Symrise AG & Anor v Baker & McKenzie (a firm) & Anor

This claim was brought by Symrise AG (“Symrise”) and, in the alternative, Symrise S.r.l (“Symrise Mexico”), its Mexican sub-subsidiary, against Baker & McKenzie LLP and its predecessor firm (“BMcK” or “the Defendant”), arising from legal services provided by the Defendant to a predecessor in title of Symrise, Dragoco Gerberding & Co AG (“Dragoco”), in connection with steps taken following the acquisition in 2002 of Haarmann & Reimer GmbH (“H&R”) and its subsidiaries. H&R and Dragoco were the German parents of two groups of companies operating worldwide in the production of flavours and fragrances. The claim is for breach by BMcK of its duty as solicitors to Dragoco, which Symrise has claimed the entitlement to enforce. Mr William Godwin and Ms Helen Pugh have appeared for Symrise and Mr Lawrence Cohen QC, Mr Sebastian Allen and Ms Jessica Elliott have appeared for the Defendant.

Symrise was formed in 2003 following the merger of Dragoco and H&R, which effectively took the form of the acquisition of H&R by Dragoco through a German vehicle owned by the majority shareholder in Dragoco, Mr Gerberding, and a private equity firm called EQTNorthern Europe Private Equity Funds (“EQT”). The driving force behind the structure of the merger was Dr Martin Wolf, who became CFO of Dragoco in 2002.

The structure of the merger was complicated and was intended, with legal and accountancy advice, to achieve the most tax efficient methodology. The cash to be paid at closing would be obtained by means of term loan facilities granted by a syndicate of banks. It was a highly leveraged acquisition with a purchase price of approximately €1,500,000,000, of which just over €1,000,000,000 was debt: such borrowing was primarily not by the purchasing vehicle, but by the target companies being acquired. Owing to the lack of tax capacity in the German subsidiaries of H&R and Dragoco, a key part of the tax planning for the transaction was the ‘pushdown’ of debt to subsidiaries in other jurisdictions, in which they could obtain the tax relief available on interest payments in those jurisdictions. It is admitted that this was an aggressive tax mitigation strategy. One such jurisdiction was Mexico.

The Defendant was initially retained in July 2002 by EQT to advise on the acquisitions, and part of its role was to advise on various post-acquisition restructuring plans, including pushdown in several countries, Mexico among them. In Mexico, this resulted in a total of €124,990,000 being pushed down into the Mexican business, which sum represented the entirety of the valuation, as carried out by Ernst & Young, of the equity value in that Mexican business. In its global advice (“Tax Memorandum: International Structure”) dated 30 September 2002, the Defendant set out the steps required to achieve the pushdown, which would culminate in a single surviving Mexican entity which was to bear the debt and claim tax relief on the interest payments.

Following the closure of the acquisition of H&R on 1 October 2002, the Defendant was retained by Dragoco, on the terms of engagement letters dated 5 and 12 November 2002, to provide legal services in relation to the post-closure integration of the Dragoco and H&R groups apart from Germany: part of the proposed closure integration was the debt pushdown scheme. The legal services included carrying out a substantial global tax due diligence exercise in 15 different jurisdictions, using local advisers from both within and, in the case of South Africa, outside the BMcK global network, where appropriate, in close co-operation with the other advisers at the time, including Ernst & Young, Deloitte & Touche and Poellath & Partners, a German law firm.

In Mexico, a key step in the series of transactions by which the surviving Mexican entity would acquire the debt to be pushed down was execution of an Intercompany Loan Agreement (“ICLA”). This was entered into on 20 June 2003 as part of the implementation of the pushdown. Advice had been sought by the Defendant from the local BMcK office, a Mexican civil law partnership (“BMcK Mexico”) in September 2002, and again, by reference to the draft ICLA in its final form, in June 2003, and the relevant tax lawyers in that office gave their approval to it prior to its execution. There were the following material terms of the ICLA, which was, by clause 11, to be governed by English law (I underline the parts significant to this judgment):

“(i)

3. Repayment

The amount drawn and outstanding under the Loan, together with all interest and other sums payable in respect of the Loan will be due from Mexico Holdco to the Initial Lender 7 years from the date of this Agreement or at any other time as otherwise agreed between Mexico Holdeo and the Initial Lender or on the Initial Lender’s demand.

(ii)

By clause 12.1, which referred to the Intercreditor Deed as defined in the ICLA (being dated 26 September 2002 (“the ICD”)

12.1

The Loan is a Non HY Intra-Group Liability (as defined in the [ICD]) for the purposes of the [ICD] and [the parties] recognise that this Agreement and the Loan and any amounts payable or action which may be taken in connection with this Agreement are subject to the provisions of the [ICD] and in the event of any conflict, the provisions of the [ICD] shall prevail”.

The debt pushdown in Mexico was completed in January 2004 with the formation of Symrise Mexico. As referred to above, the amount that was pushed down into the entities that became Symrise Mexico was approximately 100% of their equity value, which meant that they were burdened with debt equal to that of their pre-pushdown value, resulting in an inevitable equity value for the entity post-pushdown of zero. There was in the event little disagreement that this had the following effect on the Mexican business:

In March 2005 the Mexican Tax Authorities (“MTA”) commenced enquiries into the tax treatment of Symrise Mexico’s interest payments with regard to the 2003 tax year, even before they had seen the terms of the ICLA; clearly this was the result of the fact that the amount of interest off-set more than eliminated any profit, and hence any tax payment. The MTA subsequently began investigations into the 2004 tax year (on 28 September 2006) and the 2005 tax year (in June 2008). As a result of these investigations, the MTA issued demands on Symrise Mexico for the tax years 2003 (MXN $25,921,525) and 2004 (MXN $101,998,130). They regarded the interest payments made by Symrise Mexico as in reality dividends, and therefore not eligible for the tax relief available to interest payments.

The MTA in the event challenged the pushdown on three different grounds:

Symrise Mexico paid the demands made for 2003 and 2004 between December 2006 and October 2008, but on 2 January 2007 and 10 October 2008 respectively, on the advice of BMcK Mexico, they issued proceedings in the Mexican Federal Tax Court (“the Mexican Court”) to challenge the MTA’s determinations, by way of nullity petitions.

In support of their case that the terms of the ICLA (set out in paragraph 6 above), which was, as set out above, governed by English law, did not contravene Article 92(1), Symrise Mexico in the nullity proceedings lodged a letter of advice dated 1 May 2007 by a Nicholas Tostivin, an English solicitor and partner in BMcK, explaining that at English law, by virtue of its being subjected, by clause 12, to the effect of the ICD, the terms of the ICLA did not have the effect of there being an “unconditional promise of payment . . . on a date determinable at any time by the crediter”. This statement was admitted in evidence by the Mexican Court on 21 May 2007 so far as the 2003 Nullity Petition was concerned. There was an appeal by the MTA against such admission, which led to various interlocutory rulings, but in the event the same statement was admitted by the Mexican Court in the 2004 nullity proceedings on 21 January 2009, and the two proceedings were consolidated on 5 September 2009, so that the statement was admissible in both proceedings; and a further appeal by the MTA against such admission in January 2010 was dismissed by the Sixth Metropolitan Regional Chamber of the Federal Court for Tax and Administrative Justice, in a reasoned decision, confirming the “ruling dated 21 January 2009 admitting the expert technical legal evidence with respect to the scope of the application and interpretation of English law as offered by the plaintiff”, on 20 September 2010. It is now common ground that this had the result both that the evidence of Mr Tostivin was thus admitted, but that it would be unchallenged, because the MTA had not taken its opportunity to put in any evidence in response.

On 16 October 2009, the MTA issued preliminary findings to the same effect as those for 2003 and 2004 in relation to the 2005 tax year. These findings estimated a tax deficiency of MXN $120m for that year.

Symrise decided to instruct a further local legal firm specialising in tax matters, Tron Abogados S.C. (“Tron”) in November 2008, and, after considering matters with them, decided in July 2009 to settle its tax liabilities in respect of the 2003-2005 tax years. Before implementing that decision, Symrise obtained memoranda of advice from Tron, culminating, after various earlier drafts, in a draft of 4 November 2009.

