Rajan Russell v Edward Cartwright
| Jurisdiction | England & Wales |
| Judge | Mrs Justice Falk |
| Judgment Date | 20 January 2020 |
| Neutral Citation | [2020] EWHC 41 (Ch) |
| Date | 20 January 2020 |
| Docket Number | Case No: BL-2018-000492 |
| Court | Chancery Division |
[2020] EWHC 41 (Ch)
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF
ENGLAND AND WALES
CHANCERY DIVISION
Royal Courts of Justice
Rolls Building, Fetter Lane, London, EC4A 1NL
Mrs Justice Falk
Case No: BL-2018-000492
Romie Tager QC & Isabel Petrie (instructed by Ince Gordon Dadds LLP) for the Claimant
Dan McCourt Fritz & Stephanie Thompson (instructed by Gowling WLG (UK) LLP) for the Defendants
Hearing dates: 25–29 November, 2, 3, 5 & 6 December 2019
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Introduction
This is a claim by the Claimant, Mr Russell, against three other individuals, Mr Cartwright, Mr Sloss and Mr Barlow. It relates to a property development business known as “Hub” that all four individuals were involved in as a joint venture between 2011 and July 2014, and which the three Defendants have subsequently continued to operate. I will refer to the four individuals as the “principals”.
The claim relates to Mr Russell's departure from the business, which was documented principally by a Settlement Deed dated 1 July 2014. The claim has been formulated as involving breaches of express or implied contractual terms or fiduciary duty, breaches of a duty to disclose or a duty to correct a misunderstanding by Mr Russell, or alternatively as an allegation of unlawful means conspiracy. However, it is common ground that, owing to the terms of the release contained in the Settlement Deed, none of those claims can succeed in the absence of fraud or dishonesty being established.
The essence of Mr Russell's complaint is that the Defendants did not tell him about, or give him an opportunity to participate in, a development project relating to a site in Wembley which Hub successfully executed shortly after Mr Russell's departure from the business. Mr Russell says that he was wrongfully excluded and the Defendants' actions in doing so were dishonest.
Mr Russell says that, if it had not been for the alleged breaches, he would not have entered into the Settlement Deed and would have continued to participate in the joint venture. Alternatively, if he had found out about the true position after executing the Settlement Deed and before completion of the sale of his interest provided for under that document, he would have rescinded it on grounds of fraudulent misrepresentation. However, rescission is not sought by this claim, which is made in damages.
The Defendants deny the claims, and also counterclaim on the basis that the present proceedings are brought in breach of the terms of the Settlement Deed, and accordingly that Mr Russell is obliged to pay their costs on the indemnity basis.
This decision follows the first stage of a split trial, that first stage being confined to questions of liability under the claim and counterclaim and the basis on which any damages should be calculated.
Background and chronology
Mr Cartwright and Mr Russell both have a background in investment banking. They have known each other for a number of years, and when the Hub joint venture was established they were good friends. At that time neither had a professional expertise in property, although Mr Russell had made a number of property investments and had a greater knowledge of the sector than Mr Cartwright.
Mr Sloss and Mr Barlow have both worked in the real estate sector throughout their careers. They have known each other for many years, having met at university, and have worked closely with each other since they set up a property development company called Squarestone together in 2001.
Mr Sloss also knew Mr Cartwright socially. They discussed the possibility of starting a property development business focusing on mid-market residential development in Greater London, taking advantage of a drop in property prices in the aftermath of the financial crisis. In early 2011 Mr Cartwright and Mr Russell discussed the possibility of Mr Russell also being involved. Mr Russell knew Mr Sloss to an extent as well, and it turned out that he had also known Mr Barlow many years previously when they were both young children. The thinking was that Mr Cartwright and Mr Russell would largely be responsible for raising funds, and Mr Sloss and Mr Barlow would provide real estate expertise, supported by the existing infrastructure of the Squarestone business. All four would have equal shares in the business.
The basic idea was that Hub would identify development sites and potential investors. Hub would manage the acquisition and development of the site, and its sale, in exchange for fee income. In addition, the principals contemplated investing some of their own funds alongside the third party investors, and receiving a share of profits in the form of “carried interest”.
