Andrew Martin v Michael Harris
| Jurisdiction | England & Wales |
| Judge | Mr Michael Green |
| Judgment Date | 23 July 2019 |
| Neutral Citation | [2019] EWHC 1962 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: BL-2018-001491 |
| Date | 23 July 2019 |
[2019] EWHC 1962 (Ch)
IN THE HIGH COURT OF JUSTICE
HIGH COURT APPEAL CENTRE
ROYAL COURTS OF JUSTICE
APPEAL AGAINST THE ARBITRATION AWARD OF MR ARTHUR D. HARVERD
DATED 23 MAY 2018
Rolls Building
Fetter Lane, London, EC4A 1NL
Mr Michael Green QC
(sitting as a Deputy Judge of the Chancery Division)
Case No: BL-2018-001491
Mr Michael Jones (instructed by Clyde & Co. LLP) for the Appellants
Ms Elspeth Talbot Rice QC (instructed by Harcus Parker Limited) for the Respondent
Hearing date: 27 June 2019
Mr Michael Green QC:
Introduction
This is an appeal against an arbitration award made by Mr Arthur D. Harverd (the Arbitrator) as sole arbitrator on 23 May 2018 (the Award). The Appellants claim to be entitled to appeal pursuant to section 69 of the Arbitration Act 1996 ( s.69) and clause 22 of the Partnership Agreement dated 25 October 1989 (the 1989 Agreement) on certain questions of law arising out of the Award.
Before it incorporated as an LLP in May 2008, the Third Appellant, now called Coban 2017 LLP but previously Strutt & Parker LLP ( S&P) carried on business as an unincorporated partnership under the terms of the 1989 Agreement (the Former Partnership). Until his retirement in 1993, the Respondent to this appeal, Mr Michael Harris, was a partner in the Former Partnership together with, amongst others, the First and Second Appellants, Mr Andrew Martin and Mr Nicholas Greene. 1
In very broad terms, the principal issues that were before the Arbitrator were:
(1) Whether Mr Harris is entitled to an indemnity from the Appellants in respect of Capital Gains Tax ( CGT) for which he may be liable by reason of his receipt of the Compensation Sum, which was a sum payable to him pursuant to the 1989 Agreement, the amount of which was ultimately agreed between the parties in a settlement agreement concluded in April 2013; and
(2) Whether such an indemnity, if found to exist, includes any penalties that may be charged by HMRC in respect of that CGT liability.
In the Award, the Arbitrator found in favour of Mr Harris on both issues, ordering the Appellants to indemnify Mr Harris for any CGT liability payable on the Compensation Sum together with interest and any penalties charged.
The Appellants say that the Arbitrator erred in law in the Reasons for the Determination that he gave in respect of the Award (the Reasons). They have identified what they say are three questions of law that require determination in this appeal:
(1) Question 1
How are the terms of the agreement reached between the parties on 29 April 2013 properly to be ascertained, and in particular is it necessary to look beyond the two letters comprising the formal offer and acceptance in circumstances where, as here, the terms have been negotiated and agreed sequentially?
(2) Question 2
On a true construction of the agreement reached by the parties on 29 April 2013, is Mr Harris' claim to an indemnity for CGT under para.(c)(v) of Part III of the Schedule to the 1989 Agreement in respect of the Compensation Sum encompassed within, and precluded by, the words of settlement contained in that April 2013 agreement?
(3) Question 3
On a true construction of para.(c)(v) of Part III of the Schedule to the 1989 Agreement, does the indemnity for CGT contained therein extend to cover penalties charged by HMRC in respect of the tax liability in question?
I did not understand Ms Talbot Rice QC for Mr Harris to be disputing that these are the issues to be determined on this appeal. She does however submit that Question 1, namely the ascertainment of the terms of the settlement agreement, is a question of fact that is not open to challenge on this appeal. I will deal with that point in the course of this judgment.
Factual Background
The background facts are largely undisputed and I take them from the Arbitrator's Reasons.
As stated above, Mr Harris retired from the Former Partnership in May 1993. The terms of his retirement in the 1989 Agreement included an entitlement to an annuity in the form of a share in the Former Partnership's profits. This entitlement continued to apply even after S&P had been incorporated as an LLP in 2008.
