Beer & Anor v Bexbes Llp [2009] EWCA Civ 628

[2009] EWCA Civ 628Case No A3/ 2008/2714
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
THE HON MR JUSTICE ARNOLD
HC07CO1745
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 26/06/2009
Before
LORD JUSTICE MUMMERYLORD JUSTICE LLOYDSIR PAUL KENNEDY
Between
(1)MICHAEL BEERAppellants(2) JANE BEERAppellantBEXBES LLPRespondent
(Transcript of the Handed Down Judgment ofWordWave International LimitedA Merrill Communications Company165 Fleet Street, London EC4A 2DYTel No: 020 7404 1400, Fax No: 020 7404 1424Official Shorthand Writers to the Court)
MR PAUL NICHOLLS (instructed by Alston Ashby) for AppellantMR JOHN MACHELL (instructed by Bird & Bird) for RespondentHearing Hearing date: 7 th May 2009
Judgment

Background

[1]This appeal is from an order made by Arnold J on 4 November 2008 in favour of the claimant BexBes LLP (trading as “The Business Exchange”) for the principal sum of £57,780 for unpaid fees, plus interest. The order reflected the terms of his reserved judgment of 28 October 2008. The defendants (the Beers), who appeal with the permission of the judge, want this court to reduce the amount of the principal sum to £32,580. Unfortunately a lot of legal costs have been spent on a relatively modest dispute.[2]The only challenge is to part of the judgment relating to the calculation of the percentage fee due from the Beers to BexBes. The point turns on a very short question of construction of two documents: a letter of engagement dated 12 August 2005, by which the Beers engaged BexBes to help with the sale of their transport business, Mike Beer Transport Limited (MBT), and a “first offer” document dated 17 August 2005 from the purchaser of the business, Pass J Holdings (Pass J). A sale agreement was ultimately concluded just under a year later, on 11 May 2006. The name of Pass J, which had been identified by the Beers, appeared in a list of potential purchasers of MBT in the engagement letter.[3]There were two elements in the fees payable to BexBes. The first was an agreed lump sum, which is not dispute and has been paid in full. The second is an additional sum to be calculated as an amount equal to 18% of the increase in the consideration for the sale secured by BexBes over the terms of Pass J’s “first offer.” The calculation necessitated the valuation of both Pass J’s first offer and the consideration under the sale agreement. The difference between the two amounts was the sum to which the 18% was to be applied to ascertain the additional fee.[4]Pass J’s first offer, which was in note form rather than a fully drafted offer document, included the following key provision “Business goodwill £1.25m(a) £350 K cash up-front payment(b) £225K per annum based on maintaining 2005 levels of turnover and profit(c) 4 year contract Mike Beer and family Salary-Mike Beer £65,000 per annum, plus performance sharing to a total of £100,000K [sic] per annum Bonus structure 60% Mike Beer 20% Online Euro 20% Online Gmbh” (a) £350 K cash up-front payment (b) £225K per annum based on maintaining 2005 levels of turnover and profit (c) 4 year contract Mike Beer and family Salary-Mike Beer £65,000 per annum, plus performance sharing to a total of £100,000K [sic] per annum Bonus structure 60% Mike Beer 20% Online Euro 20% Online Gmbh”[5]It will be noted that items (a) and (b) total the sum of £1.25m in the heading for “Business goodwill ” and that the reference to “performance sharing”, which is expressed as a “plus” to the salary sum of £65,000 per annum, follows on the reference in (c) to the 4 year contract with Mike Beer and family.[6]The focus of this appeal is on the element of the first offer described as ‘performance sharing.’ It has a maximum value of £35,000 per annum for 4 years (i.e. £100,000 minus £65,000) and totalled £140,000 over the 4 year period. The inclusion of that sum in, or its exclusion from, the consideration relating to the sale of the MBT business affects the calculation of BexBes’ additional fee.[7]It was in BexBes’ interest to exclude the sum of £140,000 from the valuation of the first offer. Its exclusion would increase the difference between the value of the first offer and the sale consideration. It was in the Beers’ interest to include the total of £140,000 performance sharing payments to Mr Beer in the valuation of the first offer, as that would increase the value of the first offer and reduce the difference between the two valuations and the resulting amount of the additional percentage fee.[8]The precise question of construction for the judge was this: was the “performance sharing” element, as BexBes contends, part of the salary payable to Mr Beer for his services under the 4 year contract, in which case it was not part of Pass J’s first offer in relation to the sale of MBT? Or was it, as the Beers contend, part of Pass J’s first offer relating to the sale of MBT and therefore part of the consideration for the sale?[9]In that context the definition of “Consideration” in the letter of engagement is relevant. It was defined as follows:
“the Consideration in relation to the Sale Contract comprises the aggregate of all amounts of whatsoever nature that may be actually received (including any cash, loan notes, shares, profit sharing and earn out arrangements (including any cash, loan notes, shares and profit sharing arrangements comprised in such earn out…”
[10]The judge evaluated both the first offer and the consideration under the final sale agreement. He concluded that there was an increase in consideration of £321,000. This was the sum of 3 elements which the judge said represented increases in the value of the sale agreement when compared with the first offer. The appeal relates to only one of the 3 elements, namely that described in the first offer as “performance sharing” for Mike Beer and a maximum of £100,000 per annum.[11]In brief the judge held that he would not include, as part of the consideration under the first offer, the sum of £140,000 in respect of performance sharing. He said that the performance sharing payment fell to be regarded in the same way as the salary figure of £65,000. It was payment for services to be rendered in employment rather than a payment for the business. It was not part of the consideration for the sale of the business of MBT. On that basis the percentage fee payable on the increase of £321,000 was £57,780, for which he gave judgment.