Pursuant to that decision, Symrise Mexico paid on 8 April 2010 an additional sum of MXN $59,010,442 in respect of its outstanding liabilities for the 2003-2005 tax years , and formally withdrew, on 22 October 2010, the nullity proceedings in respect of 2003 and 2004. The total sum paid to the MTA in respect of the three years 2003, 2004 and 2005 was MXN $186,930,087. As part of the arrangement, Symrise Mexico obtained from the MTA what it knew, and was advised by Tron, was a non-binding promise or understanding that the MTA would not initiate audits for the tax years 2006 and 2007, not recorded anywhere in writing.

Subsequently the MTA did not honour that undertaking, and did initiate audits for those years, on 25 January 2012 and 27 March 2013 respectively. They did so on the basis that the interest payments made under the ICLA in 2006 and the first half of 2007 were also to be properly treated as dividends under Article 92(1) of the ITL. The reason why the authorities were prepared to treat payments made after the first half of 2007 as interest payments was by reference to their approach towards a Clarification Agreement executed on 1 July 2007 between the parties to the ICLA. This had been entered into, following advice to Symrise from KPMG, to ‘clarify’ to the authorities that the parties true intention in entering into the ICLA was that clause 3 should be read as if the words “or on the Initial Lender’s demand” (which were removed) were replaced by the words “or under the terms and conditions set forth by the [ICD]”. This was a strategy taken for two reasons: first because at Mexican law the courts were entitled to look to matters subsequent to the ICLA to determine the parties’ intentions at the time, so that it might support the arguments being put forward in the nullity petitions, as to the intention of the parties at the time of the ICLA, but secondly in order that (as indeed eventuated) it should be made quite clear that, at least after the execution of the Clarification Agreement itself in July 2007, even if it did not support the argument for the past, the MTA could then accept for the future that Article 92(1) was not applicable. Symrise Mexico paid on 30 May 2013 an additional MXN $65,064,342 in settlement of the liabilities in respect of the 2006 and 2007 tax years.

Symrise, alternatively Symrise Mexico, claimed the total amount of the tax payments made as above, together with what it called mitigation costs, in respect of legal fees for advice and assistance, totalling €162,492.88 and US$170,241.60. In the event the sums claimed were, as a result of further developments and discussions during the hearing reduced as follows:

During the course of the hearing, by virtue of the sensible response by both parties to the forceful arguments put forward by the other, agreements and concessions were made which in the event substantially reduced the area of dispute between the parties. I shall set out the original issues, indicating where many of them have fallen away for that reason:

There was a number of significant absent witnesses. So far as Symrise is concerned, the absence of Dr Wolf, who played a very considerable role, as referred to above, in the strategy of the pushdown, became much less significant in the light of the subsequent concession of Issue 2. As it is, it would have been helpful to have heard from Mr Henning-Berners from the Claimant and Mr Elias Adam Bitar (“Mr Adam”), the Senior Associate at Tron, who in fact carried out most of the work, and seems to have been the Tron representative who reached the unenforceable understanding referred to above, while, so far as the Defendant is concerned, it would have been helpful to have had a witness from BMcK Mexico. As for the factual witnesses who were called: I did not accept all the evidence given by Mr Sattler, particularly in so far as he asserted, contrary, in my judgment, to the likelihood, that he received oral evidence as to the merits from Tron over and above, or indeed inconsistently with, that which appears in the documents, to which I shall refer below: neither Mr Gerberding nor Mr Tron added much if anything to the evidence otherwise apparent from the documents, and I was surprised at how little Mr Gerberding knew even at the time, given his seemingly important role as Chairman and majority shareholder of Dragoco at the time of the acquisition and thereafter successively Chairman of the Management Board, Vice-Chairman of the Advisory Board and member of the Supervisory Board of Symrise. With regard to the Defendant, Mr Hawks too had little to add to what was in any event apparent from the documents, and insofar as he spoke to the retainer, this issue was in any event later conceded, as discussed above.

As for the experts, the rival opinions as to German law led to an agreement between the experts resulting in their not needing to be called, and in any event Issue 1 was, as set out above, conceded. With regard to the experts who were called, I was unimpressed by Mr Revilla, the expert on Mexican tax law called by the Claimant, and remained wholly unpersuaded by the position he took as to the likelihood of Symrise Mexico’s succeeding in establishing that the interest payments ought to have been treated as tax deductible, (he actually described the MTA’s case as “strong”) an issue which, as set out in paragraph 17(4) above, Symrise conceded after his evidence was given. He gave unexplained evidence as to the inapplicability of English law to the ICLA; purportedly relied (notwithstanding the decision of the Mexican Court, based upon its own citation of Mexican authority, as to the admissibility of Mr Tostivin’s statement) upon Mexican precedents to the contrary, which he never produced; and he accepted in the end that, even if Mexican law were applied (which he had not addressed), the result so far as the supremacy of the ICD was concerned would be the same as in English law. He also unpersuasively went back on an agreement reached with Mr Calderon as to correction of errors by the MCA which, as discussed in paragraph 50(iv) below, was plainly correct. I found the Defendant’s expert, Mr Calderon, both impressive and convincing. As for the valuation experts, as referred to in paragraph 17(7) above, Mr Bukowski’s opinion was predicated upon a basis which I found unsupportable as further referred to at paragraphs 88 to 90 below, and the expert evidence of Mr Giles was in my judgment entirely persuasive.

As will appear, the issues as to breach of retainer (Issue 4) and causation (Issue 5) do not require much consideration of the factual background, so I limit myself to a summary of the significant facts which underlie my resolution of the one real outstanding issue in the case, that of mitigation, Issue 6, commencing after Symrise’s instruction of Tron, against the background of the then pending nullity petitions, described in paragraph 13 above.

Prior to the instruction of Tron, Symrise were obtaining advice from BMcK Mexico, to which I shall return below, but also from lawyers at KPMG, who advised in April 2007 that “it is more likely than not [that] Symrise’s case may expect with certainty a positive final resolution”. They advised similarly in May 2007, although in July they indicated that they were not allowed to provide an opinion as to percentages of chance, repeating in answer to a request from Mr Berners that he wanted a statement “if it is more likely or not” that such was the case. Mr Sattler said (Transcript Day 4 page 75) in cross-examination that they brought in Tron (a year later) “because we felt that the advice given by [BMcK] may not be free of any conflict of interest, and in the light of the opinion of KPMG that a clarification agreement is necessary [introduced in the circumstances and for the reason set out in paragraph 15 above] we interpreted that KPMG was not of the opinion that we will get a positive ruling”.

Shortly after firm advice by BMcK Mexico on August 31 2008 that “the loan agreement and related documentation cannot be interpreted, as suggested by the Treasury Department, to conclude that it contained an unconditional promise of payment by Symrise and therefore interest payments cannot be characterised as dividends”, with similar firm advice in relation to Articles 29 and 31, Tron were instructed. Mr Berners wrote in an intercompany email of 4 November 2008 that “I do need a regional CFO more than ever. The scenario in Mexico is frightening” and “even if our chances to win are 80%, we will suffer major hits on our net profit as soon as we pay additional taxes and charges”.

In an email of 11 November 2008, copied to Mr Sattler, who had global responsibility for all of the Group’s legal and compliance issues, Mr Berners asked about a settlement, about whether they could ask the Judge for a preliminary ruling “which stops the current tax investigation until the law suit has been finally ruled”, and as to whether, if Symrise Mexico were stripped fully by transferring its assets to a new company, that would help to avoid paying the tax liability, and what would be the implication of such a strategy. Mr Cohen was very critical of Mr Sattler in cross-examination, given his responsibilities, for not immediately chiding Mr Berners for such a suggestion, which Mr Sattler said he did not take seriously.

