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OUTER HOUSE, COURT OF SESSION [2007] CSOH 198 |
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CA5/07 |
OPINION OF LORD REED in the cause COMMONWEALTH OIL & GAS COMPANY LIMITED Pursuers; against (FIRST) NICHOLAS WILSON BAXTER and (SECOND) EURASIA ENERGY LIMITED Defenders: ________________ |
Pursuers: Keen, Q.C., Munro; Brodies
Defenders: Currie, Q.C., Lindsay; McGrigors
Introduction
[1] This
case concerns an agreement, described as a Memorandum of Understanding, entered
into between the second defenders (whom I shall refer to as Eurasia) and the
State Oil Company of the Azerbaijan Republic ("SOCAR"), under which Eurasia
were granted an exclusive right, for a period of twelve months, to
negotiate with SOCAR on the terms of a possible further agreement relating to
the exploration and development of an oil exploration block in Azerbaijan ("the
Eurasia block"). In the event, the
Memorandum of Understanding expired without any further agreement being
concluded. In their pleadings in these
proceedings, the pursuers (whom I shall refer to as COGCL) maintain that the
conclusion of the Memorandum of Understanding was the result of the diversion
by the first defender (whom I shall refer to as Mr Baxter) to
[2] In
the summons, COGCL seek in the first place an account of the profits accruing
to Mr Baxter personally by reason of his breach of fiduciary duty. They further seek a declarator that
[3] In
response, Mr Baxter denies having acted in breach of fiduciary duty, and
The history of the case
[4] It is convenient at this
point to say something about the history of the case. The action originally proceeded at the
instance not only of COGCL but also of their parent company, Arawak Energy
Corporation ("Arawak"). The defenders
included not only Mr Baxter and
[5] In
February 2007 the summons underwent considerable adjustment. The averments relating to the misuse of
confidential information as an aspect of breach of fiduciary duty were deleted,
together with the averments of breach of confidence and the averments of breach
of contract by Interact. Averments were
introduced alleging, for the first time, that Mr Baxter had been given the
task, as a director of COGCL, of finding new business opportunities in
[6] In
June 2007 a proof before answer was allowed. It was understood that the issue to be resolved
at that stage was whether Mr Baxter was under a duty to account to COGCL
by reason of a breach of fiduciary duty, and whether Eurasia held the
Memorandum of Understanding and any profits flowing from it as constructive
trustees for COGCL, and as such were equally under a duty to account. As I have explained, after evidence had been
led (indeed, during the course of the closing submissions on behalf of
Mr Baxter and Eurasia), counsel for COGCL departed from the conclusions
for an accounting and for a declarator of constructive trust, since it was
accepted that the Memorandum of Understanding had expired without any profits
being derived from it. The court was
invited instead to make findings that there had been a breach of fiduciary duty
by Mr Baxter, and also a breach of duty by
[7] Counsel
for Mr Baxter and
[8] As this summary of the history of the case indicates, the case is concerned with a complex network of relationships between different companies and individuals. It is necessary to keep in mind the different types of relationship - some arising by virtue of directorships, others under contract - and also the different companies involved. In relation to the latter point, a feature of the evidence was the lack of attention paid to the distinct identities of different companies, although separate corporate personality was freely used to create "vehicles" which could be used for commercial purposes.
The witnesses
[9] It is appropriate next to
say something about the witnesses led at the proof. They were:
1. Mr Baxter, who was led by counsel for COGCL as his first witness.
2. Mr Alastair McBain, the president and chief executive officer of Arawak and a director of COGCL, CGL and GOC.
3. Miss Magdalena Bujnowska, the corporate secretary of Arawak.
4. Mr James Coleman,
Q.C., a corporate lawyer practising in
5. Mr Jay Scott, a former director of COGCL, CGL and GOC.
6. Mrs Susan Baxter, who is married to Mr Baxter.
[10] Mr Baxter was an impressive witness, who took care to be accurate in his evidence, and was precise as to the clarity or otherwise of his recollection. It is unfortunate that he was led in advance of COGCL's own witnesses, with the consequence, first, that he gave evidence before the evidence against him had been heard, and secondly, that his evidence in support of his own position had to be taken in the form of cross-examination. As a consequence, he did not have an opportunity to respond to evidence given by subsequent witnesses, and some of his own evidence in re-examination was not explored as fully as it might otherwise have been. His evidence was generally consistent with the contemporaneous documents. Bearing in mind that the onus of proof lies on COGCL, and that the evidence given by their witnesses was generally somewhat less impressive (for the reasons explained below), I have in general accepted Mr Baxter's account of events.
[11] Mr McBain was another careful and measured witness. He was precise in his use of language, and was candid as to the clarity (or otherwise) of his memory. He appeared to me to be doing his best to give his honest recollection of events. That recollection was however not generally as clear as Mr Baxter's. Mr McBain also became visibly tired on a number of occasions during his evidence and had difficulty concentrating on questions, necessitating adjournments. Mr McBain's evidence is in some respects difficult to reconcile with the contemporaneous documents, and with the inferences which could reasonably be drawn from undisputed events and the inherent commercial probabilities, as explained below. Where his evidence conflicts with Mr Baxter's I have usually (but not invariably) preferred that of Mr Baxter.
[12] One point which emerged clearly was that both Mr Baxter and Mr McBain are intelligent and astute businessmen, who know each other well. I have no doubt that, in their dealings with each other, a great deal would go without saying, as Mr Baxter observed in his evidence.
[13] The remaining witnesses were less important. Ms Bujnowska's evidence added little to
Mr McBain's. It appeared to me to
be coloured by her loyalty to Arawak (her demeanour towards counsel for
Mr Baxter and
[14] In addition to the evidence given by the witnesses, an agreed chronology of events was also produced.
The factual circumstances
[15] Although the issues in this
case arise primarily out of events which occurred between 13 April 2004,
when Mr Baxter became a non-executive director of COGCL, and
7 December 2005, when the Memorandum of Understanding was signed, the
evidence at the proof covered a much longer period. Events prior to April 2004 were examined
in detail, as forming the background to the critical period and establishing
the context in which Mr Baxter became a director. Events subsequent to
Events prior to Mr Baxter's
becoming a non-executive director of COGCL
[16] After training as a geophysicist, Mr Baxter worked on
mineral exploration projects around the world, and became a director of a
company involved in the sale of geophysical equipment and services. In 1985 he went into business with Mr Jeremy
Little, and formed Addison & Baxter Ltd ("ABL"), a private company
incorporated in
[17] In about 1993, following the break-up of the former
[18] Mr Baxter explained in evidence that many oil companies
were attracted to the former
[19] Following the successful completion of the offshore seismic
survey, and the development of a good working relationship with SOCAR,
Mr Baxter spoke to SOCAR's technical staff and expressed an interest in
undertaking a project in
[20] In October 1995 Mr Baxter and Mr Little formed COGCL
as a wholly-owned subsidiary of ABG, incorporated in
[21] Reference was made during the course of the evidence to COGCL's
Articles of Incorporation and By-Law, but they were not examined in any
detail. Both documents bear to be made
under
[22] In July 1997 Mr Baxter and Mr Little formed CGL
as a wholly-owned subsidiary of COGCL, incorporated in
[23] In June 1998 Mr Baxter's efforts resulted in the
conclusion of the first onshore EDPSA in
[24] In May 2000 GOC was incorporated in
[25] The EDPSA included a minimum obligatory work programme, to be
completed by November 2001. ABG was
unable to provide its subsidiaries (COGCL, CGL and GOC) with the funds required
to carry out the work. By 2001 little of
the programme had been completed. ABG
then became involved in discussions with Mr McBain, a consultant with
Vitol Services Limited, a member of the Vitol group. Vitol was a privately owned group of companies,
primarily concerned in oil trading. It
was a far larger enterprise than ABG:
its gross revenues in 2001 totalled US$32 billion. In the course of the discussions
Mr McBain travelled to
[26] In relation to ABG, Rosco SA, a Swiss-based wholly-owned subsidiary of Vitol, was to acquire 22.63 per cent of the share capital, with an option to increase its holding. Rosco was also to have the right to nominate two directors. In relation to COGCL, Rosco was to "retire" the long-term debts. In relation to CGL, a loan was to be provided by Rosco in order to provide CGL with the working capital required to complete the minimum work programme. Rosco was also to subscribe for 62.83 per cent of the share capital of CGL, the remaining 37.17 per cent of CGL's share capital being retained by COGCL.
[27] In May 2002 the arrangements between Rosco, ABG, COGCL and
CGL were implemented, SOCAR having been persuaded to extend the deadline for
the minimum programme until November 2003.
Mr McBain and Mr Roland Favre (a director of Rosco) became
directors of ABG and of GOC. Soon
afterwards, at Mr McBain's suggestion, Mr Scott went to
[28] Soon afterwards, Mr McBain made it clear that he wished to replace Mr Baxter and Mr Little in the management and control of CGL and GOC. Since Rosco owned 62.83 per cent of the shares in CGL, and GOC was wholly owned by CGL, Mr Baxter and Mr Little had no option but to accede. In July 2002 they resigned from their positions as, respectively, the president and chairman of both companies. They were replaced by Mr Scott, as president, and Mr McBain, as chairman. In relation to the replacement of Mr Baxter, Mr McBain said in evidence that Mr Baxter was "a deal maker with a coterie of contacts", but that what was needed was someone with hands-on experience of running an oil rig and commissioning contracts. Mr McBain also replaced Mr Baxter as CGL's representative on the committees established under the EDPSA to manage relations between the contractor parties and SOCAR. CGL and GOC were then managed on a day-to-day basis by Mr Scott and Mr McBain.
[29] From that point onwards Mr Scott reported to Mr McBain on
operations in
[30] Mr McBain invited Mr Baxter and Mr Little to a
meeting on
[31] Mr McBain said in evidence that he was disappointed at the meeting by Mr Baxter's reaction to the dismissal of Mr Khait and Mr Mendeleyev. His perspective was that Vitol had rescued ABG and had increased greatly the value of Mr Baxter's shareholding in the company, and that Mr Baxter was nevertheless failing to give Vitol his support. He regarded Mr Baxter's reluctance to accept the allegations about Mr Khait and Mr Mendeleyev, and his request for evidence, as unreasonable. He said in evidence that the culture of backhanders and illegal payments was endemic in that part of the world. In a country which suffered from endemic corruption, it was difficult to provide proof: it was not a question of calling in the police. Vitol's way of dealing with this was to stamp it out immediately. It was futile for them to fund a company and find that the funds were not being used properly. They therefore decided to take control of ABG and COGCL. Mr McBain said in evidence that, at the meeting, "we informed Mr Baxter forcefully that that would be our intention". Mr Baxter and Mr Little were invited to make a proposal within seven days under which Rosco would obtain board and executive control of ABG and COGCL. They were told that they would have a role in ABG in the future.
[32] On
[33] Since ABG was a public company listed on a Canadian stock
exchange, Mr McBain then sought advice from Mr Coleman, a Canadian
lawyer, about how Vitol might acquire control of ABG. Mr Coleman advised that it would be best
to seek the support of the non-executive directors. He would go to
[34] In his evidence in relation to this chapter of events,
Mr McBain's position in summary was that he was disappointed by Mr Baxter's
behaviour, and in particular by his failure to take seriously the allegations
concerning Mr Khait and Mr Mendeleyev. Although Mr McBain initially appeared to
accept that Vitol's decision to take control of ABG and COGCL had been taken
before the meeting on 2 August, and at another point in his evidence said
that he could not remember, his final position was that it was as a result of
Mr Baxter's reaction to the dismissal of Mr Khait and
Mr Mendeleyev that he decided that Mr Baxter had to be relieved of
his management responsibilities.
Mr McBain described Vitol's taking control of ABG from
Mr Baxter and Mr Little as "the last thing we wanted at that
time". Vitol had been compelled to take
this "drastic" step as a result of the "unwillingness or inability of the
previous board [of ABG and COGCL] to deal with the contagion of corruption". Mr McBain also maintained that he
thought at the time that Mr Baxter would in the future be an important
asset to the ABG group, because of his relationships in
[35] It appears however from the contemporary documents that Mr Baxter and Mr Little did in fact take the allegations seriously and wished to have a full investigation carried out, and that it was Mr Little rather than Mr Baxter who was particularly vocal in expressing his desire to see supporting evidence. The documents do not convey to me the impression that Mr Baxter's being relieved of his responsibilities was primarily the result of his reaction to the dismissal of Mr Khait and Mr Mendeleyev. It appears to me that Mr Baxter was probably correct in his impression that the decision that Vitol (or Rosco, the two being effectively indistinguishable) should take control of ABG and COGCL had been taken in advance of the meeting on 2 August. The decision of Mr Taylor, the president and chief executive of Vitol, to attend that meeting appears to me to be consistent with that conclusion. Mr McBain's written summary of the meeting, expressly "for the record", also supports that conclusion, as it links the decision to take control of ABG and COGCL to the exercise of the share options ("Rosco is exercising all its remaining warrants, and requires board and executive control of ABG and COGCL"), and deals with the dismissal of Mr Khait and Mr Mendeleyev as a separate item.
[36] Later in August 2002 Mr McBain wrote to Mr Baxter
and Mr Little, recording his surprise at their reluctance to accept Rosco's
position in relation to Mr Khait and Mr Mendeleyev, and his dismay
that Mr Khait and Mr Mendeleyev remained on the payroll of companies in the ABG
group. In his letter, Mr McBain set out the grounds for suspicion about
Mr Mendeleyev in particular: the
case against Mr Khait was that Mr Mendeleyev could not have acted as
he was alleged to have done without at least tacit support from Mr Khait.
[37] In
early September 2002 Mr Coleman and Mr McBain had a number of
meetings in
[38] At the
meeting of the board of directors of ABG on
[39] This is
a convenient point to explain how directors' fees were paid. Mr McBain explained in evidence that all
directors of all companies in the ABG (now Arawak) group received a total of US$15,000
per annum for their directorships, regardless of how many directorships they
held. If a directorship was held in a
company which was only part-owned by Arawak (directly or indirectly), that
would be the company which was billed for the fees: in his own case, CGL (in which Arawak hold a
minority shareholding via COGCL) was billed US$15,000 for his fees.
[40] According
to the minutes, there took place simultaneously with the ABG board meeting a
meeting of the shareholders of COGCL. So
far as appears from the evidence, this was the only shareholders' meeting of
COGCL to take place. The minute records that
Mr McBain was present, representing the sole shareholder, ABG. Mr McBain was appointed chairman of the
meeting. He received the resignations of
Mr Baxter, Mr Little and Mr Crabtree from COGCL's board of
directors. He proposed that the board be
reduced to four directors. That
motion was seconded by Mr McBain, and passed unanimously. His motion that the directors should be
himself, Mr Favre and two of ABG's non-executive directors was likewise
seconded by himself and passed.