Judgment of Arnold J

[12]In his excellent judgment Arnold J set out the background to the dispute, the relevant terms of the engagement letter and the sale agreement, the issues and the applicable principles of construction. His conclusions on the performance sharing issue under appeal are concisely stated in paragraphs 38 and 39 under the heading Should the “performance sharing” element be included in the Consideration payable?- . “38. It is common ground that paragraph 1(c) of the Offer Letter provides for a “performance sharing” payment of up to £35,000 per annum for four years i.e. a total of £140,000. Mr and Mrs Beer contend that this constitutes part of the Consideration in relation to the first offer. In support of this contention, counsel for Mr and Mrs Beer pointed out that the definition of Consideration embraces “all amounts of whatsoever nature…including ..profit sharing and earn out arrangements” and argued that the “performance sharing” payment was a profit sharing or earn out arrangement. Against that BexBes contends that the “performance sharing” payment constitutes part of Mr Beer’s salary under a four year employment contract and does not constitute part of the Consideration for the sale of MBT. 39. In my judgment BexBes is correct. It is clear as a matter of arithmetic that the business goodwill payment of £1.25 million consists of the two payments listed in paragraphs 1(a) and (b) of the Offer Letter. In my view clause 1(c) represents a separate, although linked, proposal to employ Mr Beer for a period of four years as part of the overall deal. The “salary” offered to Mr Beer consists of two elements. The first is a fixed sum of £65,000 per annum. The second is a performance –related payment of up to £35,000 per annum to make a total of up to £100,000 per annum. Counsel for Mr and Mrs Beer rightly did not suggest that the fixed element comprised part of the Consideration for the sale of MBT: it is plainly remuneration to Mr Beer for his employment. I consider that the performance-related element stands in the same position. The fact that it is performance–related does not make it part of the Consideration for the sale of MBT. This conclusion is supported by the fact that the “bonus structure” quoted envisages that 40% of Mr Beer’s “performance sharing” payments will be related to the performance of the two existing Online divisions with which MBT is to be integrated.”