But in any event neither of the two latter courses seem to have been taken. Instead, Mr Berners in a subsequent email of 14 November notified Mr Sattler that he had had a talk with “the lawyer in Mexico [which must have been Tron] and he knows strategies which enable us to reduce the damage significantly. A settlement is difficult because of anti-corruption rules”. I shall return to this below, because it is common ground that, at the very least, such anti-corruptionrules prevented there being any kind of binding agreement with the MTA not to pursue an audit for the payment of tax in the later years.

The purpose of Mr Tron’s engagement is made quite clear by Mr Berners in his intercompany email of 5 February 2009: “we engaged Tron . . . to negotiate a settlement with the Mexican authorities”. This is reflected in Tron’s letter of retainer of 5 December 2008. At his first meeting on 4 December, at which representatives of BMcK Mexico were present, Mr Tron said he was “in agreement with the strategy and the defence arguments and understands that although the contract has a language that the [MTA] used as a pretext, the effectiveness of the clause is conditioned and subject to other documents. [There was no challenge by Mr Tron (or Mr Sattler) that the word pretext was so used, and was recorded]. He really did not provide different arguments. Rather, he recommended that we should approach the [MTA] to try to “negotiate” or at least to request that future audits should be put on hold until the first law suit is decided” [Mr Berners’s suggestion above, never seemingly attempted].

Mr Tron immediately launched into action with a meeting with his contact at the MTA, Mr Libreros, and it seems clear that he did not seek to argue the merits of the case at all, but at this meeting of 12 December 2008 he was immediately angling for a settlement of the 2003, 2004 and 2005 liabilities as claimed in full, but in return for the “unofficial statement” from Mr Libreros that, provided that Symrise satisfied him they had reduced the intercompany debt (which they had done by way of a recapitalisation in 2007), he would not open audits for 2006 and 2007: this became the subsequent unenforceable understanding. By 23 December 2008, Mr Adam of Tron was noting that he had not seen a copy of the ICD or of Mr Tostivin’s legal opinion.

On 27 April 2009 there was the first of a number of memoranda provided by Tron to Mr Berners and Mr Sattler, setting out what they had been seeking to negotiate with the MTA. It makes no reference at all to the merits of Symrise’s case in the nullity proceedings.

The options in the 27 April memo were repeated in Tron’s second memo of 29 May 2009 (which again did not address the merits), namely maintaining the nullity proceedings or, with slight variations, withdrawing them and paying up along the lines of the discussions with the MTA. Mr Berners, by email of 11 June 2009, said that he would opt for the second alternative as, he believed, was also the view of Mr Sattler, but before bringing the case to the Symrise Board he would like Tron’s recommendations. In a follow up email of 19 June he looked for further reassurance in presentation for a Board decision about the 2006 and 2007 accounts: while recognising that they would not “get any assurance that the interest deduction in 2006 and 2007 won’t be challenged anymore”, he asked whether the MTA could be persuaded to issue assessments for 2006 and 2007 which became definite, so that those periods were no longer subject to audit – “you have to find a solution for this, before we approach the Board. That [is] the reason why we engaged you”. It is obvious that this latter suggestion was not feasible, and Tron’s third memorandum of 30 June 2009 simply repeated the previous options.

Mr Tron made clear in an email to Mr Berners of 3 July that though Tron were “positive that this [an audit of 2006 and 2007] is not going to happen”, Symrise must (and this passage is in capital letters) accept as “unavoidable . . . the risk of trusting the non-binding commitment of the authorities”, and Mr Adam confirmed on 8 July that “they cannot issue any written or formal guaranty about not opening or not assessing deficiencies for years 06 and 07, however he insisted in the unofficial position to settle the cases without going any further with the reviews”.

Mr Berners wrote to Mr Adam an email dated 29 July 2009, which stated:

“I spoke with . . . Dominique Yates [Symrise’s CFO] and Markus Sattler the other day and we agreed to settle the case according to scenario (c) [withdrawal], even though we won’t get a settlement in writing.

I understand from your latest email that we have to withdraw the appeals and pay additional MXN $109.5m for 2005. On the other hand we get MXN $36.9m (Symrise Mexico) [correction of errors, to which I will refer below] and MXN $14.3m (Symrise Luxembourg) [the withholding tax referred to in paragraph 16(i) above] refunded. After that, we can close the chapter”.

This was confirmed by Mr Berners’s email of 14 August, namely that he accepted the result for 2005 and would not file an appeal against it.

A fourth memo was sent to Mr Berners by Tron dated 25 August confirming that “it is important to note that the 2005 tax audit shall be concluded on 16 October 2009, thus, it is of the utmost importance to define the actions and strategy to be followed regarding the settlement of these cases by 30 September 2009”.

At that stage Mr Berners turns his mind towards BMcK Mexico, and they respond on 26 August that they are not prepared to contribute to any settlement, referring to the uncertainty of any reliance upon the word of Mr Libreros, who by then had ceased to be the formal Head of the International Auditing Section of MTA, and emphasising:

“Finally, as expressed in several occasions, we are of the view that the claims by the [MTA] are groundless and it is more likely than not that the legal actions filed by Symrise Mexico would prevail”.

Mr Berners now tells Tron on 27 August, after previously discussing the issue with Symrise’s British lawyers, who had in mind that “we have to mitigate damage in order to maintain the chance to sue Baker successfully”, that he needs a legal opinion from Tron “as to the legitimacy and strength of the tax authorities’ case and what the likelihood was that the tax authorities would win. At the end, we would like to get a recommendation that it was in Symrise’s best interest to settle. Finally your conclusion and recommendation to settle”. He continues “considering the chances to win the pending law suits, which in our view are not better than 50/50, and the total exposure, we believe a settlement has a very strong commercial rationale, all the more as we do not lose the possibility to chase Baker. Maybe you share this view and provide your recommendation accordingly. Can you provide your opinion in draft, so that we can collectively review and discuss it before we get the final one”.

Mr Berners discusses with Mr Yates by an email of the same date the fact that a settlement in Mexico (together with favourable positions in Germany and Singapore) could lead to a reduction of the Symrise Group tax rate “from Q3 onwards to, say, 27%” (and this eventuated, as is clear from the minutes of a meeting of the Executive Board of Symrise, recently disclosed, dated 22 September 2009).

Meanwhile there was a significant internal email sent by a junior associate at Tron to Mr Adam, dated 1 September 2009, which followed from a telephone conference which Tron had had with Mr Berners and Mr Jeremy Hill of Symrise’s English lawyers, which Mr Berners had suggested should take place in an email to Tron of 28 August namely “before you get stuck somewhere, let’s discuss your problem with Jeremy Hill to help you out”. The email reads (in material part):

“Basically, what they asked us to do was to issue an opinion with emphasis on three matters:

1)

That the source of the tax credits that they have paid and will have to pay is associated with the debt pushdown implemented by the company, at Baker’s recommendations.

2)

That the case made by the tax authorities against the company is not a frivolous one and is supported by a reasonable argument, although without us making any comment on the possibilities of success in the litigation.

3)

From a legal standpoint, the option of self-correction chosen by the company is a reasonable business decision in view of the consequences and the different scenarios it is now facing.

. . .

As regards the second point . . . [Tron] is unable to give any opinion on the probabilities of success in litigation that has commenced and is being conducted by another Office, since apart from this being a litigation matter, we do not have access to the files dealing with the pleas for nullity. Our opinion on this point was that both parties have grounds to support their position to a certain degree, and we do not have any additional elements that could tip the balance beyond 50-50. In principle they accepted that we support this point, stating that the parties’ arguments are reasonable and not frivolous.

Lastly, we agreed to draw up a document with detailed background information on the case, which we will review with both the English lawyer and the company.

We also agreed to suggest an analysis outline, including the following (i) a detailed description of the legal options that the company currently has, as well as their financial consequences; (ii) supporting, solely in view of those consequences, the reasonability of Symrise opting for the solution it chose to resolve the matter; and (iii) the reasonability of the arguments submitted by both parties to the court. This outline will be examined by the English adviser in order to establish whether the scope of our opinion covers their needs (so as not to work uselessly).