[41] In
summary, therefore, on
[42] Following
the meeting on 10 September, Mr Scott was appointed as COGCL's
representative for the purposes of the representative office in
"We have received professional advice that our shareholdings in ABG
will continue to be eligible for full business asset taper relief for CGT
purposes while we are officers or employees (full time or otherwise) of the
Company or of a company having a relevant connection.
Apparently our directorships (even though non-executive) qualify us as
'officers' under the
This matter was reflected in both the termination
agreement and the consultancy agreement (which I shall refer to as "the first
consultancy agreement"), as explained below.
[43] The
matter with which the negotiations were principally concerned, however, was the
"non-compete" clause (as it was described in evidence) which Mr McBain
wished to have included in the consultancy agreement. It appears from Mr Coleman's evidence
that one of the purposes of the consultancy agreements was to prevent
Mr Baxter and Mr Little from assisting or establishing a competing
operation. A "non-compete" clause was
considered necessary, or at least desirable, notwithstanding that
Mr Baxter remained a non-executive director of ABG, CGL and GOC. In that regard, it has to be borne in mind
not only that Mr McBain intended to remove Mr Baxter from the board
of ABG at the next annual general meeting, but also that Mr McBain had
been involved for several months in negotiations with the China National
Petroleum Corporation ("CNPC") with a view to selling to it the whole or a part
of ABG's or Rosco's interest in the EDPSA.
Mr Baxter and Mr Little reluctantly accepted the restrictions
proposed by Mr McBain.
[44] The termination
agreement was entered into between ABG, ABL, COGCL, Mr Baxter and his then
wife. It was not subject to any
limitation of time. As had been
envisaged, it provided for the payment to Mr Baxter of a lump sum
equivalent to six months' salary, without admission of liability. In relation to taper relief, it provided (at
clause 13):
"The Employer [defined as meaning each of ABG, ABL and COGCL]
acknowledges that notwithstanding the termination of the Employee's employment,
the Employee intends to benefit from full business asset taper relief for
Capital Gains Tax purposes in respect of his shareholding in ABG. The Employer agrees to use reasonable
endeavours to co-operate with the Employee in respect of the Employee obtaining
the benefit of such relief".
[45] The
first consultancy agreement was also entered into between ABG and
Mr Baxter. Although executed on
"for itself and as agent and
trustee for and on behalf of each Group Company".
the latter expression being defined as meaning:
"The Company [ABG], any company which is a subsidiary of the Company,
and Rosco SA only to the extent that Rosco SA is carrying on the Business in
place of the Company and/or any subsidiary of the Company".
The expression "the Business" was defined as meaning:
"The business now being carried on by the Company and any company which
is a subsidiary of the Company, being the exploration, production and
development of (and related activities in respect of) any hydrocarbon products
(including gas and crude oil) carried out within the
At the time, the only active subsidiaries of ABG were
ABL and COGCL. Under the agreement,
Mr Baxter was to supply "such consultancy services as the Company (acting
through the Company representative [Mr McBain] or otherwise) shall from
time to time require in relation to the management of its business". The services were to be provided for up to
six working days per month.
Mr Baxter was to be paid US$125,000, and his expenses were to be
reimbursed.
[46] Under
the non-compete provisions (clause 3.2), Mr Baxter undertook that during
the currency of the agreement he would not
"3.2.1 be
in any way directly or indirectly employed, engaged, interested or concerned
(whether as director, officer, employee, shareholder, partner, agent,
consultant or otherwise) in any business or undertaking of any kind which is
wholly or partly in competition with the Business carried on by the Company or
any Group Company in Azerbaijan or where this is or is likely to be otherwise
in conflict with the interests of the Company or any Group Company in
Azerbaijan ....
3.2.2 whether
by himself or by his servants or agents or otherwise howsoever and whether as a
consultant, principal, partner, director, employee or otherwise directly or
indirectly provide or procure the provision of any consultancy services or
carry out or procure the carrying out of any other business activity, work or
services to or for the benefit of any competitor of the Company or of any Group
Company if the services, activity or work relate to or are concerned with the
Business".
As Mr Baxter observed in evidence, although the
agreement was framed as a contract under which he could be required to work for
up to six days per month for ABG, the practical effect of clause 3.2
was to prevent him from working for himself or anyone else in the oil and gas
industry in Azerbaijan during the currency of the agreement. In addition, clause 3.4 required
Mr Baxter, during the currency of the agreement, to
"use his best endeavours to promote and protect the interests of the
Company and each Group Company and [not to] do anything which is harmful to
those interests".
Clause 7.4 dealt with taper relief and was in
similar terms to clause 13 of the termination agreement.
[47] In
evidence, Mr McBain initially maintained that he was unaware at this time
that taper relief was a matter of importance to Mr Baxter. Under questioning, however, he accepted that
it would have been reasonable for him to infer that taper relief was important
to Mr Baxter and Mr Little, and that it had been made clear to him that
they qualified for taper relief as long as they held directorships in the ABG
group. In the light of the documentation,
I accept that the importance which Mr Baxter and Mr Little attached
to taper relief was clear to Mr McBain.
[48] In
January 2003 ABG announced that Rosco had entered into agreements for the
sale of its 62.83 per cent interest in CGL to two Chinese-controlled
companies, CNPC International Ltd ("CIL") and Smart Achieve Developments Ltd
("SADL"), which were trading affiliates of CNPC. COGCL was to retain its 37.17 per cent
interest in CGL. The transaction was
completed in March 2003. At that
point a shareholders' agreement was entered into between CIL, SADL, COGCL and
CGL. It provided that the board of
directors of CGL and of GOC should comprise seven directors. The Chinese companies had the right to
appoint and remove four directors from time to time, and COGCL had the
right to appoint and remove the remaining three directors. The Chinese companies also had the right to
appoint and remove the president of CGL and of GOC.
[49] In
April 2003 Mr Scott resigned as president of CGL and GOC, and was
replaced by a nominee of the Chinese companies.
Mr Scott became a director of CGL, along with four nominees of
the Chinese companies. Mr Little,
Mr Crabtree and others resigned as directors of CGL. Mr McBain and Mr Baxter continued
to be directors of CGL. Although
Mr Baxter was never appointed by COGCL as a director of CGL, he effectively
held office as a director of CGL at the pleasure of COGCL.
[50] Although
Mr Scott had been relieved of his executive responsibilities with CGL and
GOC, he remained in
[51] On
"The Chairman called upon Mr McBain to review other opportunities
that the Company [i.e. ABG] is considering.
Mr McBain outlined briefly what the company was looking at and
indicated that Jay Scott had been hired to seek out other opportunities".
This meeting took place during the currency of
Mr Baxter's first consultancy agreement.
Mr McBain accepted in evidence that Mr Scott had been tasked
to seek other opportunities in
[52] As at
this point, Mr Baxter had lost all his directorships in the ABG group,
(i.e. ABG and its subsidiaries), apart from his directorship of ABL, which was
not a trading company. All his contracts
of employment had been terminated, bringing to an end the substantial
remuneration which he had earned (his annual salary as chief operating officer
of ABG having been £118,500). He had the
first consultancy agreement, which was due to expire in September 2003. From July 2003, as explained below, he
received US$15,000 per annum from CGL in respect of his non-executive
directorships of CGL and GOC, those companies now being under Chinese
control. CGL paid the same amount to its
Chinese directors.
[53] Later
in May 2003 Mr McBain found himself in disagreement with the Chinese
directors of CGL as to whether CGL's annual budget was a subject which should
be discussed by the board of directors (of which he and Mr Baxter were
both members). He asked Mr Baxter
to review the shareholders' agreement.
Mr Baxter then reported to Mr McBain on matters relevant to
meetings of the CGL board, and on matters relevant to meetings of CGL's
shareholders. One matter which he
mentioned was that the EDPSA required the "contractor parties" (i.e. CGL and
SOCAR Oil Affiliate) to enter into a joint operating agreement to regulate the
conduct of the operations, and that SOCAR was likely to remind CGL shortly of
the need for such an agreement. When
asked about the capacity in which he provided this report, Mr Baxter said
that the lines between companies got blurred at times, and he was not
necessarily conscious of the capacity in which he was doing anything. Since this review was concerned with the
activities of CGL, he (now) thought he was doing it in a CGL capacity.
[54] In
June 2003 ABG changed its name to Arawak Energy Corporation
("Arawak"). In July 2003 Mr Baxter
attended a board meeting of CGL in
[55] By
September 2003, relations between Mr Baxter and Mr McBain were
reasonably cordial. The first
consultancy agreement was about to expire.
Mr Baxter had not been asked to do anything under it. On 1 September he e-mailed
Mr McBain, noting that CGL was making progress on its gas wells in the
coastal block and that production might soon begin. He suggested that he might ask the Chinese
president of CGL, Mr Xin, what his plans were for gas production and sales. He had spoken to Mr Xin about this at the
July board meeting of CGL, and Mr Xin had appeared to be interested in
anything Mr Baxter could contribute.
Mr McBain replied by e-mail, agreeing with this suggestion. In evidence, Mr Baxter said that, having
never been asked to do anything under the consultancy agreement, he was trying
to get something to do. Distribution and
sales were controlled by Azeri Gas, which was closely associated with
SOCAR. In order to develop its gas
reserves, CGL therefore needed a contract with SOCAR. At the time, the Azeris were developing an
offshore gas field which was far larger than the field controlled by CGL. It would be difficult to persuade SOCAR to
take an interest in a contract for small and unquantified reserves. Mr Baxter did however have previous
experience of negotiating the sale of gas from another project in
[56] By
September 2003 it had become apparent to Mr Baxter and Mr Little
that ABL, which had ceased to be active, was likely at some point to be wound
up unless, as Mr Little was suggesting, he and Mr Baxter were to take
the company over. If, however, ABL was
either wound up or ceased to form part of the Arawak group, the consequence
would be that Mr Baxter would lose his sole remaining directorship of a
company in the Arawak group. As a result
he would cease to qualify for taper relief on the sale of his Arawak shares,
which had risen in value by millions of dollars. His potential tax liability amounted to
hundreds of thousands of pounds. He
wrote to Mr Little on 9 September:
"For as long as I own & sell Arawak shares I need Addison & Baxter Limited to be an
Arawak subsidiary (>51% owned, I presume), and I need to be a director of it
to qualify for accelerated taper relief on business assets. This is singularly the most important issue
for me. So I don't want Addison &
Baxter wound up in a hurry. If it were,
and possibly in any case, I would have to persuade adm [Mr McBain} to make
me an employee of another group >51% subsidiary, say COGCL".
Provided, however, Mr Baxter could secure a directorship or employment with another company in the Arawak group, it could be in his interests to cease to be a director of ABL. That was because ABL was the principal company of his (and Mr Little's) pension scheme. Under the terms of the scheme, it was possible for them to take early retirement at the age of 50 (i.e. in Mr Baxter's case in February 2004), to receive a tax free lump sum from the scheme, and for the scheme then to be wound up. This was only possible if they ceased to be directors of ABL.
[57] At the end of September 2003, the first consultancy
agreement having expired, Mr McBain raised with Mr Baxter the
possibility of renewing the agreement on the basis that the annual payment
would be reduced to US$25,000.
Mr Baxter replied that he would rather do without the money than
accept the non-compete restrictions.
Mr McBain agreed to drop the restrictions and asked Mr Baxter to
prepare a revised agreement. In
evidence, Mr Baxter said that, by this time, his expertise and experience
were effectively confined to the oil and gas business in
[58] In his evidence in relation to this matter, Mr McBain said that
he had no clear recollection of his discussions with Mr Baxter. In relation to the US$25,000 figure,
Mr McBain said that Mr Baxter and Mr Little had become very
wealthy because of the rise in the Arawak share price: the implication appeared to be that, since
Mr Baxter could make a large capital gain, he should not expect much by
way of remuneration for his services, but should instead endeavour to increase
the value of his shares. Mr McBain
said that the figure of US$25,000 was not intended to place a value on Mr Baxter's
services: "we reward people for doing
things". The second consultancy
agreement was "just something to keep people there, on side". Mr McBain accepted that Mr Baxter
was then about 50 years of age and had lost all his executive
remuneration. He accepted that Mr Baxter
had said that he would rather do without the money than accept restrictions on
competition, but denied that he (Mr McBain) had accepted that Mr Baxter
would be free to use his skills and contacts in
[59] I found Mr McBain's evidence on this last point difficult
to accept. He is an astute businessman,
and I think it unlikely that he imagined that Mr Baxter had it in mind to
enter the catering industry, or was anxious to have the non-compete restriction
removed because he found it insulting. I
accept Mr Baxter's evidence that it must have been clear to Mr McBain
at this time, whether or not he was told in terms, that Mr Baxter wished
to pursue oil and gas projects in
[60] During October 2003, Mr Baxter prepared a draft consultancy agreement, which was a revised version of the first consultancy agreement. The old clause 3.2 (the non-compete clause) was deleted.
[61] On
[62] On 21 October Mr Baxter forwarded the draft
consultancy agreement to Mr McBain.
Later in October Mr Baxter visited
[63] On 15 and
[64] On
"use his best endeavours to promote and protect the interests of the Company and each Group Company and [not to] do anything which is harmful to those interests".
Clause 7.4 provided:
"The Company acknowledges that the Consultant intends to benefit from full business asset taper relief for Capital Gains Tax purposes in respect of his shareholding in the Company. The Company agrees that during the continuance of this Agreement it shall use reasonable endeavours to co-operate with the Consultant in respect of the Consultant obtaining the benefit of such relief".
In the event, Mr Baxter was never required to work more than two days per month.
[65] Mr Baxter said in evidence that, once the second consultancy
agreement had been signed, he saw no obstacle to his seeking out new oil and
gas opportunities in Azerbaijan on behalf of a third party or on his own
account. I accept that that was
Mr Baxter's understanding. Mr McBain,
on the other hand, acceded in evidence to counsel's suggestion that the removal
of the non-compete clause was of no significance, given the terms of
clause 3.3. At another point in his
evidence, however, he appeared to be willing to accept that, under the second
consultancy agreement, Mr Baxter was free to pursue business opportunities
in
[66] In December 2003 Mr Scott visited
[67] While in
[68] Until about this time the weekly reports which Mr Scott
sent to Mr McBain had been e-mailed by Mr McBain to the directors of
Arawak, and copied by e-mail to a number of other people, including
Mr Baxter. Mr Baxter was not
sent Mr Scott's report for the week ending 1 February 2004, but was
provided with a copy by Mr Little.
