IN THE SUPREME COURT OF JUSTICE
CHANCERY DIVISION
MICHAEL BRIGGS QC SITTING AS A DEPUTY JUDGE OF THE HIGH COURT

30 September 2002

VERNON-KELL
Claimant

-and-

CLINCH and another
Defendants

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Oliver Ticciati (instructed by Wilmot & Co) for the claimant.
Peter Ralls QC and Gary Pryce (instructed by Cripps Harries Hall) for the defendants.

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JUDGMENT

MR MICHAEL BRIGGS Q.C.

Introduction

1. On 19th May 2002 I handed down judgment on a preliminary issue ordered to be tried in this action, namely whether the Claimant Mr. Vernon-Kell’s claim to have made a contract with the Defendants on 20th July 1998, concerning his remuneration in connection with the affairs of the Second Defendant was well founded. I held that it was not, with the consequence that Mr. Vernon-Kell’s alternative claim based upon a quantum meruit falls now to be determined.

2. In order for me to decide the preliminary issue, it was necessary for me to hear evidence about, and make findings upon, most of the facts in issue in this action. Those findings are to be found in my earlier Judgment, and it is unnecessary for me to deal comprehensively with the small additional areas of factual dispute at the beginning of this Judgment. I shall deal with them, to the extent necessary, as necessitated by my analysis of the parties’ submissions on the quantum meruit claim. I shall use without further explanation the abbreviations and terminology of my earlier Judgment.

The law

3. The law relating to quantum meruit claims is well settled, and has not been the subject of real dispute between counsel. The main authorities to which I referred are: Way v. Latilla [1937] 3 All ER 759; Sharab v. Salfiti [1996] EWCA Civ 1189 (CA); Harding Maughan Hambly Limited v. Cecar SA [2000] 1 Lloyds Rep 316. It was common ground that those decisions were authority for the following principles of relevance to the issues which I have to decide:

(a) Where the claimant is engaged to use his efforts to bring about a certain result, and that result occurs, in circumstances where it was the common understanding of the parties that the claimant would be remunerated, the implied promise to pay him reasonable remuneration will be triggered if his activities are an effective cause of the occurrence of that result.

(b) If that condition is satisfied, the Court’s (often difficult) task is to place a fair value on the services provided by the claimant; fair that is, as between the parties.

(c) The Court is not constrained to conclude that the fair reward should take any particular form; it may be a fee or a participation such as a commission, or it may consist of some form of payment in kind, such as shares rather than cash, in an appropriate case.

(d) The Court may derive particular assistance as to the ascertainment of a fair value for the claimant’s services from evidence of the parties’ mutual dealings, as indicative of the value which they themselves placed on those services at the time.

4. Counsel were also agreed (albeit for different reasons) that in certain respects the task of arriving at a fair type and amount of remuneration for services performed under a quantum meruit might, and in this case would be, bedevilled by hindsight. In this case, Mr. Vernon-Kell’s claim is that he should have received by way of remuneration a significant shareholding in Medical Solutions Plc in August 1999 at an issue price of 2.25p per share. Dealings in Medical Solutions Plc shares commenced in late August on the stock market at 8p per share, and have ranged thereafter between that price and about 40p per share. By the end of the trial of the preliminary issue they had fallen again to a closing price of 7p per share, and there has I believe recently been some modest recovery. I should add that my references to shares in this paragraph are to the shares as originally issued. There was a one for four consolidation of the share capital during 2000, as the result of which quoted prices are now four times higher than previously, reflecting the same underlying value, and the parties’ shareholdings are similarly reduced to one quarter of their previous amount. I shall refer to the shares pre-consolidation as “old shares” and the shares post-consolidation as “new shares”.

5. I suggested during argument that if Mr. Vernon-Kell demonstrated an entitlement to a quantum meruit, as at August 1999, it would be appropriate to confine my review of matters relevant to the determination of a fair remuneration to those which had by then occurred, at a time when the success or failure of the venture in the market place remained a matter of guess-work. By contrast, if I were to conclude that a fair remuneration for Mr. Vernon-Kell required that he be issued shares rather than cash in August 1999, then regard might well need to be had to subsequent events in quantifying in terms of damages his compensation for having not received those shares when they ought to have been made available to him. Again, Counsel were minded to concur with that analysis. In my judgment, provided that this process is used as a servant rather than a master, it is an appropriate means of ensuring that the mind of the Court is focused on the relevant considerations at each of the two stages at which questions of valuation arise in this action.

The issues

6. The issues between the parties on the quantum meruit question may be broadly summarised as follows:

(1) Effective cause: were Mr. Vernon-Kell’s endeavours an effective cause of the reverse takeover of the Fairfield Group which occurred in 1999, and by which the Cytometry project was ultimately funded?

(2) If so, was Mr. Vernon-Kell’s entitlement to a payment by way of quantum meruit for his services satisfied by the payment of £30,000 which he received shortly thereafter?

(3) Did Mr. Vernon-Kell’s entitlement to a quantum meruit require him to be provided with shares in Medical Solutions Plc rather than cash, or by a mixture of shares and cash?

(4) If so, what should he have received, and when?

(5) What is the appropriate measure of his loss (if any) if he did not receive what he should have received?

7. To an extent Issues 2 to 4 merge into each other, but 1 and 5 are separate and distinct from the others.

Issue 1: Effective cause?