. . .”

The fifth Tron memo dated 30 September 2009 headed “Draft for discussion” is the result. For the first time it refers to the ICLA, though there is no assessment in that regard of Symrise’s case in relation to Article 92(1). Tron’s Opinion is set out for the first time at paragraph 3, namely:

“3.2

The [MTA’s] arguments under which the interest paid . . . were reclassified as dividends are not frivolous. Such arguments are to some extent reasonable, since from the terms of the [ICLA] and according with a literal interpretation of that contract it may be concluded that the repayment clause contained in the agreement grants to the crediter the power to obtain the payment of the loan at any time . . . Despite the arguments that maybe sustained against the [MTA] position, the ones used by them to support the assessment and preliminary findings at hand are reasonable arguments, even if we do not agree with them, since they are to some extent applicable to the background of the case and reference to statutory provisions entitling them to reach the conclusions they express in the assessments, and may be confirmed by the court.”

There was a footnote which read: “The arguments of the [MTA] may not prevail in litigation. However they are sustained by a reasonable judicial argument”.

There is no addressing of whether Mexican law or English law applies to the construction of the ICLA, nor any assessment by reference to either legal system as to whether, by virtue of clause 12, the provisions of the ICD override the wording of clause 3. It seems from a gap left in the draft of the earlier paragraph, 1.2.4, that Tron had not yet even looked at the ICD.

The draft fifth memo continued:

“3.4

Considering our conclusions stated in 3.1 [a recital of the tax liabilities determined by the MTA resulting from the interest payments] and 3.2 above, it would be to our best opinion that the (i) economic benefit (possibility of offsetting the favourable amounts) and (ii) the legal certainty (no litigation involved) that such alternative would provide to the Company (in comparison with all other alternatives available) makes it an advisable position to take before the [MTA] in order to solve the discussed matters.

. . .

4.2

Therefore despite the arguments that may be sustained against the [MTA] position, the ones used by them to support the assessments and preliminary findings at hand are reasonable arguments (even if we do not share them) since they are to some extent applicable to the background of the case and referenced to statutory provisions entitling them to reach the conclusions they express in the assessments.”

Mr Tron confirmed in evidence that he still does not share the MTA arguments, and considers that, as was subsequently conceded at the hearing, as set out in paragraph 17(4) above, the arguments that Article 92(1) do not apply are in fact right (indeed as Tron had said when first instructed in December 2008).

This fifth draft memorandum included the statement, at paragraph 4.3.3, that Symrise should note that “both the withdrawal of the complaints filed against the 2003 and 2004 tax assessments and the correction of the Company’s situation for the year 2005 will deprive the Company from any further legal action against the [MTA] decisions, since this will imply that the Company has accepted the existence of the tax deficiencies and voluntarily chosen to correct its tax situation”.

Mr Hill was not satisfied with the fifth draft, and in a detailed critique dated 7 October 2009 he set out “the items that we would like to see clarified or expanded in your draft letter of advice for Symrise”. In particular in the context of “the consideration of claims that Symrise wishes to preserve against” BMcK, a number of points are made including the following:

“2.

Relative strengths and merits of the case:

Symrise will need to take into account the relative merits and strengths of any legal case which the [MTA] might have when Symrise considers which course of action to follow. Although at paragraph 3.2 of your draft letter you say that the arguments put forward by the [MTA] “are not frivolous” and that “the said arguments are to some extent reasonable” this does not really assist Symrise in its own decision-making process.

Symrise needs clear and reasoned advice from yourselves as to the relative merits, strengths and weaknesses of the case put forward by the [MTA]. It is also important to ascertain whether, in your professional opinion, the [MTA] will prevail in their arguments or whether there are sufficiently compelling reasons that can be advanced on behalf of Symrise to suggest that, on the balance of probabilities, Symrise will succeed in challenging the tax assessments in Court. In saying this, we, and Symrise, fully appreciate that Tron Abogados are only giving their professional view and without guaranteeing the outcome of this matter or predicting how any legal case will finally be decided. What Symrise needs, however, is a firm recommendation from you as to which course of action you think should be followed and the reasons why you recommend such course of action based on your understanding of Mexican tax laws and your experience in dealing with the [MTA]”.

Mr Adam responded to Mr Hill (with copies to, among others, Mr Berners and Mr Sattler) by an email dated 9 October including the following:

“. . .

2.

We will be more than happy to include within the new draft the content of . . . our email sent on October 7^th, regarding the terms of the settlement and the authorities that we have discussed it with, however, as mentioned in the memo, there is no guaranty or possibility for enforce the agreement (regarding their commitment for not auditing the years 2006 and 2007) since that was agreed on an informal and non binding basis.

3.

Under current Mexican practice, our advise must be limited to explaining the alternatives or scenarios at hand and stating the legal and tax consequences of each on of them, but to determine which of those alternatives comes to be the best or issue a recommendation to enter into a specific course of action remains a business decision we are not entitled to make.

4.

However, we will be more than happy to state the actual merits of the interpretation held by the tax authorities (even when we might not share them), and consider them as well as: (i) the current tendency of the Mexican administrative courts, (ii) the current economical situation and the pressure it has imposed on the Federal Budget (and therefore in the revenue affairs), and (iii) the complexity of the background and the structure it self; in order to issue a recommendation to avoid litigation and suggest the settlement of the cases.”

Mr Hill comments in response to a further email of 13 October 2009 from Mr Adam:

“I am unable to understand why Tron . . . is not willing to give Symrise its own assessment as to which of the alternatives is viewed by Tron as being the best route to follow – Clients expect their lawyers to be able to express their own views, based on their knowledge and experience, and that is rather a large part of the value-added which lawyers bring, certainly in every other jurisdiction I have ever encountered.

The fact that Baker & McKenzie feels able to express a very firm view in this matter is exactly why Symrise needs Tron’s views as a counterbalance.

Please can you circulate the revised draft as soon as possible.”

The sixth Tron draft incorporates for the first time some, though inadequate, reference to the ICD in clause 1.2.4, where there was previously a blank. At paragraph 3.2 the words set out in the previous report at paragraph 4.2 (quoted in paragraph 38 above), by reference to the MTA arguments “even if we do not share them”, is replaced by the even franker words “even if we do not agree with them”. There is then a new insertion by reference to what Mr Adam had said he would be prepared to say in his email of 9 October 2009 referred to in paragraph 42 above:

“Therefore, considering i) the complexity of the background of the cases discussed with the Mexican Tax Authorities and the formal arguments that said authorities might advance to sustain their decisions: ii) the current tendency of the Mexican administrative courts to confirm the decisions ruled by the Tax Authorities: iii) the current economical situation of Mexico which has imposed pressure as to the decisions of the Mexican government regarding measures to increase the country’s revenue, it is to our best opinion that it is more likely than not that the outcome of the complaints filed by the Company against the 2003 and 2004 tax assessments, will be against the interests of Symrise Mexico.”

This is repeated word for word in paragraph 4.2, prefaced by the words “Even though we are not in the position to anticipate as to the outcome of the legal proceeding initiated by Symrise Mexico (nor to provide any guarantee that the [MTA] will honour its informal commitment regarding the settlement of the cases)” – though such anticipation is exactly what they then do in the quoted passage by reference to the three reasons they give – and the paragraph concludes “based on the above mentioned reasons, our recommendation is to avoid further litigation”.

Although this was described in a covering email of 27 October 2009 as the “final draft of our opinion”, a further, and seventh. Tron memo was produced dated 4 November 2009, which was in the event the last memo, although it remained headed “draft for discussion”, and the only copy before the Court is, on each page, stamped Draft. No material changes or additions in that regard were relied upon by either side before me.