In the report, Mr Scott mentioned a potential project at Siyazan,
in the north of
[69] After receiving the report, Mr Baxter wrote to
Mr Little on
"Regarding 'Sent Siyazan
monocline data to Samson and Vitol for review and comment' and 'Travelled out
to Siyazan with Alastair to look at area' I had heard about this from Alastair
[McBain] & Ali [Jafarli]. Not surprisingly
(and encouragingly) adm [Mr McBain] continues to be interested in new projects
in
[70] Mr Baxter's response confirms that he did not understand
himself at that time to have any role in
[71] By March 2004 Mr Baxter and Mr Little had decided to resign as directors of ABL and wind up the pension scheme, provided they could secure their position in relation to taper relief. On 2 March Mr Little wrote to Mr Baxter, and to his (Mr Little's) accountant:
"I am also trying to get resolution of the timing of our resignations as directors of Addison & Baxter Limited. We have not resigned yet, because this will affect our eligibility for business asset taper relief. We need to be appointed as directors of another qualifying subsidiary to preserve this relief. I shall be discussing this at a board meeting this afternoon, and will advise further".
In evidence, Mr Baxter said that he understood that the board meeting referred to was a meeting of the Arawak board. Mr McBain said that he did not recollect the matter being raised. He initially said that he would be surprised if Mr Little had raised it at an Arawak board meeting, as it was not an appropriate matter to raise: "We weren't handing out directorships to suit people's tax positions". He acknowledged that the only company of whose board Mr Little was a member, and which had the power to appoint him and Mr Baxter as directors of a subsidiary of Arawak, was Arawak. Given what Mr Little had written, and given also Mr McBain's admittedly limited recollection, it appears to me to be likely that the matter was raised at the Arawak board meeting that day.
[72] In connection with this matter, Mr McBain was reminded in evidence of the obligation under clause 13 of the termination agreement to use reasonable endeavours to co-operate with Mr Baxter (and Mr Little) in respect of his obtaining taper relief. Asked if he took the obligation seriously, Mr McBain answered "Not really". Asked if did not take a contractual obligation seriously, Mr McBain answered that he did not know if an obligation to use reasonable endeavours was a contractual obligation.
[73] In the meantime, Mr Baxter was continuing to liaise with
Mr Zheng of CGL and Mr Jafarli of SOCAR in connection with the gas marketing
agreement. He kept Mr McBain
informed of progress. Mr Baxter
also made efforts to arrange a meeting between Mr McBain, Mr MacDougall,
Mr Lagarde and himself. In that
regard, he had written to Mr McBain in relation to the joint venture
between Vitol and Samson in the
[74] On
"While I remain a director of Arawak Energy Corporation, my BATR position is secure. The current issue is with Nick [Baxter]. He must have a qualifying BATR position before he and I cease to be directors of Addison & Baxter Limited, which is the necessary precursor to winding up the A & B Pension Scheme and then Addison & Baxter Limited itself".
Mr Little attached to the e-mail earlier e-mails between himself and the tax adviser acting for himself and Mr Baxter, in which their thinking in relation to directorships and taper relief was set out. Hard copies of the e-mails were sent to Mr Martin and Mr Coleman.
[75] On
"1. N.B. [Mr Baxter] to be appointed as a director of COGCL. Best done asap, but could wait until the next AGM (presumably May/June 2004)."
The second point was an agreement
that Mr McBain would meet Mr Baxter, Mr MacDougall,
Mr Lagarde and Mr Alex Warmath (who had joined the proposed joint venture)
in
"2. His agreement in principle to put me on the COGCL BOD [Board of Directors]. He must have been flitting in & out of your meetings last week because he was far from up to speed on this matter. Anyway it didn't take me more than 5 minutes to get there with him. We were very short of time, which helped. His suggestion is to do this at the next AGM, presumably in June (along with the Arawak AGM). Thinking out load (sic), he thought a) it was ok, b) it was appropriate, c) he might put J Scott on the Board at the same time (because J. likes that sort of thing!). and d) sling off at least one Anguillan, s/t m & m [subject to media and marketing] considerations. I made him aware that this fix is only needed for you if your ABG directorship stops & I detected no sign that this is on the cards. I will suggest to him that we make this appointment prior to the June AGM, but realistically I probably won't succeed. I guess we can wait until then".
[76] In evidence, Mr Baxter was asked by counsel for COGCL why
Mr McBain thought it was appropriate for him to become a director of
COGCL. Mr Baxter responded that he
thought it was because of the obligation of Arawak to use reasonable endeavours
to assist him and Mr Little in obtaining taper relief. He did not think it was because of his
directorship of CGL. He would have
explained to Mr McBain that it was for reasons related to taper relief
that he wanted to be a director of COGCL.
It was Arawak's only active subsidiary apart from ABL. It would have been out of the question for
Mr McBain to agree to his becoming a director of Arawak itself, and
preposterous for Mr Baxter to have suggested it. COGCL never had board meetings, and nothing
was happening in it, so it was a "tidy" directorship for him to have. The only reason for his becoming a director
of COGCL was to fulfil the requirements of taper relief. Asked whether he had told Mr McBain at
that meeting that he would be pursuing his own independent interests in
[77] Mr McBain said in evidence that he had no recollection of
the meeting. He remembered wanting to
have Mr Baxter as a director of COGCL:
he had "fantastic" contacts, including SOCAR's vice-president, their
chief geologist, and the head and deputy head of their foreign investment
division. He was "way the best person"
they could have to represent the company in
[78] In relation to this matter, there are aspects of
Mr McBain's evidence which I do not find convincing. First, I find it difficult to accept that
Mr McBain at that time regarded Mr Baxter as someone with "fantastic"
contacts who was "way the best person" to represent the company in
Azerbaijan. As I have explained,
Mr McBain had been responsible for the removal of Mr Baxter from all
his directorships and executive positions in ABG/Arawak and COGCL. Although he had given Mr Baxter a
consultancy contract as part of a termination package, he had not in reality
engaged him as a consultant. Although he
had given Mr Baxter a further consultancy contract at a reduced level of
service and remuneration, that had been to keep him "on side". He had given responsibility for the Arawak
group's affairs in
[79] Later in March Mr Baxter sought to interest Mr McBain
in a proposal by Richard Sobel, a British banker who worked for the
[80] In advance of the
"- Vitol owns various assets in
- Alastair is responsible for upstream projects in Vitol and is responsible for identifying, acquiring & managing them;
- Alastair seems very motivated to rapidly expand this asset base & grow the reserves and production;
- He favours projects and regions
that he considers undervalued or for the time being ignored, and that offer
good upside potential. This was what
attracted him to
- He is willing to look at such projects in nearly any location;
- They seem not to be adverse to disposing of interests if the circumstances or deal looks right;
- I guesstimate that Vitol's appetite is for projects in the 25-100 million barrels recoverable range, although he can clarify & confirm this;
- Vitol has large financial resources, but Alastair is careful in the selection of projects;
- Historically they have not wished to be operators, probably because they recognise they are a fledgling upstream company, and lack the human resources, experience & expertise; however now they have a few more projects, they have access to more people & their confidence is increasing."
In evidence, Mr McBain
confirmed the accuracy of that summary, subject to the qualification that his
role was changing from being responsible for upstream projects (i.e.
exploration, development and production) in Vitol to being responsible solely
for Arawak, to which Vitol's assets in
[81] In April 2004 a project review of the Siyazan monocline was completed by Mr Scott and the consultants whom he had engaged. Their report identified the north-western end of the monocline (the end furthest from the coast) as the area of greatest interest. It was noted, however, that the south-east end of the monocline might extend beyond the coastline. In that regard, the report stated:
"This is a shallow offshore area (water depth less than 10m), should reserves be located in this area development would be reasonably simple".
In evidence, Mr Scott said that "simple" was probably the wrong word: he would prefer to say that it would not be incredibly difficult. The report recommended that negotiations should be undertaken to purchase additional data from SOCAR with a view to negotiating a memorandum of agreement with SOCAR. It was recommended that the deal with SOCAR should, if possible, relate to the north-western section of the monocline: it was not suggested that it should include offshore areas. It was noted that "our ability to work with SOCAR should help us". Mr Scott had already been having discussions with SOCAR in relation to Siyazan.
[82] With effect from
[83] In about April 2004 Vitol Services Ltd also entered into a
contract with Interact for the provision of consultancy services, including a
survey of gas marketing opportunities in
[84] In the meantime, Mr Scott undertook negotiations with
SOCAR in relation to the Siyazan project.
In his weekly report to 4 April, he also mentioned that he had
"reviewed several other possible SOCAR projects". In relation to this report, Mr McBain
said in evidence that Mr Scott was "looking for other business
opportunities for Arawak".
Mr Baxter was not involved in Mr Scott's review. According to Mr McBain's evidence,
Mr Baxter had by this time been given responsibility for finding new
business opportunities in
[85] On
"As soon as Nick is firmly installed as a director of CO&GCL, hopefully on Tuesday [13 April], and assuming that I remain a director of Arawak, we can proceed with the winding up or liquidation of A&BL. Once we cease to be directors of A&BL, we can wind up the A&BPS [the Addison and Baxter Pension Scheme]. If I am to step down as a director of Arawak, then I too will need to become a director of CO&GCL. The need to remain directors of a qualifying group company comes from the business asset taper relief rules".
Events between Mr Baxter's
becoming a non-executive director of COGCL and the signing of the Memorandum of
Understanding
[86] On 13 April 2004 a
meeting of the Arawak board of directors took place. One of the items on the agenda was:
"4. Discuss and if appropriate appoint Nicholas W Baxter as director of Commonwealth Oil & Gas Company Limited".
The appointment of directors to COGCL was a matter to be decided by the shareholders of COGCL - in other words, Arawak, whose delegate was Mr McBain - at a shareholders' meeting. It is however a matter of agreement between the parties that, on that date,
"Arawak directors' meeting appoints Mr Baxter and Mr Little to the COGCL Board".
[87] I accept Mr Baxter's evidence that, at the time he became a director of COGCL, he was not given any specific management or executive functions, and that it was not suggested to him then, or at any subsequent time prior to the signing of the Memorandum of Understanding, that he had any responsibility for finding new business opportunities in Azerbaijan. As Mr Baxter observed, if he had been given such responsibilities, it would have been customary in the Arawak group for him to have a formal contract. Mr Baxter did not receive any remuneration attributable to his directorship of COGCL, but continued to receive directors' fees from CGL. He attended no board meetings of COGCL, since no board meetings were held.
[88] Early in May 2004 Mr Baxter was in
[89] By early June Mr Baxter had been authorised by Mr McBain to discuss with Mr Sobel the possibility of his financing Arawak's acquisition of Vitol's 50 per cent shareholding in a Cypriot company which held an interest in the ZAO Pechora-neftegas project in the Komi Republic in Russia. There is no suggestion that Mr Baxter was acting in this regard as a director of COGCL.
[90] Since about 2000 Mr Baxter had been a member of the
[91] Mr Baxter submitted an expenses claim to Arawak in respect of the travelling costs he had incurred in attending the meeting with Mr McBain on 28 May and the Scout Group meeting on 8 June. The expenses were paid during August by a cheque drawn on an account in the name of COGCL. That payment arrangement was made by Arawak's accounts department. Mr Baxter's expenses claim in respect of the next Scout Group meeting, on 10 August, was paid by Arawak.
[92] At about the same time as the Scout Group meeting, the appointment
of Mr Baxter and Mr Little as directors of COGCL was registered with
the Registrar of Companies in
[93] On
[94] On
"Prepared letters to SOCAR on purchasing Siyazan and then discovered that A letter had been signed giving exclusive rights to Siyazan to Trans Meridian [another oil company] for 3 months.
Alastair [McBain] in
Mr Little commented to Mr Baxter:
"I cannot help thinking that it's a bit late to be finding out that Trans Meridian has a 3 month exclusive on Siyazan. Wouldn't have happened with you and Misha [Khait] at the helm, or alternatively you would have spotted it before now".
[95] In his evidence, Mr Baxter commented that it would appear
that Trans Meridian had approached an influential person in
[96] Mr Baxter had not been involved in Siyazan; and, even after the lack of success in respect of the Siyazan project, he was not involved in the Neftchala project either. Nor was he involved in any further consideration of the Siyazan project. This episode tends to support Mr Baxter's evidence that he had not been instructed to explore new opportunities on behalf of COGCL, and that the pursuit of new opportunities continued to be dealt with by Mr Scott and Mr McBain.
[97] On 4 August Mr Baxter e-mailed Ms Bujnowska, drawing her attention to the fact that he had not been sent Mr Scott's weekly reports for some time. Ms Bujnowska responded that it had been an oversight, and sent Mr Baxter the reports which he had missed.
[98] A board meeting of CGL was held in
[99] On 25 August Mr McBain provided Mr Baxter and Mr Scott with his comments on a draft joint operating agreement which had, seemingly, been prepared by SOCAR, and had been sent by GOC to Mr McBain with some suggestions by the Chinese. Mr Baxter in turn provided Mr McBain with some additional comments. Mr McBain then submitted what he described as "COGCL comments" on the draft agreement. The comments were drafted with a view to the interests of COGCL.
[100] On
[101] On 13 September Mr Baxter e-mailed Mr McBain:
"Just to recap on our meeting last week:
1. I owe you a draft invoice for the Gas Agreement ....
2. You are going to email Jay [Scott] (BCC [i.e.
blind copy] to me) re: my increased
involvement in capturing a new project in
3. I am available to go to
Mr Baxter did not receive any
response to this e-mail. Nor did he
receive a copy of any e-mail sent by Mr McBain to Mr Scott. By this time the second consultancy agreement
had expired. Any involvement by
Mr Baxter in capturing a new project was therefore not to be covered by
that agreement. There is no indication
that any such involvement was to be undertaken as a director of COGCL. Nor is there any indication that Mr Baxter
had been asked to undertake either the initial journey to
[102] On 23 September Mr Baxter e-mailed Mr McBain again:
"I am proposing to go to
Please let me know if this plan works as far as you are concerned".
Mr Baxter received no response
from Mr McBain. He went to
[103] At about this time Mr Baxter was involved again in the consideration of the "COGCL comments" on the draft joint operating agreement to be entered into by CGL. He said in evidence that, if he had thought about the capacity in which he was doing so, it would have been as a director of CGL. It appears to me, however, that in reality he and Mr McBain were also acting in the interests of COGCL, whose interests they represented on the board of CGL.