The Beers’ submissions

[13]The Beers contend that the judge wrongly construed the definition of “Consideration” and wrongly excluded from it the performance sharing payments in the first offer. He wrongly equated those payments with Mr Beer’s salary. They say that the performance sharing payments fell within the definition of “Consideration.” They should have been included in the evaluation of the first offer. That would have increased its amount and would have reduced the difference between that and the consideration under the sale contract. The difference in value would have been £181,000 instead of £321,000. BexBes’ fee would then have been £32,580. That figure, not £57,780, should have been the principal sum payable by them to BexBes. The lower figure should be substituted in the court order.[14]In support of this contention Mr Paul Nicholls, who appeared for the Beers, made a number of points.[15]First, “Consideration” was defined widely enough to cover all amounts to be paid to the Beers based on the performance of MBT and the companies with which Pass J proposed to combine it. Mr Beer was entitled to receive the performance sharing payments, but they were deferred consideration in respect of the purchase of goodwill and took the form of future profit related payments rather than salary for work done. The additional payments related to the corporate performance of the companies’ business rather than to the personal performance of Mr Beer as Managing Director of MBT[16]Secondly, the judge wrongly equated the performance sharing bonus, which was referable to the performance of the business of MBT and the companies with which Pass J proposed to combine it, with the salary paid to Mr Beer. The performance sharing payment was referable to the goodwill in the business. It was not an extension of salary for individual performance or payment for work done or duties performed. It was conceptually different, being separate corporate performance sharing, as reflected in future profit of the companies over a four year period. It was the kind of payment used to pay vendors for the sale of the business, was related to the future performance of the companies and was conceptually different from salary.[17]Thirdly, Mr Nicholls submitted that the provision relating to performance sharing should be given the meaning which a reasonable person with background knowledge would give it. He relied on the surrounding circumstances of the transaction and on extrinsic evidence in the negotiations, statements about the subjective intentions of the parties (even by witnesses who were not parties to the transaction) and the later treatment of the performance sharing payment as indicating that the performance sharing payment was referable to the sale of goodwill and the consideration for it. The court was taken to passages in the witness statements and to passages in the correspondence.[18]Bexbes objected to the admissibility of such evidence as it went beyond the factual matrix to which regard may properly be had in ascertaining the meaning of a document to a reasonable reader with knowledge of the background of the transaction.

Discussion and conclusion

[19]What is the true character or nature of the “the performance sharing” payment? Does it fall within the definition of “consideration”? Should it have been taken into account in assessing the increase in the consideration for the sale after the first offer?[20]Turning first to the definition of “Consideration” the Beers’ strong point is that the definition is very broad indeed. But its limits are apparent from the use of the expression “in relation to the Sale Agreement.” On its ordinary and natural meaning that expression must refer to a hypothetical sale of MBT on the basis of the first offer by Pass J. Only monies payable “in relation to the Sale Agreement” are to form part of the consideration for the sale for fee calculation purposes.[21]Sums payable to an individual, such as one of the vendors (Mr Beer) under a contract of employment in consideration of the provision of services or performance of duties rather than in respect of the sale of shares of assets would not fall within the definition of consideration. Mr Nicholls accepted that the sum of £65,000 was payable as salary, that it was not part of the consideration in relation to the Sale Agreement and that it had to be excluded from the calculation of Bexbes’ percentage fee. Having rightly accepted that position, Mr Nicholls found that he was then facing an uphill task in attempting to distinguish the treatment of the performance sharing payments. He had to accept that they did not come into the calculation of the sum of £1.25m for goodwill, that they were mentioned in the same line as “salary” and that they were expressed as a “plus” to sums which were part of the consideration for the sale of MBT.[22]I agree with BexBes and the judge that the performance sharing payment is part of Mr Beer’s salary referred to under (c) in the first offer letter. It was payable to Mr Beer under his 4 year contract of employment and was additional to his fixed annual salary of £65,000. It was calculated by reference to corporate profits, but that does not transform the payment into a share of corporate profits. The performance sharing payment was not giving Mr Beer a share of the profits of an ongoing business carried on by the companies nor was it a payment to be made in exchange for the shares and assets being sold. Like the annual fixed sum of £65,000 it was paid as salary for services rendered under the 4 year contract. Like the salary of £65,000, it would only be payable for as long as Mr Beer remained an employee. Thus if, as fortunately has not happened, he had died during the four years, the salary and the bonus would have ceased to be payable at once whereas any part of the consideration not yet due would have been due to his estate.

