Royal Courts of Justice
Strand, London, WC2A 2LL
July 10th, 2001
Before:
----------
B E T W E E N
Claimants
-and -
Defendants
----------
Peter Brunner instructed by Cleaver
Thompson of Alfreton DE55 7AE for the Claimant.
Neil Mendoza instructed by Ward Hadaway of Newcastle NE1 3DX for the Defendants.
Hearing dates: 10-11, 14-18 and 21-22nd May 2001
----------
Bargh, Mr: Mr Brian Bargh; a claimant; formerly a partner in Mitchells.
Brunner, Mr: Peter Brunner, counsel for the claimants.
James, Doreen: Mrs Doreen James; second defendant; divorced wife of Ron James.
James, Ron: Mr Ron James; first defendant.
James, Vera: Mrs Vera James; wife of Ron James.
JS Motors: Business originally carried on in partnership by Ron James and Reg Smith.
Mendoza, Mr Neil: counsel for the defendants.
MGGL: Matlock Green Garage Limited; company the ownership of which is the main issue in this case; third defendant.
Mitchell, Mr: Mr Arthur Mitchell; first claimant; formerly senior partner in Mitchells.
Mitchells: Edward Mitchell & Son; a chartered accountants partnership carrying on business in Chesterfield.
Ripley, Mr: Mr Owen Ripley; a claimant; formerly a partner in Mitchells.
Smith, Mr: Mr Reg Smith, formerly a partner with Ron James in JS Motors.
2. This is a case about the ownership of the shares in MGGL. The company used to operate a filling station and to carry on a motor repair and servicing business at Matlock Green in Derbyshire. It is no longer trading, but it has quite a significant asset value. There are 100 shares in issue. The registered holders of them are Ron James and his former wife, Doreen James, as to 50 shares each. Their case is that they are the unfettered beneficial owners of all of the shares.
3. When the relevant events happened the claimants were partners in Mitchells, a firm of chartered accountants based in Chesterfield. They are now retired. They claim that under an oral agreement made in 1969 they are the true owners of half of the company. If they are right Ron James and Doreen James would be the legal owners of 100 shares, but the beneficial owners of only 50 of them. The other 50 shares would be owned beneficially by the claimants, in proportions between themselves which do not matter for the purposes of what I have to decide. Alternatively the claimants say that, if they are not already the beneficial owners of 50 shares in MGGL, they are entitled, by virtue of the oral agreement of 1969, to become the beneficial owners.
4. The defendants, Ron James and Doreen James, say that the oral agreement on which the claimants rely was never made. Alternatively they say that, if it was, it should be set aside on various grounds, of which the principal ones are that it was procured by undue influence and that it was an unconscionable bargain.
5. In my judgment the claimants have succeeded in establishing that the oral agreement was made. I also consider that it is not liable to be set aside for undue influence or for any of the other grounds advanced on behalf of the defendants.
6. A reader will already have noted that the case involves issues which go back to 1969. Most of the people who were involved then are still alive and gave evidence. Nevertheless, memories of what did or did not happen 32 years ago are bound to be unreliable. To an extent this places a haze of uncertainty over some of the questions which I have to decide, but I believe that there is sufficient material before me to support the conclusions to which I have come. There is a different aspect of time having passed before the matter has come to trial. The case was initiated by a writ served in 1986, fifteen years ago. There are some explanations of how all that time has been allowed to pass before the case has been brought to trial, but the lapse of time has been most unsatisfactory. However, I am told that an application for the claim to be struck out was compromised on agreed terms, and that it was in accordance with those terms that the trial went ahead before me. I am not happy about the long delay, but both sides wanted me to hear the case and decide it, and I have done so.
7. In the second half of the 1960s Ron James and his friend Reg Smith set up a small motor repairing business in Chesterfield. It was called JS Motors. There was no partnership agreement. Ron James said in evidence that they just worked together, but it is common ground that JS Motors was a 50/50 partnership. Ron James is now 70, so at the time he was in his mid to late 30s. In 1968 he and Reg Smith got the opportunity to take on the running of a Total filling station at Matlock Green, which is about 10 miles from Chesterfield. They moved their business to there. They still did motor repairs, but the business and turnover were enlarged by the filling station activity. Doreen James gave up the job which she had previously had, and looked after the filling station forecourt. It is clear that the business was becoming a more substantial operation than the original JS Motors, which had been a small affair.
8. Ron James and Reg Smith were good mechanics and motor repairers, but they had no business skills. Reg Smith said that he was lackadaisical, and was more interested in car rallying and motor-cycling than in dedicating himself to business. Ron James said that any sort of paper work went right over his head, and he says that he never changed in that respect over the years. They had had virtually no accounts and records in the initial years of their business. I do not think that they had been submitting income tax returns, and certainly they had not submitted any business accounts for JS Motors. That needed to be sorted out, and at some time in the second part of 1968 they were introduced to Mitchells. Mitchells was an accountancy firm in Chesterfield, the practice of which included handling the accounts and tax affairs of many small businesses. Ron James and Reg Smith instructed Mitchells to deal with the tax position of their business. The partner who took charge of the matter was Mr Bargh. I do not know his age, but I think that he also would have been in his thirties in around 1968 and 1969.
9. Mr Bargh says that he met Ron James once when he was first instructed to act for the business, and met him on one other occasion in the winter of 1968/69 when he went to Matlock Green to examine the records (which he found to be in very poor shape). He remembers seeing Doreen James then, working on the forecourt in cold and unpleasant conditions. He was very impressed by her apparent dedication. Doreen James does not remember the occasion, but I am sure that it happened. At that stage Mr Bargh merely had an ordinary and recent professional instruction from a small business client. The instruction was to try to get some accounts out for the last few years from inadequate records, and to regularise the tax position with the Inspector of Taxes.
10. The next time that Mr Bargh had any contact with Ron and Doreen James was in a week in June 1969. This week is of vital importance in the case, because it was in the course of it that, according to the evidence of the claimants, in particular Mr Bargh, the oral agreement was formed. Ron and Doreen James cannot give any precise evidence about it, except to say that they do not remember the things that Mr Bargh remembers. Mr Bargh says that he has a reasonably good recollection of the events, and I will summarise it now, with occasional comments of my own and interpolations from the evidence of other witnesses. The summary should be read subject to two reservations. First, for all that Mr Bargh says that he remembers the events quite well, they happened 32 years ago and it would be amazing if he was right in every particular. Second, Mr Bargh is cast as the 'bad guy' by the defendants, and it should be appreciated that much of his evidence is challenged.
11. In the June week concerned Reg Smith was away watching the TT Races in the Isle of Man. He was out of contact unless he telephoned. Mr Bargh was asked on the telephone by Doreen James to go to the garage. She told him that she was not willing to continue to work at the garage unless Reg Smith left. Her evidence to me did not confirm this. She said that she got on reasonably with Mr Smith. Disagreements with him were 'just niggles'. Mr Bargh may have exaggerated this in his memory over the years, especially when he says that Doreen James even said that she might leave her husband if Reg Smith did not go (an improbable detail which I suspect may be incorrect in Mr Bargh' s recollection). However, I think that there is probably some validity in what he recalls. It is of some significance that Reg Smith, who was a witness for Ron and Doreen James, said that he and Doreen did not get on, and that she did not like him. Mr Bargh recalls that Doreen James also told him that the business had no money to keep itself going. Ron James' evidence disputed this. He did recall one occasion when there had been no money in the bank to pay for the delivery of a tanker-load of petrol, but he said that, once that had been sorted out (which he unrealistically thought had been done at short notice simply by Mr Bargh speaking on the telephone to the Total depot at Immingham) the business would not have had any other money problems. Mr Bargh has no recollection of the tanker incident, but I am sure that Ron James has not made it up. I think that it must have happened in some form, though I do not think that Mr Bargh sorted it out on the telephone to Total.
12. As Mr Bargh tells me he recalls it, his views at the time when he spoke to Doreen James at the garage were as follows. The business had promise. The filling station was in a good location. It had a Green Shield stamp franchise - a valuable marketing asset at the time. It had potential significantly to increase its turnover (principally its gallonage). However, if it was going to survive Mr Bargh says that he thought that two, or possibly three, things were required. The first was the departure of Reg Smith. It was not just that Doreen James did not get on with him. Mr Bargh must have been influenced by having struggled for some time to get anywhere with the financial records of the business. They had been Reg Smith's responsibility, and they were in a hopeless state. It was also apparent that Reg Smith had a bad record for sending bills out to clients for work that had been done. The second thing required was an injection of cash. Mr Bargh's estimate of what was required was about £2,000, which was a much more significant figure then than it would be now. I believe that there was a third thing which Mr Bargh thought was required. He did not specifically mentio n it at this point in his evidence to me, but it permeated much of his conduct for the rest of 1969 and for years thereafter. It was the introduction of financial controls and management systems, things which Reg Smith and Ron James were completely incapable of providing, but which were essential for a business which was by now more than a small two man car repair operation.