[104] During September 2004 Mr Scott tendered his resignation
from his executive positions with Arawak and COGCL. His resignation took effect on 15 October. He then ceased to work in
[105] On 4 October 2004 Mr Baxter was asked by e-mail to sign and return a resolution of the directors of COGCL altering the authorised signatories in respect of COGCL's account with the National Westminster Bank. The resolution removed him from the list of authorised signatories. Such a resolution required to be signed by all the directors.
[106] After the beginning of November 2004, Mr Baxter ceased
to receive reports on operations by the Arawak group in
[107] On 1 and
[108] Late in November, arrangements were made for a CGL board meeting to be held in Beijing in December, on a date which was proposed by Mr McBain after Mr Baxter had said he would be unavailable then. Instead, Mr McBain took Mr Charles Carter, who had recently replaced Mr Martin as Arawak's chief financial officer. In evidence, Mr Baxter said that he had been told by Mr McBain on a number of occasions that he would rather take other people, such as Mr Carter or Mr Brian Hepp, a production engineer who had been one of the authors of the report on the Siyazan monocline, and that it was not worth paying for Mr Baxter to go.
[109] On
[110] Although the blocks in which CGL had an interest under the South-West
Gobustan EDPSA were onshore, and the oilfields and structures investigated by
Mr Scott at Siyazan and Neftchala were also onshore, there were other oilfields
and structures situated offshore in the Caspian Sea. The Alat-Deniz field had been discovered in
1983 and had been in production since 1986.
The Garasu-Deniz field had been discovered in 1974 and had been in
production at one time, but had been abandoned following violent accidents and was
not currently in operation. The other
structures had not been developed, due to poor geophysical study of the
area: the waters were too shallow for
ships, and investigation was further impeded by the presence of a series of
piers, which had been built across the water by SOCAR in order to carry out
drilling. Any areas which were not
assigned to a specific company were potentially available to any company with
an interest. The areas mentioned in
Mr Khait's e-mail were amongst hundreds of areas which were potentially
available. They had been drawn to
Mr Khait's attention by contacts in SOCAR.
Mr Baxter said in evidence that Mr McBain (or anyone else)
could at any time have expressed an interest in the areas in question to SOCAR
and got on with it, just as Arawak had expressed an interest in Siyazan,
Neftchala and (later) Shirvanoil.
Mr McBain and his people in
[111] In evidence, Mr Baxter said that the e-mail did not come out
of the blue: he had received an earlier
telephone call from Mr Khait, during a train journey to London, in which
this matter had been discussed. He had
not pursued the project referred to in the e-mail during his earlier visits to
[112] The area covered by the Memorandum of Understanding ("the Eurasia
block") was subsequently delineated by Mr Baxter, and differed in some
respects from the area mentioned in Mr Khait's e-mail. Its north-western edge was contiguous with
the coastal block of the South-West Gobustan EDPSA, the boundary between them
being the coastline. At that point, the
nearest oilfield to the coastal block, namely the Alat-Deniz oil field, lay more
than a mile offshore, according to the charts produced in evidence. The Alat-Deniz oilfield was a separate
structure from the oilfields in the coastal block. Until the
[113] Early in January 2005 Arawak's acquisitions of Altius, and of a 50 per cent share in the holding company of ZAO Pechoraneftegas, were completed. Mr Little (whose role in these transactions was not explained in evidence) then e-mailed Mr Baxter on the subject of "getting paid":
"Now that the deals have closed, I think it's time to present the bill. At the moment I believe I am receiving director's fees of US$15,000 p.a. and that's it ....
Are you in the same boat, i.e.
US$15,000 p.a. only at the moment?
If so, you have a bill to present for work in
Mr Baxter replied:
"I continue to be paid $15k per
annum from CGL in
I am expecting something in
respect of the gas agreement, but this is subject to further discussion with
adm [Mr McBain] and CGL Baku. The way I
deal with this type of issue is typically over a lunch with Alastair..... By his
own admission and comments from others, he can (deliberately) be mean, so if I
were you I'd ask for more than you reasonably expect. He also told me he (and probably Ian [
In evidence, Mr Baxter explained that at this stage discussions were under way between Arawak and Interact in relation to payment for the negotiation of the gas marketing agreement. The discussions were lengthy and required a considerable effort on the part of Interact. He had discussions with Mr McBain about arrangements in respect of other projects, but no agreement was ever reached.
[114] During January 2005 Mr Michael Volcko, the president of
Altius, became an employee of Arawak. He
was encouraged by Mr McBain to interest himself in business development in
[115] On
[116] On
[117] Mr Baxter met Mr McBain on 17 February. In advance of the meeting, Mr Baxter
made a note of matters which he intended to raise. These were matters which had been raised with
Mr Baxter by Mr Ali Jafarli when Mr Baxter had been in
[118] Mr Baxter said in evidence that, at the meeting on 17 February, he again raised with Mr McBain the possibility of his pursuing development opportunities for the Arawak group. He asked what types of project Mr McBain was interested in. Mr McBain responded that he was interested in onshore projects. Mr Baxter discussed with Mr McBain how he might be rewarded if he found further opportunities. The sticking point in the discussion was that Mr McBain wanted exclusivity on anything Mr Baxter found: in other words, he wanted any project found by Mr Baxter to be placed at the disposal of the Arawak group. Mr Baxter said in evidence that he had made it clear to Mr McBain, if not at that meeting then previously, that he wanted to develop a project in which he would have a proprietary interest. Mr McBain did not respond positively.
[119] At the meeting Mr Baxter did not inform Mr McBain about the
potential offshore project.
Mr Baxter said in evidence that he wished to keep the matter
confidential, not only from Arawak but more generally. Anyone might have been interested if it came
to their attention, including Arawak.
Information leaked out very quickly in
[120] Although Mr Baxter acknowledged in evidence that he could
not speak for Mr McBain, he said that he would not have thought that the
Eurasia block would have been of interest to Arawak. It did not fit Arawak's stated corporate
strategy to "target oil and gas assets with low technical risk in high return
environments". The risk was high, and
the possible return was highly uncertain.
Although offshore development could be cheaper in shallow water than in
deep water (as Mr McBain said in evidence), the exploration phase could be
more difficult and expensive, especially in congested areas such as the area in
question (congested, that is to say, with existing structures). It was very different from the Siyazan
monocline, where there was an existing producing oilfield with over a thousand
producing wells, and where the difficulties arose from the hilly or mountainous
nature of the terrain. Neftchala was
another existing producing oilfield, as also was the Shirvanoil operation. In an existing oilfield, the technical and
commercial risks were known to be low.
The Alat-Deniz was a producing oilfield.
The rest of the
[121] Mr Baxter also observed in evidence that, even if a given
project might be of interest to Mr McBain, it did not follow that it would
involve COGCL. COGCL was a holding
company, which held a minority interest in CGL.
It could not be assumed that everything that Arawak decided to do in
[122] Mr McBain said in evidence that he recollected that, at about the time of this meeting, Mr Baxter asked him how much he (Mr Baxter) would be paid to bring a project to Arawak. Mr Baxter indicated that he wanted a carried interest (i.e. a share of the profits, after the costs had been deducted) of the order of 20 per cent. Mr McBain was surprised by what Mr Baxter wanted, and said he would think about it. The matter was never raised again. Mr McBain had assumed, when Mr Baxter asked what would happen if he found a new business, that he had not in fact found anything: it never crossed his mind that Mr Baxter had actually uncovered a project. Equally, it never crossed his mind that Mr Baxter might go elsewhere with any opportunity which he might find: it was "inconceivable" to him that Mr Baxter would not act in the best interests of a company (Arawak) which he had founded and which had made him wealthy. Mr McBain accepted in evidence that Mr Baxter had been wanting him to make proposals for a working arrangement, and that he had not replied.
[123] Mr McBain also accepted that, at the meeting on
17 February, he might have said that he was interested in onshore
projects. Arawak was desperate for
projects in
[124] In relation to the question whether the possibility of an
agreement with SOCAR in respect of the potential exploration of the offshore
structures in the Eurasia block would have been of interest to Mr McBain,
it appears to me that the answer to the question depends on the context in
which it is considered. I am not
convinced, on a balance of probabilities, that Mr McBain would have been
interested in pursuing the possibility of a project in relation to the
[125] If, on the other hand, the question is whether Mr McBain
would have been interested if Mr Baxter had told him that contacts at
SOCAR had directed his attention to a proposed area for exploration, that the
proposed area was in shallow water offshore and included an established
oilfield, and that he (Mr Baxter) thought that there were reasonable
prospects of securing an agreement with SOCAR in relation to the proposed area,
then it seems to me that Mr McBain would probably have been
interested. The principal problem in
[126] If the question is considered as at a point in time shortly before the Memorandum of Understanding was executed, and therefore after Mr Baxter had successfully carried out his negotiations with SOCAR - if, in other words, the question is whether Mr McBain would have been interested if Mr Baxter had offered him the Memorandum of Understanding on a plate - then the question should certainly be answered in the affirmative. Although Mr McBain's evidence that he was "desperate" to find another project in Azerbaijan appears to me to be somewhat overstated - if he had been desperate, I doubt whether he would have shown so little interest in Mr Baxter's overtures - I have no doubt that he would at least have wanted to investigate a potential offshore project which had reached the stage of an exclusive agreement with SOCAR for access to data and for an opportunity to negotiate an EDPSA. The possibility of such an agreement was not in Mr McBain's mind when he told Mr Baxter that his interest was in onshore projects.
[127] I also accept that it is more likely than not that the company on
whose behalf Mr McBain would have acted in relation to the Memorandum of
Understanding, if the opportunity had arisen, was COGCL. As Ms Bujnowska explained, COGCL was the
company which held Arawak's assets in
[128] I also conclude that a reasonable person in Mr Baxter's
position would have known that such an agreement with SOCAR would have been of
interest to Mr McBain. Such a
person would in my opinion have realised that there was at least a real
possibility that the company on whose behalf Mr McBain would have acted,
in that regard, was COGCL. Nevertheless,
having given the matter careful consideration, I am prepared to accept that Mr Baxter
saw no conflict between the potential project and anything which Arawak were
pursuing or might realistically be interested in, given Mr McBain's statement
that his interest lay in onshore projects, the Arawak group's history of
looking only at onshore opportunities, and the risks involved in the project in
question. I do not overlook Mr Baxter's
evidence that he kept the opportunity secret because "anyone" might have been
interested in it, "including Arawak"; but the import of his evidence as a whole was
that, although it was commercially prudent to keep the information about the
opportunity to himself, so as to ensure that it did not leak out, he believed
that the opportunity was not one which the Arawak group would have wished to
pursue. My conclusion, based principally
on the impression I formed of Mr Baxter over the four days during which he
gave evidence, is that that was a genuine belief. I also doubt whether Mr Baxter would
have written to Mr McBain as he did on
[129] On
[130] Later in July 2005 Mr Baxter wrote to Mr McBain in connection with a proposed payment to Interact for services provided in respect of the negotiation of the gas marketing agreement (which had been signed in June 2004). Mr McBain responded that the payment should be made by Arawak, which (unlike Vitol) did not have a consultancy agreement with Interact. In August Mr Baxter sent Mr McBain a draft agreement between Interact and Arawak. On 3 October Mr McBain responded to Mr Baxter:
"One thing we wondered whether
you could accept would be some kind of exclusivity clause with respect to the
upstream oil and gas business in
Mr McBain was under the mistaken impression that Interact was merely a vehicle under which Mr Baxter provided his own services: his alter ego, in effect. He assumed that the agreement and the payment related to Mr Baxter's services in respect of the gas marketing agreement. In those circumstances, his e-mail of 3 October supports Mr Baxter's evidence that the question of the Arawak group having an exclusive right to exploration, development and production projects found by Mr Baxter in Azerbaijan, if he pursued opportunities there on Arawak's behalf, had been discussed and had not been agreed.
[131] Mr Baxter responded on
"I have discussed this with Interact. The agreement is between Interact & Arawak, not Arawak & me personally. As you know Interact works with a number of consultants. Also, the agreement is in respect of specific services connected to gas marketing which have been completed for some time now, and the execution of the agreement is unfortunately now long overdue. In this context it hardly seems appropriate or relevant to include additional clauses including, exclusivity. I am advised that if you wish, it may be appropriate to amend the draft to limit the definitions of 'Consultancy Services' and 'the Fee' and to shorten the Term (say to 30 October 2005) to reflect the fact that the agreement is in respect of these already completed services, but I am advised that Interact would not insist on such changes, since any additional services or fees must be by the mutual written agreement of the parties. Interact would prefer that this agreement is finalised as soon as possible, so that it can square up with the various consultants who participated in the project.
From a personal perspective, I
made proposals to you earlier in the year and I remain ready with an open mind
to discuss any further proposals you have for a working arrangement for
activities in
Mr McBain agreed to omit the exclusivity clause. He did not respond to the second paragraph of Mr Baxter's e-mail. In evidence, Mr McBain said that he was puzzled by the second paragraph, but concluded that it referred to the occasion when Mr Baxter had talked about a specific reward structure for bringing a project to Arawak. Although Mr McBain repeatedly claimed in his evidence that he had regarded Mr Baxter as the person best placed and most likely to identify new business opportunities in Azerbaijan, and that he had "tasked" Mr Baxter with the identification of such opportunities, the contrary is indicated by what Mr Baxter wrote in the second paragraph of his e-mail of 5 October, and by the absence of any response on the part of Mr McBain.
[132] The agreement was executed by Arawak and Interact in October 2005. It bore to come into effect on 1 January 2005, and to be for "the provision of services including advice and recommendations in connection with the identification and potential development of business opportunities in the oil and gas sector in Azerbaijan, commencing with but not limited to the development of natural gas marketing opportunities in Azerbaijan and the Caspian area, as agreed by the parties". The consideration was US$75,000. That sum was paid to Interact. The agreement was executed by Mr McBain and Mr Crabtree. In evidence, Mr McBain said that GOC was controlled by CNPC, who were notorious for their reluctance to pay bills or to provide an adequate reward to contractors, especially non-Chinese contractors. Mr McBain felt that it had been in the overriding interest of the Arawak group that the gas marketing agreement should be concluded: otherwise, the gas reserves could not be categorised as proven according to Canadian stock exchange rules. He was happy that Arawak should pay the consultancy costs which could not be "pushed through" GOC. Mr Baxter confirmed in evidence that, notwithstanding the terms of the consultancy agreement, the services had already been provided before the agreement's commencement date. The money paid to Interact was used to pay Azeri oil consultants whom Mr Baxter had engaged. It made up the balance left outstanding after the payment made by GOC at the end of 2004. He received nothing himself as a result of the conclusion of the gas marketing agreement, other than any consequential increase in the value of his Arawak shares.