8. It has always been common ground that it was Mr. Vernon-Kell who introduced Mr. McDonald to Dr. Clinch and the Fairfield Group. In paragraph 98 of my earlier Judgment I held that by July 1998, Mr. Vernon-Kell was “conditionally entitled to a reasonable reward if his introduction of Mr. McDonald led to the successful outcome of a transaction which, however, structured, generated the means of financing the Cytometry project to the financial advantage of either FIL or Dr. Clinch”. If for example the transaction then under negotiation had proceeded to a successful conclusion, Mr. Vernon-Kell’s introduction of Mr. McDonald would have been an effective cause of that transaction, and of the consequential funding of Cytometry which was intended thereby to have been achieved.

9. In paragraph 104 of my earlier Judgment I left open for decision now whether the same conclusion should be reached in relation to the reverse takeover which occurred in 1999.

10. Again, it is common ground that the Cytometry project was funded by means of the 1999 transaction. The Defendants say however that Mr. Vernon-Kell’s services were not an effective cause of the 1999 transaction. In substance, their case is that the chain of causation alleged by Mr. Vernon-Kell was in fact broken by reason of the following matters:

(a) The 1999 transaction was of a type different from anything that had previously been discussed, because it constituted a sale of the Fairfield Group by its shareholders, rather than a sale of the relevant rights in the Cytometry project by FRL.

(b) Commercially it was a fundamentally different transaction because it constituted a sale of the whole of Fairfield’s various businesses, of which Cytometry formed only a part, amounting to less than 50% in terms of value.

(c) Having had only a minor involvement in negotiating Stage 3 (as described in my earlier Judgment) Mr. Vernon-Kell played no part at all in negotiating the 1999 transaction.

(d) Mr. McDonald had passed to Mr. Charles Green the whole responsibility for the negotiations which led to the 1999 transaction. Mr. Vernon-Kell had had nothing of any significance to do with Mr. Green, even though he had introduced Mr. McDonald.

(e) The negotiations of Stages 2 and 3 would have failed, and the Cytometry project come to grief in late 1998, but for short-term funding and a fundamentally new negotiation put in place by Dr. Clinch without any assistance from Mr. Vernon-Kell. Accordingly there was a real break between Stage 3 and the 1999 transaction, such that Mr. Vernon-Kell’s undoubted contribution to Stages 2 and 3 had no causative connection with the 1999 transaction which ultimately succeeded in providing funding for Cytometry.

11. Persuasively though those points were argued by Mr. Ralls QC, who again appeared for the Defendants, they did not in my judgment, separately or together, break the chain of causation which commenced with Mr. Vernon-Kell’s introduction of Mr. McDonald to Fairfield, and which ended with the 1999 transaction, spearheaded by Texas. The key evidential features which have led me to that conclusion are as follows:

(1) Mr. McDonald was throughout in effective control of Texas. Although he was himself only a 25% shareholder, all or a vast majority of the other shares were held by, or by trustees for, members of his family.

(2) The main attraction to Mr. McDonald of an investment in the Fairfield Group was the potential value of Cytometry, if its development was completed and brought to market.

(3) Although of course the question whether and if so upon precisely what terms Texas should persist in a substantial investment in Fairfield was not a matter purely for Mr. McDonald to decide, and although he delegated to Mr. Green the hands-on management of the negotiations, I am satisfied that the originating cause of Texas’s investment in Fairfield was Mr. McDonald’s enthusiasm for Cytometry, which was itself initiated by Mr. Vernon-Kell’s introduction. Mr. Green said in evidence at the second trial that, after his return to Texas from full- time management of Sheffield United, Mr. McDonald told him to take over the negotiations and either pursue them to a conclusion or end them. I have no doubt that this reflected the fact that Mr. McDonald trusted Mr. Green, gave him a wide margin of discretion and authority in relation to the ongoing negotiations, and would very probably have followed Mr. Green’s advice, even if at the end of the day it had been against proceeding with an investment in Fairfield. Nonetheless, Mr. McDonald remained in control of Texas throughout, and the result was, however differently structured, a fulfilment of his original ambition.

(4) The funding of the Cytometry project remained at the heart of Texas’s investment in Fairfield. I accept Mr. Green’s evidence that the Cytometry project on its own was not a business which could successfully be brought to market. It had no track record, no profits and its prospects could only be described as speculative. It was therefore both logical and commercially sensible to bundle up the Cytometry project with the other business activities of Fairfield, the originator of that project, so as to demonstrate both that the Fairfield Group under Dr. Clinch’s leadership had a track record of turning technological inventions into money, and also of combining profitable activities with research and development within a properly run corporate framework in a manner which would satisfy outside investors (after due diligence). I also accept that the effect of the bundling was to reduce the perceived value of the Cytometry project to something less than half the aggregate value of the businesses of the Fairfield Group. But it was nonetheless Cytometry rather than the other activities of the Group which were in desperate need of funding. In particular, Dr. Clinch told me that by 1999 the other main development project of the Group, namely telepathology, had moved at least to a break-even stage at which income generated from sales by the joint venture company and from Fairfield’s contracted activities, were sufficient to fund the further necessary research and development.

(5) Although I have no reason to doubt that the continuation of the Cytometry project was by mid- 1998 in serious jeopardy due to its capacity to generate costs in excess of the Fairfield Group’s trading revenues, I consider that the combination of the temporary funding arrangement and the Texas option described in paragraphs 77 to 80 of my earlier Judgment provide compelling evidence that from Texas’s point of view, they wished to maintain a continual negotiating position from Stage 3 into the negotiation of the reverse takeover, such that there was in fact no break in Texas’s pursuit of the investment opportunity represented by the Cytometry project, and no point in time at which it could sensibly be said that its interest arose afresh, unaffected by Mr. Vernon-Kell’s original introduction of Mr. McDonald to Fairfield.

