Riverrock European Capital Partners LLP v Nicolaus Harnack
| Jurisdiction | England & Wales |
| Judge | Philip Marshall |
| Judgment Date | 21 December 2022 |
| Neutral Citation | [2022] EWHC 3270 (Comm) |
| Docket Number | Claim No: LM-2020-000230 |
| Court | Queen's Bench Division (Commercial Court) |
[2022] EWHC 3270 (Comm)
Philip Marshall KC (sitting as a Deputy Judge of the High Court)
Claim No: LM-2020-000230
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
LONDON CIRCUIT COMMERCIAL COURT (KBD)
Royal Courts of Justice
Rolls Building, London, EC4A 1NL
Cleon Catsambis (instructed by Mishcon de Reya LLP) for the Claimants
The First Defendant appeared in person (via videolink)
Adam Cloherty (instructed by Fladgate LLP) on behalf of the Second Defendant
APPROVED JUDGMENT
Hearing dates: 20, 21, 22 and 26 September 2022
I direct that pursuant to CPR rule 39.9 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic
Philip Marshall KC
Philip Marshall KC:
A. Introduction
This judgment follows the trial of claims made by RiverRock European Capital Partners Limited LLP (“RiverRock”) seeking a payment of €1,617,270 from the Defendants, Mr. Harnack and Mr. Moersdorf.
The claims are based on an alleged entitlement of RiverRock to certain payments on termination of a consultancy agreement it made with Deutsche Real Estate Asset Management Limited (“DREAM”) dated 9 September 2016 (but later revised on 8 June 2017) (the “ Consultancy Agreement”). Under this and allied agreements (referred to collectively as “the DREAM Agreements” 1) DREAM acted as the “Appointed Representative” of RiverRock, within the meaning of s.39(2) of the Financial Services and Markets Act 2000 (“ FSMA”) in respect of a fund, namely the RiverRock European Real Estate Fund (the “ Fund”). This Fund had a target size of €200 to €250 million and was focused on investments in mezzanine debt instruments backed primarily by commercial real estate in Germany.
The right to terminate is said to have arisen following the striking off of DREAM from the Register of Companies and its dissolution and to have given rise to a right to receive payment from Mr. Harnack and Mr. Moersdorf in the claimed amount pursuant to two deeds of covenant executed by each of them on 9 September 2016 (“the Deeds”). It is said that under these Deeds Mr. Harnack and Mr. Moersdorf each undertook, directly and by way of guarantee, to meet financial obligations of DREAM following termination.
The issues raised principally concern the true construction of the various contractual provisions applicable to the creation and operation of the Fund and the obligations of DREAM in respect of it. Three questions have been formulated in an agreed list of issues:
(1) Did the dissolution and striking off of DREAM [from the Register of Companies] constitute a breach of one or more of the provisions of the DREAM Agreements and/or the Deeds, which entitled RiverRock to terminate the Consultancy Agreement?
(2) If so, do certain provisions requiring payment set out in clauses 6.5 and 6.7 of the Consultancy Agreement constitute an unenforceable penalty as the Defendants allege?
(3) If not, are the sums set out in a “Revised Schedule of Fees and Expenses” recoverable?
Issues (2) and (3) therefore only arise for consideration if RiverRock is successful on issue (1).
Although the dispute mainly concerns points of construction the court heard a limited amount of oral evidence provided by Mr. Diamandis Karamagias, the Chief Financial Officer and Chief Operating Officer of RiverRock, and by Mr. Harnack and Mr. Moersdorf. In the case of Mr. Harnack this was done by way of video link by agreement between the parties. Mr. Harnack also participated in the trial more generally by this method. Permission for this was sought and given on the ground first, that he is now resident in Canada and his resources did not permit him to travel to England to attend in person, and secondly, on the basis that his participation in this manner was not objected to by the other parties.
My impression of all of the witnesses when giving oral evidence was that they were generally seeking to assist the court and giving testimony to the best of their recollection. In the case of Mr. Moersdorf, whose native language was German, it would have been better if he had given his evidence through an interpreter. Whilst he was tolerably fluent in English it was evident that he had some difficulty in understanding technical language and I was not always confident that he fully understood what was being asked. It is also the case, that in some respects the oral evidence did not match what had been said previously in witness statements. In these instances I have generally accepted what has been stated in oral evidence. The particular areas in which this inconsistency occurred are addressed in the course of this judgment.