13. I focus for the moment on Mr Bargh's second requirement, which involved somehow raising £2,000 capital for use in the business. His evidence to me was that, as he recalls, it was needed partly to pay out Reg Smith for giving up his interest in the business, partly to pay the first instalment of rent under a lease of the garage which it was expected would be granted by Total (as in the event it was), and partly for general working capital.
14. The defendants dispute that the £2,000 was needed. There was expert evidence on both sides about this. I did not find the expert evidence particularly helpful either way. Trying to look back for over thirty years I am inclined to think that Mr Bargh was right and that the business did need an injection of capital. The important point, however, is that I accept that, whether he was right or wrong, he did form the opinion that the business needed £2,000 which it did not currently have. Ron James says now that, if Mr Bargh really had said in June 1969 that it was necessary to raise £2,000, he and his wife could have raised it. There was some expert evidence directed to this as well, but again I did not find it particularly helpful. I am sceptical about Mr James' belief in this respect. Mr Bargh says that he asked Mr and Mrs James if they could raise £2,000 and they said that they could not. Whether that is correct or not, Mr Bargh's evidence was that he made some attempts himself to raise the money. He approached Mitchells' ; bank manager, who could not make a loan to Ron James or to JS Motors because of the absence of any established record of satisfactory trading. Mr Bargh approached his own aunt and uncle, who considered the matter but said that they would not lend any money. They are now dead, but there is a written statement by Mr Bargh's aunt, tendered under the Civil Evidence Act, confirming what Mr Bargh says.
15. Mr Bargh says that, having failed to find anyone willing to lend £2,000 to the Matlock Green business, he went back to see Ron and Doreen James. In his recollection he places this occasion on the Thursday evening of the week while Reg Smith was away at the TT in the Isle of Man. It was on this occasion that, if I accept Mr Bargh's evidence (as in essential respects, even if not in every detail, I do), the oral agreement was formed. Mr Bargh says that he asked whether Ron and Doreen James would like Mr Bargh and his colleagues, the partners in Mitchells at the time, to put up the money.
16. His proposal, to which he says that Mr and Mrs James agreed, was that the partners would provide £2,000, that Mr and Mrs James would work in the business and draw wages from it, that Mitchells would become the accountants to the business and would draw fees for accountancy work, and that if there was a balance of profit left after the wages and accountancy fees it would be split 50/50. It must have been a part of the proposal, whether Mr Bargh spelt it out or not (on which I do not think that there was any explicit evidence), that Reg Smith would agree to leave the business. In the event he did leave, but if he had insisted on staying Mr Bargh's proposal could not have proceeded. In legal terms it might be said that the agreement was conditional on Reg Smith being prepared to retire from the business, although I do not for a moment suggest that, in the discussion between Mr Bargh and Mr and Mrs James, the point was expressed as formally as that. At some stage, although I do not know whether this formed a part of Mr Bargh's initial discussion with Ron and Doreen James, it became part of the agreement that the business would be incorporated and carried on by a company.
17. Mr Bargh's evidence about his discussion with Mr and Mrs James was to the effect that he explained his proposal carefully to them, and he believed that they understood it. He accepts that he did not recommend or suggest to them that they should take independent advice on the proposal. I make the comment here that, having heard Ron James and Doreen James give evidence at some length, I think that, if Mr Bargh had suggested to them that they should take independent advice, they would have been unlikely to do so.
18. As I have said, Mr Bargh's evidence was that he and Mr and Mrs James reached an agreement on (he thinks) the Thursday evening. He still had to put the idea to his partners and get them to agree. There were five partners at the time, and I do not think that any of them other than Mr Bargh knew anything about Ron and Doreen James or Matlock Green garage. Mr Bargh spoke to his partners at the firm's office on the Friday morning. I think that he put it to them as a financial proposition: the partners would have some risks, but if matters went well they could receive significant returns. In addition, the firm might be acquiring, or on one view of the matter retaining, a good client for the long term benefit of the practice. He did not put it to his partners on the basis that they would be doing a financial favour to two needy individuals whom he had recently got to know and liked. The partners had a special meeting to discuss the proposal. It seems that initially some of them were doubtful, especially the senior partner, Mr Arthur Mitchell. He would have turned the proposal down, but Mr Bargh persuaded the other partners to go along with it, and Mr Mitchell went along with the others.
19. However, Mr Mitchell attached a condition to the participation by himself and his partners which has proved to be very important. Because Mitchells acted for a number of other small businesses engaged in the same or similar activities to those at the Matlock Green garage, he insisted that the participation of the partners in the Matlock Green business should remain private and confidential. On behalf of the defendants, Mr Mendoza probed this in cross-examination of several of the claimants, but in my view the evidence clearly established that Mr Mitchell did indeed impose the requirement of secrecy.
20. On the Saturday Reg Smith returned from the Isle of Man. It seems that he had telephoned once in the course of the week. His recollection is that Ron James told him on the telephone that they did not have enough money to pay for the petrol and that Mr Bargh ('Bargey') was sorting it out. When he got back someone told him that he was no longer a partner in JS Motors. It may have been Ron James, although Mr James does not remember telling him, or it may have been Doreen James, although, given that she was not a partner in the business, she would not have been the obvious person to tell him. At all events, Reg Smith was told that he was no longer in the business. I believe that he could have argued about it, but he did not. He had never earned much money from JS Motors anyway. He could and did get another job quickly, and in any case his father was well off and would always help him out if necessary. Some time after leaving the business Mr Smith received a payment of £700 for his interest. The evidence is unclear about how this happened. Mr Bargh thinks that Ron James negotiated the payment with Mr Smith. Ron James does not remember doing that, and thinks that Mr Bargh probably decided that £700 was an appropriate amount to pay. Mr Smith said that he did not expect to receive anything, so that the payment came as a surprise to him. I have to say that that seems unlikely, given the quite detailed evidence which I heard from both Mr James and Mr Smith about the range of equipment owned by the business, a half share of which belonged to Mr Smith. From what I heard £700 sounds to have been a realistic sum for him to receive for giving up a half share in the business and assets.
21. The departure of Reg Smith left Ron James as, on the face of it, the sole owner of the business, but in my view he owned it subject to and with the benefit of the agreement which had been made between him and his wife on the one hand, and Mr Bargh representing the Mitchells partners on the other. This is an important point to which I will return in connection with some of the submissions presented by Mr Mendoza on behalf of the defendants.
22. One of the Mitchells partners lived next door to the manager of the branch of a bank at Clay Cross. (The bank has been referred to in evidence as NatWest, which is the present identity of the bank. I think that in 1969 it was probably a branch of one of the predecessors of the present NatWest.) The manager agreed to lend £400 to each of the Mitchells partners, and they paid the money to Ron James (who was the owner of the business at the time, since MGGL had not yet been formed). This made the £2,000 which Mr Bargh had agreed would be provided by the partners. In the present proceedings the defendants (Ron and Doreen James) originally admitted in the pleadings that the Mitchells partners had paid the £2,000, but later they have withdrawn the admission, and do not accept that the money was paid. In my view, although at this distance in time it is not possible to produce specific evidence that each of the five payments of £400 was definitely paid, I have seen amply sufficient evidence to make me wholly satisfied that each amount was paid. There is another point which supports the claimants' case in this respect. They say that a condition which the bank manager attached to his agreement to lend £2,000 to the partners was that the bank account of the Matlock Green garage should be transferred to his branch, which was at Clay Cross, not at Matlock. It is an undisputed matter of record that the account was transferred.
23. It was a partner of Mr Bargh's proposal, to which in my opinion Ron and Doreen James agreed, that the business was to be transferred to a company. A company was acquired and it took the name Matlock Green Garage Limited (MGGL in this judgment). It commenced business at the beginning of August 1969.
24. There was no formal written agreement for the transfer of the business, but the transfer undoubtedly happened. The legal structure of the transaction can be deduced from the accounts of the company, which were prepared by Mitchells (specifically by Mr Bargh) and adopted by Ron and Doreen James as directors. The business and assets were transferred to MGGL by Ron James (who, after the departure of Reg Smith, was on the face of it the sole owner) for £700, satisfied as to £100 by the issue of 100 shares of £1 each and as to £600 by a loan account for that sum owed by MGGL to Ron James. The 100 shares were not all issued to Mr James: 50 were issued to him and 50 to Doreen James. This was, I assume, a matter of choice between the two of them, and nothing turns on it in this case. The company assumed, by some sort of informal novation, the business liabilities of JS Motors. These included a liability for a loan of £1,000 which had been made at some time in the past to JS Motors by Mr James' mother, and, more importantly for the present case, included a liability for £2,000. There is in my view no doubt that this liability was owed to the five Mitchells partners, each of whom had paid £ 400 to Ron James for use in the business in the interim period between Reg Smith departing and the business being transferred to the company. The accounts did not identify to whom the £2,000 was owed. This was because of the secrecy insisted upon by Mr Mitchell, the senior partner.
