to do so because he was afraid of losing his job, but Mr Sefton, Mr Goffin and Mr Li refused. Mr Li put forward a proposal on behalf of them all in an email of 12 March 2010 which involved them acquiring equity and sought changes in approach, together with an agreed process for the control of expenses going forward. Ms Dorosz described the proposal as disproportionate and characterised it as a failed coup. She refused to discuss any aspect of it, including any structural or management changes. Shortly thereafter Ms Dorosz secured a restructuring with Canaccord which did not require the assistance of the other executives. This attempted coup, as Ms Dorosz saw it, rankled, and undermined her trust in Mr Sefton. On the other side, her intransigence in refusing to discuss change exacerbated concerns over her style of management. Mr Goffin resigned as a direct consequence.

Ms Dorosz was later to tell Mr Brown, a director at Numis Corporate Broking, the Fund’s appointed broker, that it was this which led her to make a claim against QEP which became the casus belli. This claim gave rise to what before me was labelled “the financial dispute”. The background was as follows:

The monthly management fee was paid from an account in the name of the Fund at the end of each month by wire transfer to the accounts of QOGT and QEP respectively. Instructions for the wire transfer required two signatures. The authorised signatories included Ms Dorosz and Mr Sefton, who regularly signed the transfers. Mr Sefton’s account of events was that he raised the question of QEP receiving its full 25% share of the management fee when he was with Ms Dorosz at Edinburgh airport on 18 March. She excused herself and shortly thereafter Mr Sefton picked up an email on his phone from Yoga Mahal, an employee of QFC requesting that the wire transfer instructions be signed for that month in the usual proportions. He inferred that Ms Dorosz had just rung Mr Mahal to get him to make the request. He refused to sign. Ms Dorosz’s account is that this incident is fiction. According to her, what prompted Mr Sefton’s request for the full 25% in March 2010 was the fact that the further fundraising of US$5 million which closed in March 2010 meant that for the first time the managers’ fee, calculated at 2% of funds under management, was large enough for 25% to exceed the amount QEP had been receiving as Mr Sefton’s salary. Her response was that if the fee was to be paid in an amount of 25% to QEP, the latter must bear its full share of the expenses, including launch costs. Ms Dorosz made a written offer dated 1 April 2010 to Mr Sefton which quantified Quorum’s claim at over US$600,000 and proposed revised governance arrangements for carrying out the management services.

The inkling of a dispute first came to the attention of the independent directors of the Fund on 1 April 2010, which was Maundy Thursday. The wire transfer instructions needed to be signed that day if QOGT was to meet its payroll obligations. At 1546 UK time, Mr Mahal of QOGT sent the wire transfer instructions for the management fee to Mr Hill and asked him to sign them. The split was in the usual proportions, not 25%/75%. Mr Hill was one of the authorised signatories, although neither he, nor his predecessor Mr Burton usually signed transfer instructions. When Mr Hill received the request from Mr Mahal, he phoned Ogier to confirm the amounts. Ogier referred the inquiry back to Mr Mah in Canada. Mr Mah confirmed the amounts back to Ogier who in turn confirmed them to Mr Hill. It was now early evening in the UK. Shortly thereafter Mr Mah emailed Mr Hill to say that because he understood Mr Hill to be unavailable (which was not true) alternative arrangements had been made to sign the transfers. What had happened was that QOGT had backed down: Mr Sefton had been asked to sign, and had signed, transfer instructions in revised amounts which for the first time were split 25%/75%. The transfers were therefore not signed by Mr Hill.

The request to Mr Hill to sign the wire transfer instructions was instigated by Ms Dorosz. In my view it was rightly characterised by Mr Hirst QC on behalf of the Fund as underhand. Ms Dorosz’s evidence was that Mr Sefton had been avoiding Quorum for some days and was ignoring calls on that day. Wherever the truth lies between the rival accounts of how the dispute emerged, which I do not need to decide, it is clear that by this stage Ms Dorosz knew that Mr Sefton was not prepared to sign instructions for payment other than by way of a 25%/75% split. The email to Mr Hill gave no hint of the dispute which had given rise to the need to get Mr Hill to sign. It simply said “Please find attached wire requests for your signature”. It came out of the blue to Mr Hill. I reject QOGT’s suggestion that the email was preceded by Mr Hill asking for an estimate of the current management fee, which was based on a misunderstanding of the timing of the emails.

The following morning, Good Friday, Mr Sefton sent Mr Hill a copy of the wire transfer instructions in the form they had been signed, with the 25%/75% split, saying “Just for the record, these are the proper wire instructions which were signed last night”.

Not surprisingly, this episode struck Mr Hill as unusual, and he alerted his fellow director Mr Price to what had happened.

On Easter Sunday, Ms Dorosz sent Mr Price an email saying that she was proposing to make an announcement the following day. Mr Sefton telephoned Mr Price the same day to complain of Mr Mah’s conduct in seeking to get Mr Hill to sign the transfer instructions, and followed it with an email that evening in which he set out the draft of a letter to Ms Dorosz recounting his version of the events of Maundy Thursday and stating that he had lost trust in Mr Mah as a result of the “dishonest manner” in which he had tried to force payment through, and asking for his removal from fund business.

Mr Price was in Germany at the time. On Monday 5 April 2010 he was at Munich airport waiting to return to London when he received a phone call from Ms Dorosz. Her opening words indicated that she had instructed lawyers and taken legal advice about what she was going to say. She said that there was a serious financial dispute between her and Mr Sefton who owed her very large sums of money. She also told Mr Price that Mr Goffin had resigned, and that she had hired a replacement.

Mr Price considered that there appeared to be a fundamental dispute between the managers. He had regarded the three key individuals involved in the management to be Ms Dorosz, Mr Sefton and Mr Goffin. He was told that Mr Goffin had resigned, without apparently a job to go to, which indicated a dispute to which he was party; Mr Sefton was complaining that the CFO of QOGT had behaved dishonestly; and Ms Dorosz was asserting that Mr Sefton owed her large sums of money and had apparently already consulted lawyers. He was right to characterise it in his email the following day as a “serious argument between the managers”.

On 6 April 2010 Mr Sefton forwarded to Mr Price an email string indicating that he was unhappy at learning that a further investment of US$100,000 was to be made in QMENA without his having been consulted, in what he called a unilateral decision of QFC. This suggested that the dispute was affecting investment decisions.

On the same day Mr Price and Mr Hill discussed what to do. Their conclusion was that they should try and find out what had happened as the first step in seeking to help resolve the dispute. Because it was well known that Mr Price was a longstanding friend of Mr Sefton, it was agreed that Mr Hill would be the preferred channel of communication with Mr Sefton and Mr Price with Ms Dorosz, to avoid any perception of bias. Mr Price stopped seeing Mr Sefton socially.

The extensive communications over the following six weeks occupied much of the time of the independent directors. Mr Price, in particular, was engaged almost full time throughout the period in investigating the dispute and seeking to find a solution in the best interests of the Fund. I will not set out every twist and turn, but will confine myself to what I perceive to have been the most significant events.

In the week after Easter, Mr Price was contacted by Miles Walker, the CEO of QMENA and Phil Beck, the Chairman of QMENA and a member of the Advisory Committee, who made clear that they were unhappy with Ms Dorosz’s style of leadership in that she was unwilling to listen to anyone’s views and would not accept challenge from others. They said that this was damaging QMENA’s business.

On 7 April 2010 Mr Price spoke to Mr Goffin and was told that he had resigned as a result of Ms Dorosz’s approach to the share option issue, that there had been a substantial change of style in management, and communication difficulties for some time, and that there were differences of view in strategy for the portfolio. Mr Goffin was giving an accurate picture to Mr Price.