Result

[23]I would dismiss the appeal. The Beers have failed to establish that the judge’s decision on the “performance sharing” point was wrong either as a matter of construction or in its application to the undisputed facts of the case. In those circumstances this court is not entitled to interfere with the judge’s decision or the order giving effect to it.[24]I will now deal with several consequential matters raised by counsel when the court stated at the end of the hearing of the appeal had succeeded that it would dismiss the appeal for reasons to be given in writing.[25]The Beers did not dispute that BexBes were entitled in principle to an order for payment of their costs of the appeal, but they disputed vigorously the amount claimed on Bexbes’ application for summary assessment of the costs. BexBes’ bill was for a total of £42,217.88, including VAT and a success fee under a conditional fee agreement. This was to be compared with the total of £20,158.53, including VAT, in the Beers’ bill of costs. The court was informed that much more than £25,200 and the costs of the appeal were at stake because of the effect of a Part 36 offer below. The time taken by this appeal at the hearing was no more than a couple of hours. Such is the scale of costs commonly incurred and awarded that even modest private law litigation between citizens is in danger of being killed off by costs.[26]The first point concerns the conditional fee arrangement entered into by BexBes with their solicitors. BexBes gave notice (on form N251) dated 23 September 2008 before trial of funding by means of a conditional fee under a conditional fee agreement (CFA), which provided for a success fee. A point was raised as to whether notice of the CFA had been given in relation to the appeal. The Beers say that they should have been given separate notice that the appeal was covered by a CFA. As Counsel were unable to offer much immediate assistance on this point. Written submissions were made after the hearing and the court made inquiries of the Senior Costs Judge. He informed the court that there was no specific provision for giving a separate notice in respect of an appeal and that it is almost standard practice for any CFA to cover the costs at first instance and any appeal brought against that party. As the CFA in this case covers such an appeal, though the Beers did not know this as they did not see the CFA until after the hearing of the appeal, there was no obligation on BexBes to give further notice of CFA funding. The Beers and their advisers should have been aware that, if they appealed, the CFA would continue to apply in respect of that appeal.[27]The second point was whether BexBes were entitled to recover VAT on the summarily assessed costs. As Counsel were unable to help the court about BexBes’ VAT status, this matter was left for inquiries to be made and for the counsel to inform the court of the result of their inquiries. It has been confirmed that BexBes are exempt from VAT in respect of the supply of services to which the legal costs of their solicitors in connection with the appeal are attributable. The Beers accept that VAT is payable by them on the summarily assessed legal costs in relation to the appeal.[28]The third area of dispute concerned individual items in BexBes schedule of costs. Objections were raised by Mr Nicholls on behalf of the Beers: the time spent by BexBes on considering and preparing documents was nearly 16 hours compared with 10 hours by the Beers’ solicitors; attendances on BexBes were 19 hours compared with the Beers 3.5 hours; attendances on the Beers solicitors were 9.6 hours and on counsel 7.6 hours compared with the Beers 2.7 and 4.7 hours; and BexBes Counsel’s hearing fee was £8000 compared to his £5000.[29]In the light of the objections, in particular to the time claimed for BexBes solicitor’s work on documents and for attending on their client, on the opposing party and on Counsel, I think that a substantial reduction should be made to BexBes statement of costs. I would summarily assess their costs of the appeal at £31,625 inclusive of VAT.[30]I agree.

Sir Paul Kennedy:

[31]I also agree.