12. In my judgment the fact that the 1999 transaction was different both in nature and scale from its predecessors, and that Mr. Vernon-Kell was not involved in its negotiation are, although true, of no real consequence on the question whether his introduction remained an effective cause of the 1999 transaction. I accept that it was originally contemplated that Mr. Vernon-Kell’s services would include both introduction and negotiation, but his status as an onlooker in relation to the negotiation of the 1999 transaction was in my judgment in no sense a breach of any obligations owed to the Defendants. Indeed, Mr. Ralls was at pains to eschew any suggestion that Mr. Vernon-Kell was at fault in that regard.

13. Accordingly, I consider that the condition for Mr. Vernon-Kell’s entitlement to remuneration by way of quantum meruit as the result of the financing of the Cytometry project achieved by the 1999 transaction was triggered by his introduction of Mr. McDonald having been one of its effective causes. It follows that I decide Issue 1 in favour of the Claimant.

Issue 2: Was Mr. Vernon-Kell’s entitlement satisfied by the payment of £30,000?

14. Basing himself upon observations of Lord Wright in Way v. Latilla (supra) at page 766 to the effect that there may be no precise answer to the question what is reasonable remuneration by way of quantum meruit, but rather a range of reasonable answers, Mr. Ralls submitted that a necessary first step is to consider whether the payment of £30,000 made to Mr. Vernon-Kell in September 1999 fell within a range of remuneration capable of being categorised as reasonable. If it did, he said, then it would be of no assistance to the Claimant that the Court might itself have awarded a larger amount, or, if the range included different types of remuneration, a reward in a different form.

15. Although I was shown no specific authority which required the Court to take that approach, it is in my judgment logically persuasive and I shall proceed on the assumption (but without finally deciding the point) that Mr. Ralls is correct. The question leads however inevitably to the third issue, because it is only if I were to conclude that a “cash only” payment was a reasonable form of remuneration for Mr. Vernon-Kell that the payment £30,000 actually made could have satisfied his entitlement. Of course, if I had concluded that a “cash only” payment was within the reasonable range, the question would still arise whether its amount was reasonable, but as will appear, on the view of the matter which I have reached, that further question does not arise.

Issue 3: Shares and/or cash?

16. Of all the issues which I have to decide, this was the most keenly contested. Mr. Vernon-Kell’s case was in summary as follows:

(a) From the outset of his activities with regard to FIL, his stance had been that he wanted participation, that is a share in whatever was received upon the sale of the rights to the Cytometry project.

(b) Dr. Clinch had agreed that he should do so, throughout stages 2 and 3 of the negotiations. During that period it had been expected that FRL would obtain a substantial shareholding in whichever company received the rights to the Cytometry project.

(c) Since the real potential value (if any) of the Cytometry project lay in the future, participating in the shares of the newly formed or other company to which those rights were transferred was an appropriate form of reward for the obtaining of funding necessary to ensure that Cytometry was developed into a marketable product.

(d) Since in the end Dr. Clinch and the other shareholders in FIL obtained a substantial part of the quid pro quo for the sale of FIL and, via FRL, the Cytometry project to Medical Solutions Plc in the form of shares, it remained appropriate that a similar proportion of Mr. Vernon-Kell’s reward should also consist of shares.

(e) Professor Danielsen also obtained a substantial part of his reward for the successful outcome of the 1999 negotiations in the form of shares in Medical Solutions Plc, albeit concealed behind the employees’ and consultants’ trust.

17. The Defendants say that it was neither necessary, appropriate nor even possible that Mr. Vernon-Kell should obtain shares in Medical Solutions Plc as or as part of his remuneration for, in summary, the following reasons:

(a) It was said that Texas, and in particular Mr. Green, were firmly opposed to Mr. Vernon-Kell being given any shares in Medical Solutions Plc as part of the 1999 transaction, so much so that for Dr. Clinch to have insisted that he should receive shares would have been a deal-breaker.

(b) To reward Mr. Vernon-Kell with shares would give him participation in a great deal more of the Fairfield Group’s business than just Cytometry, contrary to the basis upon which his services had been sought.

(c) It was said that any perception that it was unfair for Mr. Vernon-Kell to receive cash rather than shares was the result of hindsight, ie the very substantial increase in the Medical Solutions Plc share price following the 1999 transactions.

(d) It was said that it was wrong to compare Mr. Vernon-Kell’s position with that of Professor Danielsen, because the latter was very much more central to the success of the venture than was Mr. Vernon-Kell. His bargaining position was very much stronger, and his role was not limited to the Cytometry project, but extended for example to telepathology.

18. The factual foundation for the points made on this issue on behalf of Mr. Vernon-Kell is not seriously in dispute. I have already described both his express desire for a participation in whatever was received for the sale of the Cytometry rights, and the consensus at stages 2 and 3 that that is what he should receive, if negotiations succeeded: see paragraphs 29, 32, 39, 49, 55, 61, 68 and 73 of my earlier Judgment. The substantial shareholdings in Medical Solutions Plc which the Clinches and Professor Danielsen obtained as a result of the 1999 transaction are a matter of record. Finally, it is common ground that the Cytometry project, even in 1999, was by no means at the stage of generating revenue. Plainly its real value depended upon whether its development could be brought to a successful fruition, and whether thereafter it could be successfully marketed. I understood from Dr. Clinch that it is only now that Cytometry is finally crossing that crucial threshold.