B. The Parties and Relevant Agreements
RiverRock is a limited liability partnership with its registered office in London. It operates as a European alternative investment firm. As explained in the witness statement of Mr. Karamagias, it specialises in a variety of forms of debt investment strategy and is regulated by the Financial Conduct Authority (“FCA”).
Mr. Harnack and Mr. Moersdorf described their background and the origination of the idea of the Fund in their witness statements in the following manner:
(1) Mr. Harnack is a real estate investment banker and adviser. Mr. Moersdorf is an independent real estate adviser based in Frankfurt, Germany. They have known each other since 1997, when they were both employed by the international property firm, Richard Ellis.
(2) Mr. Harnack went on to work at Credit Suisse. After resigning from that bank in 2011 he developed a business plan for a mezzanine debt fund focussed specifically on German commercial real estate.
(3) In July 2012 he approached the then-Chief Executive Officer and co-founder of RiverRock, Mr. Florian Lahnstein, with a proposal to establish such a fund. This seems to have resulted in the production of a term sheet dated 15 November 2012. This provided for Mr Harnack to manage the fund and for RiverRock to obtain regulatory approvals and supply various forms of assistance, including marketing and administrative support.
(4) Mr. Harnack then approached Mr. Moersdorf with a proposal that he should become an adviser to the fund, an idea that was also promoted by Mr. Michel Peretie, a partner in and co-Chief Executive Officer of RiverRock. Mr. Moersdorf agreed to take on this role. At this time Mr. Moersdorf was working for his own independent real estate investment and asset management company in Germany, Deutsche Real Estate Asset Management GmbH.
(5) During the period between 2013 and 2015 Mr. Harnack and Mr. Moersdorf undertook various trips in Europe to meet potential investors and reported back to RiverRock. The correspondence available also shows that they were seeking to recruit staff to assist in the promotion of the proposed fund and to agree the contractual arrangements that would be put in place with RiverRock.
(6) Ultimately, in March 2016, the final arrangements for the creation and operation of the Fund were agreed in principle. RiverRock would advise the Fund and act as “Alternative Investment Fund Manager”. It would delegate certain advisory functions to a company to be formed by Mr. Harnack and Mr. Moersdorf, and they would act as portfolio managers. In practice, Mr. Harnack and Mr. Moersdorf would be responsible for the day-to-day operation and management of the Fund. Since the services to be provided by Mr. Harnack, Mr. Moersdorf and their company would include activities regulated by the FCA, RiverRock was to appoint that company as its “Appointed Representative” under FSMA and assume responsibility for its regulated activities. RiverRock was also to obtain approval for Mr. Harnack and Mr. Moersdorf to perform FCA-regulated activities.
(7) On 22 June 2016 DREAM was incorporated in England and Wales as the company to fulfil the “Appointed Representative” role. It had its registered office at Mr. Harnack's then residential address in Fetcham, Surrey. However, the sole director and shareholder was Mr. Moersdorf, who was based in Frankfurt. It seems to have been intended that Mr. Harnack should become a 50% shareholder (something that was noted in an email of Mr. Harnack sent on the same date as the incorporation) but this never in fact happened.
A number of agreements were then concluded to implement what had been agreed in principle. These contracts were drafted by solicitors representing RiverRock. Mr. Harnack and Mr. Moersdorf did not have legal representation with regard to the drafting of the documents. They contained a number of overlapping provisions.
First in time was an agreement whereby RiverRock appointed DREAM as an “Appointed Representative” for the purpose of providing FCA-regulated activities in connection with the establishment and operation of the Fund (“the AR Agreement”). This is dated 1 June 2016 but was actually signed on 29 June 2016. It contained the following clauses on which RiverRock relies:
(1) By clause 1.1 RiverRock engaged DREAM to provide defined services, including the sourcing of investments for the Fund and the management of those investments.
(2) Under clause 2.1(c), DREAM undertook that it would fully cooperate with RiverRock to enable it to meet its obligations under FSMA, the FCA Rules and other legal provisions applicable to the business of operating the Fund.
(3) Under clauses 2.3(c) and (d), DREAM was to notify RiverRock as soon as it became aware that there was a material adverse change in its financial position or grounds to believe that certain representations or warranties, regarding its ability to perform and the expertise of its staff, were not accurate. There was also an obligation to notify if there was any material change in the information provided...
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