25. There is an example of this secrecy operation in practice in some correspondence between Mitchells and the Inspector of Taxes. It related to the closing balance sheet of JS Motors at 31 July 1969 rather than the opening balance sheet of MGGL at 1 August 1969, but of course the two balance sheets were essentially the same. The Inspector asked a question about the closing balance sheet of JS Motors. Mitchells' file copy of a letter from Mr Bargh in reply reads as follows: 'The sum of £2,000 was provided as follows to repay the £700 to Mr Smith and to provide further working capital'. The carbon copy then has a blank space of several lines. Mr Bargh said that the names of the five partners were written in, presumably by himself, in manuscript in order that they should not be seen by the staff in the office. Mr Mendoza was disparaging about this, but I accept what Mr Bargh says. Taking secrecy to those lengths may have been obsessive, but it is what was done. It is indisputable that the names are not on the carbon copy of the letter, and it is almost indisputable that the names would have been included in the top copy as sent to the Inspector. Whose names could realistically have been there if not the give names of the Mitchells partners, each of whom had provided £ 400?
26. I said in paragraph 24 above that all the 100 shares in MGGL were issued to Ron and Doreen James. None of the shares were issued to the Mitchells partners, as might have been expected under the agreement, testified to by Mr Bargh, for them to have a 50% interest in the business. This too is explained as a consequence of Mr Mitchell's insistence on secrecy. The witness statement of Mr Ripley, one of the partners and one of the claimants, is instructive on this. He refers to Mr Mitchell's concern about secrecy, and goes on:
We discussed how to overcome this problem and it was agreed that we should insist on the initial partnership between the Mitchells partners and Ronald James being transferred as soon as possible into a limited liability company. The shares in the company would be registered in the name of Ronald and Doreen James but blank share transfer forms for 50% of the shares were to be signed by Mr and Mrs James to enable the shares to be transferred and registered in our respective names, should the need arise at any time in the future.
27. Blank share transfers were prepared. I think that they were drafted by one of the other partners, Mr Hoskin, who has since died. Ron James and Doreen James each signed a transfer of 25 shares to a blank transferee, and the transfer forms were held in the custody of Mitchells at its offices. Ron and Doreen James both say that they do not remember signing the transfers, but they certainly did sign them. Mr Bargh said that he explained what they were when he put them before Mr and Mrs James for signature. I do not think that Mr and Mrs James positively asserted that he did not. Ron James' evidence was to the effect that, if Mr Bargh asked him to sign something, he would sign it, and if an explanation was given to him of what it was he would pay little or no attention to the explanation. Doreen James' evidence was less forthrightly given, but was essentially to the same effect. I mention for completeness that there is a minor inconsistency in the evidence and pleadings of the claimants about whether it was Mr Bargh or his partner Mr Hoskin who put the transfers before Mr and Mrs James for signature. I do not think that this matters, but for what it is worth I think, after hearing the evidence, that Mr Hoskin drafted them but Mr Bargh presented them for signature.
28. That is all that I need to say about the setting up of MGGL. From August 1969 onwards the structure remained in place without any dispute about ownership for 16 years. There are a few matters which I should record about that period.
29. The first is that Mr Bargh's optimism that the business could prosper proved to be justified. The company did make good profits over the years. The profits were dealt with, not by being retained by the company, but by being allocated in 50/50 proportions between (1) Ron and Doreen James as directors' bonuses, and (2) Mitchells as supplementary accounting charges. That is to say, each year Mitchells provided conventional accounting services to MGGL and charged conventional fees for doing so. In the same way Ron James and Doreen James each worked in the business and were paid conventional salaries for their services. If at the accounting year end a profit remained after deducting those conventional fee and salaries, it was, as a matter of accounting, eliminated from MGGL and effectively transferred as (taxable) income to Mitchells and to Mr and Mrs James. The company declared directors' bonuses to Mr and Mrs James, and it was invoiced by Mitchells for further charges payable to the firm. These invoices might be described as profit participation invoices. They were not worded in those terms, but that is what, in commercial terms, they were. Because the business prospered, quite large amounts were dealt with in this way. The amounts so allocated to Mitchells and to Mr and Mrs James were not usually paid out to them immediately. Rather they were credited to loan accounts which they had in the books of the company, and were only drawn out in cash when the company's cash flow permitted. On these occasions there were, I believe, always exactly equal drawings by Mitchells on the one hand and Mr and Mrs James on the other.
30. Within Mitchells receipts from MGGL for conventional accounting services were treated as normal receipts of the practice and included in the profits which were shared between whoever the partners were from time to time. The profit participation charges which Mitchells invoiced to MGGL once a year were not treated in that way. They were divided exclusively between the original five partners (or those who had succeeded to what they believed to have been their proprietorial interests in MGGL), to the exclusion of more recent partners who did not share in the 50% interest in the company.
31. How far the success of MGGL's business was attributable to what I mention now may be disputed, but it is certainly the case that over the years Mr Bargh devoted much time and attention to the business, doing far more than would normally be done by a professional accountant for a corporate client. He gives a lot of specific examples in his witness statement, and it is clear that he organised and provided financial systems and controls which the business needed, and that he involved himself in significant aspects of business management, such as negotiating on many matters with Total, the landlord and the major supplier, negotiating with credit card companies, visiting trade shows, fixing pay rates for staff, choosing a car-wash machine and arranging for the acquisition of it, and other varied management functions.
32. Each year Mitchells prepared the accounts of MGGL, and also the annual returns for filing at Companies House. The accounts and the returns recorded that Ron and Doreen James were the shareholders, as they were so far as the registered holdings were concerned. Mr Bargh's evidence was that each year he explained the accounts and annual returns to Mr and Mrs James, and reminded them that they were holding half of the shares for the Mitchells partners. I do not think that Mr and Mrs James asserted positively in their evidence that Mr Bargh did nothing of the sort. Their evidence was rather to the effect that, if Mr Bargh did say that to them, it went right over their heads and they made no attempt to understand it. (There are some indications in the evidence, which I will mention later, that, even if Mr and Mrs James have genuinely forgotten all about it now, in the 1970s and the first part of the 1980s they did understand that the Mitchells partners had an interest in the company.)
33. From time to time other joint ventures were set up between some of the Mitchells partners and Ron and Doreen James. An example was a business, organised as a partnership, called Matlock Green Car Sales. There is no dispute that this was a joint operation, and that some of the Mitchells partners were part owners of it. There were a few other examples of the same sort of thing, but I do not think that the other examples were of significant size.
34. In 1976 Ron and Doreen James separated, and a year or so later they were divorced. In 1979 Ron married Vera James. I think that they had lived together for a couple of years or so before that. The separation and divorce of Ron and Doreen James had no effect on the business or on the ownership of it. Doreen James continued to be the registered holder of 50 shares, and the beneficial owner of either 50 or 25 shares, depending on the outcome of this case. She continued to work at the garage. As I understand it her main role was to run the accessory shop which at some stage was introduced at the site. In her oral evidence she said that she and Ron seemed to get on better after they separated.
35. As I said earlier, the structure which had been established in June, July and August 1969 (or so Mr Bargh and his partners believed) stayed in place without any apparent dissension about it for 16 years. Then it all broke down in July 1985. Mr Bargh's evidence was that, for no reason that was apparent to him, Doreen James came one day to his office in Chesterfield and demanded the company books and records. He gave them to her and gave her copies of the blank share transfers, but not the originals. MGGL, acting by its directors Ron and Doreen James, terminated the engagement of Mitchells for accounting services, and when the Mitchells partners said that they were the true owners of 50 of the 100 shares, Ron and Doreen James said they were not.
36. There is one event around this time which I should record. A few days after it emerged that Ron and Doreen James were saying that the Mitchells partners had no interest in the shares in MGGL a meeting was arranged between them, accompanied by Vera James, and Mr Mitchell, the senior partner. The meeting took place in the garden of a local pub, the White Hart. Mr Bargh was there, but he stayed apart from the actual discussion. Mr Mitchell says that in the discussion he convinced Ron and Doreen James that the Mitchells partners did have an interest in the company. Mr and Mrs James, especially Mr James, say that he did not convince them of anything of the sort, and that they broke off the meeting without agreement on anything. However, I think that what Mr Mitchell says is almost certainly correct. The reason is that, when he got back to his office he immediately made an attendance note, which he produced in evidence, and which in part reads as follows.