On 8 April 2010 Mr Price had a call with Mr Sefton and Ms Dorosz, in which they committed to working together going forward, although the atmosphere on the call was cold. The next day, however, Ms Dorosz told Mr Price that she had lost all trust in Mr Sefton and that they could not work together, that people had not been paid the previous month, and that no one in Canada trusted Mr Sefton. Mr Sefton started to complain orally to Mr Hill, and by email to both Mr Hill and Mr Price, that he was not receiving relevant fund information and was being excluded from management deliberations and discussions by Ms Dorosz.

On 13 April 2010 Mr Price spoke to Mr Lougheed. Mr Lougheed’s view was that the two sides were irreconcilable and that the status quo could not continue. By this stage Mr Sefton had also instructed lawyers, Nabarro LLP. Although Mr Sefton and Ms Dorosz were communicating with the independent directors, both directly and through lawyers, neither was happy for the independent directors to share their side of the story with the other. This framework of conducting the dispute through the independent directors, and with the assistance of lawyers, was a reflection of the extent to which their working relationship had deteriorated.

On 15 April 2010 Mr Price sent an email to Mr Dorosz and Mr Sefton, having taken legal advice, urging them to resolve their disputes and effect a reconciliation, stating that a permanent resolution needed to be reached as soon as possible, and raising the possibility of having to disclose the dispute as a post balance sheet event in the audited accounts for the calendar year 2009 which had to be filed by the month end. Ms Dorosz’s Canadian lawyer, Mr Sheehy, sent an emollient response the following day suggesting that a resolution was possible.

On 16 April 2010 QOGT sent to QEP an offer to buy out QEP’s interest in the IMAA for $600,000. On the same day Ms Dorosz sent an email to Mr Sefton, copied to the independent directors, complaining that the Toronto team found Mr Sefton’s proposed edits to her letter as CEO of QOGT to be included in the annual report “bordering on insulting and not helpful”.

On 20 April 2010, there was a bad tempered exchange of emails between Mr Sefton and Ms Dorosz over Ambercore’s need for urgent additional funding. When Mr Brown of Numis read them he commented to Mr Price that it was ridiculous that the investment managers were now accusing each other of lying. Mr Brown’s characterisation of the exchange was justified.

By 20 April 2010 it was apparent that the dispute was spilling over into the discussions taking place with investee companies. On that day Mr Price sent to Mr Sefton and Ms Dorosz a proposal for dealing with investee companies pending resolution of the dispute, on which he invited a response. He correctly identified the danger of “value destruction” for the Fund if investee companies did not receive a clear and firm guiding hand.

Ms Dorosz sent two letters dated 20 April 2010 in response, one in her capacity as a director of the Fund, and one on behalf of QOGT. In the former she observed that the events of the last three weeks had unfortunately shown that the managers had been unable to work out their dispute without disrupting the previous established practices with investee companies. She recognised that she had a conflict of interest, but urged the board to consider the options available in the best interests of the fund, which beyond the short term might involve the termination and/or amendment of the IMAA. In her second letter, on behalf of QOGT, she stated that the normal modus operandi of decisions being made by consensus was not being adhered to. The gravity of the situation was reflected in the following passage in her letter:

“As you are aware, over the last three weeks there have been a number of disruptions in the investment activities concerning the Company. QOGT is very concerned that the best interests of the Company and long term value of the Company may be in issue as the monetary disputes between the Investment Managers have the potential to bring operations, including operations vis-a-vis investees, to a virtual standstill.”

The letter went on to propose immediate changes in the short term as being necessary “as immediate stop gap measures to preserve the value of the [Fund]”, and “necessary to preserve the [Fund’s] long term value”. These included amendment of the IMAA to include a dispute resolution mechanism for disputes between the managers; a protocol for managers’ dealings with the investee companies; and the possibility of a new management agreement if Mr Sefton did not respond reasonably to her proposal to buy him out by the deadline set of 23 April 2010. In her evidence Ms Dorosz agreed that it was her view at that time that the dispute had the potential to do real damage to the Fund unless resolved quickly.

On 21 April 2010, QEP sent a letter to QOGT rejecting the latter’s offer and making its own proposal to buy out QOGT.

On 22 April 2010 Mr Price met Ms Dorosz in London and stressed to her that the preferred solution was a resolution of the disagreements and restoration of the status quo. She made clear that she was not interested in Mr Sefton’s offer to buy her out.

By this stage Mr Price and Mr Hill had recognised that if there were no reconciliation, the next best solution was an agreed compromise between the managers. They asked Mr Huddart to act as an intermediary to assist in facilitating such an agreement, which they envisaged would involve one manager buying out the other.

Mr Huddart spoke to Ms Dorosz on 22 April 2010. She told him categorically and unequivocally that she would not work with Mr Sefton in any circumstances. She also said that if a negotiated settlement could not be reached, she would terminate the IMAA. Mr Huddart met Mr Sefton on 24 April 2010. Mr Sefton formed the erroneous impression that Mr Huddart was trying to pressurise him to agree to Ms Dorosz’s terms. Mr Huddart’s attempts to mediate a settlement failed because whilst each side was prepared to buy out the other, neither was prepared to be bought out.

Mr Price and Mr Hill conceived another idea for achieving an agreed resolution, which was to seek to persuade both parties to resign and pitch for reappointment. They resolved to obtain the views of the Advisory Committee on the idea, and the latter’s views on the strengths and weaknesses of each candidate. They spoke to members of the Advisory Committee on 26 and 27 April 2010, except for Mr Lougheed, whom they regarded as conflicted by his position as Chairman of QFC. Ms Dorosz took umbrage both at the fact and manner of the approach to the Committee members, and at the idea of having to resign and repitch. When Ms Dorosz and Mr Price were in Guernsey for a board meeting on 28 April 2010, she was very rude to him and said she had lost all confidence in his abilities. She had taken further offence during a discussion with Mr Price the previous evening when Mr Price had requested an explanation for what appeared to be an untenably large sum claimed as expenses in relation to QMENA. Mr Price wanted to understand the figures, but Ms Dorosz was affronted that she should have to justify them. It subsequently became clear that the figures were in fact erroneous and that a considerably lower sum had been incurred on QMENA expenses. Ms Dorosz also suggested on that occasion that the solution which the Fund should adopt to the current impasse was unilaterally to terminate the agreement and re appoint QOGT as sole manager. Mr Price asked her not to raise the suggestion before the accounts were filed, because it might have to be disclosed as a post balance sheet event.

It is a measure of the acrimony, and apparent intractability, of the dispute that having devoted large amounts of time and energy to seeking to find an amicable solution, Mr Price was exasperated enough to consider resigning at this stage. He was persuaded not to do so by Mr Hill and Mr Brown.

Against this background, the deadline for finalisation of the 2009 accounts provided the occasion for a further inflammation of the dispute. Completion of the audit had itself given rise to conflicts. Ms Dorosz had wanted to increase the value attributed to Wellpoint (with which Mr Sefton disagreed), and went about it in a way which irritated Mr Price because he thought it risked putting the Fund in breach of the listing rules by failing to complete the audit in time to meet the month end deadline for filing the accounts. Mr Price and Mr Hill refused to increase the valuation from that included in the draft accounts by the auditors. The accounts were finalised in time for filing on 30 April 2010, but another development threatened to disrupt it. A meeting had been arranged at the offices of Herbert Smith, who were acting for QOGT, on the morning of Friday 30 April 2010, to make further efforts to resolve the dispute. Mr Price attended with the Fund’s lawyers, Norton Rose. Ms Dorosz was in the building but declined to take part in the meeting. Proposals were discussed but no progress made.

