Analysis
In 2001 Mr Pagel (P) and Mr Farman (F), set up a hedge fund. At first they shared responsibility for marketing and investment equally, but F began to concentrate on investing and P dealt with marketing and client relationships and F began to find the split unfair, so that from 2004 the 50/50 split was renegotiated and F received two thirds of the performance fees, but paid the cost of fixed employee bonuses and shared management fees 50/50 with P. Initially, both partners had to sign confirmations for all withdrawals but from autumn 2006 this only applied to amounts over £5,000. For a number of years the fund was very successful but from 2006 it began to perform poorly. By January 2008 P and F were in discussion but not agreement about some readjustment of the allocation of profit between them. At this time the funds were down approximately 25% for the financial year and tension was high. P blamed F for the poor performance. Both P and F had to pay income tax at the end of January 2008. F needed cash to enable him to meet his liability, but was reluctant to redeem a substantial sum of his investments from the fund on a falling market and so requested that he be allowed to draw £10m from the LLP, which would include a partial excess draw. P was unhappy about this and, to facilitate the drawing of £10m required to settle his tax liability, F agreed not to take any share of the performance fees for the calendar year 2007 and to reduce his share of the management fees from 50% to 33.3%. P accepted this and allowed F to draw the £10m he required from the LLP. However, things got worse. P said he was ‘flirting with insolvency every five minutes’ as a result of large personal tax liabilities in the USA and made other comments regarding the possibility that he would need to sell his house and send his wife back to work. Tension increased when the fund experienced heavy losses from a position in illiquid stocks chosen by Farman. Farman, in an e-mail, said that if ‘the sh*t hits the fan’ he would do ‘whatever I can to look after you [P]’. Things did get worse, and although relations between the partners and the performance of the fund continued to deteriorate, F, in response to P’s demand for ₤5m, made a ‘goodwill gesture’ of shares which realised ₤3.8m. F did this as he had no desire to quit at the bottom and had decided that he wanted to continue to work at the LLP and try to re-establish the business and lost client goodwill while also assisting P financially, as he had said that he would. Payment was made on 30 January 2009. P wanted to document the gift as ‘a sign of our enduring friendship’, but F never signed any document to this effect. On 15 June 2009 a copy of a letter drafted by Ernst & Young signed and dated 12 June 2009 by P was forwarded to F. This stated that the gift was in recognition that P had suffered financially as a result of F’s investment approach. F objected to the wording of this letter on numerous occasions. Relations between the parties did not improve and P brought a claim for some £5.2m, which he said F owed him for excess drawings and a loan. F counterclaimed for the return of the gift, on the grounds that he had made it by mistake and on the basis of misrepresentations by P, who, F alleged, was nowhere as near the financial brink as he had claimed. P discontinued his claim but F continued with the counterclaim.
Held
Counterclaim failed [66].
A gift might be recovered by the donor from the donee where there was a causative mistake of sufficient gravity as to the legal character or nature of a basic transaction, or as to some matter of fact or law which was basic to the transaction and where retention of the gift would be unconscionable’; it was ‘irrelevant’ whether the mistake was not known to, much less induced by, the donee or resulted from the carelessness of the donor [39]. The picture from the documents was of a man making a gift, recognising that his trading had fallen short of his own very high standards and caused very large losses to his partner as well as to himself. He had responded partly out of honour, but the timing showed that the gift was made so that F could play his part in re-establishing the partnership as a joint business venture. Commercial probabilities were not straightforward when approaching gifts as these were uncommon in commerce. But some factors were pertinent. The scale of the wealth accumulated by both parties, the size of their holdings even when things were at their worst and F’s knowledge of the value of P’s unredeemed holdings (recognising that redemption would of itself cause further falls in value) suggest that insolvency was not on the cards and that F would have appreciated that. F would, as he said, not have been aware of US tax in any detail but he would have had some idea of the scale of the liabilities from what he was told and from general knowledge. If there had been real insolvency, the sale of a flat or a wife’s return to work would have been a drop in the ocean. This suggested that when these points were raised, at some of many heated moments between the parties, they were probably commercial hyperbole. It was also more probable than not, in a commercial context, that a gift would form part of a bargain. It was for F to prove his case. He had not done so [64].
JUDGMENT HHJ MACKIE QC: [1] This has been the trial of disputes between the two partners in the Second claimant, Gradient Capital Partners LLP, once an exceptionally successful hedge fund. At the end of the first week of trial the first claimant, Mr Pagel, discontinued his claim for some £5.2m which he said the defendant, …Continue reading "Pagel & anr v Farman [2013] EWHC 2210 (Comm)"