A lengthy discussion ensued regarding the financial affairs and shareholding of [MGGL] lasting approximately one hour and on several occasions the ownership of the shares in the Company was mentioned by me to Ron and Doreen and they stated that they did appreciate that they were equal partners with A.E. Mitchell (self), Brian Bargh, Owen Ripley and Jim Crowther (who as Doreen said replaced Spencer Hoskin).
37. Despite this, Ron and Doreen James continued to maintain that the Mitchells partners had no interest in MGGL. At some stage the partners completed the blank transfers with their own names as transferees and sent them to the company for registration. They wrote on the transfers that the consideration was £25 for each transfer, and I think that they must be assumed to have tendered £50 for having the shares transferred into their names. That would have been logical on the basis of their view of the situation. The company refused to register the transfers - equally logically given that Ron and Doreen James were denying that there ever had been an agreement for the Mitchells partners to acquire half of the company. Also, at some stage Ron and Doreen James, presumably acting on advice, caused the company to offer to pay £2,000 to the partners in repayment of their loans alleged to have been made in 1969. Ron and Doreen James maintained that the effect was that if, contrary to the case advanced by them, the partners did have any right to acquire shares in MGGL, the offer of immediate repayment in full of the £ 2,000 extinguished the right. The partners refused to agree to this, and it has not been advanced as an argument before me.
38. I think that in the course of the evidence something of the background to Doreen James's demand for the company's documents and the general breakdown of the relationship with Mitchells and its partners emerged. Not much turns on it at this stage, but I briefly mention two points. One is that Vera James, who of course had no personal knowledge of what had or had not happened in 1969, became convinced (perhaps prompted by remarks made to her by a VAT officer on an inspection visit) that Mitchells were grossly overcharging MGGL for professional services. The other is that there had been a disagreement between all three of the Jameses and Mr Bargh over a request by him to draw some money out of the bank account of the car sales partnership (a different joint venture which I have mentioned earlier) for purposes of his own. Ron and Doreen James each said in evidence that after this last episode someone (I do not think that they said who it was) advised them to demand the return of the company books and to terminate all business and professional relations with Mitchells.
39. It was in July 1985 that the breakdown occurred. Initially the Mitchells partners moved reasonably promptly to protect what they said were their rights. They commenced the present proceedings in March 1986. As I said in the overview at the beginning of this judgment, there has been an extraordinary delay in bringing the matter to trial. I will not go into it in any detail, but there is one matter which I ought to mention.
40. For a long time MGGL had had a lease from Total of the garage premises. A stage arose, I think in the early 1990s, when MGGL needed to serve a notice under the Landlord and Tenant Act 1954 to ensure that its lease would be renewed. The notice was not served. MGLL lost its tenure at the garage, and in (I think) 1994 it ceased trading. MGGL asserted that the failure to serve the notice require by the Landlord and Tenant Act was the fault of its then solicitors. It sued them for negligence. The present action understandably went into hibernation while the negligence proceedings continued. There was no point in pressing on with an action about the ownership of a company which might be worthless. I may be wrong, but I think that liability was eventually conceded. I am told that damages were assessed at over £232,000 in November 1996. I assume that the company still has that sum, or what is left of if after tax and expenses. I imagine that the money held by MGGL and derived from its action against its former solicitors is the main thing behind the present case having been revived and pursued to trial. Nevertheless, I think that I ought to quote my note of something said in evidence by Mr Bargh: 'We were a professional firm. We would not get involved in twisting someone. We are here because we do not like being accused of something of that nature'.
41. That is all that I have to say by way of description of the facts, but there are two respects in which I think that, before moving on to consider the issues in dispute, I should express opinions arising from the facts.
42. The first is this: what do I think would have happened to the business if Mitchells, and Mr Bargh in particular, had not become involved in the way that they did in 1969? Some of the expert evidence is directed to this question. The business was clearly capable of surviving and prospering, because in the events that happened it did. I have to say, however, that in my opinion, if it had remained a partnership of Ron James and Reg Smith, with Mitchells merely providing conventional accounting services, the business would probably have failed. It was seriously undercapitalised, as the example of the tanker load of petrol demonstrated. I cannot regard that as an isolated incident which, once it had been solved, would not have recurred in other forms. I believe that it was symptomatic of what would have been persistent problems. No bank would have given any significant borrowing facilities to Mr James and Mr Smith, who had no track record in business to speak of. I do not think that they could have coped on the basis of raising money by doing things like borrowing from Mr James' mother out of her savings, or selling second hand photographic equipment which Ron and Doreen James owned at the time.
43. Ron James and Reg Smith were good mechanics and repairmen (when they set their minds to it, a reservation which is particularly applicable to Reg Smith), but they had none of the other attributes which were needed in order to run a medium sized business successfully. They had no financial, organisational or managerial skills, and no interest in those matters. I would not want these remarks to be regarded as criticisms of Mr James and Mr Smith. They both came over in the witness box as most engaging characters, and it seemed from the comments of other witnesses that they are both widely liked. But they were not the right kinds of persons to own and run a business like the Matlock Green garage. To make a success of it they needed the kind of input which came from Mr Bargh. Further, I do not think that it was the sort of input which a fairly small firm of accountants would provide on a normal professional basis to an ordinary client company. It made a real difference that Mr Bargh and his partners were, as he saw it, part-owners of the company in the management of which he was involving himself to a substantial extent. I do not accept that, as a matter of practical reality, the managerial input which Mr Bargh provided to MGGL for 16 years would ever have been provided simply in return for normal professional fees charged by his firm, Mitchells.
44. My second comment concerns the true nature of the transaction which, according to the case of the Mitchells partners, took place between them and Ron James in 1969. I need to say something about this because I do not agree with the basis on which the parties appear to have viewed it themselves at times, including at the time of instructing the experts. Occasionally, though not in the claimants' submissions presented orally to me by Mr Brunner, they have analysed the transaction as a purchase by the Mitchells partners from Ron James of a 50% interest in the business for £2,000. In my opinion that is not correct. If there was an agreement as the claimants contend, when the transaction was agreed upon Ron James owned 50% of the business, and when the transaction was completed Ron James (together by then with his wife) still owned 50% of the business, by then through a 50% shareholding in a company. He did not sell anything to the Mitchells partners. It is wrong to regard the transaction as starting with Ron James as the owner of 100% of the business, and consisting of him selling to the Mitchells partners, for £2,000 or any other figure, half of what he owned. I add in this connection that, because the experts were asked to consider the transaction on the basis that it was a sale of a 50% interest in the business for £2,000 (which in my view it was not), I have not derived any significant assistance from the expert evidence.
45. If I imagine that the Mitchells partners had acquired their 50% interest immediately and openly, rather than it being kept confidential as insisted upon by Mr Mitchell, they would not have acquired their interest by purchasing it from Ron James - or indeed from Reg Smith, although their acquisition was closer to a purchase from Mr Smith than it was to a purchase from Mr James. The agreement between them and Ron James was that, once Reg Smith had given up his interest in the business, and once the company was formed and in a position to acquire the business, they would acquire a 50% interest, not by purchase from Ron James, but by subscription coupled with the provision to the company of £2,000 in cash. To the extent that the £2,000 was accounted for as a shareholders' loan to the company, the understanding, and in all probability an implied term if it had ever been disputed, was that the loan would be a long term loan, interest free and only to be repaid with the agreement of Ron and Doreen James (the other shareholders).
46. If the transaction had not been complicated by the need for secrecy the Mitchells partners would have provided £2,000 to MGGL in two ways: as to £50 by way of share subscription and as to £1,950 by way of long term interest-free loan. Because of the need for secrecy the whole of the £ 2,000 was accounted for as a shareholders' loan to MGGL. If the Mitchells partner ever took transfers of the 50 shares which they said that they owned they would have to pay £50 for them to Ron and Doreen James, and I suppose that if everything was thought through with logical perfection it would have been appropriate for them to raise the £50 by drawing it out of their loan account with the company, so reducing to £1,950 the balance lent by them to the company.
