Slater & Gordon (UK) 1 Ltd v Watchstone
| Jurisdiction | England & Wales |
| Judge | Mr Justice Bryan |
| Judgment Date | 28 August 2019 |
| Neutral Citation | [2019] EWHC 2371 (Comm) |
| Court | Queen's Bench Division (Commercial Court) |
| Docket Number | CL-2017-000348 |
| Date | 28 August 2019 |
[2019] EWHC 2371 (Comm)
THE HONOURABLE Mr Justice Bryan
CL-2017-000348
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS
OF ENGLAND AND WALES
COMMERCIAL COURT (QBD)
Rolls Building
Fetter Lane
London EC4A 1NL
Mr S. Salzedo QC and Mr I. Bergson (instructed by CMS Cameron McKenna Nabarro Olswang LLP) appeared on behalf of the Claimant/Respondent.
Mr T. Lord QC and Ms S. Shaw (instructed by Dorsey & Whitney (Europe) LLP) appeared on behalf of the Defendant/Applicant.
Hearing dates: 28 August 2019
APPROVED JUDGMENT
A. INTRODUCTION
The parties appear before the court today on the hearing of urgent vacation business on the defendant's application for permission (i) to make certain amendments to its defence and (ii) to bring a counterclaim against the claimant (S&G) for breach of confidence, inducing breach of contract and unlawful means conspiracy.
This application is supported by the thirteenth witness statement of Timothy Joseph Maloney (“Maloney 13”). The application is opposed in the ninth witness statement of Jeremy Beresford Mash (“Mash 9”) and the fourth witness statement of Kenneth Fowlie (“Fowlie 4”) and the third witness statement of Andrew Grech (“Grech 3”). I have had careful regard to the contents of those witness statements and the matters addressed therein, as well as the exhibits thereto in relation to the issues that arise. I have also had the benefit of detailed skeleton arguments on behalf of both the defendant, in support of the application, and from the claimant in opposition to the application, including a supplemental skeleton filed shortly before the hearing this morning. I have also had the benefit of counsels' respective oral submissions, for which I am grateful and which I bear in mind.
In these proceedings the claimant, S&G, claims against the defendant, Watchstone, for damages of £637 million for deceit and breach of warranty in relation to the purchase by it from Watchstone in 2015, at which time Watchstone was known as Quindell, of the shares in certain subsidiaries, comprising of the Professional Services Division (the “PSD”), which ran a large-scale personal injury litigation business (the “acquisition”). S&G's case is that Quindell, and specifically its CEO, Robert Fielding, made dishonest representations in relation to the future financial prospects of the PSD and concealed relevant information in the negotiations and due diligence leading to the acquisition.
The trial is fixed for nine weeks, starting on 21 October 2019, to hear S&G's claim in deceit and breach of warranty arising from its purchase of the PSD of Quindell. Following a pre-action expert determination process that took place in autumn 2016, these proceedings were issued in June 2017. In summary, and as is set out in S&G's particulars of claim, S&G alleges that it was induced to make the acquisition by fraudulent representations which were made to it by Watchstone regarding the failure rates, known as “dilution rates”, of cases being handled by the PSD which fed directly, it is said, into the PSD's profitability. Further, S&G alleges that Watchstone breached the warranty in the SPA regarding its December 2014 management accounts and that Watchstone failed, during the period between the execution of the SPA and completion, to notify S&G of its breach of warranty as it was obliged to do.
More specifically, S&G's claim is based upon representations that Quindell is said to have made in relation to the prospective assumptions of dilution rates, as I have already referred to, namely the forecast rates at which in the future certain cases within the business would fail to achieve sufficient pay out, whether by settlement or judgment of the court.
In this regard, firstly, S&G says that Mr Fielding made, or permitted Quindell to make, representations in relation to such dilution assumptions which he knew to be false. S&G says that it relied on those representations and decided to acquire those which it would not have done had it known the true position. In support of that, it particularises a number of matters which it claims were concealed from it, by virtue of which Mr Fielding was aware of “the true position”, thereby rendering his alleged representations false and dishonest.