[133] In about October 2005 Mr Baxter signed a resolution of the COGCL board of directors altering the authorised signatories in respect of COGCL's account with Scotia Bank Anguilla Ltd. As previously, he was e-mailed the resolution for signature and return.
[134] On
[135] On
"1. From the date of execution of this Memo and until the period of its expiry Eurasia is granted the exclusive rights to negotiate on the terms of the Exploration, Rehabilitation, Development and Production Sharing Agreement ('the ERDPSA') for the Block.
2. The Parties have intent within a period of twelve (12) months from the date of execution of this Memo to agree upon and sign the Agreement on the Basic Commercial Principles and Provisions of the ERDPSA (the 'Agreement'). The period of negotiations may be extended by the period mutually agreed by the Parties.
3. If the Parties have not agreed on the Agreement within the said period and have failed to agree on its extension, this Memo shall terminate and the Parties shall be free of the obligations assumed hereunder.
4. If the Parties have agreed on the
Agreement, pursuant to Clause 2 above, SOCAR shall address in writing to
the President of the
5. Based upon the authorizations set forth in Clause 4 above, the Parties intend within the time period defined in the Agreement to finalize the ERDPSA draft in the framework of the commercial principles and provisions agreed and sign the ERDPSA.
.......
8. SOCAR shall use all reasonable efforts
to provide
[136] The "Block" referred to ("the Eurasia block") included the
producing Alat-Deniz oilfield and seven prospective exploration structures at
Garasu, Hamamdaz-Deniz, Sangi-Mugan, Ulfat, Aran-Deniz, Dashly and Sabayü. The block trended in a south-easterly
direction from the coast to 70 kilometres offshore. The north-western edge of the block was contiguous
with CGL's coastal block. Water depths
were predominantly up to 20 metres, and reached a maximum of
50 metres. The data referred to in
clause 8 had not been provided to
[137] In evidence, Mr Baxter accepted that the conclusion of the
Memorandum of Understanding was secured as a result of his efforts, and that he
had actively pursued the opportunity to enter into that agreement. He and Mr Khait had used the know-how
and contacts which they had built up when working on the South-West Gobustan EDPSA
in order to secure the Memorandum of Understanding. There is no evidence that Mr Baxter used any
contacts, knowledge, expertise or information which he acquired as a director
of COGCL from April 2004 onwards in order to secure the Memorandum of
Understanding. It is clear that he did
not learn of the oilfield and structures in what became the
[138] During the period between Mr Baxter's becoming a director of COGCL and the execution of the Memorandum of Understanding no meetings were held of the board of directors. Mr Baxter was not requested to do anything specifically as a director, other than to sign two resolutions altering the authorised signatories of the company's cheques (he himself being removed as an authorised signatory). He took no part in the management or control of any operations of COGCL. Counsel for COGCL however invited me to find that Mr Baxter had performed three functions in particular as a director of COGCL. First, it was argued that Mr Baxter had attended the Scout Group meetings as a representative of COGCL. I do not find that to be proved, for the reasons explained above. Secondly, it was argued that Mr Baxter had negotiated the gas marketing agreement on behalf of COGCL. It appears to me, however, that Mr Baxter was acting in relation to that matter on behalf of CGL: indeed, it was only towards the end of the negotiations that Mr Baxter became a director of COGCL. Thirdly, it was argued that Mr Baxter had acted on behalf of COGCL in considering the terms of the joint operating agreement to be entered into between CGL and SOCAR Oil Affiliate. That appears to me to be correct, but it does not necessarily follow that Mr Baxter was acting in that respect as a director of COGCL, rather than as COGCL's nominee (in effect) on the board of CGL. Mr Baxter acknowledged in evidence that little thought had been given at the time to the particular capacity in which he (or others) might be acting. I note, in relation to this issue, that it is a matter of admission in COGCL's pleadings that "at the meetings [between Mr Baxter and Mr McBain] on 6 September and 1 November 2004, CGL and GOC business was discussed, including a joint operating agreement which was under discussion with CNPC and SOCAR". It was also argued that Mr Baxter had received directors' fees in respect of his directorship of COGCL, amongst other companies; but it is clear from the evidence that the only fees he received during the material period were paid by CGL in respect of his directorship of CGL, and were not affected by his also being a director of COGCL. It was argued that Mr Baxter's directorship was reflected in his attending meetings with Mr McBain, but it does not appear to me to be possible to attribute the meetings specifically to the directorship: they were concerned with such matters as possible deals between Vitol and Arawak, the proposed joint venture involving Mr MacDougall and others, Arawak's acquisition of ZAO Pechoraneftegas, the gas marketing agreement (in relation to which, as I have explained, I consider that Mr Baxter was acting as a director of CGL), and the basis upon which Mr Baxter might be instructed to pursue development opportunities for the Arawak group. It was argued that Mr Baxter had been paid expenses by COGCL; but, as I have explained, the accounting arrangements were determined by Arawak after Mr Baxter had submitted claims to the latter company; there does not appear to have been a consistent practice; and the fact that COGCL reimbursed certain expenses does not in any event imply that the expenses were incurred by Mr Baxter in the capacity of a director of COGCL. In short, so far as appears from the evidence, Mr Baxter's directorship had no unambiguous manifestation, other than his signature of two resolutions altering the authorised signatories of the company's cheques. On the other hand, he was in frequent contact with Mr McBain and other Arawak staff in relation to the affairs of the Arawak group (including COGCL) in Azerbaijan, in a context where he was in fact a director of COGCL and of CGL, and where little attention appears to have been paid to the distinct identities of the various companies or to the different capacities in which persons might be acting.
[139] It is apparent from the evidence that, between
[140] Ms Bujnowska's evidence supported Mr McBain's: she claimed that Mr Baxter had been paid
close to US$500,000 to look at new business opportunities for COGCL. That figure was, on any view, a gross
exaggeration: it included all the
payments received from the ABG/Arawak group and from GOC by Interact, which
were not received by Mr Baxter, together with the fees paid to
Mr Baxter as a director of CGL, which Ms Bujnowska accepted were paid
in respect of services to CGL, together with the payments made to
Mr Baxter as part of his "termination package" when he ceased to be
employed by ABG. Equally,
Ms Bujnowska's evidence that Mr Scott was not involved in looking for
new business opportunities in
[141] Mr Coleman maintained that, each time he met Mr Baxter, he encouraged him to try to find something for Arawak. In cross-examination, however, it became apparent that, after the meetings of 10 September 2002 and 5 May 2003, when Mr Coleman was involved in the removal of Mr Baxter from his positions with ABG and COGCL, their subsequent meetings were few in number and either casual (when they happened to bump into each other in Vitol's offices) or social (as when they spent an evening at the opera with their respective partners). Mrs Baxter did not recollect any discussion of business matters on the latter occasion; and I accept her evidence, which is consistent with that of her husband. I also accept Mr Baxter's evidence that, if he had had any such discussions with Mr Coleman, they would have been very general in character. Mr Coleman did not appear to be closely involved in the management of Arawak on a day to day basis: that may also explain his evidence, which was clearly incorrect, that Mr Scott did not have a role in connection with finding further business opportunities.
[142] Mr Scott himself said in evidence that his understanding,
between April and October 2004, was that Mr Baxter was monitoring
relations with SOCAR, keeping his contacts and looking at new business "for
COGCL, for Arawak". He said, in evidence
in chief, that he had sent Mr Baxter e-mails to do with relations with the
Government of Azerbaijan: that matter
was not however raised with Mr Baxter himself when he gave evidence, and
no such e-mails were produced. In cross-examination
Mr Scott accepted that he had had no significant amount of written or oral
communication with Mr Baxter during the period in question, and that
Mr Baxter had been working in
[143] Mrs Baxter gave evidence that she and her husband had been
surprised that he was not asked to look for new opportunities for the Arawak
group in
Events subsequent to the signing
of the Memorandum of Understanding
[144] On
"As a courtesy I would like to advise you that whilst I was in Baku I signed an MOU [Memorandum of Understanding] with SOCAR for the exclusive rights to negotiate the terms of an (ERD)PSA for the first shallow water block in Azerbaijani waters, south-east of SWG [South-West Gobustan] and north of the Ateshgah Block. The agreement is subject to certain confidentiality conditions and is unlikely to be announced officially until early in the new year. I would therefore be grateful if you would respect this confidentiality".
Mr McBain replied:
"I am intrigued by your news. Can we discuss?"
Neither in that response, nor in any subsequent communication either from Mr McBain or from Arawak's solicitors, was it suggested to Mr Baxter that it had been his task to seek out new opportunities for COGCL (or for Arawak). Mr Baxter observed in evidence that he knew Mr McBain well: if that had been his task, he would have expected Mr McBain to draw that to his attention and to request him to deliver the project to Arawak. In evidence, Mr McBain said that he was intrigued: he assumed that the link between the Memorandum of Understanding and Arawak would become evident in discussion with Mr Baxter. I find that evidence difficult to accept, given that Mr Baxter had expressly informed Mr McBain of the Memorandum of Understanding as a courtesy, and had asked him to treat the information as confidential until the agreement he had signed was made public. I also find it difficult to believe that Mr McBain imagined that Mr Baxter would have signed an agreement directly or indirectly on behalf of Arawak without his authorisation.
[145] On 13 December Mr Baxter met Mr McBain in
[146] On 14 December a board meeting of CGL was held in
[147] On 21 December PAVL filed an information statement with the
United States Securities and Exchange Commission. The statement bore to be furnished by the
board of directors and was signed by Mr Tuskey, who was a director of PAVL
and its chief financial officer, secretary and treasurer. It stated that PAVL had issued more than
20 million shares, of which 3 million (14.95 per cent) were held
by Mr Baxter. It is apparent from
the statement that PAVL was a public company.
Its directors were Mr Baxter, Mr Tuskey and Ms King. According to the statement, the company had
been carrying on business since October 2003 as a provider of marketing
and advertising services. It conducted
its business through offices in
"Even though our company has experienced revenue and marginal profitability on almost a quarterly basis, management is of the view that the Company's current business may not present the best opportunity for our company to maximise long term returns for our shareholders. Through the second half of 2005, management has considered other potential opportunities for our company including opportunities in businesses which have no connection to marketing and advertising. In particular, our director, Mr Nicholas W Baxter, has been proactive in pursuing an opportunity in the oil and gas industry based on his previous experience and contacts in that industry."
The statement contained information about the Memorandum of Understanding, and described how that "potentially lucrative opportunity" had been obtained through Mr Baxter's efforts. It described Mr Baxter's previous involvement in the oil and gas industry, and stated that he had been a director of Arawak until 2003. No mention was made of COGCL. A report in similar terms, also signed by Mr Tuskey, was filed with the SEC on behalf of PAVL at about the same time. In evidence, Mr Baxter said that, as far as he could remember, Mr Tuskey had never discussed with him details of his involvement in the Arawak group. He had no discussions with Mr Tuskey about his relationship with Arawak in the context of this project. Mr Tuskey had not been involved with ABG/Arawak since 2002.
[148] On
[149] On 5 January Mr Baxter contacted Mr McBain in relation to GOC. Mr McBain replied:
"I am really hoping that we are going to be able to continue working together in some form. However, your latest news continues to worry me. Do you think there is anything we can do which can work for both parties? Is it worth meeting?".
In evidence, Mr McBain
explained that he had been "rather stunned" to discover that the Memorandum of
Understanding had been entered into by a public company. He was grasping at ways of avoiding a
confrontation. One possibility was an
arrangement under which Arawak and
[150] On 11 January Mr Baxter learned from Mr McBain
that certain directors were unhappy about his involvement with
[151] On 7 February solicitors acting on behalf of Arawak and COGCL sent Mr Baxter a letter before action. It made numerous allegations, but did not suggest that Mr Baxter had been given any specific function of finding new projects for the Arawak group. Nor was such a suggestion made in later correspondence between solicitors.
[152] On 8 November 2006 Mr Baxter wrote to SOCAR, on behalf
of Eurasia, formerly requesting the commencement of negotiation of the
Agreement on the Basic Commercial Principles and Provisions of the ERDPSA, as
envisaged by clause 2 of the Memorandum of Understanding. On 24 November Mr Baxter wrote
again to SOCAR, on behalf of
[153] On 18 January 2007 the president of SOCAR wrote to Mr Baxter, in response to his letter of 24 November, refusing to extend the period for negotiations, and stating that the Memorandum of Understanding had terminated.
The parties' submissions
[154] Many of the parties' submissions
were concerned with questions of fact.
It is necessary at this point to summarise their submissions as to the
law.
The submissions on behalf of
COGCL
[155] It was well established that
the relationship between a company and its directors was fiduciary. No distinction was drawn in that regard
between executive and non-executive directors.
The relevant general principles were to be found in Aberdeen Railway Co v Blaikie
Bros (1854) 1 Macq. 461 at page 471 per Lord Cranworth LC, Regal (Hastings) Ltd v Gulliver
[1967] 2 A.C. 134n at pages 147-148 per Lord Russell of Killowen, Boardman
v Phipps [1967] 2 A.C. 46 at
pages 123-125 per Lord Upjohn, Item Software (UK) Ltd v Fassihi [2005] 2 B.C.L.C. 91
at paras 38-43 per Arden LJ
and Shepherds Investments Ltd v Walters [2007] 2 B.C.L.C. 202
at paras 85-108 per Etherton J.
[156] A distinction was drawn in the authorities between the rule that a person in a fiduciary position must not make a profit out of his trust, and the rule that such a person must not place himself in a position where his duty and his interest might conflict: reference was made to Ultraframe (UK) Ltd v Fielding [2005] E.W.H.C. 1638 (Ch) at paras 1305-1311 per Lewison J. It was not suggested in the present case that there had been any breach of the "no profit" rule: it was not suggested that the opportunity to enter into the Memorandum of Understanding had been available to Mr Baxter by virtue of his directorship, or as a result of contacts which he had made as a director of COGCL. Nor was the present case a "corporate opportunity" case of the kind discussed at Ultraframe at paras 1332-1355: it was not suggested that Mr Baxter possessed knowledge of the opportunity in question as the agent of COGCL. It was the "no conflict" rule which was relevant to the present case.
[157] For the purposes of that rule, it was sufficient that (1) an
opportunity came the way of a person who was a director of a company,
(2) he knew or ought to have known that the opportunity was in the
company's line of business, and (3) he failed to seek the company's
informed consent. Reference was made to Bhullar v Bhullar [2003] 2 B.C.L.C. 241, to Foster Bryant Surveying Ltd v Bryant
[2007] 2 B.C.L.C. 239 and to Prentice and Payne, "Director's Fiduciary
Duties" (2006) 122 L.Q.R. 558.