Prior to the meeting Herbert Smith had circulated a draft conditional notice of termination of the IMAA by QOGT (“the Draft Conditional Termination Letter”). The letter stated “QOGT remains very concerned that in the circumstances the best interests of the [Fund] and its long-term value may be at risk if the status quo continues without resolution.” It purported to give three years notice of termination pursuant to clause 22.1, on behalf of both investment managers, provided that during the three year notice period QEP took no further part in the management and QOGT effectively became the sole manager.

In an email sent that afternoon after conclusion of the meeting, Herbert Smith stated that the Draft Conditional Termination Letter reflected the terms which QOGT was prepared to accept; and that in the absence of agreement to those or substantially similar terms by the Fund by 10 am the following Tuesday (the first working day after the May Bank Holiday), an unconditional three year notice of termination would be served then. This recognised that a conditional notice in the form of the draft, if served, would not have been effective. A three year notice under clause 22.1 could not validly be made conditional on an agreed variation of the terms of the IMAA. Moreover it would not have been open to the Fund and QOGT to agree such variation without the consent of QEP. The letter invoked clause 29.1 which provides that an amendment may be effected by a written agreement signed by the Fund and by QOGT “for itself and on behalf of both Investment Managers”. This regulates the form which an amendment must take where there is agreement between the three parties. It does not grant QOGT authority to bind QEP to an amendment to which the latter has not agreed.

The threat to serve an unconditional notice of termination was regarded as being a post balance sheet event which prevented the accounts being filed on time that afternoon. The independent directors regarded it as a disruptive tactic deliberately timed for that purpose.

In the event no unconditional notice of termination was served by QOGT on the Tuesday because in the meantime Mr Price spoke to Ms Dorosz. He persuaded her not to serve one because it would delay the filing of the accounts. The accounts were filed (late) on 4 May 2010.

Two observations about this incident are pertinent. Although no unconditional notice of termination was ultimately served, it is of significance that the threat was made, whether or not its timing was intended to be disruptive. The threat reflected Ms Dorosz’s assessment of the efforts to reach an agreed solution, which she described in her evidence as being “futile” by this stage. Secondly, Ms Dorosz was to look back on her decision not to serve an unconditional notice with extreme regret, because she thought it would have protected QOGT’s entitlement to three years’ income. In my judgment she is mistaken in that view: an unconditional notice of termination from QOGT alone would not have been effective, because QOGT had no power to give notice of termination on behalf of both managers without the agreement of QEP. Her conviction with hindsight, however, that by persuading her not to serve the notice, Mr Price cheated her out of QOGT’s right to be paid three years income, is one which has coloured her evidence about what was happening during the period in question, and contributed to her sense of injustice about the way the Fund ultimately brought the IMAA to an end. At the time, she perceived, correctly, that the Fund favoured QOGT over QEP as the likely one manager solution, and was confident that if she maintained a position that reconciliation was impossible, QOGT would get its way of being appointed sole manager.

On 6 May 2010 the Fund sent a carefully worded letter to each of the investment managers, in similar but not identical terms. The expressed purpose was to invite views on a number of specific issues and concerns in relation to the management and administration of the fund, with a view to taking a decision on whether it was in shareholders’ interests to move to a one manager solution. The independent directors wanted to draw out from each manager the terms on which it would be prepared to continue to act as sole manager. They said that they sensed that it was inevitable that the managers were not able to work together under the IMAA, which neither of the managers disputed in its response (see below). Aside from this, they urged the managers to resolve their financial dispute because it had the potential to distract from their core management tasks and to taint shareholder’s and potential investors’ perception of the stability of the Fund. This was an accurate assessment.

QOGT responded in two letters dated 11 May 2010. One formally addressed the specific issues and concerns raised in the 6 May letter. The other was forwarded by Herbert Smith and marked “Confidential and Without Prejudice”; it was less guarded about QOGT’s assessment and agenda for management of the Fund in the future. It made clear that the dispute was fundamental and irresolvable:

“The last few weeks have been a time of great disappointment and frustration for the Quorum Group ("Quorum") and for me personally. We have invested a great deal of time and effort in exploring good faith solutions to the issues which have arisen in relation to the Fund and David Sefton, but each time we have advanced what we believed to be a constructive proposal, it has failed to make any progress…

Secondly, the current dual management structure with David Sefton is not working; there has been a breakdown in trust and confidence between Quorum and David, that amongst other things is reflected in what Quorum perceives as obstructive behaviour on David's part, which is seriously risking damage to the Fund's interests. ...

Quorum simply cannot allow its own brand and reputation to be endangered. So, having in mind the Fund's obligations to its shareholders and its view that the managers no longer have a viable working relationship, we urge the Fund to move to a solution now, and to one which involves QOGT as the single investment manager. ...

We very much hope that it will be possible for the board now to move forward with Quorum. We understand the board's reluctance to become involved in a falling-out between the two managers, however, we believe that the time for decisive action has arrived...”

QOGT’s letter proposed that the solution was to move to QOGT as sole manager, either on the terms proposed in the Draft Conditional Termination Letter, or by the gardening leave solution. It suggested that this was the only way to avoid damage to the Fund’s interests.

Mr Sefton’s corresponding letter of response to the Fund’s letter of 6 May 2010 was dated 17 May 2010. It was equally clear that the ability of the managers to work constructively in managing the fund had broken down:

“I have significant concerns about many aspects of the way in which the Fund has been managed, but these should have been capable of resolution in a calmer and more constructive atmosphere. Nevertheless, there is a dispute between the managers, it has proved intractable and it must be addressed in the best interests of the Fund.”

The letter set out detailed complaints about QOGT’s performance in managing the fund.

On 12 May 2010 QOGT had sent a letter before action to QEP and Mr Sefton in relation to the financial dispute. It asserted that QEP/Mr Sefton had acted in ways which were harmful to the Fund. The threat by one investment manager to commence litigation against the other did nothing to improve the prospects of a reconciliation. The same day Ms Dorosz suggested to Mr Sefton that they put on hold all decision making that week, and that all communication between them be in writing. This was expressed to be on the basis that the Fund was likely to make a decision on the future management of the Fund shortly, and Mr Sefton understood the sub text to be that Ms Dorosz was stalling things because she expected QOGT to be appointed sole manager soon.

Faced with this situation, Mr Price and Mr Hill resolved to put in place a holding solution by email sent on 13 May 2010 to Ms Dorosz and Mr Sefton. It was a direction pursuant to clause 5.5.1 of the IMAA. It required the investment managers to put on hold any investment decisions where they could not agree or where there was disagreement about whether a course of action had previously been agreed; and for each individual to notify Mr Price and Mr Hill if he/she believed that steps needed to be taken urgently, so that the independent directors could take a decision having heard both sides’ views. In relation to one investment decision, Mr Price made clear that even agreement by the investment managers would not be sufficient without further evidence to allay his concerns. This was an aspect of Project Cloud which at this stage involved combining the businesses of Alt and Ambercore. QOGT’s proposal was to effect such a combination by a merger, which Mr Sefton had been against for reasons set out in an email to Mr Price on 18 April 2010. Mr Price had already investigated it sufficiently to be sceptical whether if combining the businesses was desirable in principle, merger was in any event the right way of going about it, rather than a different mechanism such as a joint venture or other corporate restructure.

Mr Price and Mr Hill continued to try to persuade the investment managers to work together throughout the month. Cooperation would happen for a brief period and would then break down again. Relations between Ms Dorosz and Mr Sefton did not improve. It is a measure of how far they had deteriorated that at a meeting at Herbert Smith on 17 May 2010 to discuss the stresses and strains being suffered by the investee companies, Ms Dorosz sat in a separate room and all discussions between Mr Price and Mr Sefton and her were conducted via her lawyer.