Although there is no documentary evidence, it is said by Symrise that the decision to go ahead with the strategy, which had already been agreed by those that mattered, Messrs Berners, Yates and Sattler, in July/August 2009 as set out in paragraph 30 above was made in November 2009, although, as set out in paragraph 14 above, the payment of the sums outstanding to the MTA was not made until April 2010, and the nullity proceedings were only withdrawn on 22 October 2010, after, and taking no account of, the favourable appellate decision of the court (referred to in paragraph 11 above) confirming by reference to Mexican precedents the admissibility of the statement of Mr Tostivin, and thus confirming that there was at the very least a good arguable case that English law was to be used for the construction of the ICLA and if so that MTA would not be in a position to challenge the statement of Mr Tostivin, having not sought to adduce any counter-evidence of their own. It remains unclear whether Mr Tron even saw the statement of Mr Tostivin, but certainly no mention is made of it, and Mr Tron confirmed that he did not consider the questions of English or Mexican law in relation to the construction of the ICLA.

In the event, as set out in paragraph 15 above, Mr Tron was unable to persuade the MTA not to open an audit of the 2006/2007 years. The MTA confirmed to Mr Adam in April 2012 that “as a matter of internal rules they are compelled to review the years following those that derived in a deficiency by an ongoing strategy for tax payer”, and although he had said to Symrise in 2010 and 2011 that he would “insist” on the issue, the best that in the event Mr Adam was able to suggest in November 2012 was of pursuing Mr Rizo, who had been Mr Libreros’s superior, and who was said in Mr Adam’s email of 30 November 2012 to have been “aware back then” of the understanding, to try to reach “an understanding that honours it”. However as Mr Adam made clear in that email and a subsequent email of 26 December 2012 the MTA were not prepared to honour such understanding, which might “arise an administrative liability for them” if they did.

Finally I should address what was, by the end of the hearing, an agreed, or all but agreed, comparison of (i) the terms of what Mr Godwin calls the settlement and what Mr Cohen calls the capitulation, and which I shall call the deal with the MTA in 2009/2010 (“the Terms of the Deal”), (ii) what would have occurred in each case had Symrise continued with the nullity proceedings and lost (“Worst Case”) and (iii) the position if Symrise had pursued the nullity proceedings and won (“Best Case”).

Before doing so I should explain and address what is again an agreed position as to the assumed progress of the nullity proceedings had they been continued. As Mr Calderon explained, the evidence in the nullity proceedings was now closed after the appellate decision to admit Mr Tostivin’s statement (although it would have been possible, though unlikely, for there to be a further appeal against the admissibility decision), and that, although further submissions on both sides could be put in, there would not be any hearing, and the Mexican Court would decide the nullity proceedings on the basis of the court file. The agreed estimates are a maximum of 6 months before such outcome, with the possibility (indeed near certainty, given the agreement of the experts that the MTA tend to appeal everything) of an appeal to the Circuit Court, for which a further 6 months should be allowed: an appeal from there to the Supreme Court would be on constitutional grounds only, which appears wholly unlikely, but in that event a further 12 months would be required. It is common ground that, so far as costs are concerned, a further US$25,000 should be anticipated up to the first instance decision in the Mexican Court, and costs of US$85,000 for subsequent appeal or appeals.

I now deal with each aspect of the deal as above:

I shall return to a consideration of these financial consequences, and consider also what was put forward by Mr Godwin as non-pecuniary advantages of the deal when I consider the rival contentions with regard to Issue 6 (Mitigation) below.

I turn now to deal with the issues which survive for my decision, as discussed in paragraph 17 above, namely issue 4 breach of retainer/negligence, issue 5 causation, issue 6 mitigation and issue 7 quantum.

It is now common ground that I do not need to consider whether BMcK was negligent itself by virtue of inadequate instruction of BMcK Mexico. It could be said that when Mr Hawks instructed BMcK Mexico to consider whether the ICLA created any tax problems in Mexico he should have supplied the ICD, to which reference is made in clause 12 of the ICLA. But Mr Hawks’s response carries some force, namely that he had no idea that clause 3 was likely to cause any problem, not having any knowledge of Mexican tax law, and he would have supplied anything, including the ICD, for which he was asked, but he was not. The reality is that BMcK Mexico saw clause 3, but did not know what was in the ICD, so that they were in no position to be able to reach a conclusion (such as is now conceded) that by reference to its terms, and the subjection of clause 3 to it by clause 12, clause 3 did not offend against Article 92(1); and yet without any reservation they approved the ICLA.

In my judgment the case for Symrise is sufficiently proved as to the negligence/breach of retainer of BMcK Mexico, for which it is now conceded that BMcK itself is responsible, by two pieces of clear evidence:

I am satisfied that the Claimant succeeds on Issue 4.

The MTA commenced their investigation into the tax affairs of Symrise Mexico before they saw the ICLA (as set out in paragraph 8 above). Even though I am satisfied, and it is conceded, that in the event the ICLA did not engage Article 92(1), the wording of clause 3 plainly on its face, unless and until there was adequate study of the ICD, suggested that there was a breach of Article 92(1): and even though the MTA had already decided to investigate and were relying, and continued to rely, on Article 29 (which neither expert considers to have been arguable) and Article 31 which plainly required some careful consideration of the transactions, Article 92(1) was a good hook or peg. The Article 92(1) argument made it more likely that the investigation would continue, irrespective of whether Article 31 was or remained a live issue (as Mr Calderon considers that it would have been if some evidence had been available to the MTA, such as the statement given in evidence to me by Mr Gerberding that, although he was not himself involved, there was not to his knowledge any other purpose in a Mexican holding company buying the shares and borrowing the money than to set off the tax to get a tax benefit in Mexico).

It may well be that, as Mr Tron accepted, when authorities find aggressive tax structures they attack them, and that, as even he accepted, it seems that too much debt was pushed down - even if such was indeed, as Mr Hawks described, not BMcK’s responsibility but that of Dr Wolf and Ernst & Young. However that does not in my judgment in any way preclude the conclusion that, in the very context of the disappearance of Symrise’s tax and profits (described in paragraph 7 above), clause 3 of the ICLA would have caused and did cause the MTA to pursue Article 92(1), as well as Article 31. Even if in those circumstances the MTA would have pursued Symrise Mexico by reference to Article 31, they were in my judgment rendered more likely to pursue them once they had sight of the arguable infringement of Article 92(1), which they would in any event have run with, as they did.

However in any case, there are in my judgment at the very least 2 parallel causes of the investigation, and of the consequent risk of tax liability (which Symrise submit that they reasonably mitigated). Mr Godwin rightly in my view relied upon the authorities to which I have referred in paragraph 17(5) above. I find the passage in Chitty (31^st Ed) at 26-067 to be entirely apt, namely:

“Two causes. If a breach of contract is one of two causes, both co-operating and both of equal efficacy in causing loss to the claimant, the party responsible for the breach is liable to the claimant for that loss. The contract-breaker is liable so long as his breach was “an” effective cause of his loss: the court need not choose which cause was the more effective.”

I am satisfied that BMcK’s breach of retainer/negligence was an effective and concurrent cause of the MTA’s investigation which led to the deal.

I turn to consider this issue against the background of paragraphs 20 to 47 above. I shall address whether the deal was “in all the circumstances” within the range of reasonable responses, and in particular Ramsey J’s 4 factors. I shall deal first with (d) the benefits of ‘settling’ the cases rather than disputing them and (c) the uncertainties and expenses of litigation.

The background is that, as described above, this was never a question of entering into a compromise, in which there was something given on both sides, but of taking the best/only deal that was available. It was plain immediately from the first arrival of Tron (to which I shall refer further below) that the only deal which could be done, if Symrise were to exit from the nullity proceedings and the disputes, was one in which Symrise paid up the tax claimed in full for all 3 years, 2003, 2004 and 2005, paid a reduced fine, took the offset of those sums in respect of withholding tax which were not statute barred and in respect of the corrections for the previous errors, and accepted the informal unenforceable understanding. This is not therefore a case in which there can be any consideration as to whether Symrise could have done ‘better’, as might be the case in other circumstances.

