Judgment
Introduction
1. In this case the first claimant, Mr Michael Cherney (“Mr Cherney”), and various entities through which (in broad terms) he owns and controls assets for the benefit of himself and his family, claim damages for professional negligence, breach of fiduciary duty and breach of trust against the solicitors who acted for them in a number of dealings in the London property market between 2004 and early 2008. The solicitors were the firm of Pettman Smith, which on 1 December 2007 merged with Child & Child. It is in general unnecessary to distinguish between the positions of Pettman Smith and Child & Child (which are respectively the second and third defendants), and I shall refer to them both separately and collectively as “the Firm” as well as by their separate names. The partner who had principal conduct of all the relevant transactions on the claimants’ behalf was Mrs Marie-Garrard Newton (“Mrs Newton”).
2. The claim against the Firm was begun by a claim form issued in the Chancery Division of the High Court on 15 August 2008. At that stage there were four other defendants. The first defendant, Mr Frank Neuman (“Mr Neuman”), is a key figure in most of the relevant transactions. He had been a friend, business associate and trusted agent of Mr Cherney’s, and he was accused (in summary) of having betrayed that trust and used his position as Mr Cherney’s confidential agent and representative in this country to enrich himself at Mr Cherney’s expense. The fourth and fifth defendants were companies through which Mr Neuman carried on business. The sixth defendant, Mr Surtej Singh Janjua (“Mr Janjua”), is on the evidence before me a rather shadowy figure, who was involved, directly or indirectly, in several of the property dealings.
3. The claim against Mr Janjua was discontinued pursuant to an order made by Arnold J on 8 October 2010.
4. More importantly, in September 2010 the claimants settled all their outstanding disputes with Mr Neuman and his companies. To say that this settlement was unexpected would be an understatement. For the best part of two years, the claimants and Mr Neuman had been engaged in a series of increasingly bitter interlocutory disputes, culminating in cross-applications for committal (by the claimants against Mr Neuman and by Mr Neuman against Mr Cherney) which led to a six day hearing before Proudman J in July 2010. A piecemeal waiver of privilege by the claimants during the hearing led to the disclosure by them of certain documents which, among other matters, appeared to contradict oral evidence already given by Mr Cherney and his principal witness, Mr Daniel Mazin, in the course of the committal proceedings. Furthermore, the documents included a partially redacted manuscript attendance note of what appeared to be a rehearsed cross-examination of Mr Cherney before an English barrister, which had been arranged by his solicitors and taken place less than a week before the start of the July hearing, but without the knowledge of counsel who were instructed to appear for him. In these circumstances, the committal proceedings were adjourned by Proudman J and were due to resume, for a further week’s hearing, in late September. Proudman J was also going to be asked to rule on an application by Mr Neuman for specific disclosure of unredacted versions of the attendance note to which I have referred and various other documents. It was shortly before the resumed hearing that the claimants and Mr Neuman entered into the compromise.
5. The terms of the compromise were set out in a “confidential compromise agreement” dated 15 September 2010 and signed by the solicitors for the claimants (Fladgate LLP) and the solicitors for Mr Neuman (Denton Wilde Sapte LLP). The principal terms included the following:
(1) Mr Cherney would pay Mr Neuman £1,060,000 by 22 September, upon receipt of which the contempt applications would be discontinued;
(2) if any of the claimants (or any entity owned or controlled by them) were able to recover the VAT relating to one of the disputed transactions (
(3) the claimants agreed not to pursue their claim to a beneficial interest in a flat in Knightsbridge known as 5 Park Mansions;
(4) each party would bear its own costs in connection with the action, and would waive any orders for costs already made in its favour;
(5) the above terms would be in full and final settlement of all claims and counterclaims in the present action, and of all claims, rights or causes of action which the claimants might have against Mr Neuman and his companies or vice versa, including claims “of any kind whatsoever, whether known or unknown, wheresoever arising and whether arising under English or any other law or jurisdiction”;
(6) Mr Cherney would procure the discontinuance of certain proceedings in
(7) the settlement agreement was subject to English law, and any disputes arising out of it would be brought exclusively before the courts of England and Wales; and
(8) the parties agreed to keep the contents of the agreement confidential except as required by law.
6. When the settlement agreement was first disclosed to the Firm’s solicitors (Berrymans Lace Mawer LLP) in October 2010, following the issue of a disclosure application by the Firm, paragraphs 8 and 9 were redacted on the ground that they were supposedly irrelevant to the claim against the Firm. However, on 2 March 2011 Fladgate wrote to Berrymans saying that they had now reconsidered the position with counsel in the light of a witness statement served by Mr Neuman,
“… and counsel’s view is that paragraph 8 should now be disclosed as it is relevant for any cross-examination that all parties are aware that Mr Neuman has agreed to give reasonable assistance to Mr Cherney.”
7. Paragraph 8 of the compromise agreement reads as follows:
“Subject to [Mr Neuman] providing [Mr Cherney] with such assistance as may reasonably be required by the Claimants in respect of their claims against [the Firm] [Mr Cherney] agrees to indemnify [Mr Neuman] against any claim by or liability that he may have to [the Firm] as a result of such action. This indemnity includes [Mr Neuman’s] legal and other costs of defending any such claim, as well as the amount of the claim or liability itself.”
8. Paragraph 8 needs to be read in conjunction with paragraph 9, which says that:
“In the event that [Mr Neuman] pursues his action: Claim No. HC08C01346 against [the Firm] he agrees to indemnify the Claimants against any claim by or liability that one or more [of] them may have to [the Firm] as a result of such action. This indemnity includes the Claimant’s legal and other costs of defending any such claim, as well as the amount of the claim or liability itself.”
9. It can thus be seen that, as part of the overall settlement reached between them, the claimants and Mr Neuman agreed to provide each other with cross-indemnities in relation to their respective claims against the Firm. By paragraph 8, Mr Cherney agreed to indemnify Mr Neuman against any claim by the Firm, or any liability that Mr Neuman might incur to the Firm, as a result of the claimants’ claim against the Firm. Such claims or liability on the part of Mr Neuman could most naturally be expected to arise in the context of contribution proceedings between the Firm and Mr Neuman, because a major plank of the Firm’s defence was that Mr Neuman had had either actual or ostensible authority to act on the claimants’ behalf in most of the impugned transactions, and in his own amended defence and counterclaim (now to be discontinued) Mr Neuman had himself advanced a positive case that he was Mr Cherney’s agent in relation to a wide range of matters. Thus, if the claim against the Firm succeeded, the Firm would be likely to seek to pass on as much of its own liability as it could to Mr Neuman; but in such circumstances Mr Cherney now undertook to indemnify Mr Neuman, subject to the requirement, in the opening words of paragraph 8, that Mr Neuman should provide Mr Cherney with such assistance as the claimants might reasonably request of him in relation to their own claims against the Firm.
10. To similar effect, but without any reciprocal obligation on the part of Mr Cherney or the claimants to provide him with reasonable assistance, Mr Neuman agreed by paragraph 9 to indemnify the claimants against any claims by, or liability to, the Firm that they might incur as a result of Mr Neuman pursuing his separate claim against the Firm. This claim had been begun by Mr Neuman, also in the Chancery Division of the High Court, on 21 May 2008, and in his particulars of claim dated 4 June 2008 he had claimed that the Firm acted for him personally in relation to the purchase and subsequent sale of the Arlington Street property, and had sought an account and related relief in relation to the proceeds of sale. It was recognised at an early stage that this action was closely connected with that part of the claimants’ claim against the Firm which related to
11. The existence and terms of this settlement give rise to a number of defences and submissions by the Firm that I will need to consider in due course, including in particular a contention that it is circuitous, and an abuse of process, for the claimants to seek to recover damages from the Firm, which the Firm will then be entitled to recover in full from Mr Neuman by way of contribution, and in respect of which Mr Cherney will then be obliged to indemnify Mr Neuman. At this stage, however, it is enough to record that the sum of £1.06 million was duly paid by Mr Cherney to Mr Neuman; that the contempt proceedings were discontinued; and that the claims by the claimants against Mr Neuman and his companies in the present action were likewise removed by re-re-amendments made pursuant to Arnold J’s order of 8 October 2010. As the claim against Mr Janjua was also discontinued on that occasion, it follows that since October 2010 the Firm has been the only effective defendant to the present action.
12. By a Part 20 claim form issued on 17 December 2010, the Firm sought an indemnity, or alternatively a contribution, from Mr Neuman pursuant to the Civil Liability (Contribution) Act 1978, together with interest and costs. Mr Neuman served a defence to this Part 20 claim on 7 February 2011.
13. At the time of the committal proceedings and the negotiation of the compromise agreement, Mr Neuman was represented by leading counsel, Mr Thomas Beazley QC. His defence to the Firm’s Part 20 claim was settled by junior counsel, Mr John Machell. The hearing of the present action, and of Mr Neuman’s action against the Firm, was due to begin in a five day window from 14 March 2011. However, on 28 February 2011 Mr Neuman’s solicitors, SNR Denton UK LLP (formerly Denton Wilde Sapte LLP) made an application to come off the record, and on the evening of Wednesday, 9 March they notified the Firm’s solicitors that they were no longer acting for Mr Neuman. Between then and the start of the trial on 17 March (after two reading days for the court), Mr Neuman’s intentions in relation to the trial remained unclear. He took no steps to arrange alternative representation, but nor did he apply for an adjournment. In the event, he appeared on 17 March as a litigant in person, but was attended by his former solicitors as McKenzie friends. This arrangement continued throughout the trial until the evidence had been completed. At that stage, Mr Neuman re-instructed his former solicitors, and junior counsel (Mr Machell) made closing submissions on his behalf. I should record that, despite these rather curious arrangements, Mr Neuman’s solicitors were scrupulously careful not to go beyond the proper functions of McKenzie friends during the period when they were off the record. I also record my gratitude to Mr Machell for the assistance that he was able to give me in his closing written and oral submissions on Mr Neuman’s behalf, even though he had been re-instructed at short notice and had not been present at the earlier stages of the trial.
14. On the first day of the trial Mr Neuman made it clear that he no longer wished to pursue his own action against the Firm. Accordingly, his claim against the Firm was dismissed by a consent order dated 22 March 2011. The reason for the abandonment of his claim, however, was not that he accepted that he had entered into the
15. Although the claimants had been represented by both leading and junior counsel (Mr Philip
16. With this introduction, I will now make some preliminary remarks about the witnesses and then examine the relevant transactions in turn.
The Witnesses
17. The witnesses who gave evidence for the claimants were Mr Cherney, Mr Todor Batkov and Mr Evgeny Traspov.
(1) Mr Cherney
18. Mr Cherney is a man of enormous wealth, the origins of which are to a large extent shrouded in mystery. He was born in the
19. In his fourth witness statement dated 22 February 2011 (the principal written evidence on which he relies in the action), Mr Cherney describes the way in which he carries on business as follows:
“3. … I am not a conventional business man who every day attends an office with regular support staff. I delegate day to day management of my main business interests to the relevant partner in that particular business. This applies as much to major business interests such as the acquisition of the Bulgarian telecommunications company Mobiltel in 1997, where I delegated the day to day management of Mobiltel to the company management, as to the purchase of various properties in
4. There are two main consequences which flow from the style of management. First, I did not and do not personally retain, indeed, I have never received, much in the way of routine documentation. Secondly, I placed considerable trust and reliance on those people helping me. In this case, that meant primarily Frank Neuman and Marie-Garrard Newton.
5. I should also say something about the other claimants in this case. The second and third Claimants [Paradiso Foundation and Vida Foundation] are corporate entities which were set up in
6. I would say that one of my most trusted confidants is Mr Batkov. I first met him in March 1996 when I had a problem with a Bulgarian bank. Mr Batkov assisted me in resolving this issue and subsequently became involved in the purchase and sale of Mobiltel. Since then, he has worked very closely with me and I trust him to make payments and act generally on behalf of the Claimants. I have given Mr Batkov authority to dispose of funds held by the Foundations and I believe that he communicated this to Marie-Garrard Newton when he first dealt with her in 2004. I also told Ms Newton this when I met her in 2006.”
20. Despite the prominent role played by the two
21. I have no hesitation in accepting this evidence, in the sense that Mr Cherney was, I am sure, the person who took the major decisions, and the foundations could in practice be relied upon to act in accordance with his wishes. Nevertheless, I am not prepared to hold that the legal structures through which Mr Cherney held and controlled his wealth can be wholly disregarded. On the limited evidence available to me I am unable to hold that the foundations, or any of the multitude of companies through which Mr Cherney owned or controlled his wealth, were devoid of legal substance or that they can be treated for all purposes as Mr Cherney’s agents. The position is obscure, no doubt as Mr Cherney intended it should be.
22. For what it is worth (and in the circumstances, without supporting evidence and documentation, it is in my view very little), the only documents before the court relating to the establishment and management of the
(a) a written authority signed by Mr Cherney on 30 March 2002 (or possibly 2001), addressed to Syndikus Treuhandanstalt and three named individuals, authorising Mr Batkov to exercise certain rights “as regards the companies, managed by you, which are solely my property or in which I have share participation in the capital”, including the receipt of information concerning agreements and accounts, the receipt of copies of documents relating to such matters, and “[t]o give instructions for disposing of amounts upon accounts of these companies after preliminary co-ordination with me, and endorsement of the instructions for payment on my part”;
(b) formal documents apparently executed by members of the boards of foundation of Paradiso and Vida on 26 September 2006, establishing a by-law under which Mr Cherney is named as the “first beneficiary” with respect to all assets and revenues as well as any liquidation proceeds; and
(c) a letter “to whom it may concern” written on behalf of Lusaka Trust and dated 24 June 2010, confirming that
23. It is convenient at this point to say a little more about the position of Mrs Anna Cherney. In 1999 Mr Cherney agreed that she should move with their daughters to
24. In view of the European warrant for his arrest, and the principles established by the decision of the House of Lords in Polanski v Condé Nast Publications Limited [2005] UKHL 10, [2005] 1 WLR 637, Mr Cherney sought and obtained permission from the court to give evidence at the hearing of the committal applications by video conferencing facility (“VCF”) from Israel. The order was made by Sir John Lindsay, sitting as a judge of the High Court, on 9 July 2010. At the pre-trial review held before Lewison J on 25 February 2011, a similar application was made by the claimants for Mr Cherney to be permitted to give evidence at trial by VCF from Israel, and the application was granted on condition that a representative of the defendants with knowledge of the case be permitted to travel to Israel to supervise the giving of such evidence. Thus it came about that Mr Cherney gave his oral evidence by video-link from
25. In his closing submissions for the Firm Mr Fenwick QC went much further, and asked me to reject Mr Cherney’s testimony in its entirety save where it is corroborated by contemporary documents. He submitted that Mr Cherney’s oral evidence had shown him to be highly evasive; that his evidence bore the hallmarks of pre-trial coaching, as in the committal proceedings; that his desire to blame the Firm led him to give evidence that was at times absurd; that he was lying about his involvement in the compilation and distribution of the so-called “tax dossier”, relating to Mr Neuman’s tax affairs, which lay at the heart of the committal proceedings; that there were places where his evidence was demonstrably false; and that his oral evidence at times diverged starkly from his witness statements.
26. In my judgment there is force in many of these criticisms, and I feel no doubt that Mr Cherney’s evidence needs to be treated with very considerable caution. I agree that his answers in cross-examination were often evasive, and he frequently took refuge in what appeared to be a prepared statement to the effect that he had been let down by the Firm and his trust in Mrs Newton had been misplaced. It is unnecessary for me to decide whether this leitmotif was the result of improper pre-trial coaching, or whether it was merely the product of frequent discussions of his case with his lawyers, and I prefer to leave the point open. The significant point, to my mind, is that it betrays a rather entrenched and stereotyped approach to the claims, which Mr Cherney was always anxious to present at a fairly high level of generality and without descending into detail. However, his frequent failure to engage with accuracy on points of detail does not necessarily mean that Mr Cherney’s evidence on more general issues, such as the nature of his relationships with Mr Batkov and Mr Neuman, is also unreliable. After all, if his evidence that Mr Batkov was one of his most trusted advisers, and that he had extensive delegated authority, is accepted, it is hardly surprising if Mr Cherney did not concern himself with the details of the relevant transactions. Nor is it necessarily a cause for surprise if a man of Mr Cherney’s vast wealth and extensive business interests should be imprecise in his recollection of events in the
27. I also decline to make any findings of facts about Mr Cherney’s involvement in the affair of the tax dossier or the evidence which he gave to Proudman J in the committal proceedings. These matters are of only peripheral relevance to the issues now before the court, and at best they go only to credit. Now that the claimants and Mr Neuman have settled their differences, I think it would be most undesirable for the court to be drawn into a detailed examination of the issues on the committal applications. The claims with which I am now concerned do not turn on the propensity or otherwise of Mr Cherney to tell lies in a dispute with his former business partner, but rather on the question whether the Firm provided an adequate standard of professional service when it acted for Mr Cherney in the relevant transactions.
28. One further matter which I should mention, because it has some bearing on the accuracy of Mr Cherney’s written evidence, is the curiously convoluted procedure which was adopted in the preparation of his witness statements. An indication of this is provided by paragraph 1 of his fourth statement, where he says:
“I am providing my evidence via interpreters to my English lawyers who have then prepared my statement in English which has been translated into Russian for me to approve.”
Consistently with this, the statement (in English) is signed by Mr Cherney at the end, but also by Mr Traspov, who certifies that he read over the contents of the statement in Russian to Mr Cherney, who appeared to understand it and approve its contents, and to understand the declaration of truth and the consequences of making a false declaration, before signing it in his presence. The trial bundle also includes a translation of the witness statement into Russian, certified by a professional translator, and apparently signed by Mr Cherney on 10 March 2011.
29. Mr Traspov is an Israeli lawyer, who speaks Russian, English and Hebrew. He has acted for Mr Cherney in various legal matters since 2005, and he said in cross-examination that this work occupies about 95% of his time. He described the process which led to the finalisation and signature of Mr Cherney’s statements as an iterative one, which began with Mr Cherney meeting his English lawyers to discuss the content of his evidence. They would then produce a first broad draft for him in English, which Mr Traspov would translate into Russian, and upon which Mr Cherney would then comment. Mr Cherney’s comments would then be inserted by Mr Traspov in English, after which he would translate them into Russian. In the end a final draft which had Mr Cherney’s approval would be agreed, and he would sign it. He would sometimes sign the statement first in English, after Mr Traspov had provided him with an exact translation of it; but in such cases he would subsequently sign the Russian version after he himself had read it. This appears to be the procedure which was followed in relation to Mr Cherney’s fourth statement.
30. Quite apart from the scope for error or misunderstanding in such a complex procedure, it is far from clear that Mr Cherney was always shown or had translated for him the documents to which he refers in his statements. So, for example, he refers in paragraph 48 of his fourth statement to a letter from Mrs Newton dated 24 March 2006, of which he says he was told by Mr Batkov, but in his oral evidence he denied that he had ever seen this letter or that it had ever been read to him. I do not wish to imply that there was any impropriety in the methods by which Mr Cherney’s written evidence was prepared, and I am sure that the lawyers and translators involved, including Mr Traspov, did their best to help produce a final version that correctly reproduced Mr Cherney’s statements and intentions. But with the best will in the world a process of this nature departs a long way from the ideal, which is that a written statement should contain the evidence of the witness in his own words.
(2) Mr Batkov
31. Mr Batkov is a Bulgarian lawyer. He is managing partner of Batkov & Associates of
32. Mr Batkov gave his evidence confidently in fluent, although at times rather idiosyncratic, English. He explained that he had learnt English at school and university, and often has occasion to speak it in the course of his professional life. However, his Russian is much better, and this is the language in which he communicates with Mr Cherney.
33. Mr Batkov first met Mr Cherney in March 1996, when Mr Cherney had a problem with a Bulgarian bank in relation to a loan. Mr Cherney was dissatisfied with the way his original lawyers had handled the case, and Mr Batkov was recommended to him. He then won the case at first instance and on appeal in 1999. By this time Mr Cherney had begun other business ventures in
34. Mr Batkov describes himself as having been in charge of the worldwide assets of Mr Cherney and his family between 2001 and 2007. In this capacity he helped Mr Cherney to rearrange his affairs following the sale of Mobiltel, and it was on his advice that Mr Cherney deposited $150 million into the Vida and Paradiso foundations. He had Mr Cherney’s general authority to give instructions to the foundations, and one document which appears to evidence this has been disclosed: see paragraph 22 above. Mr Batkov agreed that the initial beneficiaries of the foundations were Mr Cherney’s wife and daughters, but he explained in his oral evidence that Mr Cherney had the right to give instructions on behalf of his daughters while they were still under the age of 18. As I have already said, the evidence before me about the Liechtenstein foundations is extremely vague and unsatisfactory, but the practical reality, I have little doubt, is that Mr Cherney did indeed give the instructions, and Mr Batkov was until 2007 usually, if not always, the channel through whom Mr Cherney made his wishes known to the foundations’ officers.