On 20 May 2010 Mr Sefton submitted two alternative proposals with the terms upon which QEP would be prepared to be engaged as sole manager. His proposal identified an expanded team, including Mr Goffin and another identified individual together with support systems. On the same day Nabarro sent a letter on QEP’s behalf to the independent directors detailing its complaints and concerns about the conduct of Ms Dorosz and QOGT towards Mr Sefton, some of which were new, which reinforced the continuing lack of trust between the two.

Mr Hill and Mr Price continued to assess the options available for the Fund, and the relative merits of QOGT and QEP as sole investment manager by reference to the terms they proposed. At this stage they still regarded QOGT as the favourite for appointment in this eventuality. To this end they resolved that they ought to test the views of a number of the more important shareholders, who would be treated as “insiders” so as not to cause damage to the Fund by full public disclosure of the dispute.

On 26 May 2010, Ms Dorosz prepared a draft letter to shareholders from QOGT pitching for approval of QOGT as sole manager. It said:

“Despite numerous attempts on behalf of Quorum to find a suitable resolution, our relationship with Mr Sefton has now broken down. While this has not yet led to any material loss of shareholder value, regretfully this dispute is currently prohibiting the [Fund] from making the necessary follow on investments, critical to achieving optimal capital returns. This is clearly unacceptable and we recognise that the board of [the Fund] has to take firm action to deal with this situation.”

She also prepared draft slides for presentation to shareholders, one of which said “The current dispute means that it is impossible to continue the current management structure.” I have little doubt that these reflected her view at the time, despite her protestations to the contrary in evidence.

On 27 May 2010, Mr Edwardson of Baillie Gifford, one of the major shareholders in the Fund emailed Mr Brown with his reaction to the situation which reflected the views of a number of others he had consulted. The preferred solution was to have both QOGT and QEP continue to be involved in management, and to put this proposal to the parties, although such arrangement “would be complicated and/or unworkable”; in the absence of continued joint involvement, he favoured QEP over QOGT as sole manager which he sensed would have more support amongst shareholders.

On 28 May 2012 Norton Rose LLP on behalf of the Fund served the Notice of Breach on QOGT and QEP. The Notice quoted clause 5.1 of the IMAA and referred to clause 3.4 of the IMAA rendering the managers’ obligations joint and several. It continued:

“The whole scheme of the [IMAA] is that the Investment Managers should, acting jointly, provide investment management services to [the Fund] in its best interests. Due to the dispute that has arisen between the Investment Managers and the impasse that has arisen as between the Investment Managers as a consequence of that dispute, the Investment Managers have ceased to provide such services.

The situation is now intolerable and [the Fund] cannot allow it to continue indefinitely. Accordingly, [the Fund] hereby gives the Investment Managers notice pursuant to clause 22.1.1 of the [IMAA] that they are in material breach of the [IMAA] on the ground that they are failing jointly to provide [the Fund] with investment management services in its best interests and requires the Investment Managers to remedy that breach to [the Fund’s] satisfaction within 30 days.

In considering whether the Investment Managers have remedied this breach, [the Fund] will require to be completely satisfied that the Investment Managers have re-established a proper working relationship and have demonstrated that they can work together constructively and amicably in [the Fund’s] best interests.”

I conclude, without any real hesitation, that the investment managers were in material breach of their obligations to provide the investment management services jointly. By 28 May 2010 there was a fundamental dispute and a complete breakdown in the working relationship between Ms Dorosz and Mr Sefton. They had failed to work cooperatively and constructively together for many weeks and were not capable of doing so sustainably. Cooperation was sporadic and increasingly limited to the more minor aspects of fund management. All trust between them had been destroyed. Each avowed that they could not and would not work with the other for the medium to long term. They were communicating through lawyers and one had sent a letter before action threatening to sue the other.

This breakdown in the relationship was bound to cause serious damage to the Fund unless repaired. Ms Dorosz recognised that she had formed the view as early as 20 April 2010 that the dispute had the potential to do real damage unless resolved quickly, as is reflected in her letter of that date. Over a month had passed in which things had got worse. Absent cooperation between the managers, important decision making would be paralysed and ongoing management of the investee companies seriously compromised.

The alternative of having to replace the joint managers with one or other acting alone (or a new manager) would not avoid any damage to the Fund; it would inevitably involve an explanation having to be given to investors, which could not have disguised the existence or acrimony of the dispute. The ousted manager could not have been expected to pull its punches. As Mr Huddart explained, public knowledge of the dispute would be bound to have a serious adverse impact on investor confidence and the price of the Fund’s shares. This is borne out by the fact that when the Notice of Termination was given, it was necessary to make a public announcement that there was an ongoing dispute, and the Fund’s share price fell from US$9.75 per share on 1 June 2010 to US$8.18 on 30 June 2010, reflecting the effect of the unresolved dispute between the managers. Any solution involving a sole manager was second best to a solution involving reconciliation and resumption of a cooperative working relationship.

Mr Ashworth sought to characterise the dispute as limited to “a financial dispute”, being only about the fee payable to QEP and the quantum of costs which it should repay to QOGT. Had that been the only bone of contention between the parties, it would still have put them in material breach if it resulted in the breakdown of trust and cooperation between them. But in any event, the dispute was not just about money. It included fundamental disagreement about management style and the manner in which investment management decisions were made, as well as differences over particular investment decisions. Mr Sefton was guilty of a degree of exaggeration in relation to disputes before March 2010 and in relation to his concerns over conflicts of interest between QOGT and other funds managed by Quorum group companies. His concerns over Ms Dorosz’s management style and investment decision making had, however been growing during that period, and the relationship further damaged by what she saw as his attempted coup and what he saw as her underhand tactics in relation to signing the wire transfers. The financial dispute was the casus belli of a dispute whose causes were deeper, which in the two months prior to the Notice erupted into discord of an intensity and intractability which destroyed any vestiges of a functional working relationship.

Mr Ashworth relied heavily on the direction given by the independent directors on 13 May 2010 as to how decisions were to be made. This direction was not at any stage modified or withdrawn prior to termination of the IMAA. He argued that this direction was an important and fundamental modification of the way in which the investment managers were to provide their services under the IMAA; and that provided the investment managers followed it, they could not be in breach of their obligations under the IMAA. It required the managers to agree where they could, and otherwise to devolve decision making up to the board for directions to be given under clause 18. In my view this is to mischaracterise the 13 May email. As its terms and context make clear, it was in truth only a short term and emergency solution “until the current situation is resolved”. It was not a direction which was intended to be a solution for the medium to long term and was not understood by either side as such. It only referred to the board making decisions where they were urgent, not that it would do so on some more general and long term basis whenever there was disagreement. The board was not seeking to take into its own hands day to day management of the Fund wherever there was disagreement between the managers, save to resolve any urgent crises as a stop gap measure. Given the dysfunctional position of the rowing managers, it would have been impractical for it to do so.

Moreover, the 13 May direction did not substantially modify the fundamental obligation of the managers to manage the Fund jointly: it did not inhibit the investment managers from working cooperatively to agree on the steps necessary to manage the Fund, had they been able to do so, save for the restriction on the Alt/Ambercore merger proposal. The direction dealt only with managing the consequences of disagreement. If the cause or nature of the disagreement was such as to breach the obligation to provide the investment management services jointly, it would remain a breach.