47. Mr Mendoza submits that I should find that the oral agreement relied upon by the claimants never existed. I cannot agree with him. I accept that the burden of establishing the agreement rests on the claimants, and I accept that there are some elements of the agreement asserted by them which appear unusual. It would not be usual for a firm of accountants to agree with the shareholder in a client company that the firm should acquire an equity interest in the company. Indeed, the expert witnesses agree that to do so was in breach of the ethical guidelines of the Institute of Chartered Accountants. I agree with Mr Mendoza that the secrecy arrangements seem unattractive, and are such as to put one on careful enquiry as to whether the agreement alleged really was made. I also agree with him that, if Mr Bargh did conclude the agreement with Ron and Doreen James, it would have been sensible for him to have recommended them first to take independent advice. He accepts that he did not do that, and this feature makes it all the more important to consider most carefully whether the Mitchells partners have indeed discharged the burden of satisfying the court that Mr Bargh really did make the agreement with Mr and Mrs James.
48. However, making every allowance for those points, I consider that there is overwhelming evidence that the agreement was made, however unusual it may at first appear. Mr Bargh gave clear evidence that he did form the agreement, and he said that his memory of it was reasonably good even after all the years. I do not find that surprising: it must have been an exceptional and memorable incident in his professional life. His memory of it would, in my opinion, have been kept alive by the very heavy involvement which he had in the business of MGGL for sixteen years. Further, my finding rests on far more than Mr Bargh's memory of something that happened in June 1969. It is supported by a great many other matters, to several of which I will refer in subsequent paragraphs.
49. What is the case against the existence of the agreement? There is the starting point, which I acknowledged two paragraphs ago, that the existence of such an agreement seems unusual and unlikely. All that that means is that it must be clearly proved. And if I took for positive evidence adduced on behalf of the defendants to the effect that there never was an agreement I find very little. They adduced evidence from several witnesses, but only the evidence of themselves touched on what was agreed or was not agreed in June 1969.
50. Doreen James' evidence did not help the defendants' cause at all. Although she had not had an ownership interest in the business in June 1969, she was present on the occasions when, at the time of Reg Smith's absence in the Isle of Man, Mr Bargh came to the garage and had discussions with her and her husband. In her oral evidence she said that she could not remember whether they came to an agreement or not. That is certainly not positive evidence that there never was an agreement. I also have to record that, although in her first and second witness statements she said that she did not know until the breakdown in 1985 that the Mitchells partners claimed to have a 50% interest in MGGL, in a third witness statement prepared only a day or so before the start of the trial she said that her previous statements had not been true in that respect. Mr Bargh, some years before 1985, had said to her that he and some of his partners owned 50% of the company. She had passed this on to a man with whom she was having a relationship at the time, Mr Selby-Heard. By the time of her third witness statement she knew that Mr Selby-Heard was going to give evidence on behalf of the claimants, and I have to wonder whether she would otherwise have kept quiet about this untruth in her original evidence.
51. Ron James' evidence contributed little more than his former wife's. The thrust of his evidence was that he had never understood anything about companies and shares. He did not remember Mr Bargh trying to make the sort of agreement which Mr Bargh says that he did make, and in so far as he would have been able to understand it, he cannot believe now that he would ever have agreed to the Mitchells partners being 50% owners of the business.
52. On the other side, in support of the agreement having existed as the claimants say, there is in my view a mass of evidence and other considerations, the cumulative force of which is overwhelming. It is certain that Mr Bargh told all his partners on the Friday of the crucial week in June 1969 that, if the partners would invest £2,000 in the business, it was agreed that they would have a 50% interest. I dismiss out of hand any notion that Mr Bargh knew that there was no such agreement, but went to the office and lied to his own partners about it. Almost equally improbable is the notion that, although Mr Bargh genuinely thought that he had made an agreement with Ron and Doreen James, he was mistaken and in fact he had not. Mr Bargh obviously believed that he had made an agreement with the Jameses, and I cannot see any good reason why I should suppose that he had got it all wrong.
53. All sorts of subsequent events and conduct are consistent with the existence of the agreement and very hard to understand otherwise. I have mentioned many of these matters already. I mention them again, without elaborating, since they speak for themselves. Each of the five partners borrowed £400 and paid it to Ron James during the period between June 1969 (when they say that the agreement was made) and August 1969 (when the company started to trade). The blank share transfers were drawn up and signed by Ron and Doreen James, for all that they now say that they do not remember signing them. The internal arrangements within Mitchells plainly assumed that the partners (or, as the years went by, some of them but not the more recent partners) had an interest in MGGL which was not just the normal relationship between a firm of accountants and a client. There are minutes of partnership meetings which discussed MGGL on the basis that the partners were part owners. The system of profit participation invoices which I described earlier was consistent, and consistent only, with Mitchells being more than merely the conventional accountants and auditors of the company. Mr Bargh devoted a lot of time to business affairs of MGGL which it made sense for him to undertake if the Mitchells partners were part owners of the business, but which would have been altogether unusual if the relationship had simply been the normal one between accountants and a corporate client. Mr Mitchell made a contemporary note of the meeting at the White Hart in July 1985, recording that Ron and Doreen James had accepted that they and the Mitchells partners had equal interests in the company.
54. There are other matters which I have not mentioned yet which also support the existence of the agreement. Further, some of them tend to show that Ron and Doreen James did know of the existence of the agreement, even if it is possible that they have subsequently forgotten about it or have subconsciously persuaded themselves that it never did exist after all.
55. Three witnesses gave evidence of having been told at some time by Ron or Doreen James that the Mitchells partners were part owners of the business. These were: (1) Mr Salt. He is an insurance broker, and an old acquaintance of Ron James and Reg Smith. He said that in 1970 Ron James said to him: 'Mitchells have taken Reg Smith's share in the business'. Mr James described Mr Salt as 'an old washerwoman'. He may have been an accumulator of gossip, but I do not think that his evidence was effectively challenged. (2) Audrey Gilmore. She worked on the forecourt for a time in the late 1970s. She said that Mr Bargh seemed to be very important in the running of the business. 'Being new I asked around but it was Ron who eventually told me that Brian had 50% of the business and that he and Doreen had the other 50% of the business'. (3) Mr Selby-Heard. He is the man with whom Doreen James had a relationship for a time. He said that she told him that the Mitchells partners owned half of the company. If his evidence stood alone I would not attach any weight to it. There were many implausibilities in it, and I thin that he has a tendency to embroider what he says. However, Doreen James admitted that she had told him that Mr Ba rgh said that the partners were part owners of the business, and that being so I am inclined to give this part of Mr Selby-Heard's evidence more credence than I otherwise might have done.
56. There were other witnesses who said that, although no-one ever said to them in as many words that the Mitchells partners had an ownership interest in MGGL, the impression which they formed over the years was that Mitchells were more than just the accountants to the company. That was the view formed by Mr David Wood, who was employed at the garage from 1969 and from about 1975 was the General Manager. He became a very senior employee. His evidence was that Mr Bargh was very important and influential in the affairs of the company. 'Neither Doreen nor Ron ever told me who had shares in [MGGL]. I had a job and it was nothing to do with me at that time, but looking back at the situation it was obvious Brian Bargh had a financial interest in the company'. He also said that in 1985, after the dispute between Mitchells and the Jameses had started he asked Ron James about the ownership of the company. 'He would not give me a straight answer.... He never denied Mitchells were part owners'.
57. Evidence was given by former employees of Total, who had dealt with MGGL in the course of their duties. They felt that if Mr Bargh was important and did more in the business of MGGL than would be done by most accountants. The impression of one witness, Mr Anderson who for a time was Total's regional manager for the North of England, was that Mr Bargh 'tended to have the final say in things'. He and other managers at Total felt that Mitchells had some form of interest in the company. I heard evidence of one occasion when a Total representative, Mr Bradley, asked Mr Bargh if he had any financial interest in MGGL and Mr Bargh said that he had not. Mr Mendoza relies on this, but it needs to be seen against Mr Mitchell's insistence on secrecy, which was never withdrawn. Mr Bargh said that he did not recall the conversation with Mr Bradley, but he would have said that Mitchells did not have a financial involvement. My note goes on: 'I would try to get over to them that there was a financial involvement, but I could not acknowledge it. They were curious about it'.
58. I mention two matters in which Doreen James was concerned. After she separated from her husband but before they were divorced there was correspondence between solicitors acting for her and solicitors acting for him. In a letter of 11 January 1977 her solicitor wrote, in relation to MGGL: 'They each own 25% of the issued share capital, the balance being held by Messrs Edward Mitchell & Sons'. The overwhelmingly likely source of this statement is information supplied by Mrs James herself. I do not accept that it may have been false information which Mr Bargh somehow imparted to Mrs James' solicitor. In 1981 Doreen James made a number of wills. They were drafted by the same solicitor. One of them made a specific reference to 'my shareholding of 25% in [MGGL]'. Again I believe that this can only realistically have come from Mrs James, and I do not accept that it was inaccurate information somehow planted by Mr Bargh. Doreen James may have become uncertain over the years about what sort of an interest in MGGL she had, but in 1977 and 1981 she seems to have understood that her interest was 25%, not 50%.