35. It appears that Mr Batkov’s relationship with Mr Cherney underwent something of a crisis in or about October 2007. More than once in his oral evidence he described this episode as his personal “
36. In the light of this background, Mr
37. The first is the almost total absence of any attendance notes or contemporary records to verify his recollection of events. His oral evidence was that he had taken notes at the time, including shorthand notes, and that he had “partially” refreshed his memory from those notes before he made his witness statement. He also said that he had provided all such notes to the claimants’ solicitors, describing it as “a huge amount of information and documentation”. However, the relevant disclosure made by Fladgate does not bear this out; and although Mr Batkov undertook in the witness box to conduct a further detailed search of his offices when he returned to
38. This brings me on to the second cause for concern, which relates to the accuracy of Mr Batkov’s recollection. In his oral evidence he was at pains to say that he had an excellent memory, and that he was very familiar with all the relevant facts, dates, events and so on. However, it soon became clear in cross-examination that Mr Batkov’s memory was by no means as infallible as he would have liked the court to believe. I will give one example. In paragraph 27 of his witness statement Mr Batkov refers to a meeting at the offices of Pettman Smith which took place on 17 March 2005, attended by (among others) Mrs Cherney and Mrs Newton as well as himself. He says it was at this meeting that Mrs Newton told them that Draycott House and
39. Another example relates to a meeting at Pettman Smith’s offices which, according to paragraph 48 of Mr Batkov’s statement, took place on or about 26 September 2007 and was attended by Mr Cherney, Mrs Newton and himself. This was the occasion, he says, when Mrs Newton told them for the first time that she had not been instructed to draw up a deed of trust in respect of the ownership of
40. The passage in Mr Batkov’s cross-examination in which he was questioned about these meetings was, to put it charitably, confused. At first he denied having been present at the former of the two meetings, but he retracted this when shown paragraph 48 of his statement. He then appeared to say that he had no independent recollection of the meeting, but reiterated that he was present at it, and went on to give a series of detailed answers to questions about what took place, claiming that he now remembered it. It is scarcely surprising that a busy lawyer like Mr Batkov should have some difficulty in remembering the precise details of meetings which took place three to five years ago, but once his claim to have a near-perfect recollection of events has been exposed as over-optimistic the near total absence of attendance notes or records of his own becomes even more significant. The upshot, in my judgment, is that Mr Batkov’s evidence needs to be treated with great caution where it is uncorroborated. I would not, however, go so far as Mr Fenwick QC, who submitted that Mr Batkov’s testimony should be “rejected wholesale” except where it is supported by contemporary documentation. As with Mr Cherney’s evidence, I think that a more sensitive and nuanced approach is required, and that a Procrustean test of this nature does not do justice to the complexities of the case or (I would add) of human nature.
41. An additional difficulty in evaluating Mr Batkov’s evidence was caused by his readiness to veer away from the question asked, and to embark upon lengthy monologues of an argumentative nature. I had to ask him on several occasions to concentrate on the questions asked, and to confine the scope of his answers.
(3) Mr Traspov
42. I have already referred to the oral evidence given by Mr Traspov about his role as a translator and legal adviser for Mr Cherney. He had no personal involvement in Mr Cherney’s
(4) Mr Neuman
43. Mr Neuman gave evidence on his own behalf, in his capacity as defendant to the Firm’s Part 20 contribution claim against him. He did not call any other witnesses, but cross-examined Mr Cherney, Mr Batkov and Mrs Newton. He conducted himself courteously throughout.
44. Mr Neuman’s personal background is briefly as follows. He was born in
45. Mr Neuman first met Mr Cherney at a hotel in Tel Aviv towards the end of 2001. They were introduced through a mutual acquaintance. Mr Cherney was looking for investment opportunities, and following their introduction he agreed to finance a wood processing business with plants in
46. Mr Neuman describes the subsequent growth and deterioration of his relationship with Mr Cherney as follows:
“9. Over time, I became increasingly involved in assisting Mr Cherney generally in his personal and business affairs and it was to me that he often looked for help. Such assistance ranged from furnishing his house in Tel Aviv to helping him obtain a
10. In early 2004, I was in
11. I believe that as a result of my assisting his wife with the arrangements for
12. By around the end of 2006 I was becoming tired of having to travel so much on behalf of Mr Cherney and I was thinking about taking on less. In that year, I had undergone major heart surgery and my father was very sick in
13. As I say, I wanted to part with Mr Cherney amicably. Negotiations between our lawyers made some progress. However, ultimately these negotiations broke down and in late March/early April 2008 I went with my son, Emanuel, to
47. I will need to examine certain aspects of this account in more detail, and it needs to be remembered that it may contain some self-serving elements, particularly in the reasons that Mr Neuman gives for the breakdown in his relationship with Mr Cherney in 2007. Nevertheless, I see no reason to doubt that the general trajectory of the relationship was essentially as Mr Neuman describes it, beginning in the early years of this century, achieving its maximum intensity between about 2004 and 2006, and then deteriorating sharply in the course of 2007 and culminating in a complete rupture in the Spring of 2008. It is also worth noting that the deterioration in their relations in the latter part of 2007 coincided approximately with Mr Batkov’s “
48. Both the claimants and the Firm are united in submitting that I should treat Mr Neuman as an unreliable witness. In the case of the Firm, this is hardly surprising in view of the comprehensive settlement reached between Mr Neuman and the claimants last year, and Mr Neuman’s contractual obligation to assist the claimants. It is, on the face of it, more surprising that the claimants should also take the same line, but here I need to guard myself against the possibility that they may, for reasons of their own, be anxious to see Mr Neuman discredited as a witness, thereby exposing him to a claim for breach of the settlement agreement. In any event, having heard Mr Neuman give evidence, and having read the transcript, I am satisfied that his evidence, like that of Mr Cherney and Mr Batkov, needs to be treated with great caution. I do not propose to set out here the specific reasons which have led me to this conclusion, but will deal with the relevant points as and when they arise.
(5) Mrs Newton
49. The main witness who gave evidence on behalf of the Firm was Mrs Newton. As I have already said, she had conduct of all the relevant transactions in issue between the parties (subject to some very minor exceptions). In her written evidence she describes her qualifications and legal career as follows:
“5. I qualified as a solicitor in 1971. From 1973 I practised initially as an assistant solicitor and then for about 10 years as a partner in a firm then known as Titmuss Sainer & Webb. I subsequently practised for some 10 years in a firm known as Pickering Kenyon based in Holborn. I was initially a salaried partner in that practice, but then became an equity partner.
6. In or around June 1998 I joined Pettman Smith as a salaried partner. I practised as a salaried partner up to and after Pettman Smith’s merger with Child & Child on 1 December 2007. I remain at Child & Child to this day.
7. Since qualification I have handled property transactions primarily relating to commercial property but also residential property. These have involved both freeholds and leaseholds as well as Landlord and Tenant matters, secured lending, acting on behalf of individuals as well as private and public companies, landlords and tenants. For upwards of the last 16 years I have also handled property transactions involving off-shore individuals and companies in various jurisdictions.”
50. It is thus apparent that Mrs Newton is a very experienced property lawyer, who has practised as a solicitor for some 40 years. She has been a salaried partner with the Firm since 1998, but has never become an equity partner. Pettman Smith was at all material times a small firm with its main offices at 79 Knightsbridge, London SW1. It was founded in 1982, and one of the founding partners, Ann Glaves-Smith, was the senior partner during the relevant period before the merger with Child & Child. The number of partners shown on Pettman Smith’s notepaper during the relevant period, including Mrs Newton, was only six or seven, together with one or two consultants.
51. By her own admission, Mrs Newton’s system of note taking left a good deal to be desired, and could fairly be described as chaotic. Between 2004 and 2008 her usual practice was to take notes in her own hand in a notebook (either an “
52. Where Mrs Newton did not make detailed manuscript notes, but the content of a meeting or telephone conversation was such as to warrant an attendance note, she would either write up a detailed manuscript record after the event or dictate an attendance note using her Dictaphone. In the latter case, her secretary then typed up the attendance note from the tape. Occasionally her secretary would also type up an attendance note from a manuscript copy. When the typing was done, Mrs Newton would normally review the typed version and amend it as necessary. Once the note had been approved, her secretary would place it on the file in its appropriate date order.
53. Mrs Newton goes on to explain:
“13. Once I used up a notebook, I then stored it in my office. I should point out that I am not, and was not, tidy. Whilst I try to (and generally can) recall where I have placed various items, I do not have, and did not have, any filing system for note books. Essentially, I placed my used notebooks wherever there was space on my desk. The notebooks usually ended up on the top of my filing cabinets or on the floor.
14. In the past, if and when I ran out of space in my office, some of my older notebooks (and loose pieces of paper which had fallen out of my notebooks) were destroyed. I do not know whether any notebooks relevant to these transactions were destroyed.”
54. The confusion thus caused was unfortunately compounded when in May 2008 Mrs Newton was asked by Mr Batkov and Mr Mazin to send her files to Fladgate on Mr Cherney’s behalf. What then happened is best explained in Mrs Newton’s own words:
“15. … From mid-late 2008 I conducted a search of my room for the notebooks that I had utilised which were relevant to the various transactions discussed below. As the manuscript notes in my notebooks were not generally on the files, but remained in, or (if loose) with, the notebooks, I wanted to collate all the information on the transactions in one place. I looked in and on the various cabinets and boxes in my room. When I found notebooks, I then flicked through them to see whether they contained any attendance notes relating to the relevant transactions. Although I found a number of notebooks, I cannot guarantee that I discovered every relevant notebook. It may be that, through the passage of time, some of the notebooks had been mislaid or removed from my office to clear space and destroyed. It may also be the case that I have not been able to find every attendance note where the relevant page or pages of the notebook had become detached and I have been unable to locate them or the pages have been lost. I have carried out a thorough search of the notebooks and any spare loose pages which remain in my office.
16. When I found my notebooks and relevant loose pages, I went through them to identify the attendance notes relevant to Mr Cherney’s transactions. As a result of Mr Mazin and Mr Batkov’s requests … I appreciated that other people may wish to read the files and may have difficulty in understanding my hand written notes. I believed that arranging for the attendance notes to be typed up would assist any person who read the files to understand the contents of the attendance notes. Those which I thought had not been typed up, but which did not appear to be readily understandable for anyone who would read them, were typed up by Naomi Thompson. I identified the attendance notes to be typed up by Naomi Thompson by attaching yellow post-it notes to the pages before handing the notebooks and loose pages to her. I did not cross-refer to the files to see if an attendance note had been typed up.
17. On the other hand, some of my hand written notes appeared to be more readily understandable. I left those hand written notes as the original manuscripts. I then either left them in the notebooks or removed them from the notebooks and asked Naomi Thompson to place them on the files.
18. I did not create or dictate any attendance notes, whether manuscript or otherwise. Naomi Thompson only typed up attendance notes from my contemporaneous manuscript notes. Although I cannot be precise, the majority of the attendance notes were typed up in mid-late 2008.
19. It took some months for Naomi Thompson to type up the attendance notes as I provided them to her on a rolling basis and she would work on them whilst performing her standard role. As per my usual practice, I would review the attendance notes after Naomi Thompson had typed them up to ensure that they accurately reflected my manuscript note. Sometimes it proved necessary to make amendments [some examples are then given]. I cannot be exact about how many attendance notes required revision, and how many remained as originally typed. I confirm that I did not make any substantive additions or alterations that went beyond the content of the manuscript notes.
20. When Naomi Thompson and I conducted this exercise in 2008, we retained the original manuscript attendance notes. As such, there should be copies of both the manuscript notes and the typed up counterparts available. I understand that some of these cannot, at the present time, be found. I can confirm that I did not intentionally destroy, or order to be destroyed, any of the manuscript attendance notes. In the context of the disclosure process in these actions, I have never suppressed any relevant documents.
21. After I had reviewed the draft typed attendance notes, Naomi Thompson made any required amendments. I cannot recall whether I instructed Naomi Thompson to place the finalised typed up attendance notes on the file, but my working assumption was that she would. I understand that the attendance notes were placed on the file according to the date of the meeting or telephone conversation …
22. I am informed that this approach to ordering the files is criticised in the litigation. I did not consider or appreciate that the approach taken was in any way misleading, and I certainly did not intend anyone to be misled. As a conveyancing solicitor I did not consider or appreciate that files could, or should, be constructed in a different way.”
55. This account is substantially corroborated by a witness statement of Naomi Thompson dated 21 February 2011, on which she was not required to attend for cross-examination.
56. Given this history, which may be thought to provide an object lesson in how not to maintain reliable conveyancing files, it is unsurprising that Mrs Newton’s attendance notes were the subject of much pre-trial correspondence, and the suspicion arose that at least some of them had been doctored, or had been brought into existence long after the events which they purported to record. In the event, however, only one specific challenge to the authenticity of an attendance note was made by Mr Norbury in his cross-examination of Mrs Newton. The challenge related to the final three lines of the typed attendance note of a meeting on 20 April 2006. These three lines were omitted from an otherwise very similar typed “telephone attendance note” apparently dated the following day. It was put to Mrs Newton by counsel that she had added this paragraph after the dispute emerged. She denied this, saying that “[w]hat may have been put in the correct place on the attendance note was a paragraph in my handwritten notes which was not previously there”. I am prepared to accept this explanation, which is supported by a number of points made by counsel for the Firm in their closing submissions, and I acquit Mrs Newton of the very serious charge of deliberate falsification of documents. I am satisfied that the likeliest explanation is that the version with the extra paragraph was indeed typed up by Naomi Thompson from the original manuscript. It is, however, symptomatic of Mrs Newton’s chaotic approach to document management that her original manuscript notes of the meeting should be missing; that two typed versions of an attendance note, which bear different dates but which appear to relate to the same meeting, should co-exist; and that one of the notes should give the impression from its heading that it was the record of a telephone conversation.
57. In marked contrast with her frankly careless approach to record keeping, Mrs Newton gave her oral evidence in a scrupulously careful and cautious manner. She confined her answers very closely to the questions put to her, and seemed determined to give away as little as possible. At times, her caution verged on the absurd, as when she refused to admit that an email copied to her had been “sent to” her, and refused to accept that it arrived in her inbox without looking. She then accepted, rather grudgingly it seemed to me, that the email probably had arrived in her inbox, and that “most likely” she would have read it. This kind of stonewalling approach may be indicative of no more than an extreme lawyerly caution, but may also be indicative of a witness who is on the defensive and determined to give nothing away. In the end, I formed the impression from Mrs Newton’s evidence as a whole that the latter explanation was often closer to the truth than the former.
58. Until the pre-trial review in February 2011, there was no pleaded allegation that Mrs Newton had acted at any stage with conscious impropriety. The complaints against her were, rather, that she had failed to exercise due care and skill, in breach of the contractual and tortious duties of care which the Firm owed to the claimants, or that she had paid away money without authority, thereby acting in breach of trust. At the pre-trial review, however, the claimants sought permission to introduce further amendments alleging conscious wrongdoing by Mrs Newton in breach of fiduciary duty. Only one such amendment was allowed, to the effect that upon the sale of Arlington Street Mrs Newton knew that Mr Neuman was planning to divert £4.5 million of the proceeds to himself, but she did not tell the claimants about this side payment because she was deliberately preferring Mr Neuman’s interests to their own. Mrs Newton denies that she knew about the £4.5 million side payment at any relevant time, and this is one of the key factual issues that I will have to determine. It is also relevant to note that, although not pleaded, similar allegations of breach of fiduciary duty, or at least a failure to perceive the possibility of conflicts of interest, lie behind some of the other allegations of professional negligence. Furthermore, in the course of the trial an application was made by the claimants for permission to amend so as to advance a claim of breach of fiduciary duty in relation to Draycott House. I refused permission to make the amendment, but principally on the ground that the application was too late and the alleged facts which supported it had been known to Mr Cherney and Mr Batkov some months earlier. It was not disputed by the Firm, and was certainly my own view, that these allegations, had they been pleaded in good time, would have given rise to at least an arguable claim for breach of fiduciary duty.
59. Against this background, it is instructive to see how Mrs Newton dealt in cross-examination about the management of a hypothetical conflict of interest between clients. The passage is a striking one, and it is worth quoting in full:
“Q. As Mr Tam Singh was, as we have seen, a valuable client of Pettman Smith’s, is it fair to say that if you perceived at any stage that information you knew relating to Tam Singh might be of benefit to another of your clients, you would be reluctant to pass that information on?
A. Depends upon client confidentiality and what it was.
Q. If you considered that the other client needed to know that information, would you have passed it on?
A. As I said a moment ago, depends precisely upon what the information was.
Q. But what I am saying is if you considered that the other client needed to know that information –
A. What he needed to know? For what purpose was it needed?
Q. For instance, information which affects the price being paid by the second client on a particular transaction that you were acting on?
A. Depends when the information arose and when the matter of the particular client was being handled.
Q. But if you thought it was important, and you knew it in time, you accept –
A. If I thought it was important and if I did not think there was a breach of client confidentiality, then the information would be passed.
Q. And what if you thought it would be a breach of client confidentiality, what would you do then to pass on the information?
A. I would inquire whether I could release the information.
Q. And if you were told that you couldn’t, what would you do then?
A. Again it depends on whether it could be construed as a breach of client confidentiality to reveal it. If it was so important to overreach that fact, then it would be revealed.
Q. So you would prejudice Mr Singh in order to benefit the second client?
A. But Mr Singh is an agent, he doesn’t buy property.
Q. I’m sorry, that wasn’t the question I asked.
A. Well, there is unlikely to be a situation in which Mr Singh would have information that I might know about that was needed by another person. He was not a client. It was not a question of any confidentiality being breached.
Q. But your earlier answer was that if you needed to you would breach a client confidentiality?
A. If it was not considered a breach of client confidentiality and the information required was essential, then it might be necessary to pass that information on.
Q. And if the information was essential but to pass it on would be a breach of client confidentiality, what would you then do?
A. As I said before, seek instructions.
Q. And if their instructions were that you couldn’t pass it on, what would you then do?
A. Again, as I said before it would have to depend upon how essential the information was.
Q. In what circumstances would you pass the information on if it depends on how essential?
A. If it’s not a breach of client confidentiality.
Q. No, we’ve already –
A. And the information is essential, then it could be. If it is a breach of client confidentiality, the client is unwilling to do it, but it is critical that it should be passed on as we listened in discussion previously in this case then it would be passed on.
Q. So there are circumstances in which you would breach client confidentiality and prefer the interests of the second client over the first client?
A. There may be.
Q. Well there are, if it was critical …
A. There may be.
Q. There are.
A. If there was a critical circumstance which did not breach client confidentiality or did not over reach that breach. Either you over reach it or you don’t.
Q. Would it not cross your mind in the situation we’ve been talking about that what you need to do is withdraw from the transaction?
A. Not necessarily. It depends entirely on the particular circumstances.
Q. Well the circumstances in question are where there is information critical to client 2 which client 1 doesn’t want you to disclose.
A. What is critical?
Q. Let’s move on …”
60. It appears from this passage, in my judgment, that Mrs Newton had only a limited understanding of the duties that may arise when a solicitor is faced with a conflict of interest between clients. She was prepared to accept that, in certain circumstances, information that was confidential to client A could be passed on to client B, even in the face of instructions from client A not to do so. The relevant test, apparently, would be how essential the information in question was to client B. Furthermore, it seems never to have crossed Mrs Newton’s mind that circumstances might arise in which it would be her duty to withdraw from a transaction, or to cease to act for one of the clients concerned. In his closing submissions Mr Fenwick QC sought to draw the sting from this passage in Mrs Newton’s evidence by saying that she had been asked hypothetical questions better suited to a law examination, and that her responses had been those of a practical conveyancer who would seek to resolve any conflict in a pragmatic fashion. He warned me against using this passage as a barometer, or touchstone, of Mrs Newton’s integrity. I have that warning well in mind, and I agree that too much weight should not be attached to it. Nevertheless, I found the passage revealing, because it seemed to me to reveal something of a blind spot in Mrs Newton’s professional expertise concerning the recognition and management of conflicts of interest between clients.
Other witnesses for the Firm
61. Apart from Mrs Newton and Naomi Thompson, evidence on behalf of the Firm was also given by three solicitors (Ms Glaves-Smith, Mr Andrew Smith and Mr Richard Homewood), and by another secretary, Maggie Lynch. I will deal with their evidence as and when it becomes relevant to do so. No issue arises about any of their credibility, and the witness statement of Maggie Lynch was agreed without challenge.
(1) Introduction
62. The first claim against the Firm arises out of the purchase in 2004 of a large flat at 12-15 Rose Square, The Bromptons, London SW3 and four associated car parking spaces in Foulis Terrace (“Rose Square”) as a future home for Mrs Cherney and her daughters. It is rightly emphasised by counsel for the Firm that the claim, as pleaded, is a narrow one. What is alleged, in essence, is that the opportunity to purchase Rose Square was introduced to Mrs Cherney by Tam Singh; that Pettman Smith were instructed in May 2004 to carry out the necessary conveyancing and corporate work to acquire the offshore company which held the legal title to Rose Square; that the sale of the property was effected by two back-to-back transactions whereby Tam Singh and his associates made a profit of at least £800,000; that Pettman Smith, through Mrs Newton, either were or ought to have been aware that this profit was being made by the vendors; and that in breach of their contractual and tortious duties of care Pettman Smith failed to inform Paradiso, Mr Cherney, the two companies in whose name the shares were acquired, or any of their authorised representatives, about the profit thus being made.