Mr Ashworth submitted that there had been no breach because the dispute between QOGT and QEP had not yet caused any damage to the Fund or had any adverse impact on its management. Were this true, it would not assist QOGT. The breach consisted in the breakdown of the relationship between the joint managers and their demonstrable failure to work together cooperatively or cohesively. It is beyond dispute that, as both said on a number of occasions at the time, this had the potential to cause real and substantial damage to the Fund if it continued unresolved. If the dispute was not affecting the day to day management of the fund yet, everybody recognised that it would inevitably do so in the near future. The Fund was entitled to give notice of material breach before the inevitable adverse effect on management of the Fund and before the damage occurred. It was not obliged to wait until the breach had caused irremediable damage.

In any event the factual premise for the argument is not reflected in the evidence. The dispute had already had an adverse impact on the management of the Fund, and caused damage to the Fund. Damage to the Fund was caused by the very existence of the unresolved dispute. Unless resolved it was bound to damage the Fund once made public; such damage required to be remedied, albeit that its effect would not be felt until the dispute had to become known to the market, as it inevitably would in the absence of a reconciliation.

Moreover the dispute was already affecting the ability of the managers to make investment decisions and manage the investments. The email string forwarded on 6 April 2010 by Mr Sefton to Mr Price showed that he was bypassed in relation to the $100,000 investment relating to QMENA. Mr Gofffin told Mr Price that there were differences of view in strategy for the portfolio before 7 April 2010, and thereafter both Ms Dorosz and Mr Sefton told the independent directors that they seriously disagreed about strategy. In her 20 April 2010 letter, Ms Dorosz spoke of a number of disruptions in the investment activities in the previous three weeks caused by the dispute. In Herbert Smith’s letter of 12 May 2010 to QEP and Mr Sefton in relation to the financial dispute, they asserted, on Ms Dorosz’s instructions, that QEP/Mr Sefton had acted in ways which were harmful to the Fund. In Herbert Smith’s letter of 13 May 2010, they said that they were instructed that “Mr Sefton [was] interfering with the running of the Fund’s investments to the detriment of the Fund and its investees.” Mr Walker and Mr Beck testified to the damage to the management of QMENA, which they reported to Mr Price in the week after Easter. QOGT’s draft letter to shareholders of 26 May 2010 stated that the dispute was already prohibiting the Fund from making the necessary follow on investments which were critical to achieving optimal capital returns. Herbert Smith’s letter of 23 June 2010, sent on behalf of QOGT, seeking appointment as the new sole investment manager, expressly records that its appointment would be necessary “to enable it to repair damage done to the portfolio over the past few months, particularly with regards to the Ambercore and LxData position which have resulted in dilution of the interests of the Fund in favour of third parties” (emphasis added).

These contemporaneous references bear out the evidence of Mr Hill who summarised the situation as one in which the result of the managers being at loggerheads was that decisions were not being made and the Fund was consequently suffering damage.

The dispute as to whether Ambercore should merge with Alt provides an example. On 11 May 2010 Mr Li, on Ms Dorosz’s instructions, told the lawyers working on the transaction to ignore Mr Sefton’s protestations that the transaction should not close, and told them to take instructions only from Quorum. Ms Dorosz regarded the delay in effecting the merger as damaging to Ambercore, as she explained in her evidence:

“There was a financial crisis, because there was a delay in the Fund failing to conclude what had been pre-approved, and that upset the bank and some of the suppliers very much. So what started out as an ordinary course working capital injection to make the balance sheet decent, when it failed to come and failed to come and failed to come, even though it had been approved by Ambercore board of directors, our board of directors, and the pending merger candidate, the Alt board of directors, it became a crisis.”

In QOGT’s letter of 20 May 2010 she expressed the position in clear terms:

“In the interests of the Fund and its shareholders, we would welcome a prompt decision, as the current impasse with Mr Sefton is, as we have indicated to you, now threatening the value of the Fund, as important decisions are being delayed or not taken. Consequently, operations have ground to a halt, including the flow of much needed follow-on capital and the cessation of desirable new investments...”

In Mannai v Eagle Star Assurance Ltd[1997] AC 749, the House of Lords considered the efficacy of notices to determine two leases which gave the date of termination a day too early. Lord Steyn said at p767G that:

“the approach to construction of the notices was to determine how a reasonable recipient would have understood them; and in considering this question the notices must be construed taking into account the relevant objective contextual scene.”

In this respect the process of construction is the same as that for any contractual term. It is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time: Investors Compensation Scheme v West Bromwich Building Society [1988] 1 WLR 896 at 912H; Chartbrook v Persimmon Homes[2009] 1 AC 1190 at [14]; Rainy Sky SA v Kookmin Bank[2011] 1 WLR 2900 at [14].

In Mannai Lord Steyn went on to observe at p768F-H that:

“notices under break clauses in a lease were not in a unique category; and that all notices exercising rights reserved under a contract should be construed in the same way: they must be sufficiently clear and unambiguous to leave a reasonable recipient in no reasonable doubt as to the contractual right being invoked; and as to how and when the notice is intended to operate. See also per Lord Hoffmann at p776D; and Geys v Societe General [2013] 1 AC 523 per Baroness Hale at [52].”

The present case is concerned with a contractual right to give notice of persistent or material breach, failure to remedy which gives rise to a right to terminate the contract. Its purpose is to enable the recipient to understand what contractual right is being relied upon, and what he is alleged to have done wrong, with sufficient clarity that he can assess the validity of the notice and take such steps as are open to him to remedy the alleged breach. The level of detail which is necessary for these purposes will differ from case to case, and may be affected by the express terms of the relevant clause. It will not generally be necessary for the notice giver to identify the steps necessary to remedy the breach, if they can sufficiently clearly be understood from the details given of the breach itself; but where the notice does so, the steps identified as necessary to remedy the breach will usually help the recipient to understand the nature of the breach being alleged. The notice must be interpreted as a whole.

Accordingly in the current context I would formulate the general principle as being that the notice must be sufficiently clear and unambiguous to enable a reasonable recipient (that is to say one having all the background knowledge reasonably available to the recipient at the time of the notice) to understand the contractual basis for the notice and the nature of the breach which is alleged to have occurred, so as to be able to assess the validity of the notice and take such steps as are open to him to remedy the alleged breach.

The Notice of Breach sent by the Fund fulfils these requirements. It invokes clause 22.2.1 and alleges material rather than persistent breach. It is sufficiently clear and unambiguous to leave the investment managers in no doubt as to the breach being alleged and what was necessary to remedy it. The breach alleged is a failure to provide the investment management services jointly. This is clear from the language used in describing the obligation (“The whole scheme of the [IMAA] is that the Investment Managers should, acting jointly, provide investment management services to [the Fund]…..” and the express reference to clause 3.4 imposing joint obligations); from the language used in describing the breach (“…..they are in material breach of the [IMAA] on the ground that they are failing jointly to provide [the Fund] with the investment management services…”); and from the language used in identifying what was expected by way of remedy of the breach (“…..[to] have re-established a proper working relationship and have demonstrated that they can work together constructively and amicably….”). Given the communications over the previous two months, the investment managers can not have been left in any doubt that the breach being alleged was a failure to work together, constructively and cooperatively, so as both to be providing the management services as a team. This was what the independent directors had urged them to do on numerous occasions. This is what they would both reasonably have understood was meant by the material breach being a failure jointly to provide the services. This understanding would have been reinforced by the fact that what was identified as necessary to remedy the breach was the reestablishment of such a working relationship.

The investment managers had no difficulty at the time in understanding the Notice of Breach in this way. Neither manager suggested to the Fund, or so far as the evidence shows to anyone else, that it did not understand what the Fund was saying it had done which amounted to a material breach, or what the Fund was telling it to do by way of remedy. Neither asked for any clarification.