59. I could continue with the process of describing other snippets from documents or the oral evidence which support the same conclusion. However, I believe that what I have said already is more than enough to substantiate the conclusion which I have reached, namely that, as the claimants allege, there was a binding agreement in force to the effect that half of the two holdings of 50 shares each in MGGL, of which the registered holders were Ron and Doreen James, were held for the Mitchells partners. I do not think that I need to analyse in fine detail the precise effect of the agreement. Perhaps it had the effect that Mr and Mrs James were nominees of 50 shares for the Mitchells partners. Perhaps the agreement operated solely in contract, the effect being that the partners could at any time call for the shares to be transferred to them or as they might direct upon payment by them of £50 to Mr and Mrs James. Either way the practical outcome is that the claimants do have rights of the sort which they seek to have declared and enforced by the present action.
60. That concludes what I want to say about this issue in the case. Under subsequent headings I move on and consider various arguments advanced by Mr Mendoza to the effect that, if an agreement was made between his clients and the Mitchells partners, his clients are not bound by it.
61. It is trite law that a transaction which has been procured by undue influence exerted by one party to it may normally be set aside at the instance of the other party. On behalf of Ron and Doreen James Mr Mendoza says that, if there was an agreement between Ron James and the Mitchells partners at all, it was procured by undue influence on the part of Mr Bargh, and it ought to be set aside. In Barclays Bank Plc v. O'Brien [1994] 1 AC 180 at 189 Lord Browne-Wilkinson set out a classification of cases in which undue influence may arise. There are two classes: Class 1 - actual undue influence; Class 2 - presumed undue influence. Class 2 subdivides into two sub-clauses: Class 2(A), where the undue influence is presumed (rebuttably) from the existence of certain relationships (e.g. the relationship of solicitor and client) between the parties; Class 2(B), where, although the relationship between the parties is not one of the kinds (like solicitor and client) which the law recognises as giving rise to a presumption of undue influence, nevertheless the party who seeks to set the transaction aside proves the de facto existence of a relationship under which he generally reposed trust and confidence in the other party.
62. Mr Mendoza submits that all three classes of undue influence existed in this case. I do not agree with him, and I will examine the classes one by one in the context of the facts before me.
63. If it can be shown that one party to an agreement actually exercised influence on the other to enter into it, and that the influence was undue, the agreement may be set aside. (I do not say that it will be set aside: there could be cases, of which, if it mattered, the present case might be one, where it would not be realistic to set the transaction aside, so that the complainant would have to look for some other remedy to compensate him for the wrong which he says he has suffered.) The burden of establishing that the undue influence was exercised rests on the complainant.
64. In my judgment Ron and Doreen James cannot discharge that burden, and therefore their reliance on Class 1 (actual undue influence), fails at the first hurdle. As it seems to me their primary case, that they never made an agreement in the first place, virtually rules out a secondary case that, if they did, they can show that it was procured by actual undue influence. Of course there are many cases where two different arguments can perfectly well be run in the alternative, but in my view this is not one of them. Mr and Mrs James can argue, as they have sought to do, that they never made an agreement with Mr Bargh, but if that argument goes against them, as it has done, I do not think they can say that they did make an agreement with Mr Bargh after all, but that they can show that he exerted undue influence on them to enter into it. To say that, if they did make the agreement with Mr Bargh, it now seems to them that they cannot properly have realised what they were doing is not the same thing at all as to say that they were unduly influenced by Mr Bargh.
65. It is important in this connection that the burden of establishing actual undue influence rests on Mr and Mrs James. It would be different if they were able to say that, although they do not think that they made an agreement with Mr Bargh, if they did it might have bee procured by undue influence exerted upon them by him, and he must prove that it was not. But since the burden is on them, they cannot put the case that way. Doreen James' evidence makes no contribution, since she says that she honestly cannot remember what happened. Ron James' evidence is that he does not remember making the agreement which Mr Bargh says he did make, and looking back on it now he does not think that he would have made such an agreement. That evidence has to be weighed against two things: first the finding which I have already made, that whatever Ron James may think now, he did make the agreement; second Mr Bargh's evidence that he explained the proposal to Mr and Mrs James as clearly as he could, believed that they understood it at the time, and did not pressurise them into agreeing to it.
66. In those circumstances I conclude that Mr and Mrs James' reliance on actual undue influence must fail. Basically I will leave this part of the case at that, but I will record that I am far from clear what the consequences would be if I had concluded that the burden of establishing actual undue influence had been discharged. Mr Mendoza assumes that the agreement would be set aside, with the result that Mr and Mrs James would simply be left as the outright owners of 100% of MGGL free from any contractual obligations to the Mitchells partners or anyone else. Maybe it would be as simple as that, but I wonder. What about the position of Reg Smith? At the time when the alleged undue influence was being exercised by Mr Bargh, MGGL did not exist. A partnership existed, and Ron James owned only a 50% interest in it. The other 50% was owned by Reg Smith. Other difficult questions could arise: for example, what difference, if any, ought it to make that, on the opinion which I have set out earlier, if Ron and Doreen James had not made the agreement the business would probably have failed? I will not go into these questions further, but I mention them lest it be thought that, had I found that Mr Bargh did unduly influence Mr and Mrs James to make the agreement, I would without further examination have disposed of the case on the simple basis for which Mr Mendoza contends.
67. In Barclays Bank Plc v. O'Brien Lord Browne-Wilkinson said that 'certain relationships' as a matter of law raise the presumption that undue influence has been exercised. He gives two examples: solicitor and client, medical adviser and patient. Chitty (28th Edition, paras 7-053 to 7-056) adds the relationships of parent and child, guardian and ward, trustee and cestui que trust, and religious adviser and the person advised. Both Lord Browne-Wilkinson's account of Class 2(A) and the description in Chitty suggest to me that the relationships to which this sub-class of the presumption applies are fixed as a matter of law, and that either there is no scope for extending them by adding new relationships to the list or at least the courts should be very slow to do that. There is no real need to extend the list, because Class 2(B) provides ample scope for the court to conclude that undue influence ought to be presumed in another relationship where, on the particular facts of the case, it seems appropriate that it should be.
68. The relevance of this is that there is no authority which holds that a Class 2(A) presumption of undue influence arises between accountant and client, which was the relationship between Mr Bargh and Ron James at the time in June 1969 when Mr Bargh is alleged to have exerted undue influence on Mr James. I could only bring this case within Class 2(A) if I thought (1) that I could add another relationship to whose which, as a matter of law, raise the rebuttable presumption of undue influence, and (2) that it was desirable to add the accountant and client relationship to the list. I do not think that I can add to the law like that, and, even if I could, I would not think it right to do so. There are some affinities between the solicitor/client relationship and the accountant/client relationship, but there are also significant differences. As a generalisation the client's accountant is less of a general adviser on all aspects of the client's affairs than is the client's solicitor, and if the generalisation is not true in a particular case, that case is likely to be within Class 2(B).
69. For that reason I do not think that Mr Mendoza's submission that this case is one of presumed undue influence within Class 2(A) can succeed. Even if it could, and in case I am wrong in what I have said so far, I do not think that, if the case was within Class 2(A), that would in any event lead to the result for which he contends. The reason (which applies equally to Class 2(B)) is that, before an agreement can be set aside in a case of presumed undue influence within either sub-class of Class 2, the agreement must have been 'manifestly disadvantageous' to the complainant. That is the result of the House of Lords' decision in National Westminster Bank plc v. Morgan [1985] AC 686. There are indications in subsequent cases that the House of Lords might at some stage reconsider that proposition, but it is certainly the law now, and it is binding on me. The question of whether or not an agreement or transaction was manifestly disadvantageous to the complainant must be ascertained objectively at the time of the transaction, and not on the basis of hindsight some years later. That is one proposition confirmed by the Court of Appeal in Barclays Bank plc v. Coleman [2000] 3 WLR 405. The same case explains that the manifest disadvantage which the complainant needs to show has to be clear and obvious; it need not, however, be large or even medium-sized, but it has to be more than de minimis. 'Provided it is clear and obvious and more than de minimis, the disadvantage may be small': Nourse LJ at page 416.