[158] In order for Mr Baxter to owe a fiduciary duty to COGCL, it
was not necessary that he should have a role in the company's management. The fact that his motivation for being a
director was tax avoidance was nothing to the point. Even if he had not been "tasked" to seek out
opportunities for COGCL, neither had the directors in the Bhullar case been tasked. It
was sufficient that Mr Baxter was a director of COGCL, that the
[159] Turning to the position of Eurasia, counsel submitted that
Mr Baxter had at all material times acted as the directing mind and will of
Eurasia: it was effectively the
instrument by which he had diverted this opportunity away from COGCL. Reference was made to El Ajou v Dollar Land
Holdings plc [1994] 2 All E.R. 685 and Crown
Dilmun v Sutton [2004]
1 B.C.L.C. 468. It did not
matter that Mr Baxter had not been asked in evidence about his position vis-à-vis
The submissions on behalf of
Mr Baxter and Eurasia
[160] The approach adopted by counsel
for COGCL to the fiduciary duty of company directors was too broad, and was
based on taking judicial dicta out of
context. The restrictions on a director
making profits on his own account, and on conflicts of interest, were closely
related. At the root of the "no
conflict" rule in particular was the unacceptability of a director's making use
for his own benefit of an opportunity or knowledge which he had acquired in his
capacity as a director. The correct
approach was explained in Bell v Lever Brothers Ltd [1932] A.C. 161
at pages 193-195 per Lord
Blanesburgh, where the true scope of Lord Cranworth's dictum in the Aberdeen
Railway Co case was made clear, and where the principle found in London and Mashonaland Exploration Co Ltd
v New Mashonaland Exploration Co Ltd
[1891] W.N. 165 was endorsed. Reference
was also made to Bray v Ford [1898] A.C. 44 at page 51
per Lord Herschell, Burland v Earle at pages 98-99 per
Lord Davey and Cook v Deeks [1916] A.C. 554 at
pages 561-563 per Lord Buckmaster LC. There was therefore no rule against a
non-executive director becoming engaged, either personally or as a director of
another company, in the same line of business as the company.
[161] That principle was not confined to the case of a dummy director. The same approach could be seen in the Regal case per Lord Sankey at page 139, Lord Russell of Killowen at pages 143-149, Lord MacMillan at page 153, Lord Wright at pages 154-156 and Lord Porter at pages 157-158, and in Boardman v Phipps per Viscount Dilhorne at page 88, Lord Cohen at pages 102-103, Lord Hudson at page 105 and Lord Guest at page 118. These authorities did not support the proposition that a conflict arose merely because a director took for himself, without the informed consent of the company, an opportunity which in the view of a reasonable person the company would have wanted, or which was in the company's line of business.
[162] Following the correct approach, it was necessary to identify the
powers which the director had to exercise in a fiduciary capacity in order to
determine whether there was a conflict: Chan v Zacharia (1984) 154 C.L.R. 178; Ultraframe. A fiduciary
might be in a fiduciary position for some of his activities but not for
others. Each transaction or group of
transactions must be looked at separately:
[163] The more recent English authorities were generally consistent
with this approach. The judgment of
Roskill J in Industrial Development
Consultants Ltd v Cooley [1972]
1 W.L.R. 433 adhered to the earlier line of authority: the critical passage
(at page 451F-G) had to be read in its context, as Elias J
explained in University of Nottingham
v Fishel [2000] I.C.R. 1462 at
page 1495. The In Plus Group decision followed the earlier authorities. The judgment of Jonathan Parker LJ
in Bhullar proceeded on the same
basis as Roskill J in the Cooley
case: namely, that it had been part of
the director's duties, on the facts of the case, to find new business
opportunities for the company. Insofar
as Bhullar implied that a managing
director could not act in any other capacity within the scope of the company's
activities, that approach might be criticised, but it did not in any event bear
on the present case. In Item Software, the law was too widely
stated by Arden LJ at para 41.
Reference was made to the criticism of that judgment in P & V Industries Pty Ltd v
[164] Even if Mr Baxter had acted in breach of fiduciary duty, it did not follow that he was liable in damages (the claim for an accounting having been abandoned). He might, consistently with his duties, have elected to resign his directorship and pursued the same opportunity, or he might have elected to remain a director and not to pursue it. The relevancy of the claim for damages could not be determined at this stage.
[165] Turning to the position of
Discussion
The
case against Mr Baxter
[166] The parties' submissions in
relation to the case against Mr Baxter were based on widely differing
approaches to the fiduciary duties of directors. In essence, counsel for COGCL adopted an
approach according to which the status of director imposed a duty of loyalty
which required the director not to pursue for his own benefit an opportunity
lying within the scope of the company's activities which came to his attention,
without having first offered it to the company, whereas counsel for
Mr Baxter adopted an approach according to which the director was under
such a duty only if the opportunity in question came to his attention when he
was acting in his capacity as a director.
Each approach was said to be supported by the authorities. In that regard, it is necessary to bear in
mind an observation made by Fletcher Moulton LJ in In re Coomber; Coomber v Coomber [1911] 1
"There is no class of case in which one ought more carefully to bear in mind the facts of the case, when one reads the judgment of the Court on those facts, than cases which relate to fiduciary and confidential relations and the action of the Court with regard to them."
[167] The basic principle on which this branch of the law is founded was stated by Lord Cranworth LC in the Scottish case of Aberdeen Railway Co v Blaikie Bros at pages 471-472:
"The Directors are a body to whom is delegated the duty of managing the general affairs of the Company.
A corporate body can only act by
agents, and it is of course the duty of those agents so to act as best to
promote the interests of the corporation whose affairs they are conducting. Such agents have duties to discharge of a
fiduciary nature towards their principal. And it is a rule of universal
application, that no one, having such duties to discharge, shall be allowed to
enter into engagements in which he has, or can have, a personal interest conflicting, or which possibly may conflict,
with the interests of those whom he is bound to protect.
So strictly is this principle adhered to, that no question is allowed to be raised as to the fairness or unfairness of a contract so entered into.
It obviously is, or may be, impossible to demonstrate how far in any particular case the terms of such a contract have been the best for the interest of the cestui que trust, which it was possible to obtain.
It may sometimes happen that the terms on which a trustee has dealt or attempted to deal with the estate or interests of those for whom he is a trustee, have been as good as could have been obtained from any other person, - they may even at the time have been better.
But still so inflexible is the rule that no inquiry on that subject is permitted."
In support of the "rule of
universal application", Lord Cranworth referred to a number of English
authorities, including in particular Keech
v Sandford (1726) Cas. temp King 61, 25 E.R. 223, to
the earlier decision of the House of Lords in the Scottish case of York Buildings Company v Mackenzie (1795) 3 Pat.App. 378,
and to the Digest 18.1.34.7. I note that the principle is also consistent
with earlier Scottish authorities (e.g.
[168] Although, as counsel for Mr Baxter pointed out, the Aberdeen Railway case was concerned with a transaction entered into by a company director on behalf of the company, in which he had a personal interest, the principle stated by Lord Cranworth was not confined to situations of that nature: indeed Keech v Sandford, cited by Lord Cranworth as an illustration of the principle, concerned a transaction entered into by a trustee in his personal capacity.
[169] Lord Cranworth's statement of the law has been repeated in innumerable cases of the highest authority. A more recent statement of high authority can be found in the speech of Lord Upjohn in Boardman v Phipps at pages 123-125:
"Rules of equity have to be applied to such a great diversity of circumstances that they can be stated only in the most general terms and applied with particular attention to the exact circumstances of each case. The relevant rule for the decision of this case is the fundamental rule of equity that a person in a fiduciary capacity must not make a profit out of his trust which is part of the wider rule that a trustee must not place himself in a position where his duty and his interest may conflict ...
It is perhaps stated most highly against trustees or directors in the celebrated speech of Lord Cranworth L.C. in Aberdeen Railway v Blaikie, where he said:
'And it is a rule of universal application, that no one, having such duties to discharge, shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound to protect.'
The phrase 'possibly may conflict' requires consideration. In my view it means that the reasonable man looking at the relevant facts and circumstances of the particular case would think that there was a real sensible possibility of conflict; not that you could imagine some situation arising which might, in some conceivable possibility in events not contemplated as real sensible possibilities by any reasonable person, result in conflict.
... The whole of the law is laid down in the fundamental principle exemplified in Lord Cranworth's statement I have already quoted. But it is applicable, like so many equitable principles which may affect a conscience, however innocent, to such a diversity of different cases that the observations of judges and even in your Lordships' House in cases where this great principle is being applied must be regarded as applicable only to the particular facts of the particular case in question and not regarded as a new and slightly different formulation of the legal principle so well settled."
In relation to the last point, Lord Upjohn referred specifically to the case of Regal (Hastings) Ltd v Gulliver, on which counsel for Mr Baxter placed particular reliance in the present case. Lord Upjohn's was a dissenting speech; but there does not appear to have been any difference in principle between the speeches of their Lordships, as distinct from a difference in the application of the relevant principles to the facts of the case.
[170] I note that Lord Upjohn, following earlier authorities, referred to two "rules": the rule that a person acting in a fiduciary capacity must not make a profit out of his trust, and the wider rule that a trustee must not place himself in a position where his duty and his interest may conflict. The Regal case was concerned with the former rule; and the speeches therefore referred to the need for proof that the directors had acquired a profit by reason of, and in the course of, their office as directors. Their Lordships were not however narrowing the scope of the wider rule enunciated by Lord Cranworth and re-stated in that case by Lord Sankey at page 137:
"The general rule of equity is that no one who has duties of a fiduciary nature to perform is allowed to enter into engagements in which he has or can have a personal interest conflicting with the interests of those whom he is bound to protect."
It was also made clear by Lord Russell of Killowen at pages 144-145 that it was no answer to maintain that the actions of the director were bona fide or were beneficial to the company:
"My Lords, with all respect I think there is a misapprehension here. The rule of equity which insists on those, who by use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud, or absence of bona fides; or upon such questions or considerations as whether the profit would or should otherwise have gone to the plaintiff, or whether the profiteer was under a duty to obtain the source of the profit for the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his action.
The liability arises from the mere fact of a profit having, in the stated circumstances, been made. The profiteer, however honest and well-intentioned, cannot escape the risk of being called upon to account."
[171] More recent authorities have indicated that the obligation not to have a conflicting interest and not to make an unauthorised profit are not the only obligations which are consequential upon a director's duty to act in what he in good faith considers to be the best interests of the company. In Bristol and West Building Society v Mothew, for example, Millett LJ said at page 18:
"A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal. This is not intended to be an exhaustive list, but it is sufficient to indicate the nature of fiduciary obligations. They are the defining characteristics of the fiduciary. As Dr. Finn pointed out in his classic work Fiduciary Obligations (1977), p. 2, he is not subject to fiduciary obligations because is a fiduciary; it is because he is subject to them that he is a fiduciary.
...
The nature of the obligation determines the nature of the breach. The various obligations of a fiduciary merely reflect different aspects of his core duties of loyalty and fidelity. Breach of fiduciary obligation, therefore, connotes disloyalty or infidelity. Mere incompetence is not enough. A servant who loyally does his incompetent best for his master is not unfaithful and is not guilty of a breach of fiduciary duty."
It is also relevant, in the context of the present case, to note what was said by Millett LJ at pages 18-19:
"A fiduciary who acts for two principals with potentially conflicting interests without the informed consent of both is in breach of the obligation of undivided loyalty; he puts himself in a position where his duty to one principal may conflict with his duty to the other: see Clark Boyce v Mouat [1994] 1 A.C. 428 and the cases there cited. This is sometimes described as 'the double employment rule'. Breach of the rule automatically constitutes a breach of fiduciary duty."
[172] Millett LJ's identification of a core obligation of loyalty, one aspect of which is the duty to act in good faith, is reflected in the more recent judgment of Arden LJ in Item Software (UK) Ltd v Fassihi, with which the other members of the Court of Appeal expressed agreement. Her Ladyship referred at para 41 to "the fundamental duty to which a director is subject, that is the duty to act in what he in good faith considers to be the best interests of the company": a duty which her Ladyship also described as "the duty of loyalty".
[173] One final point of a general nature requires to be noted. Where a personal benefit or gain has been obtained or received in breach of the principles which I have explained, it is immaterial to the fiduciary's liability to account that he acted in good faith and that no damage was suffered by the person to whom the fiduciary obligation was owed. That point was explained by Lord Cranworth in the Aberdeen Railway case at pages 471-472 and has been re-stated in many of the subsequent cases (e.g. in the Regal case at page 144 per Lord Russell of Killowen).
[174] Considering in particular the position of company directors, the reason why they are in a fiduciary relationship with the company is because, as Lord Cranworth explained in the passage quoted earlier, they have been entrusted with the management of the company's affairs. They are therefore under a fiduciary obligation of loyalty, which entails (amongst other duties) an obligation not to allow their personal interests to conflict with the interests of the company and not to make secret profits.
[175] I am unable to accept the submission by counsel for Mr Baxter, based on the decision in London and Mashonaland Exploration Co Ltd v New Mashonaland Exploration Co Ltd and on a passage in the speech of Lord Blanesburgh in Bell v Lever Brothers Ltd, that the director's fiduciary obligation, so far as relevant to his dealings with third parties, is merely to forbear from using for his own benefit the property of the company or information which is confidential to the company. The brief report of the decision in the Mashonaland case (seemingly an ex tempore judgment on an interlocutory application for injunctive relief) contains no discussion of fiduciary obligations (other than in relation to confidential information). The passage referred to in Lord Blanesburgh's speech in Bell v Lever Brothers Ltd (at pages 193-195) is not an exhaustive statement of the principles established by the earlier authorities (as Roskill J noted in Industrial Development Consultants v Cooley at page 448), and cannot have been intended to depart from those authorities.
[176] A relationship of trust normally exists between a company and all its directors, whether executive or non-executive, notwithstanding the difference in the extent to which they are involved in day-to-day management. Under the company's articles (or its By-Law, in the present case), and under companies legislation, all directors are ordinarily entrusted with powers and responsibilities on behalf of the company, and they are all therefore subject to fiduciary duties. In particular, the nature of their role, whether they are executive or non-executive, calls for disinterestedness and good faith. As was said by Sedley LJ in In Plus Group Ltd v Pyke at para 80:
"The fiduciary duty of a director to his company is uniform and universal. What vary infinitely are the elements of fact and degree which determine whether the duty has been breached."