The first of these was a group wide independent business, cash flow and accounting policy review which Quindell had commissioned PwC to carry out (“the PwC report”), which S&G claims suggested that Quindell's dilution rate assumptions were too low. It claims that, in order to conceal that finding from it, Quindell did not disclose two volumes of the PwC report to it and that its advisers prevented S&G and its advisers from accessing PwC, and mischaracterised the findings in the PwC report, and the nature and extent of the work that PwC had been carrying out, in order to throw S&G off the scent, as it is put.
S&G's primary case is that no prospective purchaser with knowledge of the true financial position of the PSD would have made the acquisition and that, therefore, it is entitled to recover the full upfront cash purchase price, £637 million, the value of what was purchased being, so it alleges, £0.
For its part, Watchstone denies that there was any fraud on the part of it or Mr Fielding and even if, which is denied, any action or representations were made as alleged, they were honest statements of opinion as to what could happen in the future. Mr Fielding's evidence is that he genuinely believed the dilution rate assumptions which he was putting forward were achievable and that he had no intention to deceive S&G. It is said that it is evidenced by the contemporaneous documentation already disclosed and by his agreement to S&G and its advisers, firstly, being given a high degree of access to the PSD's operations and people at all levels and, secondly, being provided with all of the empirical historical information relating to the performance of the business, including dilution rates. Otherwise, there was no “true position”, nor was any relevant information concealed from S&G.
As for the PwC report, it says that S&G made no further requests for any further material having received volume 2 of the PwC report, and that upon its proper construction it did not constitute a criticism of Quindell's forecast dilution rate assumptions as alleged and that, in any event, as S&G was carrying out the same sort of analysis internally as had been carried out by PwC in respect of dilution rates, with the same source information, receipt of the PwC report in that regard would have plainly made no difference to its decision to enter into the transaction.
It asserts that S&G at the time boasted, in clear terms, including in regulatory announcements to the Australian Stock Exchange, where it is listed, following the transaction, that the acquisition was carried out in circumstances where Quindell and its accounting policies had been publicly criticised, in particular in the financial press, and that S&G had accordingly not relied upon Quindell's accounting policies, including the underlying assumptions, nor on the opinions of Quindell or Mr Fielding. Instead, it is said that, as S&G explained to its investors, it carried out a “bottom-up, fundamental assessment of [the PSD]” based on “first principles” which John Skippen, the non-executive chairman of S&G, later referred to as “the most rigorous due diligence I have ever seen”.
Watchstone also takes issue with S&G's case as to the value of the business it acquired in this regard. It has just served its report from its expert, Doug Hall, a partner and head of forensic services at Smith & Williamson, who opined that the actual value of the PSD at the time of the transaction was around £618 million. Further, he says that the claimant's expert's report, which opines that the business was worth £40 million, is based on a model containing a number of fundamental flaws which, when corrected, would lead to an adjusted valuation of around £642 million.
B. THE ACQUISITION AND THE ROLE OF THE THIRD PARTY ADVISERS
S&G and Watchstone commenced discussions in relation to the potential acquisition (codenamed ‘Project Malta’) in November 2014. On behalf of S&G, negotiations were led by Andrew Grech and Ken Fowlie, then Group Managing Director and Executive Director respectively at S&G. On behalf of Watchstone, negotiations were led by David Currie, a Non-Executive Director and Interim Chairman of Quindell. Mr Currie is a partner in Codex Capital Partners LLP (“Codex”), who advised Watchstone prior to and in respect of the acquisition.
In or around the time of the negotiation of the acquisition, and as one would expect in a transaction of this size, both parties engaged a number of third party advisers. For its part, S&G was represented by inter alia Citigroup, Greenhill and Ernst & Young. In December 2014, Watchstone announced to the market inter alia that growth in cash receipts in the final quarter had not been as significant as anticipated and that PwC had been engaged by it to carry out an independent review. This review included “expectations as to cash generation into 2015”.
Following an initial meeting between S&G and Watchstone on 27 November 2014, it is common ground that Watchstone put forward a proposal for S&G to purchase a number of client files owing to cash flow issues that Watchstone was experiencing at the time. That led in due course to an “advance purchase agreement”, (“the APA”), concluded on 31 December 2014, whereby Watchstone agreed to transfer circa. 6,000 cases to S&G in return for an upfront payment of £12.1 million. The agreement also dealt with exclusivity and the due diligence that was to be carried out on the acquisition, which took place in the period from December 2014 to...
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