19. By contrast, the factual basis for the points made on behalf of the Defendants is by no means so straightforward. In particular, there is a real issue as to whether the issue of shares to Mr. Vernon-Kell really would have been a deal-breaker for Texas, and the suggestion that Professor Danielsen’s role was not limited to Cytometrics ran counter to a conclusion of mine to the contrary in my earlier Judgment. It was however common ground that shares in Medical Solutions Plc gave the holder participation in much more than just the Cytometry project, and it is fair comment that the disparity in relative benefit between the receipt of cash and shares is much greater if hindsight is allowed to affect that assessment. Equally, there is no doubt that Professor Danielsen’s role in relation to the future success of the Cytometry project after the 1999 transaction was very much more central than that of Mr. Vernon-Kell and, as the principal scientist involved in the development of Cytometry, his bargaining position was much stronger than that of Mr. Vernon-Kell, whatever the constraints arising from his relationship with the Radium Hospital.

20. I must therefore deal with the factual issues arising out of the points made on behalf of the Defendants. I can deal shortly with the question whether Professor Danielsen’s role was limited to the Cytometry project. In my judgment, having considered the materials relied upon by Mr. Ralls in his attempt to persuade me that my view on this matter in my earlier Judgment was wrong, Professor Danielsen’s role was substantially limited to the Cytometry project. To the extent that he was involved in any other aspect of Fairfield’s businesses, his role was de minimis, and of no consequence in any comparative evaluation of his rewards, as against those of Mr. Vernon-Kell. Of the documents relied upon by Mr. Ralls only one (page 424 of bundle 2) suggested any possibility of a significant involvement by Professor Danielsen in telepathology. The document consists of a note by Dr. Clinch expressing a hope that Professor Danielsen might become involved in telepathology, but later documents (for example page 432 of the same bundle) strongly suggest that Professor Danielsen was determined to keep his focus firmly on Cytometrics, and to have regard to other activities of the Fairfield Group only by reference to their tendency to assist or detract from the success of the Cytometry project.

21. The other factual issue, namely whether the issue of shares to Mr. Vernon-Kell would have been a deal-breaker for Texas in 1999, is a little harder to resolve. The burden of proving this point was undertaken by Mr. Green, both in a further witness statement prepared for the second trial, and under cross-examination. His evidence on this point may be summarised as follows:

(a) Having been put in charge of negotiations by Mr. McDonald, he was instrumental in confining Mr. Vernon-Kell’s reward to cash rather than shares.

(b) He formed the view that this was necessary for two main reasons: first because a Mr. Slack who had originally introduced Mr. Vernon-Kell to Mr. McDonald had warned them against issuing shares to Mr. Vernon-Kell in any corporate venture and secondly because he wished to restrict the numbers of an already too large concert party.

(c) Texas’s solicitors and brokers concurred in his view.

22. As to point (a) I have no reason to doubt that the initiative for confining Mr. Vernon-Kell’s reward to cash rather than shares probably came from Mr. Green. It is the other points upon which he relied that I have found difficult. The advice from Mr. Slack was described by Mr. Green as a concern that if given shares, Mr. Vernon-Kell might wish to dispose of them at an inopportune moment for the company. Mr. Green was at pains to emphasise that Mr. Slack had cast no aspersions on Mr. Vernon-Kell’s integrity.

23. Mr. Slack firmly denied that he had given any such advice to Mr. McDonald or to Mr. Green, but due to his absence abroad, his evidence took the form of a Civil Evidence Act statement, and was not tested in cross-examination. It is however to be noted that no mention of Mr. Slack’s advice to that effect is made either in Mr. Green’s earlier witness statement (in which he merely suspected that Mr. Slack had introduced Mr. Vernon-Kell to Mr. McDonald), nor in Mr. McDonald’s own witness statement. Mr. McDonald said that Mr. Slack had introduced Mr. Vernon-Kell to him as someone who wanted some investment and a facility for the construction of an incineration plant for the disposal of CJD infected cattle. If that was the context of the introduction it seems on the face of it rather surprising that Mr. Slack would at the same time have cautioned Mr. McDonald against giving Mr. Vernon-Kell shares in a corporate venture.

24. I asked Mr, Green why a concern that Mr. Vernon-Kell might wish to dispose of his shares at an inopportune moment for the company could not be met by requiring him to submit to a lock-in agreement of the type entered into by the members of the Medical Solutions Concert Party, including Dr. and Mrs. Clinch. Mr. Green could think of no reason why that would not have been an adequate protection against an ill-timed disposal of shares by Mr. Vernon-Kell. That left Mr. Green’s other reason, namely the unwieldy size of the Concert Party. Again, I found Mr. Ticciati’s submission that the addition of Mr. Vernon-Kell to an already very large Concert Party in respect of which a Rule 9 waiver had been obtained from the Stock Exchange hardly appeared likely to be a deal- breaker persuasive. Furthermore, it is evident from Mr. McDonald’s witness statement (put in evidence at a late stage by the Claimant at the first trial) that he was aware of the proposal that Mr. Vernon-Kell should obtain shares during stages 2 and 3 of the negotiations, and apparently raised no objection. Furthermore, the Texas option made in September 1998 and signed by Mr. Turnbull on behalf of Texas made express reference to Mr. Vernon-Kell obtaining £30,000 worth of shares in “Medical House” at the time of flotation: see paragraph 77 of my earlier Judgment. Mr. Green said that although he had been present at those negotiations, he had been elsewhere when the Option Agreement was signed and unaware of the reference to Mr. Vernon-Kell obtaining shares. The fact remains however that Texas committed itself to that proposition at the end of the negotiation attended by Mr. Green.