The decision to terminate was taken at the Board meeting on 1 July 2010. Under clause 22.2.1, the question is whether the breach has been remedied “to the satisfaction of [the Fund] acting reasonably.”

The independent directors were not satisfied that it had been remedied. The evidence shows that that was a reasonable conclusion, indeed in my view the only reasonable conclusion.

If, upon receipt of the Notice of Breach, the parties had set about seeking a reconciliation of their disputes and tried to restore a cooperative and constructive working relationship, it would be necessary to consider the events of the following 30 days in greater detail. But this is not what they did. Each took it as a given that their role as joint managers was doomed, and neither party devoted its energies to trying to effect a reconciliation. Instead each spent the next month trying to manoeuvre itself into the most favourable position to be appointed sole manager when what they saw as the inevitable termination of the existing arrangements came. Each accepted that the existing position could not continue for much longer, and each contended that the solution was for it to be the sole manager. Nothing happened prior to 1 July 2010 to repair the relationship or to improve the possibility of the managers being able to work together cooperatively and cohesively in the future. Their conduct suggested that the dispute was intractable. The working relationship between the managers had completely broken down and they remained incapable of working together.

During this period the failure to work together continued to have an adverse impact on the management of investments. For example the two managers were communicating independently with the senior executives of Ambercore with different agendas for the future direction of its business. QOGT was still keen for a merger with Alt which would bring much needed cash to Ambercore, whereas Mr Sefton was opposed to a merger and was keen to persuade Ambercore to explore alternative solutions to its short term financial problems and to adopt a business plan based on its core business which would enable it to survive without further capital injections. When Mr Price learned of this on 14 June 2010, he described it in an email to Mr Hill as astonishing, because, as he explained in evidence, investments can not be properly managed by the shareholder saying two different things to the board of the investee company.

On occasion during this period the independent directors continued to push for reconciliation even though they had little hope that it would be achieved. The bleakness of the prospect was confirmed by Ms Dorosz at a meeting she had with Mr Price at the latter’s flat on 23 June 2010. She described the level of cooperation as non-existent, despite written assertions that it was fine, and said that the relationship with QEP was not working. She agreed that the situation was untenable, and that the Fund should have only one investment manager.

It follows that the Fund’s Notice of Termination was valid, and QOGT’s claim fails.

Issues relating to the quantum of the claim do not arise, but I should record my findings. They proceed on the hypothesis that contrary to what I have held, the Fund’s purported termination on 1 July 2010 was a repudiatory breach which was accepted by QOGT on 8 July 2010.

The claim is for the principal sum of US$3,322,577 which is the gross fee which QOGT would have earned for a period of three years following 8 July 2010, being 75% of what the parties agree would have been the management fee calculated on the value of the fund over those three years.

On behalf of the Fund it was submitted that the formulation of the claim in this way was flawed because what was claimed was revenue, not profit. If QOGT had remained as manager for the minimum further period of 3 years it would have had to bear its share of the costs and expenses of management out of its share of the fee. There was no attempt by QOGT to identify or quantify the level of such costs and expenses.

QOGT’s response was to rely on the last paragraph in Mr Price’s witness statement, confirmed when he gave his evidence, that if the Fund had not been able to terminate for breach it would have given three years notice and put the investment managers on gardening leave. Therefore, it was submitted, the counterfactual hypothesis, in the absence of the Fund’s (assumed) repudiatory breach, is one in which QOGT was on gardening leave and so earning its share of the fee gross, without incurring expenses.

I have already concluded that the Fund would not have been entitled to put either manager on gardening leave as a matter of the true construction of the IMAA. It would also have been impractical to have put both on gardening leave, because clause 26 of the IMAA provided for exclusivity in terms which prevented the Fund from appointing anyone else to perform the services whilst the IMAA remained in force. Appointing a new manager without terminating the IMAA was therefore not an option. It is impermissible for QOGT to seek to calculate damages on the counterfactual hypothesis that the Fund would have acted in a way which was not permitted by the IMAA. Damages do not fall to be assessed on the footing that if the contract breaker had not been in breach, he would have acted in a way which was a different breach of contract. On the contrary, damages are intended to put the innocent party in the position he would have been in had the contract been performed. Damages are to be assessed by valuing the contractual rights which the innocent party has lost by reason of the breach, not by valuing the benefit of conduct to which the innocent party was not entitled under the contract: see The Golden Victory [2007] 2 AC 353, especially at [30],[32] and [37].

But even assuming that the gardening leave solution is a valid counterfactual by reference to which to assess damages, QOGT’s argument depends entirely on the passage in Mr Price’s witness statement that he would have adopted that course. It talks of putting both investment managers on gardening leave. How then would the Fund have been managed? It was clear from the evidence before me that the independent directors and the investors were anxious that there should be as little as possible increase in the cost of management of the fund and preferably none. The possibility of paying both QEP and QOGT the existing management fee and paying a new fee to a new manager for three years would not have been a realistic solution, even if the exclusivity provisions of clause 26 are ignored. Moreover the independent directors did not have the expertise to manage the Fund on a temporary basis whilst a new manager was sought. A new manager solution was not seriously considered as a possibility throughout the later stages of the dispute, when what was consistently envisaged was the appointment of one or other of the existing joint managers as sole manager. Even assuming that appointing a new manager was permitted (which it wasn’t by reason of clause 26) it was never a realistic prospect if coupled with putting both QOGT and QEP on gardening leave and paying them the full management fee for three years.

The only realistic gardening leave solution which would have been adopted, if permitted, would have been to put one or other of QOGT and QEP on gardening leave with the other managing the fund. If the retained manager was QEP, I have little doubt that Mr Sefton would not have been prepared to carry out 100% of the management and bear 100% of the cost of doing so in return for 25% of the fee. There would have had to be a renegotiation in which QEP was paid a significantly higher sum. The IMAA required payment of 1.5% to QOGT and 0.5% to QEP. The latter’s latest offer, prior to the termination, involved QEP receiving a 1.5% fee for being sole manager. On this hypothesis, putting QOGT on gardening leave would have involved paying a total of 3%, ie an extra 1% per annum in management fees which would have amounted to a 50% increase. On the other hand Ms Dorosz had made clear in her offers that QOGT was prepared to carry out the management as sole manager in return for its existing 1.5% fee. My judgment is that faced with a choice of appointing QOGT at no increased cost on the one hand, and QEP at a 50% increase in cost on the other, the Fund, guided by the principal investors, would have appointed QOGT. In the summer of 2010, when the termination for breach involved no increase in cost, the preference for QEP over QOGT as sole manager was a finely balanced one for both the independent directors and the principal shareholders (as the narrow victory of QEP at the EGM demonstrates). Mr Price’s evidence was that QEP only became his and Mr Hill’s favoured candidate as replacement manager shortly before termination on 1 July 2010. If the Fund had not been entitled to terminate for breach, and on the assumption that a gardening leave solution was permissible, the Fund would have appointed QOGT as sole manger and put QEP on gardening leave.

I am conscious that Mr Price’s witness statement talks of putting the investment managers (plural) on gardening leave, and that the following sentence assumes that this included QOGT. But the totality of the evidence before me leads me to conclude that this final sentence of his long statement was an ill considered afterthought which is not to be taken at face value.

Accordingly, had I found in QOGT’s favour on liability, I would have held that it had failed to prove that it had suffered the loss it claimed or any loss, because it adduced no evidence that the fee which it would have earned for three years would have exceeded the costs of management.