On 8 July 2011 a new company, Hub Residential Limited (“HRL”), was incorporated for the purpose of the proposed business. The principals each held 25% of the shares of HRL and were appointed as directors. Addleshaw Goddard LLP provided draft heads of terms in August 2011 (which were never signed), and in December 2011 they circulated a draft of what became the Framework Joint Venture Agreement referred to below.
The principals commenced business during 2011 without signing formal documentation (beyond the incorporation of HRL). Mr Russell made a significant early contribution by securing funding from an investor, Kew Capital LLP (“Kew”), having been able to develop a close relationship with the managing partner, Nathan Burkey. In November 2011 Kew informally committed to invest £25 million of equity.
Two sites became available, in North Acton and Newham respectively (referred to below as the “Kew” or “Rockbridge” projects). Mr Barlow focused on the former and Mr Sloss on the latter.
Formal documentation in relation to the Kew projects was entered into on 14 and 15 June 2012. The structure involved the creation of a limited partnership, Rockbridge LP, which ultimately acquired the North Acton and Newham sites. The members of Rockbridge LP comprised a specially incorporated entity formed to act as general partner, a Kew investment vehicle, a company called Hub Residential (Carried Interest) Ltd (“HRCIL”) and a limited liability partnership called Hub Residential 1 LLP (“HR1 LLP”). HRCIL was formed on 29 February 2012 to receive the carried interest that the principals would become entitled to if the projects were successful. HR1 LLP was the vehicle through which the principals, together with some other high net worth investors, invested alongside Kew. HRL was appointed by Rockbridge LP to provide project management, administration and asset management services in exchange for fees.
On 19 June 2012, probably prompted by the execution of the Kew documentation, the principals signed Shareholders' Agreements in respect of HRL and HRCIL and, it appears, signed a document called the Framework Joint Venture Agreement (“FJVA”). There is some doubt about whether a version of the FJVA was also signed at some earlier point in 2012 (a signed, but undated, copy also having been identified, and indeed being the only copy produced in evidence), and the confusion is reflected in the Settlement Deed. However, nothing turns on this and, apart from the date, there is no suggestion of any discrepancy between the texts of the two versions.
The FJVA recited that the principals were proposing to enter into a joint venture arrangement to establish one or more “Hub Entities” to provide “Hub Entity Services” to investors seeking to acquire and develop new sites or convert existing buildings within the M25 area into residential and ancillary mixed use accommodation (described as the “Hub Activity”). Hub Entity Services was defined as the raising of equity and debt finance for and providing asset development and asset management services to investors proposing to undertake the Hub Activities. Another recital referred to the parties being in discussions with Kew Capital to carry out the first Hub Activity.
The FJVA contemplated a five year term (unless the parties agreed to extend it) and equal sharing of profits and losses from, and voting rights in, Hub Entities. Under clause 9, each principal was required to “devote a sufficient amount of their business time” to the venture. Under clause 14.1 each principal agreed for the duration of the joint venture not to engage in any “Restricted Activity” without the consent of the others. The concept of “Restricted Activity” is considered further below, but essentially it was similar business activity with a value of at least £2 million.
Completion of the North Acton acquisition occurred in March 2013 and the Newham acquisition (also referred to as “TBR”) completed the following month.
Hub continued to investigate other potential opportunities. In particular, it identified a site at Harrow which it proposed that Kew should finance. However, the transaction fell through when it became apparent that Kew would not provide funds.
In September 2013 Hub identified a site in Hayes as being of interest. In November 2013 Mr Cartwright re-instigated contact with another potential investor, Bridges Ventures LLP (“Bridges”), with whom he had first had contact the previous year. During December 2013 Bridges and Hub reached agreement in principle on a structure and profit split for the Hayes project, which was reflected in heads of terms entered into in January 2014.
The Defendants' case is that during 2013 and in the early part of 2014 they became increasingly concerned about what they saw as Mr Russell's lack of contribution to...
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