25. All in all, I have reached the conclusion that Mr. Green’s categorisation of a shareholding for Mr. Vernon-Kell as amounting to a deal-breaker was exaggerated. It appears that the question was never in fact put to the test because Dr. Clinch’s own evidence at the first trial was that he himself regarded a cash only reward as fair and appropriate for Mr. Vernon-Kell. In my judgment, Dr. Clinch could had he wished to, have insisted upon Mr. Vernon-Kell receiving shares rather than cash. I have already held that, had he been issued with shares, he would have been required to subscribe to a Lock-in Agreement. In the circumstances I do not consider that the issue of shares to Mr. Vernon-Kell would have been a deal-breaker.

26. Those being my findings of fact relating to this issue, I have carefully weighed the competing arguments of Mr. Ralls and Mr. Ticciati on the question whether Mr. Vernon-Kell’s right to a reasonable reward for having been an effective cause of the funding of the Cytometry project achieved by means of the 1999 transaction requires that he be given shares rather than merely cash. In my judgment, the Claimant’s submissions on this point are to be preferred. The factors which have weighed most heavily with me on this issue are as follows:

(a) The parties’ conduct and mutual dealings over a substantial period of negotiation prior to 1999 are persuasive evidence of their own appreciation that the basis upon which Mr. Vernon-Kell had offered his services towards the funding of Cytometry called for him to be remunerated, if successful, with a participation which consisted of a fair proportion of the benefits obtained by the Defendants, in the same form in which they obtained them.

(b) The shareholders in FIL ultimately obtained those benefits mainly in the form of shares in Medical Solutions Plc, albeit with an additional cash earn-out. By receiving shares they obtained the opportunity to participate in the long term value of the Cytometry project if ultimately successful.

(c) The real potential value in Cytometry did, as at 1999, lie in the future. The essence of Mr. Vernon-Kell’s task lay in giving Cytometry a long term future by finding funding for it.

(d) There would have been real force in the objection that for Mr. Vernon-Kell to receive shares would have been a deal-breaker, if that objection was well founded in fact, but as I have held, it was not.

(e) In my judgment there is no great force in the point that the issue of shares to Mr. Vernon-Kell gave him a participation in wider aspects of Fairfield’s business than Cytometry. The objection is more naturally met by reducing the amount of shares which ought to have been issued to him by reference to the proportion which the value of the Cytometry project bore to the value of the Fairfield Group businesses as a whole.

(f) The objection that hindsight may increase the apparent unfairness of a cash only reward for Mr. Vernon-Kell is a real one. In my judgment, however, even ignoring the subsequent history of the Medical Solutions Plc share value after flotation, it was unreasonable for the Defendants to confine Mr. Vernon-Kell’s reward to cash only in August/September 1999.

27. Thus far I have treated the issue as cash or shares. The fact remains however that Dr. and Mrs. Clinch obtained a substantial but conditional right to deferred cash as well as shares, and Professor Danielsen also received £50,000 in cash outright. In my judgment a reasonable reward by way of quantum meruit for Mr. Vernon-Kell’s services required that he should obtain both shares and some form of conditional deferred cash. This is what had been expressly contemplated at the July 1998 meeting between Dr. Clinch and Mr. Vernon-Kell. Although cash earn-out is often used by the buyer of a business as an incentive to the seller to maximise the company’s performance, if he continues to be employed in its management after completion, no such incentivisation can have been in the mind of Dr. Clinch and Mr. Vernon-Kell in July 1998 so far as concerned the basis upon which they then though it appropriate that Mr. Vernon-Kell should obtain a proportionate earn-out of his own.

Issue 4: quantification and terms

28. Mr. Ticciati’s starting point on this issue was that Mr. Vernon-Kell could obtain the same proportionate reward in relation to the 1999 transaction as he and Dr. Clinch had agreed that he should have obtained had the stage 3 negotiations proceeded to a successful conclusion. In my judgment that submission is plainly wrong, because it ignores the fact that there was included in the 1999 transaction the whole of the rest of the Fairfield Group’s businesses which were assumed by the negotiators at the very least to have a value substantially greater than the value of the Cytometry project. Although it may be said that in obtaining the flotation of the whole of the Fairfield businesses rather that merely than of Cytometry, and in doing so under a structure whereby the companies rather than the businesses were sold, Dr. and Mrs. Clinch obtained additional benefits, including a significant tax benefit, the fact remains that none of those benefits fell within the scope of Mr. Vernon-Kell’s retainer. Furthermore I think that in his heart Dr. Clinch was a reluctant seller of the whole group and only succumbed because of the combination of financial pressure and the no doubt sensible advice of Texas and its advisers that the Cytometry project could not be successfully floated on its own.

29. There is however a real difficulty in ascertaining with any confidence what was the proportion of the value of the Group represented by the Cytometry project, in 1999. In particular, once it became common ground in the negotiation of the 1999 transaction that the whole of the Group’s businesses were to be included, questions of apportionment lost any commercial importance for the parties. Mr. Ticciati helpfully offered three alternative solutions to that difficulty, the first two being included in the particulars of the quantum meruit claim pursuant to directions given by me on 10th May 2002, and the third proffered in his closing submissions as the result of my invitation to the parties to consider whether the rewards made available to Professor Danielsen might not offer a suitable basis for comparison, since he, like Mr. Vernon-Kell, had been concerned with the Cytometry project rather than with the Fairfield Group’s other businesses. By that suggestion I meant (and Mr. Ticciati evidently understood) not that Mr. Vernon-Kell’s reward should be equated with that of Professor Danielsen, but that it might be appropriate to reward Mr. Vernon-Kell with shares which bore the same ratio to Professor Danielsen’s allotted shareholding as that which would have pertained had the stage 3 negotiations proceeded to a successful conclusion.