63. It is further alleged that as a result of this breach Paradiso (or alternatively the two acquiring companies) lost the opportunity to renegotiate the purchase price, giving rise to a loss which is formulated on two alternative bases. The first basis asserts that Mr Cherney or Paradiso would have been able to negotiate a lower price, in which case the loss is said to be the difference between the price actually paid (£8 million) and the true market value of Rose Square in July 2004 (£6.4 million), namely £1.6 million. The second basis is that Mr Cherney and Paradiso would not have gone ahead with the purchase, and would instead have bought a comparable family property in
64. Most aspects of this claim (on liability, causation and quantum) are vigorously denied by the Firm, but there is no dispute about the existence of the back-to-back transactions, or the fact that these apparently yielded a profit of the order of £800,000 (or, on one view of the evidence, £900,000) to the immediate vendors. It is further accepted that the existence of this apparent profit was known to Mrs Newton on 5 August 2004, the day before completion. It is denied, for a number of reasons, that the Firm was under any duty to pass this information on to any of the claimants; but on the assumption that such a duty existed, the Firm says that the duty was in any event discharged because on 5 August 2004 Mrs Newton orally informed the claimants, by their duly authorised agent Mr Neuman, that the immediate vendors appeared to be paying only £7.2 million for the shares.
65. These contentions, which I have sketched only in outline, make it necessary to examine with some care not only the basic chronology of events, but also the nature and scope of the Firm’s retainer, and the roles in the transaction played by Mr and Mrs Cherney, Mr Batkov and Mr Neuman. I will also have to decide whether Mrs Newton did indeed pass on the relevant information to Mr Neuman on 5 August 2004, despite the absence of any documentary record of her having done so.
(2) The facts
66. The story begins in late 2003 or early 2004, when Mrs Cherney was introduced to
67. The Bromptons is a prestigious development of luxury flats on the site of the old
68. Since Mr Cherney was unfamiliar with the
69. Mr Neuman’s version of events is that he was in
70. Mr Neuman considered the property, which was in the best part of the Bromptons, to be a good investment, and he was willing to recommend its purchase to Mr Cherney. He flew to
71. At an earlier stage, after the purchase price had been negotiated down to £8.3 million but before the meeting in Tel Aviv and the final reduction to £8 million, the vendor had required the payment of a non-refundable deposit of £100,000. Mr Cherney instructed Mr Batkov to arrange for this to be done, and on 1 March 2004 the vendor’s solicitors, Montague Lambert & Company, wrote to Mr Batkov recording their understanding of what had been agreed:
“We understand that you are instructed on behalf of the prospective purchaser who has agreed to purchase the above premises for £8.3 million.
To facilitate the due diligence your clients will be forwarding a non-refundable deposit of £100,000.00 by the 8th March 2004.
Once your representatives are in receipt of the documentation then your client will have 21 days within which to exchange contracts and make payment of the balance deposit of £730,000.00 for a 10% deposit on exchange with completion to be scheduled for the 3rd June 2004.
This matter is to proceed by way of a share sale of the entire shareholding in Benwick Limited which is incorporated in
The letter was copied to Mr Neuman. The writer’s reference (“SS Janjua J1238”) suggests that the client for whom Montague Lambert were acting was probably Mr Janjua, which in turn suggests that Tam Singh’s involvement in the transaction was probably as an agent or middleman, and not as the beneficial owner of the property.
72. The sum of £100,000 was duly paid on 5 March 2004 by means of a transfer from a personal bank account of Mr Cherney’s with the Alpha Bank in
73. Once the price of
74. On 6 May 2004 a meeting took place at Pettman Smith’s offices, attended by Tam Singh, Mr Neuman and Mrs Newton. The purpose of the meeting was for Mr Singh to introduce Mr Neuman to Mrs Newton. Mrs Newton had never met Mr Neuman before, and I infer that Mr Neuman had asked Mr Singh to effect the introduction. In her statement Mrs Newton describes the meeting (of which both her manuscript and typed attendance notes survive) as follows:
“30. At the meeting on 6 May 2004, Mr Neuman informed me that:
a. he represented a good friend of his, Mr Cherney, who was considering purchasing some property in
b. Mr Cherney was not able to come to
c. Mr Cherney had emigrated to
d. the properties Mr Cherney had in mind were new flats to be bought as homes for his wife and their daughters and another apartment which might be purchased for his other children from a previous marriage. We discussed the proposed transactions relating to the purchase of a flat in The Bromptons [i.e. Rose Square] and the two particular flats in Knightsbridge, as addressed in more detail below; and
e. it was likely that Mr Cherney would purchase the properties through [Paradiso]. If so, the Trust would therefore be the client.
31. I was not alarmed to be instructed by an agent in this manner. It was similar to my dealings with wealthy Middle Eastern people or some of my Far Eastern clients who usually used an agent and I only rarely met the client in person. Indeed, it is also not uncommon for foreign clients to bring interpreters to our meetings even if they speak English themselves.
32. … The fact that I did not initially meet the person who was the client was not a concern. I could, and did, carry out the necessary money laundering checks.”
75. This account is substantially borne out by the two attendance notes, from which it also appears that:
(a) Mrs Newton was informed of the £100,000 deposit which had already been paid to Montague Lambert;
(b) the price of the Knightsbridge flats was thought by Tam Singh to be in the region of £16 million;
(c) Mr Singh said that the price of
(d) Mr Neuman asked Mrs Newton to contact Montague Lambert as soon as possible.
76. In cross-examination Mrs Newton said she understood from the meeting “that Mr Neuman was a friend and was acting as an agent for Mr Cherney; that Mr Batkov was Mr Cherney’s main Bulgarian lawyer; that I would be contacted by Mr Batkov and probably also Liechtenstein, but that I would be receiving instructions generally from Mr Neuman”. This answer was in my view broadly correct, but in so far as it gives the impression that Mrs Newton expected Mr Neuman to be her main source of instructions, I do not accept it. I prefer the contemporary evidence of the attendance notes, which record that when Mrs Newton asked how Pettman Smith should get instructions, she was told they would come from either Mr Neuman or Mr Batkov, with no indication of any priority between them. It seems to me that Mrs Newton would naturally have expected to receive instructions on legal matters from Mr Batkov, who she was told was Mr Cherney’s “main lawyer”, and on practical matters relating to the purchase from Mr Neuman.
77. On the same day, Mrs Newton wrote to Mr Syan of Montague Lambert to introduce herself as the solicitor now acting for the purchaser. She stated her understanding that the purchase price was £8.3 million, and that the transaction would proceed by means of a share sale. She enclosed a detailed “memorandum of information requirements” in relation to a share sale, and asked to receive the relevant papers in due course. The memorandum referred to the vendors as “Tam Singh?” which indicates, as Mrs Newton confirmed in cross-examination, that she did not at this stage know for whom Tam Singh was acting, or whether he was selling the property on his own account. She described him as a person who, to her knowledge, acted for a number of people, and had made several valuable introductions to the Firm. On the question whether Tam Singh had himself ever been a client of the Firm, Mrs Newton was non-committal but thought there might have been one occasion when the litigation department acted for him. When shown an internal email dated 17 December 2004, in which the senior partner, Ms Glaves-Smith, referred to Tam Singh as “a valuable client”, in the context of a possible problem with conflicts of interest, Mrs Newton said she imagined Ms Glaves-Smith merely thought that “as he introduced clients to the Firm, he was of importance”. She also disclaimed any close involvement in the conflicts issue, although she reluctantly acknowledged (as I have already said: see paragraph 57 above) that she was copied into the relevant email traffic and had indeed briefly participated in the discussion. I found Mrs Newton’s answers on these matters evasive and unconvincing, and on balance I feel little doubt that Tam Singh was not only a valuable introducer of business to the Firm, but also a regular client in his own right. He was certainly well known to Mrs Newton personally, and it can have come as no surprise to her to find that he was closely involved, in one way or another, with the sale of
78. In her letter of 6 May Mrs
79. On 12 May Montague Lambert replied, enclosing some draft documentation and explaining that the £100,000 had been paid as a non-refundable deposit. Mr Syan said he understood that the purchase was proceeding by way of a share sale, and he awaited a draft share purchase agreement. Mrs Newton responded, presumably on the same day (the letter is misdated 6 May), saying she looked forward to receiving replies to the enquiries sent on 6 May so that Pettman Smith could proceed to prepare the share sale documentation.
80. On the next day, 13 May, Mrs Newton wrote again to Mr Syan raising a number of points of concern arising out of the draft documentation which had been provided. She also asked Mr Syan to state whether his client was in fact Benwick Limited or another party, and if it was Benwick, in which jurisdiction it was incorporated.
81. On the same day Mr Neuman contacted Mrs Newton, presumably by telephone, and told her that a further “deposit” of £600,000 either had already been sent, or was shortly going to be sent, by Mr Batkov direct to Montague Lambert. Mrs Newton pointed out to Mr Neuman that deposits are usually paid only on exchange of contracts, to which Mr Neuman’s reply was that he wished the purchase of
82. Despite the terms of her own written attendance note, Mrs Newton seems to have got the impression that the £600,000 had definitely already been transferred to Montague Lambert. In any event, she wrote a further letter to Montague Lambert on 13 May recording her understanding that the sum had already been transferred to Montague Lambert’s account, and saying that it must be held strictly to Pettman Smith’s order. She also made some further enquiries in relation to the share sale, and asked to hear from Mr Syan urgently so that the matter could proceed swiftly.
83. On 14 May Mr Batkov sent an email to Mrs Newton. This was the first direct communication between them. He said he had just spoken to Mr Neuman, who was then in the
“I was informed that the real estate is a property of an offshore company registered on the
In connection with the above acquisition I kindly ask you:
1. to provide me with information about the offshore company – owner of the above property, if possible – registration documents, financial statements, etc.
2. to provide me with information about the property itself – location, plan, etc.
3. to give information what payments must be made just now in order not to lose the deal.”
Mr Batkov then dealt with the proposed acquisition of the Knightsbridge property, and concluded by assuring Mrs Newton that she could rely on the full co-operation of Paradiso.
84. Mrs Newton replied to Mr Batkov on the same day, explaining that she was still awaiting information from Montague Lambert.
85. The precise basis upon which the vendor was apparently requesting a further pre-contract payment of £600,000 remains obscure, but it is common ground that on 25 May 2004 this sum was paid by Paradiso to Montague Lambert’s client account as a deposit for
86. The client care letter was then sent on the same day, 26 May 2004, and addressed to the Trustees of Paradiso. I will quote the first paragraph of the letter:
“We write further to our recent conversation and previous conversations with Mr T Batkov and Mr F Neuman when you confirmed your instructions to us to act on your behalf in respect of various transaction[s] including the purchase of the shares in a company called Benwick Limited the only asset of which is [Rose Square] and the acquisition of two flats at The Knightsbridge, London. In addition we understand that your representatives are negotiating the acquisition of another company, Gwenberry Investments Limited the sole asset of which is a property known as Draycott House,
87. Over the next few weeks progress continued to be made in relation to the flats at The Knightsbridge, and Mrs Newton corresponded with Mr Batkov and the vendors’ solicitors (Withers LLP), but little seems to have happened in relation to Rose Square, at any rate so far as Mrs Newton was concerned. There must, however, have been communications between Montague Lambert and Mr Batkov, perhaps via Mr Neuman, because on 24 June Mr Batkov sent an email to Mrs Newton informing her that a further £3.8 million had to be paid in relation to Rose Square. Mr Batkov also said he had been informed that Paradiso had already acquired the shares of Benwick Limited. Mrs Newton replied on the same day, saying she was not aware that the shares of Benwick had already been transferred and enclosing the information which she had been able to obtain regarding that company. On 29 June Mr Batkov sent another email to Mrs Newton, saying he still had no proof that the shares in Benwick Limited had been transferred, and that this was holding up the transfer of the £3.8 million. He said he would be in
88. Mrs Newton replied on the same day, explaining that the transfer of the shares and payment of the consideration for the purchase ought to happen simultaneously; that to the best of her knowledge no such transfer had yet taken place; and that so far as she was concerned she did not yet have sufficient information from Montague Lambert to enable her to report to Mr Batkov on the transaction and request the release of the funds for completion. She also said that she would be delighted to meet him on the afternoon of 2 July.
89. The meeting which had been arranged for 2 July duly took place at the offices of Pettman Smith. Nobody was present apart from Mr Batkov and Mrs Newton. According to Mrs Newton’s manuscript and written attendance notes, Mr Batkov explained that he had acted for Mr Cherney for a number of years, and that he was a prominent and well-known Bulgarian lawyer. He said he had set up the trusts in
“[Mr Batkov] confirmed we should take instructions from [Mr Neuman] for [Mr Cherney] and he/Liechtenstein would also contact us. [Mr Batkov] stated he should be kept advised of progress. Confirmed we should do so.”
90. In her oral evidence Mrs Newton said, and I accept, that in accordance with her usual practice she would have prepared the manuscript attendance note either during or immediately after the meeting. I see no reason to doubt its accuracy, not least because at this early stage of the transaction Mrs Newton could have had no possible motive to misrepresent, or mis-record, what Mr Batkov said to her. On the contrary, Mr Batkov’s statement that Pettman Smith should take instructions from Mr Neuman on behalf of Mr Cherney, but that Mr Batkov would also contact the Firm and he should be kept advised of progress, is entirely consistent with what Mr Neuman himself had said at the earlier meeting on 6 May. At most, there was a slight change of emphasis, in that Mrs Newton might now have been justified in regarding Mr Neuman as her principal source of instructions emanating from Mr Cherney, although Mr Batkov would need to be kept fully informed of progress; and it was already her understanding that any requests for funds should be made to him. Nevertheless, Mr Batkov vehemently denied in cross-examination that this was an accurate record of what he had said to Mrs Newton. He suggested that the note was fraudulent and back-dated, and that Mr Neuman never had any authority to give instructions on Mr Cherney’s behalf. I reject this evidence, which seems to me a product of the later falling out between Mr Cherney and Mr Neuman, and perhaps also of Mr Batkov’s desire to regain full favour with Mr Cherney by giving supportive evidence.
91. On 12 July Mrs
92. On 14 and 15 July Mrs
93. On 16 July Mrs
94. On 20 July Montague Lambert finally sent Mrs Newton replies to the enquiries which had been raised, together with supporting documentation. Mrs Newton discovered from this material that the 100 shares in Benwick Ltd were held as to 99 shares by a Guernsey company called Delancy Ltd and as to one share by another
95. On 23 July Mr Batkov informed Mrs Newton by email that
96. On 27 July £7.4 million was duly transferred into Pettman Smith’s client account by means of a transfer from
97. On 28 July Mrs
98. The precise circumstances in which this document came to be faxed to Mrs Newton are unclear, but it is notable that it came directly from the immediate vendor, Draycott House Ltd, at the instigation of Tam Singh and/or his associate Mr Khan. It seems to me improbable that they would have sent the fax unprompted, and I infer that Mrs Newton had probably asked Mr Singh (whom she knew well, and who was as I have found a regular client of the Firm) to provide her with information about the sub-sale.
99. On 5 August Jeffrey Green Russell faxed to Mrs Newton a copy of a board resolution of Draycott House Ltd resolving to sell Benwick Ltd to Paradiso, and a completion statement which revealed that the purchase price paid by Draycott House Ltd for Rose Square had been £7.2 million, and that the balance needed to complete the transaction on 5 August was £7,087,419.18. Mrs Newton explains in her written evidence that Montague Lambert had previously asked her to arrange for the completion monies to be paid to Jeffrey Green Russell, who were acting for the original vendor. Mrs Newton now became aware, for the first time, of the purchase price which Draycott House Ltd had agreed to pay, and of the fact that it therefore stood to make a turn of either £800,000 or £900,000 (depending on whether the original non-returnable deposit of £100,000 was to be set off against the purchase price of £8 million) on the sub-sale.
100. Mrs Newton’s clear evidence is that she then spoke to Mr Neuman and obtained his authority to proceed. In her written evidence she says this:
“72. Upon receipt of the fax dated 5 August 2004, I spoke to Mr Neuman. Among other things, I informed him about the sub-sale and that [Draycott House Ltd] appeared to be acquiring the shares in Benwick for £7.2 million. Mr Neuman instructed me that the transaction should proceed at £8 million as agreed. I understand that no attendance note of this conversation can be found. I consider it is likely that I would have recorded this conversation, but cannot recall whether that is the case. In the circumstances, it is more likely that this attendance note has been lost or mislaid, but it may be the case that I did not make any manuscript note of the conversation. However, I do recall informing Mr Neuman of the price at which [Draycott House Ltd] appeared to be acquiring Benwick, and I remember Mr Neuman giving me definite instructions to proceed nonetheless. In light of Mr Neuman’s role as Mr Cherney’s agent, I believed I could follow his instructions.”
This account is denied by Mr Neuman, who says that Mrs Newton never informed him about the sub-sale or the profit being made by Draycott House Ltd, and says that he became aware of this only as a result of disclosure in the present proceedings.
101. Before resolving this conflict of evidence, I should record that on the next day, 6 August, Mrs Newton emailed to Mr Batkov a two page letter describing the arrangements for completion and expressing the hope that the transaction would be finalised that day. She attached the final version of the share sale agreement, and described various fees and disbursements which would be payable. She said she had mentioned the fees to Mr Neuman “when recently speaking with him”, and she understood them to be acceptable. She had also explained to Ms Liechti of Syndikus the need for nominee shareholders and directors, with the consequential need for declarations of trust by the nominees stating for whom they held the shares. She explained the mechanics that would be needed to effect this on completion, and undertook to send Mr Batkov copies of the relevant documentation for his records once completion had taken place. She said nothing anywhere in the letter about the sub-sale, or the profit apparently being made by Draycott House Ltd.
102. As Mrs Newton expected, completion did then take place on 6 August. Pettman Smith transferred the sum of £7,287,419.18 due to Jeffrey Green Russell, and the necessary share transfers and declarations of trust were executed. During the afternoon Mrs Newton telephoned Mr Neuman to inform him that completion had taken place, and sent a confirmatory fax to that effect. She said that she would let him have other information at the beginning of the following week (6 August 2004 was a Friday), and on Monday 9 August she drafted a long letter for that purpose, although it was not sent until 12 August (with some additions to the original draft). This letter dealt mainly with practical matters following completion, and again said nothing about the sub-sale or the profit being made by Draycott House Ltd.
103. I now return to the critical issue whether Mrs Newton did indeed inform Mr Neuman of the sub-sale on 5 August. Under cross-examination she maintained that the conversation took place, and although she could not recall her exact words said she would have told him that the completion statement received from Jeffrey Green Russell showed that Draycott House Ltd was purchasing the property for £7.2 million. She accepted that the fact of a back-to-back transaction is of importance to a purchaser, and it was for this reason that she informed Mr Neuman about it. She had not done so before, because there was no point in doing so until she knew the price being paid by Draycott House Ltd. When asked why she did not tell Mr Batkov, or take steps to update him, she replied that she was not asking for instructions from anyone other than Mr Neuman, and she assumed that any information would be passed on by Mr Neuman to Mr Cherney and Mr Batkov. She did not update Mr Batkov on this particular point, although she knew that he had requested her to keep him up to date, and she had written him several letters for that purpose, because on this occasion she was updating Mr Neuman. When asked why there was no reference to the matter in her letter of 6 August to Mr Batkov, she said she had no idea, but thought the reason might have been that she dictated the letter on the previous day, before she had received the completion statement, and she then failed to amend it before the typed up version was sent. In view of the importance of the fact, and Mr Batkov’s status as Mr Cherney’s main lawyer, she agreed that she should have included in the letter a reference to the profit of £800,000 or £900,000 being made by the immediate vendor.
104. I have not found the question whether Mrs Newton informed Mr Neuman about the sub-sale an easy one to resolve. There are a number of factors which could point to the conclusion that she did not. First and foremost, there is the absence of any written record of the conversation, and the absence of any reference to it in her contemporary letters to Mr Batkov and Mr Neuman. Secondly, there is a possible motive for a failure on her part to inform Mr Batkov or Mr Neuman. Tam Singh and/or his business associates clearly stood to benefit from the sub-sale, even if the ultimate beneficial ownership of Draycott House Ltd was unclear; and if the sub-sale had come to the attention of Mr Cherney, it is in my view quite possible that he would have tried to negotiate a further last-minute reduction in the £8 million purchase price of Rose Square. Both Mr Janjua and Mr Singh were clients of the Firm, and it may be thought that Mrs Newton would not have wished to expose them to this risk. Thirdly, Mrs Newton’s blind spot about conflicts of interest might have predisposed her to conceal the sub-sale from Mr Cherney and his other advisers.
105. On the other hand, Mrs Newton’s evidence on the point was clear, firm and essentially unshaken in cross-examination: she did inform Mr Neuman, and she considered that she had thereby discharged her duty to bring the sub-sale to her client’s attention. It would in my view have been reasonable for her to take the view that informing Mr Neuman was sufficient, given what she had been told about his authority to represent Mr Cherney’s interests and to give instructions on his behalf at the meetings on 6 May and 2 July. Mr Neuman’s evidence that he was not told is uncorroborated, and in my judgment needs to be treated with great caution in view of his contractual obligation under the settlement agreement to support the claimants’ case and the roller-coaster history of his own relationship with Mr Cherney. The absence of any attendance note of Mrs Newton’s conversation with Mr Neuman is less surprising than it would be with a solicitor who had a more reliable system of record keeping. Furthermore, the contemporary correspondence shows that she was in close and regular contact with Mr Neuman in the days leading up to completion, and that more than one conversation took place between them. Her letter of 27 July 2004 to Mr Batkov, in particular, provides a telling example of a conversation of which no record would otherwise exist, and which shows Mr Neuman giving instructions on Mr Cherney’s behalf about the legal structure of the transaction without demur from Mr Batkov. Finally, it is at least possible (although I think on balance unlikely) that Mrs Newton always intended to include a reference to the sub-sale in her letter of 6 August to Mr Batkov, and that her explanation for having failed to do so is correct.