On 1 May 2010, however, it is common ground that S&P restructured in a manner which constituted a “ Dissolution” for the purposes of the 1989 Agreement. This in turn triggered the provisions of paragraph (c) of Part III of the Schedule to the 1989 Agreement which by sub-paragraph (i) provided for the replacement of Mr Harris' entitlement to a share of S&P's profits with a lump sum payment, called the Compensation Sum, that was meant to be in an amount sufficient to enable Mr Harris to purchase an annuity that would provide an income equivalent to that being received immediately prior to the dissolution. Sub-paragraph (c)(i) of Part III of the Schedule to the 1989 Agreement provided as follows 2:
“In the event of the dissolution of the Firm (other than in the circumstances mentioned in sub-paragraph (vi)) then any Retired Partner 3, in substitution for his right to any profit share or annuity, shall be entitled to have paid to him the Compensation Sum. The Compensation Sum shall be such a sum of capital as shall be certified by the Firm's Accountants to be sufficient to enable the Retired Partner concerned to buy from an Insurance Company of repute an Appropriate
Annuity such Accountants for such purpose acting as experts and not as arbitrators and their decision being final.”
Sub-paragraphs (c)(ii), (iii) and (iv) of Part III of the Schedule contained provisions for the identification of the Appropriate Annuity and the cooperation of the Retired Partner with the requirements of the Accountants.
The sub-paragraph that has since become central to the dispute is sub-paragraph (c)(v) of Part III of the Schedule to the 1989 Agreement ( sub-para. (c)(v)) which provides for the following tax indemnity in relation to the Compensation Sum (underlining added):
“The Partners shall indemnify each Retired Partner and each widow of a Retired Partner who has died against any liability to capital gains tax to which he or she may become subject as a result of the receipt by him or her of the Compensation sum [sic] and any interest which may be payable on or in respect of any such capital gains tax unless the Partners shall have requested such Retiring Partner or widow to pay the same and he or she has failed to do so within 30 days of the receipt of such request; provided that such Retiring Partner or widow shall at the expense of the Partners take such steps as the Partners may reasonably require to have any assessment to capital gains tax in respect of such receipt set aside or modified.”
Following the dissolution, discussions began with a number of Retired Partners including Mr Harris in relation to S&P's and the Former Partnership's ongoing obligations to them. The other Retired Partners were apparently content to accept a fixed annuity payable in monthly instalments rather than a lump sum Compensation Sum. However, Mr Harris, as was his right, preferred to be paid the Compensation Sum as provided for in sub-paragraph (c)(i) of Part III of the Schedule. Accordingly, a process was instigated to determine the amount of the Compensation Sum and discussions took place over several months between Mr Harris and the Appellants. S&P's Accountants, Grant Thornton, were instructed to calculate the Compensation Sum due to Mr Harris, acting as experts in accordance with sub-paragraph (c)(i) of Part III of the Schedule.
Mr Harris also raised another issue that he wanted taken into account in the determination of the total amount due to him. The Arbitrator described this issue in paragraph 6 of the Reasons in the following terms:
“6. Mr Harris informed Mr Martin that he believed that certain deductions from his annuity payments had been wrongfully made in the past and he wanted the deducted sums to be returned to him. These related to interest payments on a medium term loan (“MTL”) from Barclays Bank Plc and capital repayments. Mr Martin obtained an Opinion dated 25 January 2013 on the said deductions from Mr Philip Jones QC of Serle Court, Lincoln's Inn. The Opinion was not entirely conclusive because there was little evidence then available and it was difficult to advise on who had the better case. So much depended on what exactly was said by whom and in what context. Inter alia, it was not clear that the wording contained in a letter from Mr Harris dated 7 April 1993 represented his agreement to the deductions. Mr Jones stated:
“ If he did agree to these terms, it seems to me that he can have no complaint about the deduction of interest to 2008. The position in relation to the capital contributions is less straightforward but I think Strutt & Parker has the better case. The position in relation to the deductions after 2008 is much more problematic. I would say the chances are 50/50.””
In other words, Mr Harris was claiming that he had been underpaid his annuity by reason of wrongly deducted interest on the Former Partnership's MTL in respect of two distinct periods: (a) 1998–2008; and (b) 2009 and 2010. He was also claiming that capital repayments on the MTL had been wrongly deducted from his annuity payments in respect of the period 1998–2008. The validity of these deductions was in doubt but these were settled pursuant to the settlement agreement eventually reached with Mr Harris, as described below.
Grant Thornton first calculated the Compensation Sum on 29 October 2012. There then followed discussions with Smith & Williamson who were the accountants acting on behalf of Mr Harris. In their final report dated 18 January...
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Andrew Martin v Michael Harris
...with one disputed consequential matter arising from my judgment on the substantive issues handed down on 23 July 2019, reported at — [2019] EWHC 1962 (Ch) ( Judgment) 1. In the Judgment I answered the three questions put to me in favour of the Appellants and I set aside the arbitration Awa......