30. In stage 3, Mr. Vernon-Kell would have received 25% of the shareholding which Professor Danielsen would have received. Pursuant to the agreement made in 1999, his trust received 4,444,444 old shares in January 2000, by way of a pre-arranged transfer by Mrs. Clinch. Applying the 25% ratio would produce an issue of 1,111,111 old shares to Mr. Vernon-Kell.

31. Taking them in reverse order, Mr. Ticciati’s second suggestion was based upon Mr. Vernon-Kell simply receiving shares costing £30,000 at the issue price, i.e. a simple conversion of his cash receipt into shares at the issue price of 2.25p per old share. That would produce 1,333,333 old shares.

32. Finally, Mr. Ticciati’s preferred solution was based upon treading the Cytometry project as constituting 40% of the aggregate value of the Fairfield Group businesses and therefore reducing by 60% the original 10% reward proposed for Mr. Vernon-Kell under the stage 3 negotiations. That would produce an issue of 1,600,000 old shares. The 40% proportionate valuation of Cytometrics was based upon evidence from Dr. Clinch that in 1998 the value of Cytometrics was identified as £300,000 against a group valuation of £750,000.

33. No one of these alternative solutions to the valuation problem is obviously superior to the others. It is however noticeable that the first two which I have described above produce reasonably similar results. As I have described, the apportionment of value between Cytometrics and the rest of the Fairfield Group businesses upon which the third approach is based is inherently difficult to verify. Nonetheless, its higher outcome does offer at least some basis for preferring the second to the first. It is also to be noted that a reward of £30,000 worth of shares is substantially the same as Mr. Vernon-Kell noted, without adverse comment, that he was to receive if the stage 3 negotiation had been successful, in his note of the 20th July 1998 meeting, the relevant part of which is quoted in paragraph 22 of my earlier Judgment.

34. It is at points like this that the court is, on the authority of Way v. Latilla (supra) entitled to apply a broad brush. In my judgment Mr. Vernon-Kell should have been issued with 1,333,333 old shares.

35. Putting on one side the 4,444,444 old shares which Mrs. Clinch transferred to Professor Danielsen’s trust, Dr. and Mrs. Clinch received between them 21,111,111 old shares in August 1999. The ratio between what I have held that Mr. Vernon-Kell ought to have received, and what Dr. and Mrs. Clinch did receive is therefore 6.32% (rounded to 2 decimal places). In my judgment that ratio should then be applied so as to ascertain what Mr. Vernon-Kell ought to have received by way of deferred earn-out.

36. Dr. and Mrs. Clinch received by way of earn-out £90,000 in 2001. Dr. Clinch’s evidence is that the second tranche of £90,000 has not been received, and that the performance of the company is such that it will never now be received. Mr. Ticciati criticised Dr. Clinch’s evidence on that point as inadequately supported by underlying disclosure of documents. While I have some sympathy with that submission, it would in my judgment be disproportionate now to require an investigation by reference to the Company’s accounting documentation of the truth or otherwise of Dr. Clinch’s assertion. The sum at stake is small and it will be sufficient for me to declare that a sum equivalent to 6.32% of any further earn-out received by Dr. and Mrs. Clinch hereafter be paid to Mr. Vernon-Kell by Dr. Clinch within 14 days of receipt (if any).

37. Mr. Vernon-Kell has also claimed an appropriate proportion of the £20,000 received by Dr. and Mrs. Clinch in consideration of certain restrictive covenants entered into by them in connection with the 1999 transaction. In my judgment that claim is misconceived. Dr. and Mrs. Clinch gave value for that £20,000 separate and distinctly from their receipts as, in effect, shareholding vendors of the Fairfield Group. There is no basis upon which Mr. Vernon-Kell should obtain anything by reference to that payment of £20,000.

38. I turn now to the issue as to the terms upon which Mr. Vernon-Kell ought to have received shares in Medical Solutions Pie. I have already held that he would have been obliged to subscribe to a lock-in agreement. There is however the additional question whether, like Dr. and Mrs. Clinch he would also have been, or should for the purposes of any assessment of damages be treated as if he had been, subject to a call option in favour of Texas over all of any part of those shares. It will be recalled that part of the 1999 transaction consisted of the grant by Dr. and Mrs. Clinch of a call option to Texas over half the shares which they received beneficially (ie ignoring the shares transferred to Professor Danielsen), exercisable at twice the issue price: ie at 4.5p per old share.

39. In his evidence at the second trial Mr. Green explained that the reasoning behind the call option was to set a limit to the extent to which Dr. and Mrs. Clinch could profit from an increase in value of the shares issued to them, post flotation. Furthermore, he said that even if contrary to his view the 1999 transaction had proceeded on the basis of including an issue of shares to Mr. Vernon-Kell, he would also have been subject to a Texas call option. I infer (although this is not spelt out by Mr. Green) that he meant that half Mr. Vernon-Kell’s shares would have been subject to a call option, just as were half the shares issued beneficially to Dr. and Mrs. Clinch.