106. I also bear in mind that Mrs Newton is a solicitor and officer of the court. It would not be plausible to suggest that her memory on such a significant point is at fault, and if I were to find that the conversation never took place, the conclusion that she had deliberately misled the court would be inescapable. Regrettably, such things can and do happen from time to time, and as will appear later in this judgment there are important parts of her evidence relating to subsequent transactions which I have found incredible. I also remind myself that I am applying the civil standard of proof on the balance of probabilities. Nevertheless, the inherent improbability of a solicitor deliberately misleading the court in evidence given under oath means that I would need to feel a high degree of assurance before concluding that the conversation never took place. In the end, and after giving the matter anxious consideration, I have reached the conclusion that the conversation did indeed take place, and that Mr Neuman orally instructed Mrs Newton that the transaction should proceed at £8 million. I also find that Mr Neuman had actual authority to give this instruction on Mr Cherney’s behalf.
(3) Conclusions
107. The findings of fact which I have just made are sufficient to dispose of the
108. I am satisfied that the general nature of the Firm’s retainer was to act and provide advice on the conveyancing and corporate aspects of the purchase of Rose Square, and the other London properties that Mr Cherney wished to acquire. The retainer did not extend to providing advice on the commercial merits of the transactions, or on the prices to be paid. It is relevant to note in this context that Pettman Smith were instructed only after the price of Rose Square had been agreed at £8 million, and after the non-returnable deposit of £100,000 had been paid. Mr Cherney was a man of immense wealth and wide business experience, with trusted legal and business advisers already acting for him. What he lacked was the services of a
109. It does not follow from this, however, that the Firm was under no duty to inform Mr Cherney or his agents about the sub-sale once its existence and terms had come to light. In the context of a purchase about to be completed for £8 million, plus the non-returnable deposit of £100,000, it was in my view plainly incumbent on the Firm to inform the client that the immediate vendor stood to make a profit of £800,000 or £900,000 on the transaction, and that it had contractually bound itself to acquire the property for only £7.2 million in February 2004. In cross-examination Mrs Newton accepted without hesitation that the fact of such a back-to-back transaction was important, and was something about which the purchaser had to be informed. In my view she was right to do so, and I therefore reject the submission of counsel for the Firm that it was under no duty to pass this information on to the client.
110. The proposition that there was such a duty is really one of commercial common sense, and does not require authority to support it; but I derive some assistance from the decision of the Court of Appeal in Mortgage Express Ltd v Bowerman & Partners [1996] 2 All ER 836, where it was held that a solicitor acting for both purchaser and lender in relation to the purchase of a domestic flat for £220,000 was under a duty to disclose to the lender the fact that the vendor was himself purchasing the property for only £150,000 and was selling it on simultaneously. This figure was some 21% lower than the lender’s valuation of £190,000, and some 46% lower than the purchase price of £220,000. The divergence between the prices paid on the original acquisition and the sub-sale was of course much greater than in the present case, where the difference is of the order of 11%; and the present case also concerns a high-value central London flat in a prestigious redevelopment, which may well have been difficult to value with accuracy. Nevertheless, I find the discussion of the duty owed by the solicitors to the lender in the judgment of Sir Thomas Bingham MR at 841g to 842e helpful, including in particular his concluding words:
“A client cannot expect a solicitor to undertake work he has not asked him to do, and will not wish to pay him for such work. But if in the course of doing the work he is instructed to do the solicitor comes into possession of information which is not confidential and which is clearly of potential significance to the client, I think that the client would reasonably expect the solicitor to pass it on and feel understandably aggrieved if he did not.”
See too the concurring judgment of Millett LJ at 844j to 845h. Schiemann LJ agreed with both judgments.
111. I will also add, for completeness, that even if I had found that Mr Neuman lacked actual authority to give instructions on behalf of Mr Cherney and/or Paradiso to Pettman Smith for the transaction to proceed to completion at £8 million, I would have held that he had ostensible authority to do so. The necessary representation for this purpose was given by Mr Batkov on 2 July 2004, when he confirmed that Mrs Newton should take instructions from Mr Neuman. I accept the submission of counsel for the Firm that this is not an example of impermissible delegation by Mr Batkov, but rather gives rise to the legal issue whether an agent (here Mr Batkov) can make a representation on his principal’s behalf that a further person also has authority to act on behalf of the principal. On this question, and the reasons for answering it in the affirmative, see generally Bowstead & Reynolds on Agency, 19th edition, Article 72 and paragraphs 8-013 to 8-023, and in particular paragraphs 8-021 and 8-022.
Draycott House
112. The next pleaded claim relates to the purchase of a long-stay hotel called Draycott House (not to be confused with the Bahamian company of that name which was the vendor of
113. The defence, as amended, took issue with almost all aspects of this claim, and in particular denied that the vendors of Gwenberry had made a huge profit as alleged; the price of £1.3 million paid in January 2004 had been for the freehold interest in the property, which was then subject to a number of long leases, but by June 2004 at the latest those leases had been surrendered, and the current value of the unencumbered freehold was much higher. Further, in December 2004 the Bank of Scotland had agreed to provide a term loan facility, secured on Draycott House, in the sum of £6.5 million, and had obtained its own valuation for that purpose. Although that valuation had not been disclosed, it was reasonable to infer that it must have been significantly in excess of £6.5 million.
114. At the pre-trial review Lewison J refused the claimants permission to adduce expert evidence out of time on the value of Draycott House. There was no appeal against his ruling. In those circumstances, the claimants were never going to be able to establish at trial that Draycott House had been purchased at an overvalue, and for that reason alone the claim was doomed to failure. Indeed, in their skeleton argument for the trial the claimants’ counsel realistically accepted “that without expert evidence they will never overcome the evidential burden … of establishing how much they overpaid, even if the Court might well be left with the strong impression that an overpayment was made” (paragraph 63). However, the matter took a potentially fresh turn when, on the eve of the trial, Mrs Newton served a second witness statement which set out her involvement in the purchase of Draycott House by a company called Pulrose Ltd in September 2003 for a total price (including both the freehold and the leasehold interests) of £8.05 million. Pulrose was beneficially owned by Mr Janjua, and he was the client for whom Mrs Newton had acted on the acquisition. None of these facts was disclosed by Mrs Newton when the Firm subsequently acted for Vida on the purchase of Draycott House in 2004/5.
115. Against this background, the claimants (as I have already mentioned) applied in the course of the trial for permission further to amend the claim so as to introduce an allegation of breach of fiduciary duty, and to seek to recover the difference between the price paid by Vida and the market value of the property. In order to run this fresh case, it would also have been necessary to obtain relief from the sanction imposed by Lewison J for the claimants’ late disclosure of expert evidence, and this therefore formed the second limb of the application which I had to consider. For the reasons which I gave in my ruling, I refused permission to make the amendments. Although the claim was an arguable one on the merits, it had been made too late, and the evidence of both Mr Cherney and Mr Batkov established that the necessary facts to ground the claim were known to at least some of the claimants’ legal advisers well in advance of the pre-trial review.
116. I refused the claimants permission to appeal against my ruling, and no subsequent application for permission has been made to the Court of Appeal. In those circumstances, it is accepted by the claimants that their claim relating to Draycott House cannot succeed, and I therefore need say no more about it.
(1) Introduction
117. I now move on to the claims which relate, in one way or another, to the purchase and sale (through a corporate vehicle) of a long leasehold interest in a development site in Central London at 11-15 Arlington Street, W1 (“Arlington Street”). The corporate vehicle for the acquisition of
118. The subsequent sale of
119. On 30 November 2007 Halsbury entered into an agreement with Mr Neuman (and others) to exercise its option to purchase Thornley, and this agreement (together with a sub-sale of Arlington Street itself) was completed on 12 December 2007 when the balance of the ostensible purchase price of £13.3 million was paid to Child & Child (as Pettman Smith had by then become). At or about the same time, however, a further sum of £4.5 million was transmitted to Mr Neuman in
120. This is the bare factual background against which the
121. The preliminary issues of fact are, broadly speaking:
(a) whether (as Mr Neuman alleges, but the claimants and the Firm deny) Mr Neuman was the beneficial (as well as the legal) owner of Thornley, and whether it was always intended that Arlington Street should be his own personal acquisition and not one undertaken on behalf of Mr Cherney or entities connected with Mr Cherney; and
(b) whether (as the claimants and Mr Neuman allege, but the Firm strongly denies) Mrs Newton (and through her the Firm) knew about the side payment before Mr Neuman himself revealed its existence. It will also be necessary in this context to consider whether the claimants themselves knew about the side payment, or were complicit in it.
If I conclude that the existence of the side payment was known to the Firm, but not known to the claimants, I will then have to consider the pleaded claims of breach of duty and breach of fiduciary duty which relate to the side payment as a whole.
122. The detailed allegations of breach concern, in chronological order, the following specific matters:
(a) whether the Firm was at fault in failing to ensure that Mr Neuman executed a deed of trust in favour of Mr Cherney or Vida in relation to the shares in Thornley, and (if so) whether any loss flows from that breach;
(b) the payment of a sum of £750,000 to
(c) the payment of a sum of £500,000 to Tam Singh in December 2007;
(d) the payment of £2 million to
(e) the payment of £1.5 million to Mr Neuman on 16 April 2008.
It is of course accepted by the claimants that where the payment in question was paid from, or otherwise derived from, the side payment, they cannot recover it twice over. To that extent, therefore, the specific claims are alternative to the claims which relate to the side payment as a whole.
123. With this introduction, I will now make fuller findings of fact about the history of the
(2) The history of events
124. In early 2006 Mr Neuman noticed a large, empty property in
125. On 1 February Mr Neuman had two telephone conversations with Mrs Newton. He told her that Mr Cherney wanted three new companies to be incorporated in the BVI for property transactions in
126. Negotiations then continued, and by 14 February the offer had been increased to £8.725 million, consisting of £6.65 million for the property and £2.075 million plus VAT as a consultancy fee for Willowacre. Mr Glantz provided Mrs Newton with a breakdown of the consultancy fee, which included costs it had incurred over three years in reaching agreement with LUL and securing planning permission.
127. Meanwhile, Mr Neuman flew to
128. Mr Neuman’s account of this conversation is very different. According to him, Mr Cherney said that he was not interested in purchasing the property himself. Mr Neuman then tried to persuade Mr Cherney to invest, explaining how most of the purchase money could be raised by mortgaging Draycott House and the balance (apart from the VAT on the purchase) could be met from funds which he had already transferred to Pettman Smith in connection with other property transactions and refurbishments. Mr Cherney remained hesitant, and Mr Neuman then said he would like to develop the property himself if he could raise funds in the way he had suggested and obtain a loan for the VAT from Mr Cherney. The discussion ended, according to Mr Neuman, with Mr Cherney saying that Mr Neuman could go ahead on the basis he had outlined, using Mr Cherney’s funds, but he wanted to be paid interest. He told Mr Neuman to talk to Mr Batkov about arranging a loan of around £1.5 million to cover the VAT, on the footing that the loan would bear interest at 6% per annum.
129. I will say at once that I reject Mr Neuman’s account of what was said at this meeting. It does not seem to me at all plausible that Mr Cherney would have agreed to Mr Neuman taking over this transaction, in a prime site in
130. On 17 February a meeting took place, presumably at Pettman Smith’s offices, attended by Mr Neuman, Tam Singh and Mrs Newton. There was discussion of the terms of the lease, which was in a form that had already been agreed. Mrs Newton pointed out that it contained provisions relating to insurance that might entitle the landlord to determine the lease if the premises were destroyed, which might not be acceptable to a lender. It was not possible to vary the lease at that stage, but it might be possible to consider a variation later with LUL, and it was decided that this problem would have to be dealt with, if necessary, at a later date. Mr Neuman gave instructions that the transaction was to go ahead on the basis that the shares would be purchased in a BVI company, and he requested Pettman Smith to organise the acquisition of a new company for that purpose. He made it clear that he was to be the director and shareholder.
131. On 20 February the acquisition of Thornley was arranged through Mossack Fonseca & Co (
132. On 21 February a sale and purchase agreement relating to the issued share capital of
133. It is common ground that the funds for stage one of the Arlington acquisition were taken from monies held on client account by Pettman Smith in respect of Draycott House, Rose Square and The Knightsbridge, together with part of a loan of £396,998 by Mr Janjua which had been arranged at short notice in order to enable completion to take place. Mr Neuman authorised Mrs Newton to use the client account monies in this way. The loan by Mr Janjua was arranged through the agency of the ubiquitous Tam Singh. Mr Cherney says that he never authorised Mr Neuman to use the client account money, and stage one of the acquisition was completed without his knowledge or approval. Mr Batkov likewise says that he was not informed. Nothing turns on this, however, because it is common ground that, if the transaction was originally unauthorised, it was later adopted and ratified by Mr Cherney. If it were necessary to do so, I would anyway have held that the use of the client account monies, and the arrangement of the loan from Mr Janjua, fell well within Mr Neuman’s ostensible authority so far as Pettman Smith were concerned.
134. It is convenient to record at this point that around this time Pettman Smith prepared a draft “short report on company/property ownership” for Paradiso,
135. The second stage of the acquisition of
136. On or about 7 March Mr Batkov, who at this stage knew little or nothing about Arlington Street, arranged the transfer of €4.25 million from the account of a company called Denise Overseas Ltd to Rye Park, for the purpose of completing the purchase of a hotel in Moraira (halfway between Alicante and Valencia) called the Gema Hotel. This was one of the Spanish properties in which Mr Cherney wished to invest, and Mr Neuman had already entered into a contract for its purchase in 2004, paying a deposit of €400,000. According to Mr Batkov, Mr Neuman told him that the three BVI companies were to be subsidiaries of Denise Overseas Ltd, and Mr Cherney instructed him to transfer the balance of the purchase money to
137. On 10 March Mrs
138. On 16 March Mrs
“Whilst obviously I shall report to you in detail on the whole transaction relating to the Company and the
139. In cross-examination it was put to Mrs Newton that she had not in fact prepared a draft deed of trust, but I see no reason to doubt that she had indeed done so. Self-evidently, she could not complete the draft deed until she received instructions who the beneficiary was to be. With her letter Mrs Newton enclosed the completion statement for stage one of the acquisition, and an estimated completion statement for stage two. She explained that it was not certain that the loan from Barclays Bank would be available for use on 24 March, and that in any event she did not expect to receive more than £6,190,600 on drawdown after taking account of a retention for interest in the sum of £400,000 and the bank’s arrangement and security fees. She therefore hoped it would be possible for the whole of the completion monies shown on the estimated statement to be remitted to Pettman Smith’s client account as soon as possible.
140. Mr Batkov’s evidence is that he had not been made fully aware of the acquisition of
141. On 22 March Mrs
142. On 24 March the contract with LUL was varied on the terms negotiated by Mr Neuman, and the sum of £2 million (less bank charges of £6) was remitted from
143. Mr Batkov was concerned when he received these letters, because Mr Cherney had not yet decided how to proceed and no instructions had been given to Pettman Smith. In addition, he knew nothing about the money transferred from
144. On 29 March, if not before, Mr Cherney evidently decided that the purchase should proceed, and instructed Mr Batkov accordingly. Mr Batkov wrote on the same day to Mr Strauss and Ms Liechti of Praesidial in
145. Also on the same day, a variation of the facility with Barclays was agreed whereby the amount to be advanced was reduced to £5.5 million of which £5 million would be provided as equity release and the balance retained to cover interest and costs. As a result of this variation, the amount prospectively available for use on completion was increased from the previously indicated £4.6 million to £5 million. The increase appears to have been negotiated by Mr Neuman, and he discussed it with Mrs Newton on the telephone.
146. On 30 March completion of the lease duly took place. The sum required for completion was £6,169,478.13, and Pettman Smith transferred it to LUL. The completion monies comprised the £5 million advance from Barclays and further monies drawn from the Firm’s client account ledgers for
147. In April 2006 Mr Cherney was able to travel to
“[Mr Neuman] stated that [Mr Cherney] wished us to continue as we had been doing by taking instructions from [Mr Neuman] and [Mr Batkov]. He was very happy with [Pettman Smith] and what had been happening. [Mr Cherney] hoped to become more involved now that he was able to visit this country.”
As I have explained, I acquit Mrs Newton of the charge of having fabricated this passage, and I accept it as an accurate record of what Mr Cherney said, at any rate as it was translated by Mr Neuman. In particular, I accept that Mr Cherney expressed himself as being content with developments to date, and that he told Mrs Newton to continue taking instructions, as before, from Mr Neuman and Mr Batkov. Mr Cherney may have been irritated by some of Mr Neuman’s unilateral actions in relation to the acquisition of
148. One further thing which happened at the meeting was that Mr Neuman signed the Vida loan agreement. Mrs Newton explained the content of the agreement to him, and he and Mrs Cherney also explained it to Mr Cherney. The opportunity was not taken, as it might have been, to obtain Mr Cherney’s instructions on the Thornley declaration of trust and get Mr Neuman to sign that document too. Mrs Newton was pressed in cross-examination on why this was not done. She accepted, rather defensively, that it could have been done, and agreed that she did not raise the point at the meeting. She also agreed that she had not chased Mr Batkov for a reply to her earlier enquiry about the identity of the beneficial owner.
149. On 3 May Mrs
150. In her written evidence Mrs Newton says Mr Neuman told her that the £750,000 was not a partial repayment of the £2 million which had previously been transferred to the Firm, but was urgently required in connection with one of Mr Cherney’s property transactions in
151. On 12 July 2006 Mrs Newton attended a meeting with LUL and Mr Neuman at which Mr Neuman explained to LUL his proposals for the development of
152. On 13 July Mr Cherney, Mr Batkov and Mr Neuman attended a meeting at the Firm’s offices to discuss Mr Cherney’s immigration problems. The solicitors present were Mrs Newton and her colleague Mr Michael Noel-Clarke. The meeting lasted a little over two and a half hours, and the note of it prepared by Mr Noel-Clarke contains a detailed chronological record of the background which Mr Cherney provided. None of this is of any immediate relevance to the issues I now have to decide, but I mention it because Mrs Newton will have learnt on this occasion, if she did not already know, that Mr Cherney’s immigration problems were of extreme complexity; that he had frequently been refused admittance to various countries; that he had been held in custody for short periods by a number of immigration authorities while his background was investigated; and that many allegations of involvement in organised crime had been made against him, although none had been substantiated. The immediate purpose of the meeting was to concentrate on trying to have the restrictions on his entry to
153. Over the following months Mrs Newton corresponded with HMRC about the VAT problem, and various meetings of a routine nature took place to discuss progress with
“At this moment of time we have no instructions to provide any information to you relating to
I will return later to the reasons which Mrs Newton may have had for writing in this way.
154. On 19 July 2007 Mrs Newton was informed by Mr Neuman and Tam Singh that they had been negotiating a proposed sale of
155. Meanwhile, on 23 July Mr Batkov had sent Mrs Newton an email, marked with high importance, asking her to provide him as soon as possible with information regarding all the payments which had been wired to the Firm’s client account for the purchase, renovation etc of the Cherney family’s London properties (Rose Square, The Knightsbridge, Draycott House and Arlington Street) from May/June 2004 to date. Mr Batkov also asked to be informed whether Mr Neuman “ha[d] transferred any sums in your favour”, as well as how the rent from
156. In early to mid-August 2007 CKFT became concerned about the insurance provisions in the lease of
157. On 20 August Mrs
“I recall that the terms of the lease were negotiated at great length at the time and we conceded on many issues to satisfy the then purchaser’s funders. The period of 5 years in the particular sub-clause was originally 3 years, but an amendment to this was later agreed. The consideration paid therefore reflects the terms of the lease as it was entered into.”
158. Apparently before this refusal was received (it was sent by an email timed 11.36 am), a further meeting took place at Pettman Smith’s offices between Mrs Newton, Mr Neuman and Mr Cherney. The need for a deed of variation was again discussed, subject to the possibility of obtaining indemnity insurance which it was agreed the Firm should investigate.
159. At the end of August further communications took place between Mr Batkov and Mrs Newton, which must have made it clear to her that the relationship between Mr Cherney and Mr Neuman was deteriorating. On 29 August Mr Batkov sent Mrs Newton an email, marked urgent and strictly confidential, in which he said that Mr Cherney had recently “become rather upset” about the lack of exact information about how the funds for acquisition and repairs of the London properties had been spent. He continued:
“[Mr Cherney], through me only, would like you to present him detailed information as regards the above issue … [Mr Cherney] kindly asks you to approve personally all the funds for repairs as well as all the sums from the sale of the real estates. He is flying to
160. Mrs Newton replied on 30 August, undertaking to send “to you only” statements of the relevant expenses within the next couple of days. She also said that information relating to any sales would be provided to Mr Batkov “so that our mutual client may authorise these before any commitment is reached”.