[177] The importance of directors' fiduciary duties is reflected in the fact that they are mandatory rules of law which the company and the director cannot contract out of. Section 310 of the Companies Act 1985 makes void:
"(1) ... any provision, whether contained in a company's articles or in any contract with the company or otherwise, for exempting any officer of the company or any person (whether an officer or not) employed by the company as auditor from, or indemnifying him against, any liability which by virtue of any rule of law would otherwise attach to him in respect of any negligence, default, breach of duty or breach of trust of which he may be guilty in relation to the company ..."
[178] The significance of the fiduciary duties of non-executive directors is illustrated by the case of Meyer v Scottish Co-operative Wholesale Society Ltd, which concerned a textile company which was a subsidiary of the co-operative society. Certain of the company's directors were nominees of the society, and were also directors of the society. The company was however managed by two other directors. The resultant position was described by Lord Denning at pages 67-68:
"So long as the interests of all concerned were in harmony, there was no difficulty. The nominee directors could do their duty by both companies without embarrassment. But, so soon as the interests of the two companies were in conflict, the nominee directors were placed in an impossible position. Thus, when the realignment of shareholding was under discussion, the duty of the three directors to the textile company was to get the best possible price for any new issue of its shares (see per Lord Wright in Lowry v Consolidated African Selection Trust Ltd [1940] A.C. 648, 679), whereas their duty to the co-operative society was to obtain the new shares at the lowest possible price - at par, if they could. Again, when the co-operative society determined to set up its own rayon department competing with the business of the textile company, the duty of the three directors to the textile company was to do their best to promote its business and to act with complete good faith towards it; and in consequence not to disclose their knowledge of its affairs to a competitor, and not even to work for a competitor, when to do so might operate to the disadvantage of the textile company (see Hivac Ltd v Park Royal Scientific Instruments Ltd [1946] Ch. 169), whereas they were under the self-same duties to the co-operative society. It is plain that, in the circumstances, these three gentlemen could not do their duty by both companies, and they did not do so."
[179] The Aberdeen Railway case and the Meyer case are examples of situations where directors had a personal interest, or a duty to a third party, which conflicted with the disinterested performance of their duty to act in what they in good faith considered to be the best interests of the company. In the Aberdeen Railway case, the director's duty to secure the best bargain he could for the company was compromised by his personal interest that the company should pay as high a price as possible. In the Meyer case, the directors' duty to do their best to promote the business of the company, and consequently not to assist a competitor, was compromised by their owing the same duties to a competing company. Many other examples can be found amongst the authorities which were cited in argument in the present case. Some are concerned with transactions entered into by persons after they had resigned as directors or had tendered their resignation: such cases give rise to issues which need not be considered in the present case. Some of the authorities are however closer on their facts to the present case, and illustrate how the relevant principles apply in practice: in particular, how attractive opportunities may be open to all bar the director, who is bound by a duty of self-denial, unless the company grants its informed consent.
[180] The decision of Roskill J in Industrial Development Consultants Ltd v Cooley is an application of the general "no conflict" principle stated by Lord Cranworth. The director in that case was, as Roskill J stated at page 447, subject to "the plainest conflict of interest". After the company of which he was managing director had unsuccessfully sought a contract for the design and construction of gas board depots, he was separately approached by the gas board with a view to his tendering for a contract on his own account. He learned that the gas board were back in the market for the construction of depots, and the timescale and capital sums involved. In order to obtain his release from the company, so that he could tender for the contract, he lied to the company about his state of health. The possibility that the gas board might have been willing to contract with the company was assessed as being no higher than 10 per cent. It was argued, under reference to the speech of Lord Blanesburgh in Bell v Lever Brothers Ltd, that there was no breach of duty because the relevant information had been received by the director in a personal capacity rather than in the course of his duties as director: a similar argument to that of counsel for Mr Baxter in the present case. The argument was rejected, Roskill J stating at pages 451-453:
"Information which came to him while he was managing director and which was of concern to the plaintiffs and was relevant for the plaintiffs to know, was information which it was his duty to pass on to the plaintiffs because between himself and the plaintiffs a fiduciary relationship existed as defined in the passage I have quoted from Buckley on the Companies Acts and, indeed, in the speech of Lord Cranworth LC.
It seems to me plain that throughout [the relevant period] the defendant was in a fiduciary relationship with the plaintiffs. From the time he embarked upon his course of dealing with the Eastern Gas Board ... he embarked upon a deliberate policy and course of conduct which put his personal interest as a potential contracting party with the Eastern Gas Board in direct conflict with his pre-existing and continuing duty as managing director of the plaintiffs. That is something which for over 200 years the courts have forbidden ...
Therefore, I feel impelled to the conclusion that when the defendant embarked on this course of conduct ... he was guilty of putting himself into the position in which his duty to his employers, the plaintiffs, and his own private interests conflicted and conflicted grievously. There being the fiduciary relationship I have described, it seems to me plain that it was his duty once he got this information to pass it on to his employers and not to guard it for his own personal purposes and profit."
An argument that there was no duty to account, since the gas board would not in any event have contracted with the company, was rejected by Roskill J at page 453:
"When one looks at the way the cases have gone over the centuries it is plain that the question whether or not the benefit would have been obtained but for the breach of trust has always been treated as irrelevant."
In that regard, Roskill J referred to Keech v Sandford and to the Regal case. There was therefore a duty to account for the profit received, notwithstanding that the case fell outside the scope of the "no profit" principle as it had been formulated in the Regal case. In that regard, Roskill J said (at page 453):
"[O]ne must, as Lord Upjohn pointed out in Phipps v Boardman [1967] 2 A.C. 46, 125, look at the passages in Regal having regard to the facts of that case to which those passages and those statements were directed. I think Mr Brown was right when he said that it is the basic principle which matters. It is an over-riding principle of equity that a man must not be allowed to put himself in a position in which his fiduciary duty and his interests conflict."
Roskill J therefore ordered the defendant to account for the profit which he had made, adding (at page 454) that he would otherwise have awarded damages for the plaintiff's loss of the opportunity to obtain the contract.
[181] Counsel for Mr Baxter sought to distinguish the Cooley case from the present case on the basis that the defendant in that case, unlike Mr Baxter, was employed as a managing director, with a specific responsibility to secure contracts of the type in question. As Roskill J made clear at page 451 in the passage quoted earlier, however, the decision in the Cooley case was based on the fiduciary relationship between a company director and the company, as defined in the speech of Lord Cranworth in the Aberdeen Railway case. Since the fiduciary obligation to avoid a conflict between interest and duty cannot be severed from the principal duties arising under the fiduciary relationship (cf. Tito v Waddell (No 2) [1977] Ch. 10 at 230 per Sir Robert Megarry V-C; Birks, "The Content of Fiduciary Obligations" (2002) 16 Trust Law International, pp 47-48, 50), the defendant's responsibilities as managing director were relevant. It is difficult however to imagine that the result of the case would have been different if the gas board had approached another director and he had acted in the same way, since any director would have been under a duty "so to act as best to promote the interests of the corporation", as Lord Cranworth stated in the Aberdeen Railway case: "to do their best to promote its business and to act with complete good faith towards it", as Lord Denning said in the Meyer case.
[182] The decision in Bhullar v Bhullar is another example of the application of the same principles. The case concerned a company, run by two families, which carried on a supermarket business, but which had also acquired an investment property: its objects included the acquisition of property for investment. The families fell out. The directors from one family informed those from the other family that they wished to go their separate ways, and did not wish any further properties to be acquired by the company. That decision was accepted in principle. While negotiations took place over the division of the assets, the appellant directors discovered by chance that the property next to the company's existing investment property, currently being used for car parking by the tenants of the latter property, was on the market. They did not inform the company, but purchased the property for their personal benefit in the name of a company which they controlled. As in the present case, it was argued on the basis of the Regal case that, since the appellants had not been acting as directors at the time when they learned of the investment opportunity, it followed that their fiduciary duty was not engaged. It was also argued that any interest of the company in acquiring the property could only have been extremely limited. Jonathan Parker LJ, in whose judgment the other members of the Court of Appeal concurred, referred to Lord Cranworth's decision in the Aberdeen Railway case and to its application by Roskill J in the Cooley case. His Lordship observed (at para 30) that "the rule is essentially a simple one, albeit that it may in some cases be difficult to apply". He concluded, at para 41:
"It seems obvious that the opportunity to acquire the property would have been commercially attractive to the company, given its proximity to Springbank Works. Whether the company could or would have taken that opportunity, had it been made aware of it, is not to the point: the existence of the opportunity was information which it was relevant for the company to know, and it follows that the appellants were under a duty to communicate it to the company. The anxiety which the appellants plainly felt as to the propriety of purchasing the property through Silvercrest without first disclosing their intentions to their co-directors - anxiety which led Inderjit to seek legal advice from the company's solicitor - is, in my view, eloquent of the existence of a possible conflict of duty and interest."
The directors were therefore ordered to procure that the property was transferred to the company at cost price, and to account for profits.
[183] The cases of Cooley and Bhullar were discussed by Arden LJ in Item Software, in a judgment with which the other members of the Court of Appeal expressed their agreement. Arden LJ noted that both Cooley (at pages 451 and 453 per Roskill J) and Bhullar (at para 41 per Jonathan Parker LJ) spoke of the director having a duty to disclose. In that regard, her Ladyship said, at paras 40-41:
"[40] However, the Bhullar and Cooley cases do not suggest that the duty to disclose there referred to is some new and separate duty imposed on a fiduciary, breach of which would give rise to a potential liability to pay compensation. It may be that in those cases the courts spoke of a duty to disclose simply to explain why in those cases the information obtained in a private capacity gave rise to a liability to account for secret profits. In addition, it is often said that a fiduciary must disclose a conflict of interest and duty because that is a shorthand way of stating the mechanism by which he can avoid any liability to account for secret profits. ...
[41] For my part, I do not consider that it is correct to infer from the cases to which I have referred that a fiduciary owes a separate and independent duty to disclose his own misconduct to his principal or more generally information of relevance and concern to it. So to hold would lead to a proliferation of duties and arguments about their breadth. I prefer to base my conclusion in this case on the fundamental duty to which a director is subject, that is the duty to act in what he in good faith considers to be the best interests of his company."
[184] The same approach was followed by Etherton J in Shepherds Investments Ltd v Walters, which concerned directors of a company who, while remaining in office, were involved in establishing a competing company. His Lordship said (at para 132):
"As Arden LJ so clearly stated in Item Software, in relation to a fiduciary's duty to disclose his own misconduct to his principal, or, more generally, information of relevance and concern to his principal, the single and overriding touchstone is the fundamental duty of a director to act in what he considers in good faith to be in the best interests of the company. There is no separate and independent duty of disclosure. In the context of the director's own acts to promote a competing business, the breach of fiduciary duty is to carry out the impermissible acts of promotion without first disclosing the intention to do them and obtaining permission to so. There is a breach because the director's conflict between his personal interest and his duty to the company has not been authorised after full disclosure to, and informed consent by, the company. In the case of the acts of his fellow directors in promoting a rival business, the breach of fiduciary duty of the director is failing to disclose matters which are of relevance and concern to the company and which, if acting in good faith in the best interests of the company, the director would disclose."
[185] While bearing in mind the warning by Fletcher Moulton LJ in In re Coomber with which I began this discussion, and accordingly bearing in mind the need for the relevant principles to be applied with sensitivity to the facts of particular cases, it appears to me that the cases which I have discussed illustrate a number of principles relevant to a situation where a director exploits for his own advantage a commercial opportunity which might have been commercially attractive to his company:
1. A director is under a duty to act in what he in good faith considers to be the best interests of the company for whose affairs he and the other directors are responsible. He is therefore under an accessory obligation not to place himself in a position where his duty and his interest may conflict. In consequence, he is obliged not to act for his own benefit or for the benefit of a third party, in a situation where there is a potential conflict of interests, without the company's informed consent, and not to make an unauthorised profit (Aberdeen Railway at page 471 per Lord Cranworth; Meyer at pages 67-68 per Lord Denning; Bristol and West Building Society v Mothew at page 18 per Millett LJ).
2. A director who wishes to exploit for his own benefit (or that of a third party) a business opportunity which is in the company's line of business must therefore first disclose the opportunity to his company and obtain its consent (Cooley; Bhullar). As Arden LJ explained in Item Software at para 41, the duty breached in Cooley and Bhullar was not a fiduciary "duty to disclose ... information of relevance and concern" to the company, but rather the fiduciary duty to avoid a conflict between the director's duty and his personal interests. The underlying duty which may be in conflict with the director's personal interests is, as Arden LJ also explained in Item Software (ibid), the director's duty to act in what he in good faith considers to be the best interests of the company.
3. The relevant consideration is not whether the director has come across the opportunity in the course of performing his functions as a director, but whether by taking up the opportunity the director would be putting himself "in a position where his duty and his interest may conflict" (Boardman v Phipps at page 123 per Lord Upjohn). This includes circumstances where "the reasonable man looking at the relevant facts and circumstances of the particular case would think that there was a real sensible possibility of conflict" (ibid, at page 124).
4. The opportunity need not concern something in which the company is at the time pursuing an active interest: it is sufficient that "the existence of the opportunity was information which it was relevant for the company to know" (Bhullar at para 41 per Jonathan Parker LJ). This is consistent with paragraph 3 above: there will be a potential conflict if a reasonable person would think that there was "a real sensible possibility" that the opportunity would have been commercially attractive to the company.
5. It is no answer for the director to say that the information or opportunity did not come to him in the course of performing his functions as a director (Bhullar; Cooley). This follows from paragraph 3 above.
6. It is no answer for the director to say that he was acting in good faith (Regal; Boardman v Phipps).
7. It is no answer that the company could not or would not in fact have taken the opportunity, if the reasonable man would think that there was a real sensible possibility of conflict: "whether the company could or would have taken the opportunity, had it been made aware of it, is not to the point" (Bhullar at para 41, per Jonathan Parker LJ).
8. Equally, where the opportunity involves a third party, it is no answer that the third party would have been unwilling to deal with the company, if the reasonable man would think that a conflict existed (Cooley). As Roskill J observed in Cooley at page 454, it would be curious if "he whose duty it would have been to seek to persuade them to change their mind should now say that the plaintiffs suffered no loss because he would never have succeeded in persuading them to change their mind". This is consistent with the law's unwillingness to enquire, where a conflict existed, as to whether the fiduciary nevertheless performed his duties as well as he would otherwise have done (Aberdeen Railway at pages 471-472 per Lord Cranworth).