70. Applying those principles to this case, I do not think that the transaction upon which Ron and Doreen James agreed (as I find that they did) with Mr Bargh and the other Mitchells partners was manifestly disadvantageous to them. It is important to be clear about the time and context against which the question has to be considered. It should not be considered against a background where Ron James was the sole and unfettered owner of the business. It is true that there was a brief period between June and the beginning of August 1969 when Reg Smith ha departed and the new structure of the business being owned by MGGL had not yet been put into place. On the face of it Ron James was the only owner of the business at that time. But that was not when the agreement was made with the Mitchells partners. The agreement was made before Reg Smith returned from the Isle of Man and accepted that he would depart from the business. It is true that in the period from then until the beginning of August Ron James owned the business, but his ownership was not unfettered. He owned the business subject to and with the benefit of the agreement with the Mitchells partners.
71. The time when the agreement was made, and thus the time at which it falls objectively to be judged, was when Ron James owned a half share in the business, when the other half share was owned by Reg Smith, an excellent motor repairman and a good friend but a very poor businessman, when the business was seriously undercapitalised, and when it was totally lacking in management skills and experience. The agreement, if it took effect, would result in Ron James (or him and his wife, if that was what they preferred) still owning half the business, by now through a shareholding in a company, with adequate capital having been introduced into the business, and with the other half of the company owned by the Mitchells partners, who could be expected to introduce some financial controls and disciplined management systems. In my view the agreement, analysed at that time and in that way, was not manifestly disadvantageous to Ron and Doreen James at all. I have expressed the view earlier in this judgment that, if the business had gone on in the same way as before as a partnership between Ron James and Reg Smith and with Mitchells doing the accounts but not having any more involvement than that, the business would probably have failed. I believe that an objective observer in June 1969 would have viewed the proposal which Mr Bargh put to Ron and Doreen James, and to which in my vie they agreed, as advantageous to them rather than the reverse.
72. There is one other point to make here. I do not think that it helps Mr Mendoza's argument to say that, even if the agreement was advantageous to Mr and Mrs James, it was also advantageous to the Mitchells partners, and that there were other arrangements which might have been made which would have been more advantageous to Mr and Mrs James than the one which was in fact made. A theme which underlies his arguments is that a different arrangement might have resulted in Ron James and his wife owning all the shares in MGGL, unfettered by any agreement with the Mitchells partners which impinged on their right as owners. Mr Bargh could still have assisted in the control and management of the business, being remunerated simply by normal professional fees charged by Mitchells for his time. That way, so the thinking goes, Ron and Doreen James would have been better off than under the agreement for equal ownership of the company which, on the basis of my decision so far, was in fact made.
73. I am not sure that Mr and Mrs James would have been better off if matters had been organised that way. The argument assumes that the company did not need the £2,000 of capital which the Mitchells partners introduced, or that, if it did need it, Mr and Mrs James could have procured it from other sources. Perhaps they could, but I am not convinced. It also assumes that Mr Bargh and his partners would have been willing for him to provide extensive management input into the company on the basis of a wholly conventional accountant/client relationship. But the real point here is that it would not help Mr and Mrs James' argument in this case even if there could have been an agreement or arrangement which would have been better for them. The actual agreement and transaction was not manifestly disadvantageous to them, so, even if, contrary to my view, the relationship between them and Mr Bargh gave rise to a presumption of undue influence within Class 2(A), the agreement and transaction nevertheless could not be set aside. In particular it could not be set aside on the basis of an argument that Mr Bargh and the other Mitchells partners might have entered with Mr and Mrs James into a different transaction which would or might have been more advantageous to Mr and Mrs James than the transaction which they actually did enter.
74. The second situation in which undue influence may be presumed (rebuttably) is where the complainant establishes (so that at this initial stage the burden is on him) that de facto there existed a relationship under which the complainant generally reposed trust and confidence in the other party. I do not think that Ron and Doreen James can succeed in establishing that such a relationship existed, at least at the time when it would have needed to exist if it was to support their argument. They gave evidence of how much they came to rely on Mr Bargh, and how, if Mr Bargh advised them to sign a document or do something else, they simply did what he said. Other witnesses, who were more impartial, cast considerable doubt on this portrayal of the Jameses as being dominated by Mr Bargh, but in any case the timing of events and relationships is altogether wrong for the argument to stand up.
75. It should be remembered that the relationship between the Jameses and the Mitchells partners lasted for 16 years before it broke down in 1985. The evidence which Ron and Doreen James gave of how much they depended on Mr Bargh related to the period after the MGGL structure was in place and Mr Bargh was heavily involved in the management of the business. However, I need to concentrate on how matters stood between Mr and Mrs James on the one hand and Mr Bargh on the other in June 1969. Further, I think it is clear that the sort of de facto relationship which needs to exist to give rise to a Class 2(B) presumption of undue influence has to be one which was already in existence before the transaction which is attacked by the complainant. (See comments of Buxton LJ in Irvani v. Irvani [2000] Ll R 412 at 424).
76. In June 1969 the only relationship was one under which Mr Bargh had been instructed by Ron James and Reg Smith to get some accounts out for the JS Motors business. Mr Bargh had probably met Ron James only twice before: once when he was first instructed and again on the occasion in the winter of 1968/69 when he visited the garage to inspect the books and records. There were then, within two or three days in June 1969, two or three meetings between him (with his wife) and Mr Bargh in the course of which the agreement was concluded. However much trust and confidence he and Doreen James came to repose in Mr Bargh over subsequent years, I cannot see that they had already started to repose it before the agreement was made. It only adds to the deficiencies of Mr and Mrs James' case on this point that their evidence is that they can remember very little of what happened at the time.
77. For those reasons I do not think that Mr Mendoza's reliance on a Class 2(B) relationship to give rise to a presumption of undue influence can succeed. I should also state that, even if there had been such a relationship, the claim to set aside the transaction would have foundered for the reasons which I have enlarged upon in connection with Class 2(A), resting on the absence of manifest disadvantage to Ron and Doreen James from the transaction.
78. The result on undue influence as a whole is that I decline to accept that that area of the law frees Mr and Mrs James from the agreement which, in my view, they made with the Mitchells partners concerning the ownership of the shares in MGGL.
79. There is a limited jurisdiction in equity under which the courts may grant to members of the lower income groups who are less highly educated (expressions used by Megarry J in Cresswell v. Potter [1978] 1 WLR 255) relief against unconscionable bargains. Mr Mendoza invites me to apply this form of relief in this case. I do not think that it would be right for me to do so.
80. Some factors which I have already mentioned in connection with undue influence are also relevant here. An important one is that Mr Mendoza's argument seems to me to presuppose that Ron James was the outright and unfettered owner of the business, and that Mr Bargh, taking advantage of Mr James' shortage of funds and lack of business sophistication, unconscionably persuaded him to agree to allow the Mitchells partners to acquire a 50% interest in the business for a grossly inadequate consideration. I say nothing about what I would have done if I had accepted that that was an accurate encapsulation of what happened, but in my view it is not accurate at all. As I have said, the agreement was not one between Ron James, as unfettered owner of all of the business, and the Mitchells partners for Mr James to part with half of what he owned. It was between Ron James, as owner of a 50% interest in the business, and the Mitchells partners for Ron James to remain as a 50% owner of the business, with it now being owned by a company and having the Mitchells partners rather than Reg Smith owning the other half.
81. Again for reasons which I have already given, I do not regard the bargain as unconscionable. I do not suggest that the Mitchells partners entered into it out of altruistic motives, and I accept that, like almost anyone who enters into a commercial transaction, they hoped that it would turn out well for themselves. But I do not accept that the terms were oppressive or unfair. I repeat that in my view the agreement and the participation of the Mitchells partners (especially Mr Bargh) in the business probably saved the business from collapse. If the transaction was successful (as in the event it proved to be) the relationship would prove to be for the mutual benefit of both the Jameses and the Mitchells partners. It is in my view a travesty to describe that as an unconscionable bargain.
82. There is at least one other objection to the attempt to invoke the jurisdiction whereby equitable relief may be given against unconscionable bargains. Chitty, para 7-078, says that one of the conditions is that other party ' must have acted unconscionably in the sense of having knowingly taken advantage of the complainant. Ron and Doreen James have a problem with this like the problem which means that they have not established that Mr Bargh exerted actual undue influence upon them. There is no presumption which operates in their favour on this issue: they have to establish that Mr Bargh knowingly took advantage of them. As I have said at several points already, their evidence is in essence that they do not remember what happened, coupled with an assertion by Ron James that he cannot believe that he would ever have agreed to a 50/50 joint ownership of the business between himself and his wife on the one hand and the Mitchells partners on the other. As against that Mr Bargh's evidence is that he explained everything to them, and proposed to them a transaction which he thought was fair. In those circumstances I cannot conclude that Mr Bargh acted unconscionably and knowingly took advantage of Mr and Mrs James.