161. On the same day Mr Batkov sent Mrs Newton a further email, saying that he supposed “the disagreements between [Mr Cherney] and [Mr Neuman] [had] deepened”. He said he had just received a call from Mr Cherney, who wanted Mrs Newton to arrange for Mr Neuman’s brother-in-law Tami to be restored as a director of “the company”, and repeating his “definite requirement” that all the contracts and payments in relation to the
“In addition [Mr Cherney] declared that he does not like any payments to and from
Mrs Newton replied briefly on the same day, noting what Mr Batkov had said and adding:
“I believe that I understand the reference to payments to and from
162. The reference to payments to and from Spain, I have little doubt, was a reference to payments to and from the Spanish bank accounts of the companies which Mr Neuman had established in the BVI for Mr Cherney’s Spanish property transactions, including the purchase of the Gema Hotel. Those payments included the payment of £2 million from
163. Mrs Newton was now in a potentially rather delicate position, because she knew from Mr Batkov that Mr Cherney’s confidence in Mr Neuman was crumbling, and that any expenditure had to be approved by Mr Cherney personally, but Mr Neuman (with whom she had established a good working relationship) was still in charge of the Arlington Street negotiations as well as the repair and refurbishment works to the other properties. Thus matters continued on the ground much as before, and on 31 August, for example, Mrs Newton discussed the insurance clause in the lease with Mr Neuman and Tam Singh, either at a meeting or (as the typed attendance note suggests) on the telephone.
164. On 6 September Mrs
165. Mrs Newton adds in her witness statement, although this is not recorded in the attendance notes, that Mr Neuman also indicated that the price being offered by the new prospective purchaser was considerably less than £18 million. With some hesitation, I accept this evidence, but I do not believe (and to be fair Mrs Newton does not suggest) that any particular price was mentioned by Mr Neuman. I am unable to accept Mr Traspov’s evidence that there was no discussion at the meeting about a possible price reduction on the sale of
166. Over the next few days Mrs Newton corresponded further with LUL’s solicitor and the insurance broker. It emerged that insurance was probably not going to be a realistic alternative, because cover could only be provided for a period of 25 years, whereas the flats would be let for substantially longer terms.
167. On 26 September Mrs
168. Two further matters were discussed at this meeting. First, Mr Batkov asked for details of the deed of trust for
169. The second matter discussed was an apportionment of the future proceeds of sale of
170. Two days later, on 28 September, a further meeting took place at the Firm’s offices attended by Mr Neuman, Mr Cherney and Mr Mazin, but not Mr Batkov. Mrs Newton’s manuscript attendance note of this meeting is dated 27 September, but I accept her evidence that this was a mistake: she agreed in cross-examination that dates are “not [her] thing”. At the meeting a deed of trust was produced for Mr Neuman to sign, but he refused to do so, saying that the property was his. Mrs Newton described the emotional register of the meeting as “animated”, and it was clear to her that Mr Cherney and Mr Neuman were having an argument. This was not only about the deed of trust, but also about the division of the proceeds of sale. Various figures were discussed and written down, but as their conversation was in Russian Mrs Newton did not understand what they were saying. It was, however, apparent to her that the figures under discussion were changing from time to time. There was also a brief discussion of the position on the sale of
171. The outcome of the meeting was that Mr Neuman took copies of the draft documents away with him, and said he would consider them and discuss the matter with his advisers before reverting to Mr Cherney. Mrs Newton informed Mr Batkov of this by email on 2 October, and agreed to fix up a meeting in October when Mr Cherney and Mr Batkov expected to be in
172. After Mr Neuman had left the meeting on 28 September, Mr Cherney asked Mrs Newton through Mr Mazin to confirm that she was acting for him alone in relation to the sale of
173. Mrs Newton was asked in cross-examination to describe the nature of her relationship with Mr Neuman in late September 2007. She described it as being “like any relationship with a client”, and denied that they were close friends, although she accepted that she and her husband had occasionally been out to dinner with him. She agreed that he was good company, and that she had never had similar social contact with Mr Batkov. Mr Neuman is a man of considerable charm, and I am satisfied that Mrs Newton was on terms of easy familiarity with him. It is, I think, revealing that he began his cross-examination of her by asking whether he could address her as “Marie-Garrard … the way I always used to call you”. At a later stage, when Mrs Newton was briefly recalled to answer questions on some documents, he even addressed her on one occasion as “My dear”. I do not mean to imply that there was any impropriety in their relationship, but I think their friendship was a good deal closer than Mrs Newton was prepared to admit.
174. On 8 October a meeting took place between Mrs Newton, Mr Neuman and Tam Singh. According to Mrs Newton’s written and typed attendance notes, Mr Neuman said that there was to be a new transaction relating to the sale of
175. Shortly afterwards, Mr Cherney and Mr Traspov also called in to see Mrs Newton, and according to her attendance note (which is dated 8 October) the new sale of Arlington Street for £13.3 million to a different buyer was discussed between them, including the option for the transaction to proceed by way of a share sale. According to Mrs Newton’s written evidence, Mr Cherney gave the impression that he was aware of the transaction and was willing for it to proceed. Mr Cherney himself denies that Mrs Newton told him about the new sale price, and says that he would certainly have remembered such a substantial price reduction if he had been told about it. He says that the main purpose of the short, unplanned meeting was to ask Mrs Newton for further reassurance that she was acting only for him, and that Mr Neuman could not enter into any transactions in relation to his properties without his approval. He also says that Mrs Newton must be mistaken about the date of the meeting, because his travel document stamp shows that he entered
176. It seems to me probable that the meeting took place on 9 rather than 8 October. This would not be the first time Mrs Newton made a slip in her dating of an attendance note. But I find it hard to believe that the purpose of the meeting was merely for Mr Cherney to obtain a repeated assurance from Mrs Newton that she was acting for him alone. She had already given him such an assurance on 28 September, and as she was at this stage his trusted
177. On 10 October Mr Syan sent a simple form of share purchase agreement to Mrs Newton, from which it appeared (if she did not know already) that the prospective purchaser was Halsbury. The purchase price in the draft was left blank.
178. On 11 October Mr Neuman wrote to Mrs Newton, giving her instructions for distribution of the sale proceeds upon completion of the sales of
179. At about the same time Mr Neuman prepared, or had prepared for him, a document dated 10 October 2007 and headed with his Spanish address (Calle Jesus, 35 92 1B, 46007 Valencia), the body of which reads as follows:
“Total sums due to me (25% of net profit) upon sale of
Draycott £3,128,355.12
3,544,776.86
My proportion of additional payment, £4,500,00
in respect of
Due to me £4,669,776.86.”
The document was signed by Mr Neuman, and contained a space for signature by Mr Cherney beneath the statement:
“I agree to the above figures on the basis that the properties are sold for the sums mentioned no later than 10 December 2007 and to pay those sums to you immediately following the sale.”
180. There can be no doubt that Mrs Newton was in possession of this document, because it was placed on the Firm’s general file for Paradiso and contains in the top right hand corner the reference number for that file in her handwriting. The additional payment of £4.5 million in respect of the
181. The question whether Mr Cherney, too, knew about the side payment is one to which I will have to return, but there is already one strong indication that he did, namely his muted reaction and apparent agreement when Mrs Newton told him that the new sale had been agreed for only £13.3 million. Given that Mr Cherney had recently refused to countenance a reduction to £16 million in the price offered by Raylan, his indifference seems very hard to understand unless he already knew of the existence of a substantial side payment.
182. On 11 October contracts were exchanged between
183. On 15 October Mr Batkov sent an email to Mrs Newton, regretting that he had been unable to meet her on his previous visit to
“The thorough investigation of the statements of accounts showed that 100% of the funds utilized for payment of
In relation with the above [Mr Cherney] kindly ask[s] you in case of realization of a sale-purchase deal for Arlington [or Draycott House] not to allow any kind of payments – dividends or upsides, before the completion of the above investigation. [Mr Cherney] confirmed that [Mr Neuman] is to receive 20% of the upside for the one property and 25% of the upside for the other. Do you happen to have any information is there any progress with the documents [Mr Neuman] was supposed to sign? I would appreciate it if you could keep me informed.”
184. Mrs Newton replied on the same day. She assured Mr Batkov that the documentation issued in respect of the sale of
“Whilst I appreciate that [Mr Cherney] does not wish for any payments to be made from the sale proceeds before matters concerning Spain have been satisfactorily investigated by you, I believe that [he] appreciates as, of course, do you, that upon completion of the sale of Draycott it is essential that the mortgage from the Bank is repaid unless that has happened before completion takes place. Further upon the sale of
Turning to
Finally as regards documents to be signed by [Mr Neuman], whilst he was presented, at a meeting here with [Mr Cherney] a couple of days after we last met here, with the documents setting out that Arlington was held in Trust in a similar way to Draycott etc and he took those documents away with him he did not at the meeting sign them and indicated that until he had obtained advice from his lawyer on them he would not sign them. The only “document” that I am aware that [Mr Neuman] has signed is the letter which is dated 11 October 2007 mentioned above.”
185. In her written evidence Mrs Newton says that in the light of this email, and her meeting on 8 October, she understood that she could not disburse the
186. On 25 October Mr Kaye of CKFT contacted Mrs Newton with a query arising out of her replies to additional enquiries. He received no reply, and repeated the request on 31 October when he added some further questions. These requests seem to me impossible to reconcile with Mrs Newton’s oral evidence that Raylan had formally withdrawn from the transaction in late September, and I infer that no such withdrawal had taken place. The matter is made even more mysterious by a later email from Mr Kaye to Mrs Newton dated 2 November, in which he said he appreciated that she was no longer acting in connection with Arlington Street, but nevertheless passed on to her a number of requests for information. I am unable to say how Mr Kaye got the impression that Mrs Newton was no longer acting. It was of course completely untrue. It seems likely that Mrs Newton told him so herself, but the point was not put to her in cross-examination, and I am not in a position to make a finding of fact to that effect.
187. On 7 November Montague Lambert wrote to Pettman Smith asking to be supplied with the contract signed by the vendor for the sale of
188. On 21 November Montague Lambert sent a draft share purchase agreement to Mrs Newton, and shortly after 7 pm she returned an amended version which she was willing to approve. The amendments were extensive. They included the identification of Mr Neuman as the vendor, the introduction of Thornley (defined as “the Company”) as a party, and the introduction of the concept of the “Vendor’s Loan” defined as the loan, the amount of which was left blank, made by the Vendor to the Company. Clause 3.1 then provided that the amount of the Vendor’s Loan should be paid in cash “in accordance with clause 4.3” and deducted from the consideration for the shares in Thornley, the amount of which was also left blank. The reference to clause 4.3 was, as Mrs Newton accepted in cross-examination, a typographical error for clause 3.3, which provided that the sum needed to discharge the Vendor’s Loan should be forwarded to Pettman Smith by CHAPS automated payment in cash, in full and final settlement to Mr Neuman from Thornley.
189. It was put to Mrs Newton in cross-examination that she had deliberately introduced the concept of the Vendor’s Loan in order to justify the making of the side payment to Mr Neuman. However, I do not think that this can be correct, and I accept her explanation that the purpose of the concept was to explain, for accounting purposes, how the monies which had been lent for the acquisition of
190. Mrs Newton also appears to have learnt on 26 November that Halsbury had agreed to sell on
191. On 27 November Mrs
192. Meanwhile, on 28 November Mrs
193. The share sale agreement was ultimately exchanged, in the form of Mrs Newton’s amended draft, on 30 November 2007. However, the date inserted in manuscript by Mrs Newton at the head of the agreement was 30 October 2007. She insisted in her oral evidence that this was simply a mistake, and was not a deliberate attempt to backdate the document. With a solicitor less prone to careless slips in relation to dates, this explanation would be hard to credit; but the error seems to me characteristic of Mrs Newton, and with some hesitation I am prepared to accept her explanation. I also accept that the reason why she did not mention the mistake in her witness statement is that she only noticed it shortly before the trial, and after she had prepared her statement.
194. The share sale agreement provided for completion to take place immediately, or in any event within 10 working days after the date of the agreement, in default of which it could be determined by the vendor. In the event, completion took place on 12 December. Meanwhile discussions had taken place between Mrs Newton, Montague Lambert and CKFT, as a result of which it was agreed that on completion, and in view of the onward sale of the property, the property deeds would be sent to CKFT and the company documents to Montague Lambert.
195. On 10 December Mr Batkov’s office contacted Mrs Newton to say that Mr Cherney and Mr Batkov would be flying to
196. On 11 December Mrs
“At the request of Mr Frank Neuman I attach a copy of the Agreement entered into by Mr Neuman in connection with the sale of certain shares in a company emanating from which he expects to receive in his account with your bank some funds relating to this transaction today.”
197. It seems clear to me that this can only have been a reference to the side payment, and that writing as she did in these terms Mrs Newton must have known about it. In cross-examination she accepted that the email to Mr Alvarez was sent either by her or by somebody at her request, and that she never told Mr Cherney or Mr Batkov about this request by Mr Neuman. She tried to explain her failure to do so on the basis that she thought the sum in question was probably money that Mr Cherney had agreed was payable to Mr Neuman, and although she had specifically been told to obtain Mr Cherney’s authority before making any payments out of the proceeds of sale, she did not need to do so at this stage because she was not yet being instructed to send any money anywhere. I am afraid that I find this explanation incredible, and I cannot avoid the conclusion that Mrs Newton knew perfectly well that Mr Neuman was receiving a side payment from the sale. I am equally unable to accept her explanation that she never mentioned the matter to Mr Cherney or Mr Batkov because she “did not think it was relevant”.
198. On 12 December Mrs
199. On 13 December Mrs
“I confirm having instructed by bank to sent [sic] to Mr Neuman £4,500,000.00 to his bank Caixa Valencia Spain.”
Mrs Newton professed not to have seen this email until it was recently shown to her, and said she would have been extremely surprised if she had seen it at the time. I find, however, that she did receive and read it, and because she already knew about the side payment it came as no surprise to her. I am not deflected from this conclusion by Mrs Newton’s evidence that Child & Child experienced major difficulties with its internet and email systems in the aftermath of the merger. It is, of course, possible that the email was never received by her, but its authenticity is not in question, and since I have rejected her claim that she was unaware of the side payment, I think it is far likelier that the email was received by her, and that her explanation for its possible non-receipt formed part of her increasingly desperate attempts, in the teeth of all the contemporary documents, to maintain that she knew nothing about it.
200. On 14 December (which was a Friday) Mr Neuman wrote to Mrs Newton from his Spanish address instructing her not to release any funds held by her in respect of the
“Attending Frank Neuman regarding
It should be noted the payment made by Mr Neuman is an agency fee due to Mr Singh concerning the negotiations and introduction of the buyer of the shares in Thornley Estates, the owner of
Mrs Newton then telephoned Tam Singh, and was instructed by him to transfer the £500,000 to the client account of Mr Janjua. On 18 December she effected the transfer of £500,000 from the Paradiso client account, into which the completion monies had been paid, to Mr Janjua’s client account with the Firm, the reference number of which was J1182/2. On the same day the Firm received the sum of £500,000 (less £7 bank charges) from Mr Neuman, which was paid into the Paradiso client account. Thus the balance on the Paradiso client account was reduced by the net amount of £7.
201. On 16 January 2008 Mrs Newton attended a meeting with Mr Cherney and Mr Neuman at the Firm’s offices. There was a discussion about the distribution of the
202. On 21 January Mr Batkov sent an email to Mrs Newton which I will quote in full:
“In Saturday [Mr Cherney] unexpectedly informed me that he had received information that the deal on
There is neither any progress on the deals regarding ownership over the realties in
[Mr Cherney] is still insisting on the scheme about which agreed during our last meeting, i.e. the total amount from the sale of
Kindly ask you to provide me with detailed information what had happened, what is the situation with Draycott House and the VAT on
I would appreciate your prompt reply.”
203. Mrs Newton replied on the following day, and said this in relation to the sale of
“The purchase price for the sale of the
In view of my finding that Mrs Newton knew about the side payment, I do not need to underline that this was a thoroughly misleading reply, even if it was literally true that she had made no payment out of the £13.3 million (because the payment to Mr Janjua was matched by a transfer from Mr Neuman into the Paradiso client account) and that no sum of £5 million had been paid to Mr Neuman (the sum was £4.5 million, and it had been paid to Mr Neuman’s Spanish bank account).
204. Mrs Newton’s reply to Mr Batkov was sent at 11.10 am. At 7.31 pm on the same day two documents were printed off Mrs Newton’s computer at the Firm’s offices. The first document was a draft letter, apparently intended to be sent by Mr Neuman to Mr Cherney, setting out his position in the negotiations between them and stating terms on which he would be prepared to settle. The draft letter contained a reference to the side payment in the following terms:
“Totally separately we received a payment for other things not directly associated with [the Thornley] share sale of £4,000,000.00. The share sale as you know was handled by [Mrs Newton] and she holds in her client account the sum of £13,300,000.00. From the sum of £4,000,000.00 which was paid in
The second document was a completion statement as at 12 December 2007, which showed the purchase price for the shares in Thornley as £13.3 million, and an additional “Sum paid to Spain by Buyer in respect of separate matters associated to the sale” of £4 million. After deduction of the £500,000 paid to the agent and the acquisition cost of
205. In cross-examination Mrs Newton denied that she had created the documents, and denied that she had helped Mr Neuman prepare them. She suggested that he might have come into the office and asked for the assistance of a secretary to type the documents, to which she would have said “Yes, go ahead”. Further, the system could have shown Mrs Newton as the person who last saved the documents, because it was set up at the time in a way that enabled secretaries to send emails as if they were coming from a particular person’s inbox. I do not find these speculations at all convincing, and I conclude that Mrs Newton helped Mr Neuman with the preparation of both documents.
206. The next morning (23 January) Mrs Newton sent the two documents to Mr Batkov as attachments to an email which read as follows:
“I have just received a letter and statement from Mr Frank Neuman regarding
The wording of this email was clearly designed to give the impression that Mrs Newton had played no part in the preparation of the letter and statement, and that she was merely acting as an intermediary between Mr Neuman and Mr Cherney. That impression, I am satisfied, was completely untrue.
207. On 24 January La Caixa informed the Firm by fax that they were instructed by Mr Neuman to transfer £1.5 million to the Firm’s current account in
208. Mr Batkov also emailed Mrs Newton on 25 January, saying he was “deeply sorry” about the situation between Mr Neuman and Mr Cherney and expressing the hope that their differences might be settled. He said that Mr Cherney had provided the entire acquisition cost of Arlington Street and had paid for the ensuing repairs, so “he has got the right to express his disapproval of the actions [Mr Neuman] has undertaken”. Mr Neuman had, however, informed him in a conversation the previous evening that he had changed his mind, and had already transferred £1.5 million from
“I concur with your sentiments – the situation is most unfortunate and upsetting. At this moment of time we have not received any funds but I have received a fax message from a bank in Spain advising me that they are sending to this firm’s account £1.5 m and seeking confirmation of the account details which I have sent to them. I shall let you know when it arrives.”
209. Also on the same day, Mrs Newton (as the metadata again suggest) helped Mr Neuman to prepare a draft letter and expenditure statement relating to Draycott House, and she then forwarded these documents to Mr Batkov as attachments to an email saying:
“Mr Frank Neuman has asked me to send you the attached letter and statement that he has prepared.”
Mrs Newton denied that she had played any part in the preparation of these documents, and again suggested that Mr Neuman might have sought the assistance of her secretary. She also said she did not remember sending the email to Mr Batkov, but maintained that, if she did so, it would not have been improper:
“Even though Mr Neuman and Mr Cherney may have been in discussions about apportionment of proceeds etc at that stage, I would not have considered it inappropriate to provide information from Mr Neuman to Mr Cherney/Mr Batkov to assist in resolving those negotiations. I was merely acting as an information go-between.”
210. The transfer of the £1.5 million from La Caixa eventually took place on 30 January, and Mrs Newton arranged for the money to be credited to Paradiso’s
211. On 31 January Mr Batkov flew to
212. On 1 February Mr Batkov asked Mrs Newton for detailed information about the funding of the acquisition of the
(a) a statement of income and expenses for Arlington Street from stage 1 of its acquisition down to January 2008, but excluding the sale of the property;
(b) a statement of monies received and repaid from Cherney accounts at the Firm in relation to Draycott House, Rose Square and The Knightsbridge; and
(c) a statement of payments to East West Building Consultants Ltd from January 2006 to February 2008.
213. On 13 February Mr Batkov wrote to Mr Neuman, saying:
“I have discussed the matters with [Mr Cherney] regarding the possible ways for you both to break amicably. He still feels rather offended by the way
Mr Batkov then mentioned two other matters about which Mr Cherney was unhappy, and passed on a request from Mr Cherney for Mr Neuman to take certain steps relating to properties in
“In case you decide to do the above, [Mr Cherney] does not see any obstacles for you to split amicably.”
214. Mr Batkov sent this letter by fax and email to Mr Neuman in the
“I do not understand your comments on
I have no objection to settling everything in
Mrs Newton now says that she did not draft this letter, but accepts that it might have been typed up by one of the Firm’s secretaries. It seems to me more likely, however, that she did in fact help him with it, and that her reference to the letter having been just handed to her was another attempt to disguise how closely she was involved on his behalf.