40. Mr. Ticciati criticised this proposition as, first, a late corner (not having raised at the first trial) and secondly as being inconsistent with the basis upon which shares were issued to Professor Danielsen. On this point, where Mr. Green was momentarily in his written evidence prepared to contemplate the possibility that an issue of shares to Mr. Vernon-Kell might not have been a deal-breaker, I consider that his evidence is persuasive. Furthermore, the determination of a just and reasonable remuneration by way of quantum meruit as between Mr. Vernon-Kell as payee and Dr. Clinch as payer compels an analysis of the question whether it would be fair for Mr. Vernon-Kell to be treated as entitled to have been issued shares on more generous terms than those which were extracted from Dr. and Mrs. Clinch themselves. In my judgment that would not be fair or reasonable, and I do not regard the apparently uniquely generous treatment afforded to Professor Danielsen as detracting from that conclusion. He was, as I have already held, a person of almost unique importance to the successful outcome of the Cytometrics project and someone who enjoyed, and obviously used, a very special bargaining position.

Issue 5: quantification of damages

41. Mr. Vernon-Kell did not of course receive the remuneration by way of quantum meruit which I have held that he ought to have received. He pursued a claim for damages for losses consequential upon that non-receipt, but offers to give credit for the £30,000 which he did receive instead.

42. Basing himself upon a passage in the Judgment of Norse LJ in Shariab v. Salfiti (supra), Mr. Ticciati submitted that the correct way to value the shares which Mr. Vernon-Kell should have received was to ascertain their market price on the date (or dates) when, had he received them, he would have sold them. The Lock-in Agreement to which Mr. Vernon-Kell would have been subject had he received shares operated in two stages. Until the end of September 2000 Medical Solutions Plc’s brokers could refuse consent to a share dealing without giving any reason for doing so. Thereafter, for another two years, the Lock-in shareholders agreed not to dispose of their shares without the broker’s consent, not to be unreasonably withheld. These two periods were described in evidence as the “hard Lock-in period and the soft Lock-in period”.

43. Mr. Vernon-Kell’s evidence was that he would have sold shares issued to him pursuant to his quantum meruit entitlement during a period of approximately 6 months after the end of the hard Lock-in period. Mr. Ticciati pointed out that there were significant disposals of shares by members of the Concert Party during that period, and that, whether because this reflected the continuing desire for shares in Medical Solutions Plc in the market place or otherwise, it was reasonable to infer that consent to a prudent programme of sales by Mr. Vernon-Kell during that period would not have been refused. Mr. Ticciati pointed out that no documents constituting or recording communications with Medical Solutions Plc’s brokers had been forthcoming on disclosure. While I decline to infer, as Mr. Ticciati pressed me to do, that the Defendants had such documents in their possession which they had failed to disclose, it remains the case that it would have been possible for the Defendants to adduce evidence from the brokers Messrs. Tether & Greenwood to contradict the impression which appears from the evidence of share sales during the soft Lock-in period, namely that the brokers would not have refused their consent.

44. In my judgment it is probable that Mr. Vernon-Kell would have disposed of such shares as he had been able to sell during the period of six months following September 2000, and that the Lock-in Agreement to which he would have been subject would not have stood in his way. Mr. Vernon-Kell’s case was that he would have obtained a sale price of approximately £1.32 per new share, after the 1 for 4 consolidation. This case was supported by the table of share prices shown to me, details of which were not in dispute.

45. I have, however, held that reasonable remuneration to Mr. Vernon-Kell would have been a share allocation pursuant to which half of the shares allocated would have been subject to a Texas call option at 4.5p per old share. Texas had such a call option over the shares issued to Dr. and Mrs. Clinch, and it was exercised in two tranches in October 1999 and August 2000. If Texas had enjoyed a call option over shares issued to Mr. Vernon-Kell I have no doubt that it would also have been exercised, having regard to the very substantial excess in market price over option price at the relevant dates. Accordingly, I conclude that on the same dates Texas would have acquired from Mr. Vernon-Kell half the shares which would have been allocated to him, in two equal tranches for a price of 4.5p per old share.

46. In fact of course Mr. Vernon-Kell received £30,000 on 2nd September 1999, for which he much give credit, as he acknowledges. There is however an issue as to how this credit should be valued. Mr. Vernon-Kell’s principal complaint, which I have held to be substantially justified, is that he received cash rather than shares, so that he was, in effect, locked out of the benefits of being a Medical Solutions Plc shareholder. Strictly, he was only locked out of those benefits for the very short period between the date upon which they ought to have been issued to him (25th August 1999) and the date when he received his cash, which was as I have said, 2nd September 1999. Thereafter, there was a market for shares in Medical Solutions Plc, and he could have applied his £30,000 had he so wished in the purchase of shares at the prices then prevailing. Furthermore, shares thereby acquired would have been free from any restrictions, either by way of lock-in or, critically, by way of a Texas call option.

47. By the time Mr. Vernon-Kell received his £30,000 the shares were trading within a range of 8.75 to 7.75p per old share, ie more than three times the issue price of 2.25p. Accordingly, over that short period Mr. Vernon-Kell lost the opportunity to enjoy an increase in the price of shares which should have been allotted to him of over 300%. Putting it another way, whereas £30,000 would have purchased for him 1,333,333 old shares, he would only have been able to acquire in the market place less than one third of that number with the £30,000 actually paid to him on 2nd September.