As for the unenforceable understanding, this was plainly from the documents arrived at with Mr Libreros, who had left the relevant department by the time the decision was made in August 2009, and I am not satisfied (particularly in the absence of Mr Adam) that such understanding was ever made with Mr Libreros’s superior, Mr Rizo, although Mr Tron said in evidence that he had mentioned it to him at a seminar and over dinner, probably in the following year. I note that Mr Adam himself, in October 2010 and in April, November and December 2012, was referring to the agreement as having been with the “former Chief” and their “predecessor in office”, not with Mr Rizo, who remained in office. However I accept that Symrise were led to believe that there was such an understanding, and that it survived the departure of Mr Libreros, and that Mr Sattler and Mr Berners accepted what Mr Tron told them in that regard.

However it is clear that, as Mr Sattler confirmed in his evidence, he was always told that such understanding was unenforceable, even though (on what basis is still unclear to me) Tron felt able to tell Symrise that they had no experience of such an understanding not being complied with, and that Symrise were plainly warned of the risk. So far as Symrise’s attitude to it is concerned, Mr Godwin described it in his closing submissions as “somewhere between a hope and an expectation”. Symrise, and in particular Mr Sattler, who was, as set out in paragraph 21 above, both a lawyer and responsible for compliance, at no stage probed precisely what was involved in the anti-corruption measures which were referred to, or how such measures, if preventing an agreement, could allow for an informal unenforceable understanding.

The concomitant risk, which Mr Sattler also recognised, as he accepted in evidence (Transcript Day 5/26/11) was that if the MTA did not stand by the understanding, there was very likely, indeed in my judgment (and in the opinion of Mr Calderon) inevitably, the consequence that the tax position, the applicability of Article 92(1), having been accepted in respect of the 2003, 2004 and 2005 years, the same would apply in respect of the 2006 and 2007 years (subject to the future protection of the Clarification Agreement). Symrise again did not probe what was involved in or meant by the alleged understanding. It cannot surely have been thought to amount to a promise that in no circumstances would the MTA challenge any accounts that were put in for the 2006 and 2007 year: all that was apparently being understood was that the MTA would not open an audit in respect of those years. As Mr Tron himself said in evidence (Transcript Day 7/84), once an audit was opened, the issue would be “moot” - i.e. the accounts would have to be considered on the same basis as the corrected accounts for the previous years.

If anyone on Symrise’s part had considered for a moment what was involved in the informal unenforceable understanding, I cannot conceive that they would have thought that there was a 50% chance of any benefit being obtained from it, and probably a very considerably lesser percentage chance of their being able to avoid paying for 2006 and 2007 on an equivalent basis for the 2003-5 years, which in the event, as set out in paragraph 50(vii) above, amounted to MXN $270m.

The first question is then to compare what was obtained from the deal rather than from carrying on with the nullity proceedings and losing them. The course of carrying on was one supported by Mr Yates in his email to Messrs Berners and Sattler, referred to in paragraph 81 below, and recommended by Ms Villarreal of Symrise Mexico in her email to Mr Berners of 4 May 2009 (dubious as she there expressed herself to be of there being a “legal way” in which there could be any guarantee about the treatment of the accounts for 2006 and following). Had they adopted such course, then, as discussed in paragraph 50 above, would they have been worse off? Not much, is the answer, and they would have lost the chance of success. They would, as in the deal, not have recovered the sums paid for 2003-2005, but would still have obtained the credits in respect of the withholding tax (insofar as not statute barred) and the previous years’ errors. They would of course not have had the (less than 50%) chance that the unenforceable understanding would work. They would have had to have paid (as appears in paragraph 50(iii) above) an additional €625,222 in fines, and they would have had the additional legal costs of running the nullity proceedings (after the successful admission of Mr Tostivin’s evidence) up to the first instance decision and the possibility of appeals thereafter: the agreed estimate for that is US$ 110k.

There is then the comparison to be carried out with what would have happened if Symrise had continued the nullity proceedings and won. I deal below with the strength of the claim and the chances of success, but at this stage simply address what Ramsey J referred to as the benefits of continuing the proceedings, and succeeding. In that case, as discussed in paragraph 50 above, there would have been a recovery of all taxes and surcharges paid in respect of 2003, 2004 and 2005, approximately MXN $247m (€14,286,615). In addition there would be the inevitability of success in respect of the 2006 and 2007 years, because the MTA would have lost the principle of Article 92(1), namely a total of MXN $270m (€15m) or MXN $322m (€17.8m) (paragraph 50(vii) above), rather than the less than 50% chance of avoiding it to which I have referred. Although Symrise would not receive the credits, they would have no need of them (as explained in paragraph 50(iv) and (v) above). The agreed extra $110k in costs would need to be incurred, in the event of there being an appeal, but to set against that there would be the saving of any legal costs in respect of the two sets of proceedings which were in fact subsequently instituted (and were unsuccessful) in respect of the statute barred withholding tax, any costs of challenging (as in the event they sought to do) the 2006-2007 years, and of course, materially, the substantial costs incurred of these proceedings against BMcK, which would not have been necessary if Symrise were successful against the MTA.

Apart from these financial matters, Mr Godwin has raised two more general matters, which he refers to as benefits from not proceeding with the nullity petitions:

As is clear from the history that I set out in paragraphs 26 to 45 above, these assessments, namely comparing that which would be achieved by the deal with what would result if the proceedings were simply taken forward and lost, and in particular comparing it with the very substantial pot which would be recovered (in respect of 2003-2005) and with certainty avoided (in respect of 2006-2007), were not addressed by Symrise (or Tron).

I now address, together, Ramsey J’s (a)strength of the claim and (b)whether the ‘settlement’ was the result of legal advice.

The advice which Symrise received prior to the instruction of Tron was uniformly favourable to their chances. As to BMcK Mexico’s advice, Mr Sattler in his witness statement (paragraph 16) says that in 2006 Mr Berners instructed them to advise whether or not Symrise had a greater than 50% chance of succeeding with its tax challenge. They gave that opinion to Symrise. It was consistent with the advice given by Symrise’s other legal advisers, KPMG, to whose favourable advice I have referred in paragraph 21 above. Mr Sattler described KPMG’s written advices as “fuzzy”, but I do not share his view. Ernst & Young carried out a tax audit for the year 2003, and both confirmed the propriety of the statements for tax purposes and treated the (subsequently impugned) loans as long term liabilities (rather than on demand loans).

As for BMcK Mexico, on 12 December 2006 they are recorded as advising the Symrise team led by Mr Berners that “the chances to obtain a favourable decision exceed 50%”. I have already recited in paragraph 22 above their firm written advice of 31 August 2008. In an email of 26 August 2009 BMcK confirmed that “it is more likely than not that the legal actions filed by Symrise Mexico would prevail” and stated “as expressed in several occasions we are of the view that the claims by the [MTA] are groundless”. This was sent to Mr Berners and Mr Sattler, and not only was there no challenge to the fact that this had been said on several occasions, but Mr Sattler confirmed in his oral evidence (Transcript Day 5/74) that BMcK had on many occasions expressed the view that the MTA claims were groundless. They said this again in their letter of 11 November 2009, and although in relation to that letter it was sought to be inferred by Mr Godwin that this approach was coloured by the fact that by that time they were being asked to make a contribution to the deal, again no challenge was then made to the fact that they had described the claim as groundless on many previous occasions, as Mr Sattler has confirmed.

It is perhaps necessary to interpose that in the course of this trial Symrise abandoned its case that MTA would have succeeded, and accepted that MTA would not have succeeded. In this context it is worth noting that Mr Sattler, who is a lawyer, accepted in the course of the hearing that he knew that Mr Tostivin’s opinion was the only English law opinion available to the Mexican Tax Court, that under Mexican laws of interpretation one must look at the full terms of the contract and the intentions of the parties, and that the intentions of the parties were always that the loan was not on demand.

Two significant emails from Mr Berners, unexplained because he was not called, must now be addressed:

Against the background of the advice on the merits which Symrise did receive prior to the instruction of Tron, I turn to Tron, in the context of the reliance placed by Symrise upon them as being the providers of independent legal advice for the purposes of Ramsey J’s factor (b).