215. On 19 February a meeting took place at the Firm’s offices attended by Mr Cherney, Mr Batkov, Mr Mazin and Mrs Newton. Mr Noel-Clarke was also present for part of the time. There was discussion about how the sale proceeds of
216. On 20 February Mr Neuman visited the Firm’s offices, and at 4.03 pm Mrs Newton sent an email to Mr Batkov attaching a letter and statement from Mr Neuman “which he requested me to send to you”. Mr Neuman’s letter said that he had been discussing matters with his lawyers, and the annexed statement showed the sums lent to him by Mr Cherney “to assist my purchase of
217. In her covering email to Mr Batkov, Mrs Newton said “I wonder whether I should also transfer the appropriate funds to
218. On 21 February Mrs
219. On the same day, 25 February, Mr Batkov sent a further email to Mrs Newton headed “Various matters” and marked with high importance. He said he and Mr Cherney had discussed Mr Neuman’s latest proposal of 20 February “several times”, and Mr Cherney had reacted to it “quite emotionally”. He said that Mr Cherney authorised Mrs Newton to transfer the current balance of the
“I lean on your readiness expressed in front of [Mr Cherney] and me to follow whatever instruction given by our mutual client as regards the disposal of the above funds. I am fully aware that the execution of such an instruction might cause you serious problems bearing in mind the fact that [Mr Neuman] has not transferred the ownership over
– regarding
…
I suggest refusing [Mr Neuman] any repayment under
1. repayment of the sum of [£4.25 million] that has been transferred by Denise Overseas to
2. report for the sums that have been really spent for repairs on Draycott House,
In my opinion, this position in the best possible degree corresponds to the real relations between the parties as well as it ignores the risk for further objections towards [the Firm] on the part of whatever party.
I would like to underline that [Mr Cherney] has no any intention to cancel his agreements with [Mr Neuman] concerning Draycott and
It is common ground that the references to £4.25 million are mistakes, and that Mr Batkov intended to refer throughout to the €4.25 million which had been transferred by Denise Overseas Ltd to
220. On 3 March Mrs
“
I refer to your email messages concerning the proceeds of sale of the above share transaction. Having discussed this matter with my partners we are agreed that we have no difficulty whatsoever in returning to Liechtenstein or wherever our mutual client, [Mr Cherney], may request, the funds which he advanced from this firm’s client accounts relating to matters concerning Draycott House, Rose Square and The Knightsbridge or retaining them if he prefers on the client account of this firm relating to those matters. We have seen [Mr Neuman’s] statement that he sent to you indicating that those monies were to be refunded and therefore we have transferred to the respective client accounts held by this firm the relevant sums plus interest on those sums at the rate of 6% as also mentioned by [Mr Neuman] on the statement [details were then set out, together with particulars of the Vida and Barclays loan repayments].
A further sum to be paid relates to
…
I enclose a statement showing the sale proceeds taking into account the above mentioned payments and this firm’s costs and disbursements relating to the transaction to date from which you will note the net profit amounts to £944,573.07. We are holding that amount on the firm’s client account together with interest accrued on the moneys held. As we believe you appreciate we do not feel able to release those funds to [Mr Cherney] without the authority of [Mr Neuman] who was, as you yourself have pointed out in your message to me, the sole director and shareholder of Thornley. We have during last week tried to contact [Mr Neuman] to obtain more specific instructions regarding the distribution of that balance but have been unable to reach him and therefore to obtain any specific instructions on these funds.
May I add that my comments, when we have recently met, to the effect that I had understood at the commencement of the
We consider that, notwithstanding our assumption at the time of the acquisition of the Arlington companies/property and the fact that the funds to acquire Arlington came from either [Mr Cherney’s] funds on the Pettman Smith client account or from Rye Park, as there were no Deeds of Trust entered into and [Mr Neuman] has in his recent correspondence with you indicated that Arlington belonged to him, we cannot act in any other manner as we hope you understand. Until the funds are distributed they will continue to earn interest on our client account and at the time of distribution all such interest will be taken into account as it is client money.”
The statement annexed to the letter showed £2 million paid to
221. The letter was to be sent by email only, but on 6 March Mrs
222. Mrs Newton next heard from Mr Batkov on 10 March, when he sent her an email replying to her letter of 3 March on
“[Mr Cherney] defend his position that the
223. Mrs Newton replied on 12 March. She disclaimed any knowledge of arrangements between Mr Cherney and Mr Neuman relating to
224. On 14 March Mr Batkov met Mrs Newton in
(a) Mr Batkov asked why
(b) Mr Batkov expressed surprise that the Firm was unaware of the side payment, especially as it had featured on a statement which the Firm had forwarded to him on Mr Neuman’s behalf. Mr Batkov suggested that the Firm had written letters and prepared statements for Mr Neuman, but Mrs Newton said this was “completely incorrect”. The Firm had provided normal completion statements for Mr Neuman, but nothing more.
(c) Mrs Newton repeated that she knew nothing about any payments made to Mr Newman by the purchaser in
(d) Mr Batkov then asked if the Firm had returned the funds as it had been instructed to do. Mrs Newton gave some details, and in response to a query said that £2 million had been paid to
(e) Mr Batkov said that funds should be returned to
Mr Batkov described the meeting as a very emotional one, and I can well imagine that it was an uncomfortable experience for Mrs Newton. I am satisfied that what she said to Mr Batkov about the side payment was untrue. I am also satisfied that his suggestion that the Firm had written letters and prepared statements for Mr Neuman was, in substance, correct.
225. On 17 March Mr Batkov sent a long six page letter to the Firm, setting out Mr Cherney’s position and repeating many of the points which he had already aired with Mrs Newton at their meeting on 14 March. He asked her to amend the completion statement for
226. Some further correspondence then ensued between Mr Batkov and Mrs Newton, but it throws no additional light on the issues I now have to decide. It was about this time when the Firm first notified its insurers of the possibility of a claim against it, and from mid-March 2008 onwards Mrs Newton no longer had full conduct of the files. She provided assistance when requested, but took no further decisions.
227. I have now completed the basic factual narrative which forms the background for consideration of the preliminary issues identified in paragraph 121 above, and of all the specific claims down to and including those arising from the payment of £2 million to
(3) Was
228. I now return to the first of the preliminary issues: was Mr Neuman the beneficial (as well as the legal) owner of Thornley, and was it always intended that Arlington Street should be his own personal acquisition and not one undertaken on behalf of Mr Cherney or entities connected with Mr Cherney?
229. In my judgment it is clear that these questions must be answered adversely to Mr Neuman. I have already rejected Mr Neuman’s account of what was said at the critical meeting between him and Mr Cherney in
230. I am not deflected from this conclusion by Mr Cherney’s evidence that stage one of the acquisition of Arlington Street went ahead in something of a hurry and without his prior knowledge or approval. He was irritated, in my view, that Mr Neuman had acted precipitately, and without further reference back to him before committing client account funds to the purchase. But Mr Cherney did not question that Mr Neuman had been purporting to act on his behalf, and I am satisfied that Mr Neuman’s actions fell within the scope of his actual, or at any rate his ostensible, authority. I think it is revealing, in this context, that when Mr Cherney and Mr Batkov were informed of the completion of stage one of the purchase, they did not immediately contact Mrs Newton to criticise her for having followed Mr Neuman’s instructions. I agree with the submission of counsel for the Firm that their failure to react in such a way is a strong indication that Mr Neuman was acting within his authority.
231. In my judgment Mr Neuman’s claim to be the beneficial owner of
232. I will add that in reaching this conclusion I have taken due account of what Mr Neuman said in cross-examination in answer to questions from Mr Norbury and Mr Fenwick QC. I found much of his oral evidence to be evasive, at times contradictory, and generally unconvincing. In particular, I find it impossible to believe that, if Mr Neuman had intended the
(4) Who knew about the side payment?
233. I have already found that, despite her denials, Mrs Newton knew about the side payment of £4.5 million to Mr Neuman from at least 10 October 2007 onwards. That was the date of the memorandum signed by Mr Neuman, referring to “My proportion of additional payment, £4,500,000”, which she placed (or gave directions to be placed) on the Firm’s general file for Paradiso. The natural inference of knowledge of the payment from this document is supported by a wealth of other evidence, in respect of which, as I have explained, Mrs Newton’s denials seemed to me increasingly incredible. I refer in particular to:
(a) the email which she sent to Mr Alvarez at La Caixa on 11 December 2007;
(b) Mr Syan’s email to her of 13 December 2007, which I have found she received; and
(c) the documents which were printed off her computer at 7.31pm on 22 January 2008.
234. I have naturally thought long and hard before reaching the uncomfortable conclusion that a solicitor of Mrs Newton’s long experience has, on oath, given evidence that she must have known to be untrue. In relation to Rose Square, and the question whether she informed Mr Neuman about the sub-sale, I felt able to give her the benefit of the doubt; but the cumulative effect of the evidence relating to her knowledge of the side payment is such that I reluctantly feel impelled to reject her version of events as untrue. I should add that, having reached this conclusion, I have reconsidered my previous conclusion in relation to
235. I now turn to the question whether the existence of the side payment was also known to Mr Cherney and Mr Batkov. I have already referred to one piece of evidence which strongly suggests that Mr Cherney already knew about the side payment when a new purchaser of Arlington Street, apparently for £13.3 million, first appeared on the scene, namely his apparent acquiescence and lack of concern when (as I have found) Mrs Newton discussed this development with him (in the presence of Mr Traspov) at the Firm’s offices on 9 October 2007. In making this finding, I have rejected the evidence of Mr Cherney and Mr Traspov about the purpose of the meeting and what transpired at it. I am satisfied that it was a short and unscheduled meeting, but I accept Mrs Newton’s evidence (supported by her attendance notes) of what was discussed at it. The combination of Mr Cherney’s apparent indifference to the news, if the price had indeed dropped as low as £13.3 million, with his attempt to find a different and unconvincing explanation for the purpose of the meeting, is in my view very revealing.
236. The impression that Mr Cherney knew about the side payment is reinforced by the fact that, when Mr Fenwick QC cross-examined him about the sale of Arlington Street, he disclaimed any knowledge (prior to the commencement of the present proceedings) of discussions for the sale of the property at £13.3 million, but nevertheless said on two occasions, without prompting, that the true amount of the purchase price was £17.8 million (transcript, Day 3, pages 48 and 51). This is a figure that features nowhere in the Firm’s files or the contemporary correspondence, but it is of course the sum of £13.3 million and £4.5 million. Nor can the references be explained away as statements, with the benefit of hindsight, of the overall price which was in fact paid on the sale of
“My Lord, I would like to assure you, from the whole letter there is only one point of truth there. There is only one sentence which is truthful there in regard to my conversation with Marie-Garrard, where I talk that not a penny of the sales proceeds from
…
I would like to repeat once again that I have never heard about the price lower than 17,800,000. Had I heard anything like that, I would tell her that she has no authorisation for proceeding in such a way to any contract whatsoever.”
237. There is also evidence to suggest that Mr Batkov always knew that the true purchase price for the sale of
“I telephoned Mr Neuman to find out what was happening. I asked Mr Neuman why the side payment had not been £4.5m to make up the agreed sale price of £17.8m.”
238. In cross-examination Mr Batkov confirmed that he remembered the occasion, and said he had first heard from Mr Cherney on 19 or 20 January that the sale had taken place and been completed. The cross-examination continued:
“ Q. And you telephoned Mr Neuman?
A. Yes.
Q. And the first question you asked him was: why is it 4 million, not 4.5 million?
A. Yes.
Q. Correct?
A. Correct.
Q. It was not: why did you receive any money by way of a second part of the transaction?
A. No. ”
Perhaps realising too late what he had given away, Mr Batkov then sought to say his information was that the total amount of the sale was “around £18 million”, and a little later “We looked for 18 million. That’s it full stop.”
239. In my view the probable truth of the matter is that the price agreed by Mr Neuman with the new purchaser of
240. Although I find on the balance of probabilities that this is what happened, I do not disguise that there are several aspects of the affair which still remain puzzling. One question is why the £4.5 million had to be paid under the table to Mr Neuman. It seems not unreasonable to speculate that there may have been (discreditable) tax reasons for this. Another question is why the new purchaser (or purchasers, after the onward sale of
241. In any event, whatever the answer to these conundrums may be, I am satisfied that Mr Cherney’s and Mr Batkov’s knowledge of the side payment provides a complete answer to the claims against the Firm which relate to the side payment as a whole. Even if it could be established that the Firm was negligent in not taking steps to prevent the side payment being made, or that Mrs Newton acted in breach of fiduciary duty in preferring the interests of Mr Neuman to those of Mr Cherney, the fact that Mr Cherney and Mr Batkov intended the transaction to be structured in this way, and intended £4.5 million to be paid to Mr Neuman, precludes them from complaining about what happened, or from alleging that any loss was thereby caused either to Mr Cherney or to any of the other claimants. In short, the side payment to Mr Neuman was made with their full knowledge and authority.
(5) The absence of a declaration of trust for Thornley
242. I now come on to the specific allegations of breach against the Firm, beginning with the alleged failure of the Firm to ensure that Mr Neuman executed a declaration of trust over the shares in Thornley.
243. The allegation is pleaded as follows in paragraph 67 of the amended particulars of claim:
“In further breach of the duties of care, Pettman Smith failed to ensure or to take reasonably adequate steps to ensure that Mr Neuman executed a deed of trust in favour of Mr Cherney or Vida before [Thornley’s] incorporation alternatively before the initial Arlington Street purchase alternatively before Arlington Street Ltd was sold (as set out below). As a result, Mr Cherney and/or Vida have suffered loss as [a] result of the events after the said sale (as set out in paragraph 118 below).”
Paragraph 118 says that:
“As a result of the said breaches …, Mr Cherney and/or Vida have suffered loss and damage in the sum of up to £5,663,750 in that Mr Neuman rather than Mr Cherney and/or Vida has received up to £5,663,750 belonging to alternatively owed to Mr Cherney and/or Vida from the sale of the Thornley shares.”
244. I accept the submission of counsel for the Firm that the correct question to ask is whether, in all the circumstances, Mrs Newton failed to take reasonable steps to obtain a deed of trust, signed by Mr Neuman, in favour of an identified beneficiary. In answering this question it is necessary to look at the matter chronologically, and without the benefit of hindsight.
245. The first stage of the acquisition of
246. On 16 March 2006, a fortnight before the completion of stage two, Mrs Newton wrote to both Mr Batkov and Syndikus saying that she had prepared a deed of trust and expressly stating that she needed to know “the name of the trust for whom Mr Neuman will be acting as nominee in this particular instance … so that I may finalise the deed”. Mrs Newton never received a reply to this request. In my judgment she adequately discharged her duty of care by preparing a draft deed and sending this letter when she did, and the ball was then in the claimants’ court to supply her with the necessary instructions. One reason why no instructions were forthcoming may have been Mr Batkov’s curious belief, elicited in cross-examination, that it would have been satisfactory for Mr Neuman to sign a deed of trust in blank leaving the name of the beneficiary to be inserted at a later date when Mr Cherney had decided who the beneficiary was going to be. Another possibility is that Mr Cherney wanted to keep his options open for as long as he could, before committing himself about where in his property empire this investment was to be held. One thing I regard as certain is that he would not have wished to be named as the beneficiary himself. Such a degree of transparency would not have suited his purposes.
247. Nor can Mrs Newton be fairly criticised, in my judgment, for failing to make an educated guess about the identity of the beneficiary. It was no doubt likely that Mr Cherney would in due course nominate one of the two
248. Mrs Newton says in her witness statement, and confirmed in cross-examination, that she again raised the matter of a deed of trust with Mr Neuman before completion of stage two, but he told her that it was probably not necessary to organise one. It was put to Mrs Newton that she should not have accepted instructions from Mr Neuman on this point, because the whole purpose of a deed would have been to protect the principal, Mr Cherney, against his agent, Mr Neuman. However, I agree with the submission of counsel for the Firm that this is an artificial way of looking at the matter, and heavily coloured by hindsight. At that stage Mrs Newton still had no reason to suppose that there was likely to be a conflict of interest between Mr Neuman and Mr Cherney, and she was in my view fully entitled to accept Mr Neuman’s response as an indication, on Mr Cherney’s behalf, that the time was not yet ripe for a decision to be made on the identity of the beneficiary.
249. On 20 April 2006 Mrs Newton met Mr Cherney for the first time. I have already found (see paragraph 147 above) that Mr Cherney said on this occasion that he was content with developments to date, and that he told Mrs Newton to continue taking instructions, as before, from Mr Neuman and Mr Batkov. It is true, as Mrs Newton reluctantly accepted, that the opportunity could have been taken to obtain Mr Cherney’s instructions on the Thornley declaration of trust, and to get Mr Neuman to sign it then and there. With the benefit of hindsight, this would obviously have been an appropriate occasion for this step to be taken. Nevertheless, I am not prepared to stigmatise her failure to raise the subject as a breach of duty. It was, at most, a non-negligent error of judgment on her part.
250. The matter was then left in abeyance for well over a year. I accept that a solicitor better organised than Mrs Newton would probably have followed up her earlier request for instructions with one or more reminders, but the fact remains that the ball was still in the claimants’ court, and they took no steps to provide Mrs Newton with the necessary instructions. I cannot regard her failure to follow the matter up, with experienced clients who were well able to look after their own interests, as a negligent breach of duty. As a lawyer dealing with the conveyancing and corporate sides of the transaction, it was in my view sufficient for Mrs Newton to have sought the necessary instructions once in clear terms in correspondence, and to have raised the matter again with Mr Neuman. She says that she may also have mentioned the lack of a deed of trust to Mr Batkov in a later meeting. Whether or not that is the case – and her evidence on the point is too inconclusive for me to make a finding on it – I consider that her rather passive attitude to the problem falls, albeit by a narrow margin, on the acceptable side of the line. With a wealthy overseas client like Mr Cherney, surrounded by business advisers of his own, it was not her duty to chivvy him on a matter which he must have understood perfectly well for himself.
251. On 5 July 2007 Praesidial asked Mrs Newton for the first time to provide the “whole documentation” in relation to “
“In all instances, I am, of course, able to send copies of all the documentation to Liechtenstein to bring them up to date to ensure that they have current information on these properties, but in view of the instruction received from our mutual client, I am concerned that by doing so I am acting in a manner which is contrary to his requirements. On the other hand, I fully understand that it is the Trust that is providing the funds and therefore, in effect, instructing me and they are therefore entitled to information. I should therefore be most grateful for your assistance in advising me what action I should now take in responding to Liechtenstein, in particular whether or not I should forward to them copies of the documentation that they seek.”
Mrs Newton and Mr Batkov subsequently met in September 2006, and on 18 September she wrote to Ms Liechti providing some of the information that had been requested. She then sent a much fuller set of documents for the two flats at The Knightsbridge, including the deeds of trust signed by Mr Neuman, on 23 October 2006.
252. In the light of this background, it seems to me quite probable that in July 2007 Mrs Newton was nervous about supplying documentation relating to
253. On 26 September 2007 Mr Cherney and Mr Batkov met Mrs Newton at the Firm’s offices. This was the occasion when, apparently to their surprise, Mr Cherney and Mr Batkov discovered that no deed of trust had been executed for
254. This narrative establishes, in my judgment, that although Mrs Newton’s conduct in relation to the deed of trust is in a number of respects open to criticism, it never fell below the standard required of a reasonably competent solicitor. The allegation of breach of duty is therefore not made out, and the claim must fail. I will only add that, if liability had been established, the claim would in my view anyway break down at the stages of causation and loss. Even if a deed of trust in favour of Paradiso had been in place, Mr Neuman would still have received the side payment when
(6) The payment of £750,000 to
255. The claimants’ pleaded case in relation to this payment, and the subsequent payment of £500,000 to Tam Singh on 18 December 2007, is as follows:
“85. Following the Arlington Street purchase, Pettman Smith and Child & Child made the following payments out of funds held in their client account for Mr Cherney, Vida and/or Paradiso on Mr Neuman’s instructions:
85.1 On 30 May 2006, £750,000 was paid to
85.[2] On 18 December 2007, £500,000 was paid to Mr Tam Singh as an “agent fee” by Child & Child.
86. Neither of the said payments was authorised by the Claimants or any of them. Mr Neuman is accordingly liable to account to Mr Cherney, Vida and/or Paradiso for the said sums. Further, the said payments were made in breach of their retainer and/or in breach of their duties of care and/or in breach of trust by Pettman Smith and Child & Child respectively. Further or alternatively, the said payments were made in breach of Pettman Smith’s and Child & Child’s retainers and/or duties of care respectively in that no alternatively inadequate attempts were made to obtain the authority of Mr Cherney, Vida, Paradiso (whether directly or through Mr Batkov) before making the said payments. The Claimants have suffered loss and damage in the amount of the said payments as a result. Further and in any event, Pettman Smith and Child & Child are respectively liable to restore the said payments.”
256. In my judgment the claim relating to the £750,000 can be rapidly disposed of. At this relatively early date, there was no sign of any discord between Mr Cherney and Mr Neuman; and little over a month earlier, at the meeting on 20 April 2006, Mr Cherney had expressly stated his wish that the Firm should continue to take instructions from Mr Neuman and Mr Batkov. This payment was made in response to an instruction given by Mr Neuman, and his explanation was that it was urgently required in connection with one of Mr Cherney’s property transactions in
“As I stated a moment ago, my understanding was that Mr Neuman had authority as the agent of Mr Cherney to give me such instructions.”