This issue too falls away with my previous findings. Mr Sefton and Ms Dorosz had both been party to an agreement with Mr Estill in late September 2009 when the Fund was trying to raise a further US$10 million. The subscription was US$1 million short and Mr Estill was persuaded to invest that amount in return for an undertaking that the managers would guarantee a rate of return of 12% for a year and underwrite any losses which might be suffered when the shares came to be sold. This was an undertaking given on behalf of the managers, not the Fund. It was reflected in a brief letter agreement dated 15 October 2009 signed by Ms Dorosz, Mr Sefton and Mr Estill.

Following termination of the IMAA, a letter from Mr Sefton of 8 August 2010 prompted Mr Price to investigate a draft of this letter agreement. He sought confirmation from Ms Dorosz and Mr Sefton whether the draft had been signed or an agreement entered into to that effect. Ms Dorosz’s letter dated 13 August 2010 said “to the best of our knowledge and belief… no agreement to the effect of the draft letter agreement referred to in your letter or to similar effect has ever been entered into on behalf of the Fund and/or on behalf of one or both of [QOGT] and [QEP] with Mr Jim Estill”. This was untrue. There was such an agreement; and the draft letter agreement reflecting it had been executed. Ms Dorosz’s evidence was this was a mistake, not a deliberate attempt to mislead. She had forgotten that any document had been executed, and in denying that any agreement to that effect had been concluded, she had merely been inadvertently adopting the language of the Fund’s letter asking for the confirmation, without sufficient attention to the wording. I do not need to make any findings about her state of mind. The Fund’s case is not that Ms Dorosz’s denial was the relevant breach, but rather that the breach consisted in entering into the Estill agreement in the first place; that this was a material breach which would have formed the subject matter of a notice of breach had the IMAA not already been terminated; and being irremediable would have resulted in a valid notice of termination 30 days thereafter.

My conclusions are as follows. I accept Mr Price’s evidence that the Fund would have sought to rely on the Estill agreement when it came to light in August 2010 as grounds for terminating the IMAA, had the IMAA not already been terminated. The Fund would not, however, have been entitled to do so. The Estill agreement was not a material breach of the IMAA. It was an agreement made by the managers, not the Fund, and was reasonably believed to be, and was, in the best interests of the Fund. The Fund has failed to establish that the Estill agreement involved a breach of any of the listing rules or regulatory requirements governing the Fund, or was otherwise not in the Fund’s best interests.

The counterclaim was put forward by the Fund as being essentially defensive. In paragraph 19 of the Fund’s opening submissions it was stated that:

“The Fund has from the outset recognised that QOGT has no assets. Its counterclaim will only have any value as a set off against any damages awarded to QOGT if the main claim were to succeed. The approach taken to the counterclaim has been tailored to remain proportionate with those circumstances.”

Since the defensive purpose of the counterclaim is rendered otiose by my dismissal of the claim, I can state my conclusions and reasons relatively briefly.

The counterclaim focuses on the Fund’s investments in (i) QMENA, and in particular the latter’s investments in the software licences from Wellpoint, SR2020, Strata and Ambercore; and (ii) SQ5. The Fund’s case is that the investments were made in breach of the IMAA because they were outside the Fund’s “Investment Objective, Policy and Restrictions”; and/or that the investments were made in breach of both contractual and fiduciary duty because QOGT caused the investments to be made in the interests of the investees being able to fulfil their obligations to Quorum funds (QIP and/or QSET), rather than in the best interests of the Fund. QOGT denies breach and further contends that any liability is excluded under clause 21.3 of the IMAA.

The relevant provisions of the IMAA are:

“In this Agreement, including the Recitals, unless the context otherwise requires … the following terms shall have the following meanings:

“Investment Objective, Policy and Restrictions” means the investment objectives, investment policy and investment restrictions as from time to time determined by the Board in accordance with Clause 5.7.5 and notified to the Investment Managers, which investment objectives, investment policy and investment restrictions at the Effective Date are those set out in the Item 1 of the Schedule.

3.3

In observing and performing their obligations under this Agreement, the Investment Managers shall comply with the Investment Objective, Policy and Restrictions and (so far as relevant and to the extent that the Investment Managers are kept informed in writing) any amendments made by the Board to the investment Objective, Policy and Restrictions.

5.4

Subject as provided in Clause 5.3 above, the services to be provided by the Investment Managers under this clause shall without prejudice to the generality of Clause 5.1, include the following

5.4.2

determining the manner in which any money raised by the Company may be invested taking into account the Company’s particular requirements, the Investment Objective, Policy and Restrictions,

5.4.5

keeping the Board informed of any future proposed developments or changes relevant to the Investment Objective, Policy and Restrictions of the Company and advising the Board on any changes to the Investment Objective, Policy and Restrictions which the Investment Managers, acting reasonably, consider advisable,

5.5

In managing the Fund, the Investment Managers shall have regard to, and at all times act in compliance with

5.5.1

the Investment Objective, Policy and Restrictions as altered or amended from time to time by the Board and any policies or restrictions determined by the Board (in each case as notified in writing to the Investment Managers) and any other lawful orders and decisions given from time to time by the Board,

5.7.5

All activities engaged in by the Investment Managers under this Agreement shall at all times be subject to the control of and review by the Board

21.1

The Investment Managers undertake to observe and perform their obligations under this Agreement in accordance with the Investment Objective, Policy and Restrictions and to exercise all reasonable skill, care and diligence in accordance with the best interests of the Company

Schedule

1 INVESTMENT OBJECTIVE, POLICY AND RESTRICTIONS

1.1

Objective and Policy

The investment objective of the Company is to provide long term capital gains through investing in growth companies which provide technology to the oil and gas industry. In addition, the Company aims to provide a regular dividend yield (after expenses and management fees) due to its strategy of investing through interest bearing secured convertible debt.

The Investment Policy of the Company at the date of this Agreement is set out under the headings “Investment Objective and Policy”, “Convertible Secured Debenture Investment Structure”, “Initial Investments” and “Portfolio Opportunities” in Part 1 of the Prospectus

1.2

Restrictions

In carrying out their duties under this Agreement the Investment Managers shall comply (so far as relevant and to the extent that the Investment Managers are kept informed of them in writing) with the following

•

the Investment Objective, Policy and Restrictions;

•

the Memorandum and Articles of Association of the Company;

•

the investment policy and investment restrictions of the Company as set out in the Prospectus or otherwise as may be determined by the Board from time to time and

•

any restriction set out in any subsequent prospectus, listing particulars or other circular to shareholders and/or debenture holders issued by the Company”

The obligation of the managers was not merely to take account of the Investment Objective Policy and Restrictions (“the Investment Policy”) under clause 5.4.2, but to observe and comply with it under clauses 3.3, 5.1.1 and 21.1. The Investment Policy as defined in the Schedule was to be found under certain headings in the Prospectus. In fact the Prospectus as issued did not have all the headings identified in paragraph 1 of the Schedule. In particular there was no heading “Portfolio Opportunities”. This suggests that the Investment Policy referred to in the IMAA was that set out in an earlier draft of the Prospectus which was not before the Court. Nevertheless both parties proceeded on the footing that the Investment Policy at the date of the IMAA fell to be defined by reference to the IPO Prospectus as issued in January 2008. There was no formal promulgation of any amendment to it at any time between January 2008 and July 2010.

The relevant parts of the IPO Prospectus identify the Investment Policy in the following terms:

“INVESTMENT OBJECTIVE AND POLICY

The Company’s investment objective is to provide long term capital gains to investors through investing in growth companies which provide technology to the oil and gas industry. In addition, the Company aims to provide a regular dividend yield due to its strategy of investing through interest-bearing secured convertible debt.

The Company intends to achieve its investment objective and dividend policy through the provision of expansion capital to companies which own and/or are developing commercially proven proprietary technology which may have a potentially significant impact upon the oil and gas industry. Investee companies will have existing customer contracts typically generating revenues of between US$5 million and US$50 million per annum.