83. I do not accept Mr Mendoza's submissions under the heading of unconscionable bargain.
84. Mr Mendoza's next argument was that there was a fiduciary relationship between Mitchells and Ron James, that the agreement was entered into in breach of it, and that therefore the agreement should be set aside. I am prepared to accept that in some respects a fiduciary relationship may exist between an accountant and his client, but, even if one existed between Mitchells and Mr James, I do not accept the other elements in this argument.
85. It is not the law that a professional adviser who has fiduciary obligations to his client cannot make a contract with his client, or that if he does the client can always have it set aside. I accept that the court will look closely at contracts between a solicitor and his client, and perhaps also between an accountant and his client. For an example of the latter situation see the decision of McKinnon J in Nitrotim Ltd v. Ageda [1996] CLC 1573. However, this is little, if anything, more than the application of the law of undue influence where there is a relationship of trust and confidence between the professional adviser and the client. I have already discussed Mr Mendoza's submissions about undue influence, and I have not accepted them. I will not repeat now what I said there.
86. I do accept that, given the existence of a professional relationship between Mitchells and Ron James, it would have been sensible for Mr Bargh to suggest to Mr and Mrs James that, before agreeing to Mr Bargh's proposal, they should take independent advice. However, I do not consider that Mr Bargh had a fiduciary obligation to make that suggestion so that he was, without any further reason, in breach of duty by failing to make it. In my judgment it is not the case that the omission to make the suggestion meant that, when Mr and Mrs James agreed to the proposal, the agreement which thereby came into effect was tainted by a breach of fiduciary duty. It is perhaps appropriate for me to repeat something which I have said earlier: having heard and seen Mr and Mrs James give evidence at some length, I think that, if Mr Bargh had suggested to them that they should take independent advice, it is unlikely that they would have done so.
87. The authority on which Mr Mendoza principally relies for this part of his submissions is Demerara Bauxite Co Ltd v. Hubbard [1923] AC 673, a decision of the Judicial Committee of the Privy Council. The case concerned the relationship between a solicitor and his client. The solicitor took an option from his client to purchase a property from her at a fixed price. He had information about the property which he did not disclose to her. She successfully contended that she could repudiate liability under the option. I do not think that the case can be regarded as similar to the circumstances with which I am concerned. For that to be so Mr Bargh or the other Mitchells partners would have needed to have had knowledge of some circumstances affecting the garage which they did not disclose to Ron and Doreen James. There is no hint of anything of the sort.
88. I do not accept that Mr and Mrs James, being unable for the reasons which I have already given to set the agreement aside on grounds of undue influence or unconscionability of the bargain, can succeed in setting it aside on the ground that it resulted from a breach of fiduciary duty on the part of the Mitchells partners.
89. Mr Mendoza has advanced several arguments which challenge the legal effectiveness of the share transfers which Ron and Doreen James signed in blank. I will deal with them one by one, but there is a general point. Mr Mendoza seems to me to present the arguments on the basis that, if any one of them is upheld, it vitiates the whole agreement on which the claimants, the Mitchells partners, rely. I do not agree with that. The claimants sue on the basis of the agreement which they say that they made with Mr and Mrs James. They do not sue on the basis of the share transfers. The transfers are only one item in the overwhelming mass of evidence by which they have succeeded in satisfying me that the agreement which they rely on was indeed made. If the share transfers themselves could be said to have suffered from some feature which meant that they were ineffective, that would not in my view have any appreciable impact on the existence of the agreement.
90. Misrepresentation. Mr Mendoza says that, when the share transfers were put before Mr and Mrs James for signature, their nature was misrepresented. I do not understand on what basis he is able to say that. The evidence of Mr and Mrs James was that, although they must have signed the transfer forms, they did not remember doing so and did not remember Mr Bargh explaining what the forms were. Mr Bargh said that the documents were explained to Mr and Mrs James. I can see no evidential basis for the argument that the contents of the documents were misrepresented. And, as I have said in the previous paragraph, I do not think that, if they were, the consequence would be to invalidate the whole agreement.
91. Non est factum. I think that the suggestion here is that Ron and Doreen James may not have realised what they were doing when they signed the blank transfers. Therefore, it is said, the documents were legal nullities under the principle described as non est factum ('it was not done'). There were suggestions that Mr Bargh may have slipped them unobtrusively into a pile of routine cheques which he expected Ron James to sign without looking at them. I do not think that there was any evidence that he did anything of the sort, and in the absence of evidence I am not prepared to make the assumption that he did. There is no evidential basis for the non est factum argument, and even if there was it would only mean that one of the many evidential supports for the existence of the agreement would be unfounded. I reject as utterly fanciful the notion that Mr Bargh knew that he had not made an agreement with Mr and Mrs James at all, that he lied to his partners by telling them that he had made such an agreement, and that he then sought to buttress his position by getting Mr and Mrs James to sign share transfer forms presented to them in an underhand way which meant that they would not realise what they were doing.
92. No consideration. Mr Mendoza says that there was no consideration given to Ron and Doreen James for their agreeing to sign the blank transfers. That may be true in the sense that there was no separate consideration which was specifically for the blank transfers, distinct from the entire consideration for the whole agreement. It may also be the case that there was no term of the agreement that Mr and Mrs James would execute the transfers and deliver them into the custody of Mitchells. On that basis, when Mr Bargh (or Mr Hoskin) produced the transfers for Mr and Mrs James to sign, Mr and Mrs James might have been entitled to refuse to sign them. But that does not make any difference to what I have to decide. It is not the case that, if Mr and Mrs James were not contractually obliged to sign the transfers, the whole agreement falls away. The fact is that they did sign the transfers, and the existence of them is one item of evidence which supports the claimants' case that the agreement for them to have a 50% interest in MGGL was indeed made. I cannot ignore the transfers on the ground that Mr and Mrs James might not have signed them, and in any case, even if I did ignore them, there would still be ample other evidence to satisfy me that the agreement on which the claimants rely did exist.
93. The Companies Act 1948 was still in force in 1969, when, as I have found, the agreement was made. Section 161(2) listed a number of persons who were disqualified from appointment as auditors of a company. They included: '(b) any person who is a partner ... of an officer ... of the company';. Mr Mendoza argues that this provision was infringed by the agreement, and that the illegality had the effect of rendering the whole agreement invalid. I disagree on both points.
94. The argument that the section was infringed begins with the correct proposition that Ron and Doreen James, as directors of MGGL, were officers of the company. The argument then asserts that the Mitchells partners were ' partners' (within the meaning of the word 'partner' used in section 161(2)(b)) of Ron and Doreen James. I disagree entirely. Mr Mendoza's proposition is that MGGL was a sort of quasi-partnership between Mr and Mrs James on the one hand and the Mitchells partners on the other. That is non-technical language. I understand what is meant by it, but it is not at all what the word 'partner' in the statute meant. As a matter of law Mr and Mrs James and the Mitchells partners were not partners with each other. They had a different form of association through shareholdings in a private company, MGGL.
95. I would add that, even if section 161 had meant that Mitchells were disqualified from being the auditors of MGGL, I would not accept that the consequence was to render the agreement between the Mitchells partners and Mr and Mrs James unlawful and invalid. The consequence would probably have been that the accounts had not been properly audited, but that would not have had any additional effects on the validity and enforceability of the agreement concerning the ownership of the shares in the company.
96. I mention this point only briefly. An allegation survives from a stage of the pleadings which has largely been superseded, that the Mitchells partners, or at least the persons who were partners in 1969, were in breach of duty in tort to Ron and Doreen James, and are liable in damages. I expect that the fault is mine, but I do not understand the argument - either the nature of the breach of duty or the loss which the damages would compensate. Mr Mendoza said virtually nothing about this point, and I think that he more or less accepts that, if his arguments which seek to set aside the agreement fail, his clients cannot succeed in recovering anything by way of damages in tort. That is my own view. I mention the matter for completeness, but I do not need to say anything more about it.
97. The overall result is that the claimants' case succeeds in principle. In the Statement of Claim they have claimed various kinds of relief, principally by way of declaration. I hope that counsel will be able to agree an order which, on the basis of this judgment, gives the relief which is appropriate. If not I will have to hear further argument upon it.
98. The defendants advanced a number of counterclaims. One was for repayment to MGGL of the amounts paid by it to Mitchells pursuant to the profit share invoices described at an earlier point in this judgment. Another concerned the ownership of a property at Matlock Green which was purchased by Ron and Doreen James and some of the Mitchells partners. The purchase money was drawn from the loan accounts with MGGL held by the parties, and, if Mr and Mrs James had succeeded in their contentions that the Mitchells partners ought never to have had the loan accounts in the first place, it would have been accepted that the partners could not retain their apparent ownership of an interest in the property. However, on the view of the case which I have formed, the counterclaims fail. They fall to be dismissed.