257. In my view Mrs Newton was entitled to reply as she did, and it is only with the benefit of hindsight that her conduct may appear a little imprudent. It is true, as she accepted in cross-examination, that she had not made any payments before to
(7) The payment of £500,000 to Tam Singh on 18 December 2007
258. I have set out the claimants’ pleaded case in relation to this payment in paragraph 255 above.
259. The background to the payment is briefly as follows. On 28 September 2007 Mrs Newton had assured Mr Cherney that she was acting in his best interests in relation to the sale of
260. On 12 December the sale of
261. When asked why she had not checked the position with Mr Cherney or Mr Batkov before making the payment to Mr Singh, Mrs Newton said that as far as she was concerned the money which came into the client account came from Mr Neuman. She did not think it odd that Mr Neuman was giving Mr Singh £500,000, even though any introduction effected by Mr Singh must have been on behalf of Mr Cherney as the beneficial owner of Arlington Street, because Mr Neuman was in the process of negotiating a split of the proceeds of sale with Mr Cherney, and in that context she thought that Mr Neuman “may have decided or agreed with Mr Singh to make a payment to Mr Singh”. It did not occur to her that Mr Neuman might be trying to conceal the payment from Mr Cherney, and from her point of view it was enough that Mr Neuman had asked for the payment to be made and had then put her in funds to make it. As to the reason why the payment was made into Mr Janjua’s client account, she said that Mr Singh did not have an account of his own with the Firm into which the money could be paid. When asked why the money had to be paid into a client account at all, her answer was “Because those were the instructions which I received”. She accepted that Mr Singh was in the habit of acting as an agent for Mr Janjua, and professed not to be surprised that Mr Singh wanted the money to be paid into Mr Janjua’s account. She thought that Mr Singh might have done this if he had had instructions from Mr Janjua that the money was needed for a particular matter.
262. In evaluating this evidence I need to bear in mind that Mrs Newton’s position was that she was still unaware of the side payment, and so far as she was concerned the sale of Arlington Street had indeed been completed for £13.3 million, all of which (including the original deposit) had been paid into Paradiso’s client account. I have found, however, that Mrs Newton knew about the side payment, although she may not have known that Mr Cherney and Mr Batkov also knew about it. In these circumstances her evidence takes on a rather different complexion. It seems to me she must have realised that the £500,000 provided by Mr Neuman almost certainly came from the side payment, and that it was not a normal agent’s fee but rather represented the cut taken by Mr Singh and/or Mr Janjua for their participation in the transaction, including (I suspect) engineering the “new” sale to Halsbury with a split purchase price. On the footing that the £500,000 formed part, or almost certainly formed part, of the side payment, Mrs Newton must also have realised that it might be covered by her instructions not to part with any of the proceeds of sale without the authority of either Mr Cherney or Mr Batkov.
263. In my view Mrs Newton was adopting a very high risk strategy when she agreed to Mr Neuman’s suggested method of payment of the £500,000. In proceeding as she did, she was exposing herself and the Firm to powerful prima facie claims that they had acted in breach of trust (because £500,000 was paid out of the Paradiso client account without any authority from Paradiso); in breach of fiduciary duty (because she was improperly preferring the interests of Mr Neuman to those of her client Mr Cherney); and in breach of the contractual and tortious duties of care which she owed to Mr Cherney and Paradiso (because she knew the £500,000 almost certainly formed part of the proceeds of sale, but she paid it out without obtaining authorisation from either Mr Batkov or Mr Cherney). Nevertheless, assuming these claims (or some of them) to be made out, the question remains whether Mr Cherney or Paradiso can be said to have suffered any loss as a result, or whether any restitution for breach of trust needs to be made. In my opinion it is at this stage that the claim clearly fails, subject to one trivial exception.
264. The critical point is that Mr Cherney knew about the side payment. By agreeing to a split purchase price, and the payment of £4.5 million to Mr Neuman in
265. This conclusion is sufficient to dispose of the claims based on breach of duty and breach of fiduciary duty. A footnote is still needed, however, for the breach of trust claim. Paradiso cannot in my judgment seek to recover the £500,000, even though it was paid out of the Paradiso client account, because the payment was matched by the simultaneous (or virtually simultaneous) payment in of £500,000 by Mr Neuman, and the latter sum (as I have found) was always intended by Mr Cherney to be Mr Neuman’s money once the side payment had been made. In effect, the client account was used as a channel for a payment by Mr Neuman to Mr Singh, and the Firm never held the £500,000 paid by Mr Neuman on trust for Paradiso because it was paid for the specific purpose of funding the onward payment to Mr Singh. However, the net result of the transaction was to deplete the client account by £7, that being the amount of the bank charges deducted from the £500,000 transferred by Mr Neuman.
266. It seems to me that the Firm has no answer to a claim that the £7 was paid away without authority, and to that trivial extent liability for breach of trust is established. In the context of the present case, however, I regard a claim for £7 as falling within the principle “de minimis non curat lex”, and I will therefore not go on to enquire what defences the Firm might have to the claim, or whether the loss of the £7 remains uncompensated. It is enough to say that many of the points which I will discuss in relation to the next two claims (the £2 million paid to
(8)The payment of £2 million to
267. As before, I will begin by setting out the way in which the claim is pleaded:
“121. As set out in paragraphs 90 to 92, 97 and 100 above, Mr Cherney and/or Mr Batkov on behalf of all the Claimants repeatedly instructed Ms Newton not to transfer funds to Rye Park notwithstanding the fact that £1,999,994 had been advanced from Rye Park monies for the purposes of the Arlington Street purchase (such sums being held by Child & Child on implied or constructive trust for Mr Cherney alternatively Vida or Paradiso at all material times). Further such instructions were given and accepted during meetings between Ms Newton and Mr Batkov on 31 January 2008 and 19 February 2008. Further:
121.1 On 20 February 2008, Ms Newton asked (by email) for instructions as to whether the advance from the Rye Park monies for the purposes of the Arlington Street purchase should be repaid to Rye Park (apparently forgetting or choosing to ignore that £750,000 had already been repaid); and
121.2 On 25 February 2008, Mr Batkov replied by email with instructions from Mr Cherney not to pay Mr Neuman or Rye Park any sums from the Pettman Smith client account(s).
122. On 6 March 2008, Child & Child paid the sum of £2,000,000 to
122.1 the repeated instructions from or on behalf of Mr Cherney and/or Vida that the Rye Park monies not be repaid from the funds held on client account by Pettman Smith then Child & Child; and
122.2 the fact that Pettman Smith had already paid
123. In making the said payment, Child & Child were in breach of clear instructions to the contrary as set out above and thus in breach of trust.
124. As a result of the said breach of trust, Child & Child are liable to restore the £2,000,000.”
268. The factual background to the payment was briefly as follows. On 19 February 2008 Mr Cherney, Mr Batkov, Mr Mazin and Mrs Newton attended a meeting to discuss how the sale proceeds of
269. In her written evidence Mrs Newton said that as a result of this email “I considered that I had been given explicit instructions to return the sums received from
270. In cross-examination Mrs Newton maintained this line, and said that she clarified her understanding of her instructions in her letter of 3 March 2008 to Mr Batkov. I have quoted most of this letter in paragraph 220 above, and again I will not repeat it. The letter said that the Firm was arranging for £2 million to be sent to
“I assumed, as I had not heard back from him, that I could rely upon the email from him of 25 February which clearly stated that Mr Cherney required the money back that he had sent from Denise Overseas to
271. In my opinion Mrs Newton ran a wholly unjustifiable risk in deciding to make the payment of £2 million to
272. In all the circumstances I conclude that the £2 million was indeed paid out of the Firm’s client account in breach of trust, because Mrs Newton had no authority to make the payment. Since the payment was made from the Paradiso client account, Paradiso is the claimant which is prima facie entitled to require restoration of the £2 million.
273. Money held by a solicitor on client account is held on trust for the client. A trustee who wrongly pays away trust money commits a breach of trust, and comes under an immediate duty to remedy the breach. But, as Lord Browne-Wilkinson said in Target Holdings Ltd v Redferns [1996] AC 421 at 437C:
“the fact that there is an accrued cause of action as soon as the breach is committed does not … mean that the quantum of the compensation payable is ultimately fixed as at the date when the breach occurred. The quantum is fixed at the date of judgment at which date, according to the circumstances then pertaining, the compensation is assessed at the figure then necessary to put the trust estate or the beneficiary back into the position it would have been in had there been no breach.”
In carrying out this exercise, hindsight and common sense are to be employed:
“Equitable compensation for breach of trust is designed to achieve exactly what the word compensation suggests: to make good a loss in fact suffered by the beneficiaries and which, using hindsight and common sense, can be seen to have been caused by the breach.”
(Ibid at 439B)
274. The starting point in considering this question is the fact that the £2 million was paid to
275. At this point it is necessary to look more closely at the settlement between the claimant and Mr Neuman concluded in September 2010. I have already summarised (in paragraphs 5 to 8 above) the main terms of the written compromise agreement dated 15 September 2010. For present purposes, I draw attention to three of those terms. First, the claimants agreed to accept the compromise in full and final settlement of all claims, rights or causes of action (defined in the widest terms in paragraph 12) which they might have against Mr Neuman, East West Building Consultants Ltd and Draycott Property Management Ltd. Secondly, Mr Cherney agreed to procure the discontinuance of the proceedings brought by Denise Overseas Ltd against Mr Neuman and Rye Park in Valencia, Spain (paragraph 14; this and another set of proceedings to be discontinued were defined as “the Spanish Proceedings”). Thirdly, it was expressly agreed and acknowledged by Mr Neuman (also in paragraph 14):
“… that the properties and all rights attached to them which are the subject matter of the Spanish Proceedings belong to [Mr Cherney], directly or indirectly, and [Mr Neuman] will execute all documents necessary to perfect the registration of those properties according to [Mr Cherney’s] instructions. Further, [Mr Neuman] acknowledges that he has no claim against the Claimants for any monies spent or work done in connection with such properties or any other monies or works whatsoever.”
276. The pleadings in the relevant Spanish Proceedings are in evidence, with English translations. In bare summary, Denise Overseas Ltd contended that it had paid €4.25 million to
277. There is also a further complication which needs to be noted. Despite all appearances to the contrary, it appears that the written compromise agreement of 15 September 2010 did not represent the entirety of the agreement between the parties. On the eve of the trial, 16 March 2011, Mr John Mark Buckley of Fladgate LLP, the claimants’ solicitors, made a witness statement (his ninth) to correct what he had said in paragraph 3 of his earlier statement dated 7 October 2010, to the effect that the written compromise agreement was the entirety of the settlement between the parties. He said:
“In fact, by oversight I omitted to state that a further term had been orally agreed between the parties on about 15 September 2010 which was that the rights to the Gema Hotel, Moraira, Spain acquired for the sum of €526,751 paid to Massgava SL pursuant to a private purchase agreement signed on 27 May 2004 be given to [Mr Neuman].”
When Mr Neuman was cross-examined by Mr Fenwick, he at first denied that there had been a separate oral agreement relating to the rights to the Gema Hotel, but when he was shown Mr Buckley’s statement he retracted that evidence and said he now remembered that his Spanish lawyer wanted to be sure that Mr Cherney could have no claim to the hotel, and this was then agreed between Mr Neuman and Mr Cherney. Mr Cherney also agreed in cross-examination that there had been a separate oral agreement relating to the Gema Hotel, although he said that he regarded the rights as worthless so he was not in fact giving anything away by the agreement.
278. Quite apart from the side agreement relating to the hotel, it also transpired from Mr Neuman’s evidence that there was a separate Spanish settlement agreement. The existence of this separate agreement had first surfaced during Mr Neuman’s cross-examination of Mr Batkov, when Mr Neuman asked him whether he was aware that a separate agreement had been drawn up dealing with “everything that had to do with
“There was nothing there that cannot, with exception of the thing that it is the confidential agreement, and a confidential agreement, it is confidential because you are not supposed to discuss it.”
A little later he repeated that there was no difference between paragraph 14 of the English agreement and the Spanish agreement, and no additional terms had been agreed which he did not want to have mentioned in the present proceedings.
279. It is a notable fact that the Spanish settlement agreement has not been disclosed in the present proceedings, either by the claimants or by Mr Neuman. Without the opportunity to examine it, I am unable to accept Mr Neuman’s evidence that it adds nothing to paragraph 14 of the English agreement. It seems to me very probable that it contains further provisions which neither the claimants nor Mr Neuman wish the court to see, and which might throw light on the question which I am now considering, namely whether Mr Cherney has in one way or another received full value for the £2 million paid to
280. Even without sight of the Spanish agreement, however, it seems to me reasonable to infer that by virtue of the compromise full value for the £2 million has indeed already been received by Mr Cherney. Mr Cherney freely accepted the terms set out in paragraphs 1 to 11 of the agreement in full and final settlement of all claims of any kind anywhere in the world which he then had against Mr Neuman, and he also agreed to discontinue the Spanish proceedings in return for taking the Spanish properties (with the exception, according to the oral side agreement, of the Gema Hotel). Thus any claim by Mr Cherney or Paradiso to recover the £2 million, either from Mr Neuman personally or from
281. It is true that the terms of settlement clearly envisaged the continuation of the present proceedings, including the claim to recover the £2 million from the Firm. But that does not much affect the basic point that the comprehensive nature of the settlement undermines the loss that is now claimed in respect of the £2 million, particularly when regard is had to the indemnity given by Mr Cherney to Mr Neuman for any consequential liability to the Firm that Mr Neuman may incur. If I were now to give judgment against the Firm for £2 million, the Firm would have a strong case for saying that the whole, or at least a large proportion, of that liability should be passed on to Mr Neuman under its Part 20 claim, and Mr Neuman would then be able to claim an indemnity for that liability from Mr Cherney. Thus the net amount of Paradiso’s loss would be reduced to such amount, if any, as the Firm was not able to pass on to Mr Neuman in the Part 20 proceedings. In my judgment this element of circularity greatly reduces any value which might otherwise be attributable under the compromise to the continuation of the claim to recover the £2 million.
282. There are two further points which I should add for the avoidance of doubt. The first point is that in addressing the present question I do not think a distinction can sensibly be drawn between the positions of Paradiso and Mr Cherney. The claimants’ whole case is premised on the proposition that Mr Cherney is, so to speak, at the apex of the asset ownership tree, and that the other claimants, including Paradiso, act at his direction and in accordance with his wishes. It follows, assuming this to be correct, that although Paradiso is technically the appropriate claimant to seek recovery of the £2 million, credit must be given for any corresponding value for the £2 million received by Mr Cherney. The second point has to do with the timing of the compromise agreement. It is almost certainly no accident that it was concluded shortly before the resumption of the committal proceedings before Proudman J, and there are good grounds for supposing that Mr Cherney may have been ready to settle on terms favourable to Mr Neuman because he feared a damning judgment against him and/or being compelled to disclose redacted parts of documents. Even if that is so, however, it does not mean that Mr Cherney did not receive full value for the compromise. It means, rather, that part of the value which he received was the immediate termination of the committal proceedings and the related disclosure application.
283. At the end of the day, the onus is on Paradiso to show that it has suffered any loss as a result of the Firm’s breach of trust in paying away the £2 million. Approaching the matter with hindsight and common sense, and having regard to the settlement agreement reached last September, I am not satisfied that this burden has been discharged. Accordingly, the claim fails.
The payment of £1.5 million to Mr Neuman on 16 April 2008
(1)The Facts
284. I have already explained how the sum of £1.5 million was transferred to the Firm by La Caixa on Mr Neuman’s instructions in late January 2008, and credited by Mrs Newton to Paradiso’s
285. When Mrs Newton faxed the signed transfer form back to La Caixa on 25 January, she headed her message “
286. It is unlikely that Mrs Newton had received Mr Batkov’s email when she returned the documents to La Caixa, because the fax details indicate receipt by La Caixa at 11.41, equivalent to 10.41 am
287. I should also mention at this point, if only to reject, Mr Neuman’s own explanation for the payment. When cross-examining Mrs Newton he put it to her that the payment related to a property transaction which he was planning to carry out with her husband, and the purpose was to have the money available if they decided to proceed with the transaction. Mrs Newton accepted that Mr Neuman and her husband had discussed a property deal, but said the discussion had taken place several months earlier in about September or October 2007. I accept her evidence on this point, and do not consider that the payment had anything to do with Mr Neuman’s own property transactions. Although some support for this explanation could be found in the words “New Buy” on the bank’s transfer form, I think it is far likelier that this was a convenient label which Mr Neuman attached to the payment in order to disguise its true purpose. The fact that there was some form of business relationship between Mr Neuman and Mrs Newton’s husband is, however, of some interest, because it may help to explain how Mrs Newton allowed herself to become enmeshed in a position of such conflict of interest without taking any steps to extricate herself from it.
288. As I have already recorded, on 30 January 2008 the payment from La Caixa came through, and Mrs Newton credited the £1.5 million (less £7 bank charges) to Paradiso’s
289. There matters rested until 17 March 2008, when in the context of his long letter of that date to Mrs Newton (see paragraph 225 above) Mr Batkov referred to the side payment and then said:
“… You can not deny in any way that [Mr Neuman], as “a good will gesture”, transferred from
He then asked Mrs Newton to amend the completion statement for
290. On the same day Mr Neuman wrote to Mrs Newton requesting the immediate return of the £1.5 million. His letter was sent by fax, and was received by the Firm in the early hours of 18 March. At 2.06 am on the same day he repeated the same request by email.
291. In view of the conflicting claims now made to the £1.5 million, and the complaints in Mr Batkov’s letter of 17 March about the Firm’s conduct and the payment of £2 million to
“Obviously it is essential that [Mr Cherney] and [Mr Neuman] resolve their difficulties as soon as possible and jointly give the firm instructions as to whom the balance of the sale proceeds belong.”
292. On the same day Mr Neuman sent a further fax to Mrs Newton expressing astonishment that the Firm was refusing to release the £1.5 million to him. He said the money had been transferred for the purpose of a new acquisition of which the Firm was aware, and the money came from a joint account in the names of himself and his son, Emanuel Neuman, who was an investment banker in
293. Further discussions took place between Mrs Newton and Saphel Rose, and on 19 March she sent him an email referring explicitly to the £1.5 million and attaching Mr Neuman’s fax of the previous day:
“Further to our discussions yesterday, I refer to the money (£1,500,000 less bank charges) received from
294. Towards the end of March, Mrs Newton informed her senior partner, Mr Andrew Smith, of the competing claims to the £1.5 million. Mr Smith asked Richard Homewood, who was a litigation partner at the Firm, to look into the matter. Mr Homewood then discussed it with Mrs Newton on the telephone, and she provided him with further background information. Having considered the material supplied to him, he decided to seek the advice of specialist chancery counsel. The barrister he chose to instruct was Mr Thomas Braithwaite of Serle Court Chambers in
295. Mr Homewood’s instructions to Mr Braithwaite were contained in a letter dated 3 April 2008. On the previous evening he had sent by email to Mr Braithwaite’s clerk the documents that he wished him to read, attaching them “in the order in which they are to be read”. The documents comprised, in the following order:
(a) Mrs Newton’s memorandum of 18 March 2008 to Saphel Rose;
(b) her letter of 17 March 2008 to Mr Batkov;
(c) Mr Batkov’s letter to the Firm of 17 March;
(d) a lengthy letter written on 26 March by Mrs Newton to Mr Jeremy Collins of Berrymans Lace Mawer, who had been appointed to act by the Firm’s insurers, and a much shorter letter dated 2 April 2008 from Mr Collins to Mr Andrew Smith;
(e) some (but not all) of the relevant emails and correspondence passing between Mrs Newton and Mr Batkov between 25 January and 12 March 2008; and
(f) the demands from Mr Neuman for payment of the £1.5 million.
296. It is worth noting at this stage what Mrs Newton said to Mr Collins about the £1.5 million in her letter of 26 March 2008:
“16. Following completion of the sale of the shares in Thornley Estates and before repayment of the various funds advanced for the purchase of
…
As you will gather the Firm’s instructions have changed from time to time and in the light of this we are not certain to whom we should pay funds and whether funds we have previously paid were paid correctly. It may be that this is not a case to be referred to the insurers, but instead should be referred for determination by the courts. However the Firm does not wish to take any steps without the agreement of the insurers to the course of action.”
297. It can be seen from this extract from her letter that Mrs Newton regrettably concealed from Mr Collins the true circumstances in which the £1.5 million had been transmitted to the Firm, and implied that she accepted Mr Neuman’s latest assertion that the money had been transferred for use in connection with a new transaction on which the Firm was to be instructed. She also suggested that Mr Cherney’s claim to the money might be based on a “misunderstanding”, because it was nowhere stated that the money had been sent to the Firm for a purpose connected with
298. In his letter of 2 April 2008 to Mr Smith, Mr Collins pointed out that the operation of the Firm’s client account was entirely a matter for Mr Smith and his partners. He noted that the Firm was giving consideration to seeking interpleader relief, but declined to give any guidance. This non-committal response was no doubt one of the reasons why Mr Homewood decided to instruct counsel.
299. Mr Homewood’s letter of instruction to Mr Braithwaite is too long to quote in full, but I draw attention to the following extracts from it:
“This is a problem over monies held in a Child & Child client account where we are caught in the middle of a dispute between two individuals who have fallen out, one whom I shall call MC, an Israeli Russian and the Settlor of the Paradiso Foundation who is our client, and the other his erstwhile friend, Mr Frank Neuman (“FN”). Frank Neuman is also a client of the firm.
As I understand it MC and FN were in effect “partners/funders” in the purchase (and eventually sale) of shares in a company known as 11-15 Arlington Street Limited (“Arlington”) whose shares were in turn owned by Thornley Estates Limited (“Thornley”), a BVI company controlled by FN; in any event it seems that monies belonging to MC and to FN were co-mingled within the Paradiso client account.