[186] Applying these principles to the facts of the present case, it is clear in the first place that Mr Baxter was at all material times a director of COGCL. As such, he owed fiduciary duties to the company. The fact that he was a non-executive director does not mean that he did not owe the company the same fiduciary duties as its executive directors. As explained earlier, the common law (or, in English law, equity) imposes the same fiduciary duties on all directors, because they are all in a relationship of trust and confidence with the company, having been entrusted with the management of its affairs (similarly, although the provisions of Part 10 of the Companies Act 2006 are not applicable to the present case, it is consistent with principle that those provisions, identifying the principal duties of directors, apply to executive and non-executive directors alike). Although Mr Baxter was not involved in the day-to-day running of COGCL's business, his role as a non-executive director of a wholly-owned subsidiary of a listed company was not merely nominal; and he possessed, under the By-Law and under company legislation (which I have to assume to be the same in Anguilla as in the United Kingdom) a variety of powers, including the power to convene meetings of the board.
[187] As a director of COGCL, Mr Baxter was under the same duty as any other director to act in what he in good faith considered to be the best interests of the company. He was under an obligation not to place himself in a position where his own interests conflicted with his performance of that duty, and not to act for his own benefit or for the benefit of a third party, in a situation of potential conflict, without the company's informed consent. The existence of these duties was unaffected by the fact that Mr Baxter's only reason for becoming a director was to secure tax relief: his directorship brought with it not only eligibility for taper relief, but also responsibilities of loyalty and good faith. If he could not discharge those responsibilities, he should not have remained a director.
[188] Although COGCL was not pursuing offshore opportunities, it is a
matter of admission that it had been involved in pursuing efforts to identify
new business opportunities in
[189] Mr Baxter's duty to act in good faith in the best interests of COGCL encompassed informing it of matters known to him which it would be in the company's best interests to know about. That duty conflicted with his personal interest in keeping the information to himself.
[190] When Mr Baxter decided not to disclose to COGCL that there
was a possibility of his being able to secure an agreement with SOCAR relating
to the exploration and development of the Eurasia block, and instead decided to
pursue that possibility on his own account, he gave his personal interests
priority over his duty towards the company.
He then embarked upon, and persisted in, a course of conduct which
placed his personal interests in conflict with his duty to act in good faith in
the best interests of COGCL. The further
his discussions with SOCAR progressed towards an agreement, the plainer the
conflict of interest became, and the more clearly Mr Baxter subjected the
performance of his duty to the company to the pursuit of his personal interest
or, latterly, the interests of
[191] In these circumstances, I conclude that Mr Baxter acted in breach of the fiduciary duty which he owed to COGCL.
The case against Eurasia
[192] The claim against Eurasia
is concerned with a situation where a third party is said to have received "a
valuable commercial opportunity" from a director, knowing that the director has
given it to them in breach of his fiduciary duties to his company, thereby
depriving the company of that opportunity.
The proposition of law on which the claim is based, as encapsulated in
the plea in law, is:
"... [COGCL] having suffered loss, injury and damage by reason of [Mr Baxter's] breaches of fiduciary duties and by reason of [Eurasia's] knowing receipt of a commercial opportunity brought to it in breach of [Mr Baxter's] fiduciary duties ... is entitled to reparation from them."
Counsel for COGCL confirmed in his submissions that the argument was that Eurasia were liable in damages as accessories to Mr Baxter's breach of fiduciary duty, as a result of their knowing involvement in that breach as recipients of the Memorandum of Understanding.
[193] The expression "knowing receipt", which appears in COGCL's pleadings, and the expression "knowing assistance", which also featured in submissions, are commonly used to refer to the two types of liability described by Lord Selborne LC in Barnes v Addy (1874) 9 L.R.Ch.App. 244 at pages 251-252:
"[The responsibility of a trustee] may no doubt be extended in equity to others who are not properly trustees, if they are found ... actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust. But ... strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees."
I note that that dictum is quoted, as a statement of Scots law, in Menzies on Trustees, 2nd ed., at para 1286. In the first situation described by Lord Selborne, the third party is made liable as a recipient of trust property or its traceable proceeds. In the second situation, the third party is made liable to pay compensation as an accessory to the trustee's breach of trust. In the present case, notwithstanding the reference in the pleadings to "knowing receipt" rather than "knowing assistance", the claim is of the second kind: COGCL maintain that Eurasia are liable to compensate them for their loss, as an accessory to the fiduciary's breach of duty, rather than being liable to restore property held in trust, or liable by reason of unjust enrichment.
[194] The necessary ingredients of such a claim under the law of
[195] In the course of his judgment, Lord Nicholls considered the nature of the accessory liability, and its proper limits. The relevant passages merit extensive quotation. His Lordship began (at pages 386-387) by explaining the rationale of the liability:
"Stated in the simplest terms, a trust is a relationship which exists when one person holds property on behalf of another. If, for his own purposes, a third party deliberately interferes in that relationship by assisting the trustee in depriving the beneficiary of the property held for him by the trustee, the beneficiary should be able to look for recompense to the third party as well as the trustee. Affording the beneficiary a remedy against the third party serves the dual purpose of making good the beneficiary's loss should the trustee lack financial means and imposing a liability which will discourage others from behaving in a similar fashion.
The rationale is not far to seek. Beneficiaries are entitled to expect that those who become trustees will fulfil their obligations. They are also entitled to
expect, and this is only a short step further, that those who become trustees will be permitted to fulfil their obligations without deliberate intervention from third parties. They are entitled to expect that third parties will refrain from intentionally intruding in the trustee-beneficiary relationship and thereby hindering a beneficiary from receiving his entitlement in accordance with the terms of the trust instrument. There is here a close analogy with breach of contract. A person who knowingly procures a breach of contract, or knowingly interferes with the due performance of a contract, is liable to the innocent party. The underlying rationale is the same."
His Lordship then discussed the question whether liability should be strict or fault-based. Having rejected strict liability, for reasons which appear to me to be equally persuasive from the perspective of Scots law, his Lordship described the nature of the fault required. It was generally accepted that dishonesty fulfilled that role. In that regard, his Lordship began by explaining (at page 389) what dishonesty meant in this context:
"Whatever may be the position in some criminal or other contexts (see, for instance, Reg. v Ghosh [1982] Q.B. 1053), in the context of the accessory liability principle acting dishonestly, or with a lack of probity, which is synonymous, means simply not acting as an honest person would in the circumstances. This is an objective standard. At first sight this may seem surprising. Honesty has a connotation of subjectivity, as distinct from the objectivity of negligence. Honesty, indeed, does have a strong subjective element in that it is a description of a type of conduct assessed in the light of what a person actually knew at the time, as distinct from what a reasonable person would have known or appreciated. Further, honesty and its counterpart dishonesty are mostly concerned with advertent conduct, not inadvertent conduct. Carelessness is not dishonesty. Thus for the most part dishonesty is to be equated with conscious impropriety. However, these subjective characteristics of honesty do not mean that individuals are free to set their own standards of honesty in particular circumstances. The standard of what constitutes honest conduct is not subjective. Honesty is not an optional scale, with higher or lower values according to the moral standards of each individual. If a person knowingly appropriates another's property, he will not escape a finding of dishonesty simply because he sees nothing wrong in such behaviour.
In most situations there is little difficulty in identifying how an honest person would behave. Honest people do not intentionally deceive others to their detriment. Honest people do not knowingly take others' property. Unless there is a very good and compelling reason, an honest person does not participate in a transaction if he knows it involves a misapplication of trust assets to the detriment of the beneficiaries. Nor does an honest person in such a case deliberately close his eyes and ears, or deliberately not ask questions, lest he learn something he would rather not know, and then proceed regardless."
His Lordship acknowledged that there were some situations where the question was less straightforward. In that regard, his Lordship said (at pages 390-391):
"The individual is expected to attain the standard which would be observed by an honest person placed in those circumstances. It is impossible to be more specific. Knox J captured the flavour of this, in a case with a commercial setting, when he referred to a person who is 'guilty of commercially unacceptable conduct in the particular context involved:' see Cowan de Groot Properties Ltd v Eagle Trust Plc [1992] 4 All E.R. 700, 761. Acting in reckless disregard of others' rights or possible rights can be a tell-tale sign of dishonesty. An honest person would have regard to the circumstances known to him, including the nature and importance of the proposed transaction, the nature and importance of his role, the ordinary course of business, the degree of doubt, the practicability of the trustee or the third party proceeding otherwise and the seriousness of the adverse consequences to the beneficiaries. The circumstances will dictate which one or more of the possible courses should be taken by an honest person. He might, for instance, flatly decline to become involved. He might ask further questions. He might seek advice, or insist on further advice being obtained. He might advise the trustee of the risks but then proceed with his role in the transaction. He might do many things. Ultimately, in most cases, an honest person should have little difficulty in knowing whether a proposed transaction, or his participation in it, would offend the normally accepted standards of honest conduct.
Likewise, when called upon to decide whether a person was acting honestly, a court will look at all the circumstances known to the third party at the time. The court will also have regard to personal attributes of the third party, such as his experience and intelligence, and the reason why he acted as he did.
Before leaving cases where there is a real doubt, one further point should be noted. To inquire, in such cases, whether a person dishonestly assisted in what is later held to be a breach of trust is to ask a meaningful question, which is capable of being given a meaningful answer. This is not always so if the question is posed in terms of 'knowingly' assisted. Framing the question in the latter form all too often leads one into tortuous convolutions about the 'sort' of knowledge required, when the truth is that 'knowingly' is inapt as a criterion when applied to the gradually darkening spectrum where the differences are of degree and not kind."
Lord Nicholls then discussed the question whether negligence would suffice for liability. His conclusion (at page 392) was that it would not ordinarily be appropriate to impose upon persons dealing with trustees a duty of care towards the beneficiaries of the trust, in the absence of particular facts which would warrant the imposition of such a duty. It appears to me to be likely that a similar conclusion would be reached in Scots law. It was not in any event suggested in the present case that negligence would suffice. Lord Nicholls concluded (at page 392):
"Drawing the threads together, their Lordships' overall conclusion is that dishonesty is a necessary ingredient of accessory liability. It is also a sufficient ingredient. A liability in equity to make good resulting loss attaches to a person who dishonestly procures or assists in a breach of trust or fiduciary obligation. It is not necessary that, in addition, the trustee or fiduciary was acting dishonestly, although this will usually be so where the third party who is assisting him is acting dishonestly. 'Knowingly' is better avoided as a defining ingredient of the principle."
[196] As that passage makes clear, the liability is not confined to breaches of trust, but also applies in respect of breaches of fiduciary obligations. In Brown v Bennett [1999] 1 B.C.L.C. 649 it was considered by the Court of Appeal to be arguable that the liability applied not only in relation to property but in relation to all breaches of directors' fiduciary duties in relation to the management of a company.
[197] I do not doubt that Scots law also imposes a liability upon a
third party who participates in a breach of trust or fiduciary duty. Whether the test of liability is precisely
the same as in English law was disputed in argument: counsel for COGCL implicitly maintained that
liability attached to a person who knowingly participated in a breach of trust,
whereas counsel for
[198] Although the concepts of "knowingly" and "dishonestly" (or "in bad faith") participating in a breach of fiduciary duty are not precisely the same, the distinction between them is not of critical importance in the present case. Two issues appear to me to be of central importance to the claim made against Eurasia: first, whether (as COGCL maintain) Mr Baxter's state of mind can be attributed to Eurasia; and, secondly, whether Mr Baxter's state of mind was such that, were it attributable to Eurasia, their conduct would amount to knowing or dishonest participation in his breach of fiduciary duty.
[199] It is convenient to begin by dealing with the second of those
issues. As I have explained, I have come
to the conclusion, albeit with some hesitation, that Mr Baxter did not
realise that he was acting in breach of his obligations to COGCL. Given that conclusion, if follows that COGCL
have failed to establish their claim that
"To be liable for inducing breach of contract, you must know that you are inducing a breach of contract. It is not enough that you know that you are procuring an act which, as a matter of law or construction of the contract, is a breach. You must actually realize that it will have this effect. Nor does it matter that you ought reasonably to have done so."
[200] In
view of my conclusion that Mr Baxter did not knowingly act in breach of
his fiduciary duties, there is no question of my finding that he acted dishonestly
or in bad faith. As Lord Nicholls
said in Royal Brunei at page 389,
honesty is "assessed in the light of what a person actually knew at the time,
as distinct from what a reasonable person would have known or
appreciated". There is no suggestion in
the present case that Mr Baxter wilfully or recklessly closed his eyes to the
possibility that his conduct might be in breach of his fiduciary duty.
[201] In the circumstances, it is unnecessary for me to reach any
conclusion on the question whether Mr Baxter's state of mind can be
treated as that of
[202] COGCL's claim proceeds on the basis that, because Mr Baxter was a substantial shareholder in Eurasia, one of its directors (from 31 March 2005), its president and its chief executive officer (from 28 November 2005), it follows that his knowledge can be attributed to Eurasia.
[203] Counsel for COGCL relied on the "directing mind and will" theory, as explained by Hoffmann LJ in El Ajou v Dollar Land Holdings plc. I note that Lord Hoffmann discussed the issue more fully in Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 A.C. 500, drawing a distinction (at pages 506-507) between primary, general and special rules of attribution. The company's primary rules of attribution are generally found in its constitution, and in company law. The general rules of attribution are the principles of agency and vicarious liability. Special rules of attribution apply "when a rule of law, either expressly or by implication, excludes attribution on the basis of the general principles of agency or vicarious liability" (page 507). In such circumstances, "the rule of attribution is a matter of interpretation or construction of the relevant substantive rule" (ibid).
[204] In the present case, there was no argument directed to the
question whether the relevant rule of law - namely, the rule imposing accessory
liability on a person who knowingly and intentionally participates in a breach
of fiduciary duty (or on a person who does so dishonestly, depending on how the
rule is correctly stated) - is consistent with the company's primary rules of
attribution together with the general principles of agency, or (as I am
inclined to think) requires a special rule of attribution. If the primary rules are applicable, there is
no evidence as to the articles of association or other constitutional documents
of
[205] Nor do I accept that Eurasia can simply be treated as a "vehicle" or instrument employed by Mr Baxter: it appears to be a public company with numerous shareholders and with other officers besides Mr Baxter, which had an existence for more than a year before it became involved in Mr Baxter's dealings with SOCAR. I note that it was not in any event suggested that the corporate veil should be lifted, so that Eurasia could on that basis be treated as the same person as Mr Baxter.
Conclusions
[206] I accordingly conclude that
Mr Baxter acted in breach of his fiduciary duty to COGCL when he pursued
the Eurasia block opportunity for his own benefit, or latterly for the benefit
of Eurasia, without having first disclosed the existence of that opportunity to
COGCL and obtained their permission. I
also conclude that
[207] The case will be put out for a hearing to discuss the appropriate form of order, and future procedure, in the light of these conclusions.