It is clear that Tron were brought in in order to negotiate: this is what Mr Berners expressly said in his email to Mr Yates of 5 February 2009, and he says it again in terms at the end of his email to Tron (copied to Mr Sattler) of 19 June 2009:

“You have to find a solution for this, before we approach the board. That’s the reason why we engaged you”.

There is no secret of this in the very first meeting which Mr Tron had with BMcK Mexico on 4 December 2008, the note of which I have set out in paragraph 25 above. His immediate recommendation was “that we should approach the [MTA] to try to negotiate”. That is what occurred, as set out in paragraphs 26 above. The following is clear:

Against that background I come to the advice which Tron did give:

When Mr Cohen in cross-examination put to Mr Sattler that there were other reasons for Symrise entering into the deal, (to which I shall refer below) Mr Sattler insisted (Transcript Day 4/64): “no. I disagree with that, because it is, I am of the opinion that we had to learn that we had no proper chance to win the appeals filed by us”. They did not learn from Tron that they had no proper chance to win by reference to the merits of the case, as to which Tron continued to remain unwilling to differ from the views of BMcK Mexico. What occurred as a result of the pressure being put upon Tron was the sending of the email of 9 October 2009 set out at paragraph 42 above, which I repeat here for convenience:

“However, we will be more than happy to state the actual merits of the interpretation held by the tax authorities (even when we might not share them), and consider them as well as: (i) the current tendency of the Mexican administrative courts, (ii) the current economical situation and the pressure it has imposed on the Federal Budget (and therefore in the revenue affairs), and (iii) the complexity of the background and the structure itself; in order to issue a recommendation to avoid litigation and suggest the settlement of the cases.”

This new position was, as set out in paragraph 44 above, subsequently incorporated for the first time in Tron’s sixth memorandum. Whatever those statements actually mean - and at no stage were they probed by Symrise who no doubt gratefully accepted them for what they were - they are not on their face all of obvious significance. Certainly, it was accepted in cross-examination by both Mr Sattler and Mr Tron that the complex part of the tax dispute related to whether Article 31 applied after careful consideration of the transactions: the attraction of the Article 92(1) point from the MTA point of view was its apparent simplicity, if only clause 3 was considered. Mr Sattler agreed in cross-examination that no one had ever said to him or advised him that the Mexican Tax Court did anything but reach the right conclusion on the merits. However this new line was used as the basis, as set out in paragraph 44 above, for the advice in Tron’s sixth memo, based upon it, and not upon the merits of the case, that “it is to our best opinion that it is more likely than not that the outcome of the complaints . . . will be against the interests of Symrise Mexico”.

As to this, the following can be said, and is submitted by Mr Cohen:

The only basis upon which Symrise can be said to have relied upon independent legal advice is by reference to Tron’s belated suggestion, if such it be, that they would lose in any event. The advice in any case did not analyse the advantages and disadvantages, as I have set them out above, and in particular did not point up, particularly while emphasising the unenforceability of the undertaking, the very substantial amount of money that stood to be gained if Symrise were to take the nullity petitions, all ready for decision as they were, to that decision.

The fact that there were commercial reasons for settlement does not mean that Symrise is not entitled to rely upon the settlement in order to recover over against BMcK. It is very often in cases of mitigation that a victim of a tort or breach of contract can say that it was put into a difficult position by the tortfeasor or contract breaker, and thus, often in the agony of the moment, had to get out as best it could. Thus for example a party made impecunious by a tortfeasor or contract breaker may have to dispose of its assets at an undervalue: may for pressing reasons have to give up, as here, the wonderful prospect of reclaiming from the MXN $250m that it had paid out and of avoiding payment of the MXN $270m in respect of the following years. But such is not this case. Symrise was not impecunious (even though Symrise Mexico was, as a result of the pushdown put into substantial debt) and there was no time pressure, except that created by the collateral needs of the group, to which I shall refer below. The only time pressure that there could be said to have been was to pay the MXN $120m which it was conceding for the 2005 year by 31 October 2009, in order to avoid an extra surcharge of MXN $10.5m, which in the event it failed to do, and has accepted in these proceedings that it must be treated as if it had done.

It would also not be reasonable for a victim, particularly one not in the agony of the moment, to be swayed by the expectation of recovery against the tortfeasor into taking a step influenced by that fact alone. In his email of 30 July 2009 to Messrs Berners and Sattler, Mr Yates actually expressed himself as in support of pursuing the nullity proceedings and then suing BMcK if they were unsuccessful (an entirely sensible course), and further stated his view in an email of 29 July 2009 that “any settlement would, as I understand it, significantly diminish our ability to claim any damages from [BMcK] via the legal route”. Whether or not he was right about that, it is quite apparent that what I have referred to above as the pressure on Tron after the decision had already been taken in July/August 2009 to follow the settlement route, to come up with what Mr Godwin himself in closing colourfully called “something more meaty”, was influenced by the desire that Tron should amend their opinion in order to render it more likely that recovery could be made against BMcK.

I have stated above that the existence of commercial reasons for settlement may not render it unreasonable for the victim to take the steps it does, and Mr Godwin reminded me of my own decision in that regard in Tullow Uganda Ltd v Heritage Oil & Gas Ltd [2013] EWHC 1656 (Comm), where the claimant was under considerable pressure from the Government of Uganda, to which it succumbed. But there is no such outside pressure here, where the decision was effectively taken in July/August 2009 subject to getting an opinion from Tron for the purposes of claiming over against BMcK. The most striking statement is that which I have set out in paragraphs 22 and 73(i) above, namely: “even if our chances to win are 80%, we will suffer major hits . . .”. This makes it clear that the case was settled without any real reference to the merits of it or to the sums which were being lost, at least until it became necessary to obtain Tron’s opinion. In an email of the same date (4 November 2008) to his colleagues he noted that they had actually taken 85% of the loan out at the end of 2007 (by recapitalising Symrise Mexico), and he was assuming “that the risk respectively the likelihood has reduced since 2005 significantly . . . given that the likelihood to lose the lawsuits for 2003 and 2004 is below 50%, I would expect that the likelihood has dropped in 2005 and 2006 to 30% and to less than 10% from 2007 onwards”. Nevertheless he was concerned that the scenario could “ruin the Mexican company”, and yet there would be the very substantial recovery if those lawsuits were successful, even though he considers (very pessimistically) that they might take another 3 to 5 years.

Mr Cohen submitted that there were collateral reasons for the doing of the deal. It had always been known that the debt pushdown could be problematic and was aggressive, and there had been legal battles not only in Mexico but also in Germany and Singapore.

The onus to prove that the steps taken by Symrise were not reasonable, or rather not within a reasonable range of responses, is upon BMcK. That does not mean that they have to identify the reason or reasons which Symrise did in fact have for taking the course they did. Indeed within the confine of a trial in which only Mr Sattler had close knowledge of the situation (it becoming clear quite quickly, as set out above, that Mr Gerberding had very little knowledge of the circumstances, and in the absence of Mr Berners and Mr Yates), at best Mr Cohen has sought to draw inferences as to what the reasons were. There are some limited passages of cross-examination which were to some degree enlightening, and upon which he relies:

Mr Godwin summarises why, on his case, the deal was reasonable, by reference to five factors:

I conclude that the onus of proof that the steps taken were not within the reasonable range of responses is satisfied by the Defendant:

I am entirely satisfied for all those reasons, and those that appear from my summary above, that BMcK have established that the steps taken by Symrise were not in reasonable mitigation. In the event, as is now conceded, Article 92(1) is not applicable, whether Mexican or English law was applied, and thus, had they proceeded with the nullity petitions they would have succeeded, at any rate in relation to Article 92(1), for which alone complaint is made against BMcK in these proceedings. In my judgment Symrise acted unreasonably in abandoning the proceedings which they had a very good chance of winning (and in the event would have won), and giving up the very good prospect of a recovery which would have avoided the tax losses. The Claimant’s tax recovery claim therefore fails.