…
The background to the current dilemma is that on about 25 January 2008 FN paid the sum of £1.5m to Child & Child; this was received into the Paradiso client account. FN has now asked for the return of the £1.5m. FN maintains that the £1.5m is not Paradiso Foundation monies but was always and remains his money. I understand that the £1.5m was paid in respect of a future transaction or transactions but which did not materialise (no doubt because of the ensuing dispute between FN and MC) …
…
If the £1.5m were to be repaid, this would leave £994,000 in the Paradiso client account being, so I understand, the remainder of monies on the sale of Arlington/Thornley. This might be an indicator that the £1.5m is not part of the sale proceeds.
As no claim has yet directly been made by MC in respect of the £1.5m – to date the only mention of the £1.5m as being, in effect, Paradiso monies is by Todov Batkov … should we now notify MC and ask him whether he asserts any claim to the £1.5m and that if not we will send the monies to FN? Not to inform MC accordingly possibly contravenes our duty as a solicitor to inform/advise etc MC/Paradiso Foundation as our client. Of course, if MC is so informed/advised he will no doubt lay claim to the £1.5m as he has done to the £2m. Hence, an interpleader is very likely.
…
[Mrs Newton] spoke yesterday to the Ethics section at the Law Society whose preliminary/off the cuff view was that as MC has made no claim for the return of the £1.5m, the duty on Child & Child is to return the monies to FN. I am not so sure on this in view of who the client is and what the client’s wishes may be.”
300. Mr Homewood made it clear in cross-examination that he had assembled the documents for counsel and written his letter of instruction under considerable time pressure, and had not had time to reflect on the case in any depth. The main priority, from the Firm’s point of view, was to get the papers down to counsel as soon as possible. He agreed, therefore, that some of the analysis in his letter to Mr Braithwaite was “fairly simplistic”.
301. On 15 April Mr Braithwaite gave some preliminary advice to Mr Homewood, suggesting that a letter should be sent to Mr Batkov asking him to explain how Mr Cherney maintained a claim to the £1.5 million. He also advised that contact should first be made with Mr Neuman to ascertain whether he objected to the Firm writing to Mr Batkov: if he did object, the Firm would be entitled to interplead, but if he did not, the letter should be sent. Mr Homewood then consulted Mrs Newton on the text of the draft letter, and she made a number of minor amendments. She also suggested that Mr Homewood should telephone Mr Neuman if he thought it advisable to do so in the light of counsel’s comments.
302. Earlier on the same day Mrs Newton found, and forwarded to Mr Homewood, her letter of 23 January 2008 to Mr Batkov together with its enclosures. Mr Homewood forwarded this material to counsel at about 5.30 pm. Later the same evening Mrs Newton also sent Mr Homewood the transfer request form with the “New Buy” narrative, commenting that this upheld Mr Neuman’s statement that the money was sent to be used in connection with a new acquisition “even though at the time I was not aware of that fact although did know that various transactions were being considered by him”. She also said that a letter had been received from Mr Neuman’s Spanish lawyers laying claim to all monies held by the Firm on Mr Cherney’s behalf. Mr Homewood forwarded this further material to Mr Braithwaite shortly before 9 am the next morning.
303. On 16 April Mr Neuman instructed Peters & Peters to act on his behalf. The partner with conduct of the matter was Mr Keith Oliver. He at once telephoned the Firm, and asked to speak to Andrew Smith as the senior partner. He demanded immediate repayment of the £1.5 million. He followed this up with a further telephone call, and a faxed letter marked “extremely urgent” which referred to the “New Buy” transfer slip and threatened to refer the matter to the Solicitors Regulation Authority unless the Firm agreed by 4.30 pm to attend a meeting the next morning. The reason given for the threatened reference to the SRA was that Mr Neuman’s funds were being “improperly retained”, and had been “plainly and inexplicably misapplied”, without Mr Neuman’s authority or knowledge, to another client or trust account.
304. This unwelcome development prompted Mr Smith to take charge of the situation himself, and he must have contacted Mr Braithwaite’s chambers soon after receiving Mr Oliver’s letter at 2.18 pm. They had a short conversation, but were unable to discuss the matter at any length because Mr Braithwaite was engaged in a conference. At 3 pm Mr Braithwaite called Mr Smith, and left a voicemail message saying he thought he had found an answer which would enable the Firm safely to repay the money to Mr Neuman. He said he could find no English authority on the point, but the decision of the Privy Council in Damodaran v Choe Kuan Him [1980] AC 497 “applies pretty much by analogy”, and his reading of it was “that if you want to pay Mr Neuman you will be safe in doing so without the risk of any complaint by Mr Cherney”.
305. Later the same afternoon, Mr Braithwaite sent an email to Mr Smith at 4.27 pm saying he had come across a further authority which in his view would justify the payment to Mr Neuman without fear of any legitimate claim by Mr Cherney. That authority was Re Becke (1854) 18 Beav 464, where a solicitor held funds on behalf of an administratrix; the next of kin made claim to the money, and the question was what the solicitor should do when the administratrix also claimed the funds. Mr Braithwaite continued:
“On application to the
“If an administratrix employs a solicitor for the purpose of getting in the assets, he is bound to pay over the money to his client, after deducting his costs, and here, an order would, if necessary, be made to compel him to pay over the whole amount to the Petitioner …
There can be no question but that if the next of kin had taken proceedings against Becke [the solicitor], he might have protected himself by saying “I am merely the solicitor of Mrs Mercer [the administratrix], and am only bound to pay over the money to her”, and, on the other hand, Mrs Mercer would be liable for the money received by her agent and solicitor.”
I can see no basis for distinguishing this authority, and it seems to me that acting bona fide [Child & Child] can, and is obliged, to pay Neuman and need not rely on an interpleader, even if it has knowledge of a potential claim by [Mr Cherney].”
306. Mr Smith at once forwarded this email to Mr Homewood, who in turn forwarded it to Mrs Newton. She replied to them both a few minutes later, noting the advice and asking Mr Smith whether he agreed that the money plus accrued interest could now be returned to Mr Neuman’s account in
(2) The pleaded case
307. As before, I will set out the pleaded case against the Firm in relation to this payment:
“127. On 17 April 2008, Child & Child paid out the further sum of £1,499,993 to Mr Neuman from their client account without obtaining or even seeking the authorisation of the Claimants or any of them. This sum had been transferred by Child & Child to their client account for Paradiso and was thus held on trust for Paradiso (alternatively Mr Cherney or Vida). Child & Child claim, in the statement of account in relation to the
128. However, as Child & Child knew by 17 April 2008, the payment on 30 January 2008 was itself a repayment of a part of the Side Payment. There was therefore no basis for making the “repayment” to Mr Neuman on 17 April 2008. In making the repayment, Child & Child were in further breach of the retainer and/or in breach of the duties of care and/or breach of trust, as a result of which Mr Cherney and/or Vida have lost £1,499,993. By these proceedings, in which the whole Side Payment was claimed against Mr Neuman, Mr Cherney and/or Vida sought to mitigate the said loss, but did not recover any of the said loss from Mr Neuman. Child & Child are, in any event, by reason of the said breach of trust liable to restore the sum of £1,499,993 to Mr Cherney and/or Vida.”
308. The references in paragraph 128 to Mr Cherney and Vida having “sought to mitigate” the loss in the present proceedings, and having failed to recover any of it from Mr Neuman, were added by amendment after the settlement agreement had been entered into. Before then, the statement was in the present tense and read as follows:
“By these proceedings, in which the whole Side Payment is claimed against Mr Neuman, Mr Cherney and/or Vida seek to mitigate the said loss.”
(3) Liability
309. In the light of the findings of fact which I have made, I consider that the £1.5 million was paid by Mr Neuman out of the side payment as an addition to the “above board” proceeds of sale of Arlington Street, and was intended by him to be held thenceforth on the same basis as the remaining balance of the £13.3 million. This was well understood by Mrs Newton, and it explains why she paid the money into the Paradiso client account. Unlike the payment of £500,000 for Mr Singh, the £1.5 million was not paid into the account to fund an immediate onward transmission to a third party. Nor, in my view, was it held by the Firm on a resulting trust for Mr Neuman, to await his further instructions as to its disposal. Such an analysis would be inconsistent with the payment into a client account in the name of Paradiso, and with Mr Neuman’s desire to make the payment as a gesture of good will, or perhaps more accurately as a partial climb down, in his dispute with Mr Cherney. I therefore conclude that from the moment when the £1.5 million was paid into the account it was impressed with the same trusts as the remainder of the above board
310. If that is right, it is plain that the money was then paid back to Mr Neuman without the Firm obtaining, or even seeking, the authority of Paradiso or Mr Cherney to do so. They knew nothing about the payment until it had been made, and they were presented with it as a fait accompli. Matters had not even reached the stage of Mr Braithwaite’s proposed letter to Mr Batkov, because his preliminary advice to Mr Homewood had not been acted upon before it was superseded by his subsequent advice to Mr Smith. It follows, in my judgment, that the repayment to Mr Neuman was made in breach of trust, and Paradiso is prima facie entitled to require the Firm to restore the same amount to the client account.
(4) The Firm’s reliance on counsel
311. The Firm relies on the fact that it sought, and then followed, advice from experienced chancery counsel. This reliance is relevant both to the Firm’s pleaded claim to be excused for any breach of trust pursuant to section 61 of the Trustee Act 1925, and to the separate issue whether the Firm breached its duty of care to the claimants. It is clear, however, that reliance cannot be placed on the advice if Mr Braithwaite was not supplied by the Firm with all the information he needed to consider and advise on the issue; and still less can reliance be placed if he was supplied with information which was in any material respect wrong or misleading.
312. I will approach this issue by looking first at the advice which counsel eventually gave to Mr Smith, and which the Firm then followed. As far as I can see, this advice was solely based on two authorities: Damodaran v Choe Kuan Him [1980] AC 497 (PC) and Re Becke (1854) 18 Beav 462. These were the cases which evidently satisfied counsel that the Firm could safely pay the money to Mr Neuman without Mr Cherney’s consent, and that his earlier, more cautious, advice need no longer be followed.
313. The issue in Damodaran appears clearly from the headnote:
“The vendor was the registered proprietor of land [in
The Privy Council held, allowing the vendor’s appeal, that in proceedings to enforce a solicitor’s undertaking to pay over a sum of money the protection of the interests of any strangers to those proceedings was not a valid ground for the exercise by the court of its discretion to order payment of money into court. As Lord Diplock, delivering the judgment of the Board, said at 502E:
“The main purpose and value of a solicitor’s undertaking in transactions for the sale of land is that it is enforceable against the solicitor independently of any claims against one another by the parties to the contract of sale.”
314. The nature of the issue in Re Becke appears sufficiently from Mr Braithwaite’s email of 16 April 2008 to Mr Smith. The judgment of Sir John Romilly MR is reported only briefly, and the relevant parts of the judgment are cited in counsel’s email. It is perhaps worth noting that the solicitor’s reasons for refusing to pay over the money to his client were anyway suspect, because he had apparently instigated the proceedings by one of the other next of kin which he was using as a justification for his conduct.
315. The decision in Damodaran turned on the existence of a solicitor’s undertaking, which has no parallel in the present case. There is no suggestion that the Firm or Mrs Newton ever gave Mr Neuman an undertaking to return the £1.5 million. With respect to counsel, I am therefore unable to see how the case was of any assistance, even by way of analogy. In Re Becke, however, the position was different. There was no solicitor’s undertaking, but the solicitor had received the fund on behalf of his client, the administratrix. He was therefore bound to pay it over to her on demand, because he held it as her agent and on her behalf. If the next of kin had a claim, it was one which they had to bring against the administratrix, and the solicitor would have had a complete defence if they had sued him. The case therefore turned on the relationship of solicitor and client, and the fact that the solicitor received the fund on his client’s behalf. None of that is at all surprising, but again it bears no relation to the facts of the present case. Mrs Newton was not acting as Mr Neuman’s solicitor when he paid her the £1.5 million, and he was not at that point a client of the Firm. Mrs Newton only had authority to take instructions from him on behalf of Mr Cherney and the
“… might appear to be akin to putting Paradiso Foundation in the position of a bank who receives monies in from a customer, and thereafter the monies can be paid out to a customer. But here there is a solicitor/client relationship as opposed to a banker/customer relationship.”
316. It is only fair to say that Mr Homewood then stressed that, once the payment had been made, Paradiso was the client which controlled the movement of money out of the client account, including the £1.5 million; and he expressly doubted whether Mr Neuman still exercised control of Paradiso together with Mr Cherney. He thought that this might be the determining point in deciding that an interpleader by the Firm was inevitable. He also expressed doubt about the off the cuff view which Mrs Newton had obtained from the Law Society to the effect that it was the Firm’s duty to return the money to Mr Neuman. Mr Homewood said he was not so sure of this “in view of who the client is and what the client’s wishes may be”.
317. Even on the false assumption that Mr Neuman was a client of the Firm, I confess that I still find it hard to understand how counsel can have given the confident advice which he did. If only because the money was paid into the Paradiso client account, it seems to me obvious that the possibility of a claim to the money by Paradiso or Mr Cherney could not safely be discounted. However, the important point for present purposes is that Mr Braithwaite’s instructions were, in an important and highly material respect, misleading. Furthermore, if the true position concerning the side payment, as it was known to Mrs Newton, had been clearly and honestly explained to him, I do not for a moment believe that Mr Braithwaite would have given the advice which he did. It is true that some references to the side payment were to be found in the documents supplied to him, including in particular Mr Batkov’s letter of 17 March 2008, but the strong impression was given that this was a matter about which the Firm knew nothing; and the further material supplied for counsel by Mrs Newton had all been designed to bolster Mr Neuman’s case about the payment of the money, which she must have known to be false. In these circumstances, I cannot avoid the conclusion that the instructions provided to Mr Braithwaite were, in every sense of the word, partial, quite apart from the mistaken statement that Mr Neuman was a client.
318. The main responsibility for this regrettable state of affairs must, in my judgment, lie with Mrs Newton, who failed to explain the position fully and frankly to her colleagues. Mr Homewood had to produce his instructions for counsel under considerable time pressure, and he had had no prior involvement with the case. Apart from the error about Mr Neuman, his instructions seem to me to reveal a generally sensible and thoughtful approach to the problem. The only surprise, to my mind, is that counsel felt confident enough to depart from his initial advice that the first step should be to find out whether Mr Cherney wished to advance a claim to the money. Had that sensible step been taken, there can be no doubt that a claim would have been forcefully advanced, and the Firm would then have had no option but to interplead, or apply to the court for directions.
319. I must also add that, although a solicitor is normally entitled to rely on advice from competent counsel who has been properly instructed, it is well established that the solicitor cannot shelter unthinkingly behind counsel and still has a duty to consider the matter for himself: see, for example, Jackson and Powell on Professional Liability, 6th edition, paragraphs 11-118 to 11-120 and the cases there cited.
320. Given that counsel’s revised advice depended on two cases only, and on the proposition that Mr Neuman was acting as a client of the Firm when he made the payment, I consider that it was incumbent on Mr Smith to consider the position carefully for himself before acceding to the urgent demands being made by Peters & Peters. It seems, however, that Mr Smith was content to rely on counsel’s specialist knowledge without addressing his own mind to the problem. In my view this fell below the standard of conduct reasonably to be expected from the senior partner of a firm which specialised in private client work, and although I have some sympathy with the predicament in which he found himself, I think that Mr Smith should have taken time for mature and careful consideration of Mr Braithwaite’s advice before yielding to Mr Neuman’s importunate demands.
321. To conclude on this issue, I decline to excuse the Firm’s breach of trust under section 61 of the Trustee Act 1925. Section 61 provides as follows:
“If it appears to the court that a trustee … is or may be personally liable for any breach of trust … but has acted honestly and reasonably, and ought fairly to be excused for the breach of trust and for omitting to obtain the directions of the court in the matter in which he committed such breach, then the court may relieve him either wholly or partly from personal liability for the same.”
In my judgment the Firm cannot be said to have acted reasonably, given the deficiencies in the instructions to counsel and its failure to give proper and independent consideration to his advice. Nor would it be fair to excuse the Firm for the breach of trust, in view of their status as skilled professionals acting in the course of their professional business for reward: see National Trustees Company of Australasia v General Finance Company of Australasia [1905] AC 373 (PC) at 381-2 and Re Windsor Steam Coal Company (1901) Limited [1929] 1 Ch 151 (CA) at 164 per Lawrence LJ. There is in my view no answer to the short and simple point that the Firm should have protected itself by initiating suitable court proceedings, whether by way of interpleader or an application for directions, if the conflicting claims to the £1.5 million could not be resolved by consent.
322. For the same reasons, I also hold that in making the repayment to Mr Neuman the Firm was in breach of the contractual and tortious duties of care which it owed to Paradiso and Mr Cherney.
(5) Loss
323. It remains to consider whether the claimants (or any of them) have in fact suffered any loss as a result of the Firm’s breaches of trust and duty. Prima facie, Paradiso has of course lost the £1.5 million that was paid away without authority to Mr Neuman; but the same considerations which have already led me to conclude that the claimants are unable to establish any loss in relation to the £2 million paid to Rye Park seem to me to apply with (if anything) even greater force in relation to the £1.5 million. The claim to recover that sum from Mr Neuman himself is among the matters covered by the compromise agreement between the claimants and Mr Neuman, and in the murky circumstances of the present case I am quite unable to conclude that Mr Cherney has not, in one way or another, received full value for the claim. Further, since the £1.5 million was paid from, and returned to, Mr Neuman’s Spanish bank account, it is possible that the “missing” Spanish settlement agreement may contain relevant provisions which have been kept from the court.
324. I also consider that the circularity point applies with particular force to the £1.5 million. Since the money was repaid to Mr Neuman, at his request, the Firm would appear to have an unanswerable claim for contribution against Mr Neuman pursuant to section 1(1) of the Civil Liability (Contribution) Act 1978 which says that “any person liable in respect of any damage suffered by another person may recover contribution from any other person liable in respect of the same damage (whether jointly with him or otherwise)”. Further, since the whole of the misapplied £1.5 million was paid to Mr Neuman, and he has therefore had the full use and benefit of that sum, the principle established by the decision of the House of Lords in Dubai Aluminium Co Ltd v Salaam [2002] UKHL 48, [2003] 2 AC 366, applies: Mr Neuman must bring the full £1.5 million into account before it could be “just and equitable” (in accordance with section 2(1) of the 1978 Act) to place any part of the burden on the Firm, which received no benefit from its breach of trust and negligence.
325. As Lord Nicholls said in Dubai Aluminium:
“52 … The object of contribution proceedings under the Contribution Act is to ensure that each party responsible for the damage makes an appropriate contribution to the cost of compensating the plaintiff, regardless of where that cost has fallen in the first instance. The burden of liability is being redistributed. But, of necessity, the extent to which it is just and equitable to redistribute this financial burden cannot be decided without seeing where the burden already lies. The court needs to have regard to the known or likely financial consequences of orders already made and to the likely financial consequences of any contribution order the court may make.
…
53. In the present case a just and equitable distribution of the financial burden requires the court to take into account the net contributions each party made to the cost of compensating Dubai Aluminium. Regard should be had to the amounts payable by each party under the compromises and to the amounts of Dubai Aluminium’s money each still has in hand. As Mr Sumption submitted, a contribution order will not properly reflect the parties’ relative responsibilities if, for instance, two parties are equally responsible and are ordered to contribute equally, but the proceeds have all ended up in the hands of one of them so that he is left with a large undisgorged balance whereas the other is out of pocket.”
See too the speeches of Lord Hobhouse (at paragraphs 76 to 77) and Lord Millett (at paragraphs 161 to 164). It follows from the application of this principle that the Firm would be entitled to recover contribution of 100% from Mr Neuman, even if in terms of relative culpability and responsibility for the loss they were (say) equally to blame.
326. Under paragraph 8 of the compromise agreement, Mr Cherney would then be liable to indemnify Mr Neuman for the full amount of the Firm’s contribution claim, so he would end up bearing the full amount of the loss which the claimants sought to recover. This is relevant in at least two ways. First, it shows that no real value can be attributed to the saving in the settlement agreement for the right to claim this sum from the Firm. Secondly, it would in my view be an abuse of process if the court were to countenance such a pointless procedure.
327. There is one further point which I should add. It may be the case that Mr Cherney would not be liable to indemnify Mr Neuman if Mr Neuman could be shown to be in breach of his own obligation to provide Mr Cherney with such assistance as the claimants might reasonably require in respect of their claims against the Firm. But in those circumstances the reason for Mr Neuman’s failure to obtain an indemnity would be his own breach of contract. That would be a matter between him and Mr Cherney, for which the Firm could not in any way be held responsible. It would accordingly represent a break in the chain of causation, as between the claimants and the Firm, and the possibility of the claimants having a worthwhile claim against the Firm because of Mr Neuman’s breach of contract could not in itself remedy the abuse of process in proceeding against the Firm, or justify the claimants in seeking to obtain judgment against the Firm for the £1.5 million.
328. In all the circumstances, I conclude that this claim too must fail.
Conclusion
329. I believe that I have now dealt with all of the claims against the Firm. For the reasons which I have given, I hold that each claim fails. It follows that the action against the Firm must be dismissed. It also follows that the Firm’s Part 20 claim against Mr Neuman must be dismissed, because the Firm has not been held liable in respect of any damage suffered by the claimants.