The strategy of the Company will be to invest in companies in the oil and gas technology sector which the Investment Managers believe, acting reasonably, are financially stable and have a proven business model and customer base. The presence of an existing customer base and revenues helps to establish the commercial, as distinct from simply experimental, premise for the technology.

Investments will be sought in companies which the Investment Managers believe, acting reasonably, have strong growth prospects, an established market position relative to the competition and most or preferably all of the following characteristics:

•

proprietary technology or processes, which have a significant impact within the energy sector (particularly within the focus areas identified under the heading ‘‘Key Focus Areas within the Oil and Gas Technology Sector’’ in Part II of this document);

•

proven use of the technology, i.e. no investment in research and development or start-ups;

•

proprietary assets, including technology and processes, which can be used as security for the convertible debt instruments;

•

recurring annual revenues of US$5 million or more, generally with an upper limit of US$50 million (at which level the Investment Managers believe the cost of investment will limit the potential for significant capital gains to investors);

•

management teams in which the Investment Managers have confidence in their ability to execute their business plans; and

•

positive EBITDA or significant working capital.

The Company may, in its absolute discretion, invest in investee companies with recurring annual returns of between US$1 million and US$5 million.

The Company intends to seek to diversify its investment risk by adopting a portfolio approach and therefore: (i) the Company will not invest more than 30 per cent of its total assets in of any one company (calculated at the time of the relevant investment); and (ii) it is intended that the Company will invest in assets diversified according to factors such as the nature and stage of development of the technology industry sector (upstream, midstream and downstream) the amount of revenues being earned and geography, both in terms of the country of incorporation and the customer base.

The Company does not intend to invest in other closed-ended or open-ended funds and, in any event, the Company will not invest more than 10 per cent of its total assets in those funds (calculated at the time of the relevant investment).

Material changes to the Company’s Investment Objective and policy will only be made with the approval of Shareholders.”

………….

JOINT VENTURES

The Investment Managers will actively seek to create local joint ventures or sales licensing platforms for the Company, in regions such as the Middle East. The aim of these joint ventures or sales licensing platforms will be to: (i) increase access to local investment opportunities for the Company; and (ii) provide a local sales platform that investee companies can (but are not obliged) to use to drive out sales in that region. The contractual benefit, and/or shares in, these joint ventures will always be held directly by the Company.

…………..

The Fund argued that the investments in QMENA and SQ5 did not comply with the Investment Policy because the policy requires investees to be companies which:

I would if necessary hold that the investments in QMENA and SQ5 were within the Investment Policy by reference to the IPO Prospectus. The passage under the heading of “Joint Ventures” is a description of QMENA and obviously envisages the creation of a new start up company to exploit the licences. SQ5 falls squarely within the type of investment described under the heading “Key Strengths”. Although these passages do not appear in the IPO Prospectus under one of the headings identified in paragraph 1 of the Schedule to the IMAA, I would treat the reference there to what is set out under the heading “Portfolio Opportunities” (which is not a heading to be found in the IPO Prospectus) as intended to include these passages. These passages are within the relevant part of the IPO Prospectus as issued which addresses portfolio opportunities.

In any event, the short answer to this allegation is that if the investments in QMENA and SQ5 were not within the Investment Policy defined by reference to the IPO Prospectus, the Investment Policy was amended by the Fund to permit those investments because there was informed approval of them by the board of directors. They were discussed at board meetings and other meetings at which the independent directors were present. They were recorded and approved in the annual accounts signed off by the board. Mr Price and Mr Hill were aware of the features of the investments which the Fund now complains rendered them in breach of the Investment Policy, and made no objection to them. On the contrary, the investments were repeatedly endorsed by the independent directors and Ms Dorosz. The Investment Policy was defined in the IMAA as “the investment objectives, investment policy and investment restrictions as from time to time determined by the Board”. Investments made with the full knowledge and approval of the board must necessarily have fallen within the objectives, policy and restrictions determined by the board.

The Fund argued that some formal process of amendment of the relevant part of the content of the IPO Prospectus was necessary to fulfil the definition in the IMAA of the Investment Policy as “the investment objectives, investment policy and investment restrictions as from time to time determined by the Board in accordance with Clause 5.7.5 and notified to the Investment Managers”. I am unable to agree. Clause 5.7.5 does not require any formal process. On the contrary the reference to clause 5.7.5 in the definition suggests that an informal process of “control and review” of the managers’ investment activities may be a method by which the Investment Policy is amended. The Investment Policy as initially defined in the IPO Prospectus is not couched in formal definitive terms but in informal narrative terms. The purpose of the IMAA imposing restrictions by reference to the Investment Policy, which may be amended by the directors as they see fit, is to restrict the investments to those which the board approves as being within the objectives of the fund. The policy and objectives within which the managers must work are to be those determined from time to time by the board. If the managers make investments whose nature is known to and approved by the board, that purpose is fulfilled without any need for formal promulgation of amendments to the Investment Policy.

No one suggested at any stage prior to commencement of these proceedings that the investments in SQ5 or QMENA were outside the Investment Policy or impermissible. That was because no one considered them to be so. This is a lawyer’s point constructed after the event, not a point of substance.

The contractual and fiduciary obligation on the managers was to act in what they honestly and reasonably believed was the best interests of the Fund. The allegation that they failed to do so in respect of the investments in QMENA or SQ5 was not made out on the evidence.

The complaint is that the investments enabled the investees to meet their obligations to pay the payments due to other funds within the Quorum group, in particular QIP and QSET, involving a conflict of interest which was a breach of the IMAA and a breach of fiduciary duty. I reject both suggestions.

The claim for breach of fiduciary duty arising out of a conflict of interest is legally incoherent. The claim is not advanced against Ms Dorosz. It is advanced against QOGT, which was a special purpose vehicle having no interests in any other Quorum companies or Quorum funds. QOGT’s only principal was the Fund and its only business was managing the Fund.

In making the investments in QMENA and SQ5, the managers fulfilled their contractual obligation to act in what they reasonably believed to be the best interests of the Fund. It was not per se a breach of the IMAA to invest in companies which were also invested in by other Quorum funds. Clause 13 of the IMAA provided that the investment managers might have potential conflicts of interest with the Fund, and that where they were under an actual or potential conflict of interest their duty was only (i) to ensure that the transactions were effected on terms which were not materially less favourable to the Fund than would have been the case in the absence of the conflict, and (ii) to take reasonable steps to ensure the fair treatment of the Fund. The investments in QMENA and SQ5 were on no less favourable terms than would have been the case had they not been investees in whom QIP or QSET had invested. There was no unfair treatment of the Fund.

Clause 21.3 of the IMAA provides:

“The Investment Managers shall not be liable for any loss to the Company (including any decline in the value of the Company) arising from any investment decision or recommendation made within the Investment Objective, Policy and Restrictions or arising from any investment on behalf of the Fund except to the extent that the loss is due to the gross negligence, wilful default or fraud of an Investment Manager or its directors, partners, employees or agents.”

QOGT argued that the second half of clause 21.3 applied to the immediately preceding words only, such that the managers were not liable (1) for losses arising from investments within the Investment Policy or (2) losses arising from investments outside the Policy unless caused by gross negligence, wilful default or fraud. The Fund argued that clause 21.3 didn’t apply at all to losses from investments outside the Investment Policy, and that there was liability for losses from investments within the Investment Policy if they were caused by gross negligence, wilful default or fraud. I do not need to resolve this issue of construction. It is sufficient to record my findings that there was no gross negligence, wilful default or fraud on the part of QOGT.

Accordingly the claim and counterclaim will be dismissed.