48. In his evidence at the first trial, Mr. Vernon-Kell said that he did in fact buy £8,000 worth of shares in Medical Solutions Plc in September 1999 and sold them on the 2nd, 5th and 8th March 2001 at prices of £1.25, £1.26 and £1.33 respectively. These were of course prices for the new shares. Mr. Vernon-Kell added that with a larger shareholding, he would have scrutinised the market more carefully and sold them for a price of £1.32. It follows that, had he used the whole of the £30,000 to buy shares in Medical Solutions Plc he would have made a substantial gain on them, albeit not as great a gain as would have been available on shares issued to him at 2.25p. On any view, the gain which he would have made by buying shares with the £30,000 cash which he received would have been greater by orders of magnitude than the interest on the £30,000 for which Mr. Vernon-Kell offers to give credit.

49. Mr. Ticciati submitted that it would be wrong to require Mr, Vernon-Kell to bring into account against the loss prima facie suffered by being given shares rather than cash the amount which he might have gained had be used that cash to buy shares in Medical Solutions Plc. He says that such a calculation would only be justified if a failure to invest his £30,000 in Medical Solutions Plc shares had been pleaded as a failure to mitigate his loss. He pointed out correctly that no failure to mitigate had ever been pleaded against Mr. Vernon-Kell, either in relation to his contract claim or in the separate pleadings which I directed should be served in relation to his quantum meruit claim.

50. In my judgment, the question whether Mr. Vernon-Kell should account merely for interest on the 30,000 or for the gain which he might have made had he invested that sum in Medical Solutions Plc shares is not, or at least not necessarily, one which only arises as the result of an alleged failure to mitigate. Leaving aside his lack of participation in the cash earn-out, the very essence of Mr. Vernon-Kell’s complaint to the extent that I have found it to be justified, lies in his having been denied participation in the gain in value in Medical Solutions Plc shares from the date of issue until the date when they became a commodity capable of being acquired on the market. Thereafter, he had the same opportunity as anyone else to participate in the subsequent rise in the value of those shares, and £30,000 with which to do so. Furthermore, the quid pro quo for having been a participant during that critical short period was, as I have held, that the shares so acquired would have been subject both to lock-in restrictions and, as to half of them, to a Texas call option limiting the potential gain to less than actually occurred during that initial period.

51. In my judgment the opportunity to participate in the further substantial gain in the value of Medical Solutions Plc shares after 2nd September 1999 was not something which Mr. Vernon-Kell lost by virtue of the wrong done to him by giving him cash on 2nd September rather than shares on 25th August, save only to the extent that the number of shares which he could have acquired with his £30,000 was less than he should have been given. It follows that, to the extent that the deployment of the £30,000 which he received could have enabled him to participate in that further rise in share value after 2nd September, it would be wrong to include as damages the increase in value after that date of the shares which he should have received by way of quantum meruit, without bringing into account the gain which a purchase of £30,000 worth of shares on 2nd September would have yielded for him.

52. To require Mr. Vernon-Kell to give credit for the gain which he would have made after 2nd September if he had invested the £30,000 in Medical Solutions Plc shares, unencumbered by any restrictions, is therefore no more or less than an accurate means of identifying and then quantifying his real loss. It involves no criticism of him for having failed to invest the whole of the £30,000 in shares. Their future market performance was at that date a matter of pure speculation. He did not thereby fail to mitigate a loss caused to him in respect of the increase in value since 2nd September, because that increase in value was not something which formed any part of the loss caused by the Defendants’ breach of the quantum meruit obligation to him. His real loss was being locked out of the increase in value which had already occurred by 2nd September, about which he could do nothing.

53. It is in my judgment therefore appropriate to identify the loss caused to Mr. Vernon-Kell by two comparative calculations. The first is a calculation of the aggregate financial benefits which would have flowed to him had be originally been issued with shares in Medical Solutions Plc, sold half of them as he has testified, and transferred the other half pursuant to the Texas call option. To that must be added to small participation in the cash earn-out I have already described. The second calculation proceeds on the basis that he had invested the whole of the £30,000 paid to him on 2nd September in Medical Solutions Plc shares at the mean price prevailing on that day, and sold all of them, after consolidation, for £1.32 per share in accordance with his unchallenged evidence on that point. In both calculations interest should be added to sums (if any) realised as cash earlier than the date of the last actual or notional sale. The net difference between those two calculations, if the first produces a larger aggregate than the second, represents the financial expression of the loss suffered by Mr. Vernon-Kell. I set out in the next paragraph my arithmetic in the application of those two calculations.

54. First calculation

Second calculation

Loss as at March 2001

£257,263
-£120,000

£137,263

Notes

1. I have been unable to ascertain from the evidence the precise date when the £90,000 earn-out was paid in 2001. Dr Clinch said that it was paid once the accounts to 31st December 2000 were signed off. I have therefore treated it as an item of loss accruing as at March 2001.

2. I have used March 2001 as the date of notional sale of shares under the second calculation because that is when, while under no restrictions, Mr Vernon-Kell started selling the shares he did acquire.

3. Where necessary, I have rounded financial amounts to the nearest pound, and shares to the nearest share.

4. I have used 8.25p as the acquisition price under the second calculation because that is the mean between the prices stated in the evidence.

5. I heard no submissions on an appropriate interest rate. I will hear submissions on that matter after judgment. That may involve a minor adjustment to the net amount of damages payable. Interest will run on that amount from March 2001 until judgment.

6. It was not submitted that any adjustment need be made by reason of the effects of taxation.

55. Mr Vernon-Kell is therefore entitled:

1. to judgment for £137,263, subject to adjustment in relation to the interest element in the first calculation in relation to sums which should have been paid prior to March 2001;

2. to interest from March 2001 until judgment at a rate to be determined.

3. To be paid 6.32% of any sum which Dr and Mrs Clinch receive on account of the second earn-out, within 14 days of receipt.