I turn to address the issue of quantum in any event, since I have heard the evidence and argument. Both valuation experts purported to approach the question of loss on the same basis, namely, as Mr Godwin put it in his opening skeleton, “on the basis that the payments made resulted, on normal accounting principles, in an equivalent reduction in the value of [Symrise’s] investment in Symrise Mexico”. However in fact the Claimant did not approach such loss on such normal accounting principles. Mr Bukowski did not even look at copies of the financial statements of Symrise Mexico, Busiris or Symrise when preparing his report. He simply totted up the tax payments, set out when they were each paid and totalled them up.

Mr Giles however did value the diminution in value of the shareholding of Symrise Mexico in the hands of its ultimate parent Symrise, which is the only basis upon which such loss can be valued, as Mr Godwin’s own skeleton recognised. Since, for reasons canvassed with Mr Sattler and very substantially nothing to do with BMcK or the tax (see paragraph 7 above), the liabilities of Symrise Mexico massively exceeded its assets at all material times, the value of that shareholding was prima facie nil. This is how Symrise Mexico was valued in the offering circular on the 2006 IPO of Symrise. Mr Sattler accepted in evidence that, prior to the recapitalisation of Symrise Mexico (and the write off of its losses) in November 2007, the value of Symrise Mexico’s shares was zero. There is an alternative value which Mr Giles puts forward, and to which I shall return.

Mr Bukowski seeks to justify his £1 for £1 approach in 3 ways:

It was Mr Giles himself, not Mr Bukowski putting forward some alternative case, who postulated an alternative case by reference to the facts before me. Having explained that a company which could not pay a dividend was not liquid and had no value, he identified a situation in which it could be said that the liquidity was delayed. Particularly in a case where the company is a subsidiary within a Group, there may lie within it, and within the Group, the prospect that something might occur to enable it to pay a dividend, particularly if, as here, the only reason whereby it is continuing in existence rather than being liquidated is by virtue of the support of the Group. In this case it can be said that Symrise Mexico carried within itself a value, namely the value by reference to a potentiality of paying a dividend. Rather than speculate as to what might have been the chances as at 2003, it is possible to identify the claim less speculatively in this case by looking to see what did happen; and by virtue of the actions of one or more members of the Group (it is not clear which) there was a recapitalisation and a writing off of losses which after November 2007 enabled it to begin to pay a dividend.

Mr Giles has therefore calculated (and Mr Bukowski has agreed) what sums could thus have been paid by way of dividend and when, and this method of valuation became known as Giles 2 (as compared with Giles 1 which, as has been seen, led to no loss at all). Mr Giles himself said that he was not sure which of Giles 1 and Giles 2 he preferred, but it seems to me clear that there was some un-accessed value in the shareholding which was capable of being unlocked.

Mr Cohen makes two submissions. First he submits that what occurred by way of the recapitalisation and the writing off of the losses is res inter alios acta, and that I should ignore it. It seems to me that, consistent with the Giles 2 approach, the delayed liquidity in this company was related to its position as a subsidiary in a group, and that it was always possible for one or more members of the Group to unlock that liquidity. What is therefore being valued is not what has happened subsequently by way of res inter alios acta (although that is helpfully being used as a method of valuation) but the value (provided that it is suitably discounted as a future value) inherent in the subsidiary. Alternatively, Mr Cohen submitted that, in order to unlock the dividends, money had to be paid out in respect of the recapitalisation/write off, and at the very least credit should be given in valuing the future dividends by reference to the monies so requiring to be laid out. This is not a matter as to which Mr Giles gave a view, either in his report or in his evidence, or on which Mr Bukowski has had any opportunity to comment, and I concluded that, when it was raised by Mr Cohen in closing submissions, it was too late to address the point.

Provided I can be satisfied that there is a proper valuation of the shareholding by reference to Giles 2 by reference to discounting for the future, I prefer Giles 2, as reflecting some loss in the value of the shareholding. There were 3 issues between the parties as to how to arrive at that valuation:

In evidence he effectively made 2 points in response to Mr Giles:

So far as this latter argument is concerned, Mr Giles addressed this persuasively in his third expert’s opinion:

“3.13

Mr Bukowski is essentially failing to engage in the instructed exercise. In order to value loss to Symrise AG as of the date of breach, we must put ourselves in the position of Symrise AG as of June 2003. We rely on the expected tax payments, which differ per our instructions, and tax payment dates. However, simply because with hindsight we know with certainty what payments were made, we cannot assume away all risk looking forward from June 2003 to the tax payment or potential dividend payment dates.

3.14

But for the tax payments, Symrise Mexico would have had additional cash on hand as of the tax payment dates. When it was able, given the financial constraints of Syrnrise Mexico, the company could have paid that additional cash as dividends through the parent companies to Symrise AG. There is necessarily risk incurred between June 2003 and 30 May 2013, the last tax payment date. For example, there was the risk that Symrise Mexico could have gone bankrupt during that time, which has been noted in many of Symrise Mexico’s financial statements. That risk must be accounted for in an appropriate discount rate, such as the cost of equity.

3.15

By way of analogy, corporate bonds often include a schedule of expected or promised payments and payment dates on which interest and principal will be paid to the bondholders. Although we can identify those future payments, when valuing the bond we still must account for the risk inherent in future payments. One would never value a corporate bond using only the risk free role simply because the future interest payments were identifiable.”

He explained further in evidence (Transcript Day 12/143-145) that what the experts were to do was value in 2003. That did not mean assuming in hindsight that there was no risk as at 2003. But for the adoption of hindsight he (and I) would have valued the shareholding as nil because there was no conceivable basis upon which a dividend could be paid. The chance or prospect of such a dividend being paid at some stage in the future is what is being valued and “we are trying retrospectively to find out what the valuation was in 2003”. Indeed he criticises Mr Bukowski for moving away from “the agreed approach . . . that the correct discount rate is the cost of equity as in June 2003, which he makes plain is Symrise Mexico’s cost of equity”.

I have preferred the expert opinion of Mr Giles on all matters (and indeed in relation to the valuation date and conversion rate Mr Godwin has conceded that Mr Giles’s opinion is correct), and I prefer it on this aspect too, for the reasons he gave.

I turn to the question of Mitigation costs, reduced, as set out in paragraph 16(iii) above, in post-trial written submissions by Mr Godwin to €90,124 paid by Symrise AG and €101,731 paid by Symrise GmbH, after various reductions and allowances, mainly of a broad-brush kind, sought to be explained in those submissions.

The difficulty arises out of more than the onus of proof being upon the Claimant. It is best defined by the exchange I had with Mr Godwin in closing (Transcript Day 13/40). I asked him whether (given the concession that Symrise would have won if they had continued with the nullity petitions) if Symrise were to establish negligence but fail on mitigation/settlement (which has in fact eventuated), in that he had not called anybody to disentangle the calculations and be cross-examined, he would be seeking to recover against BMcK the irrecoverable costs. He made it quite clear that Symrise were not pursuing a case on that basis. There were two reasons which he gave why he was not running a case on the basis of recovery of such irrecoverable costs. His first was that it was wholly inconsistent with Symrise’s case. His second was that it was not a realistic task for him to perform to identify such costs. Such irrecoverable costs claim in the event of failure on Issue 6 is thus not being pursued. But on the basis that I am now, in this part of my judgment, considering what Symrise could have recovered had they succeeded on Issue 6, I must inevitably be influenced by that reaction, even though he sought to pursue some kind of ‘disentanglement’ in his post-hearing submissions, to which in any event Mr Cohen objected. I would simply say that, had I decided Issue 6 in favour of Symrise, I would have likely been persuaded to take a stab at something less than the €191k claimed, as Mr Godwin effectively asked me to do in his post-hearing submissions, but I have not now done so.

I have found for the Defendant on Issue 6, and no sums are due in respect of any of the payments to the MTA. I accordingly give judgment for the Defendant. If I had found for Symrise, I would have adopted the Giles 2 valuation, with his choice of valuation date, conversion rate and discount factor, such that the figure would have been €3,276,000.