HC 188/04

THE  HIGH  COURT

RECORD NO. 9954P/2002

BETWEEN

McGILL CONSTRUCTION LTD

PLAINTIFF

AND

PAUL McKEON, DECLAN HOGAN, PATRICK BROCK

WHITEFIELD CONSTRUCTION LIMITED

AND

PATRICK BROCK & SON LIMITED TRADING AS

BROCK BUILDING CONTRACTORS AND BY ORDER OF 

THE COURT ADRIAN HEGARTY, DAVID TAYLOR AND

PATRICK O’DOWD

DEFENDANTS

Judgment of Finnegan P. delivered on the 19th day of May 2004

The Plaintiff alleges that it concluded an agreement to purchase the entire issued share capital of Whitefield Construction Limited and while it originally sought specific performance of that agreement in the events that happened the issues which arise for determination are the following:-

(1)	Whether there was a concluded agreement for the purchase by the Plaintiff of the entire issued share capital in Whitefield Construction Limited.

(2)	If there was such a concluded agreement damages for breach thereof.

(3)	If there was no such concluded agreement by reason of want of authority on the part of Paul McKeon the first named Defendant.

(a)	Was the first named Defendant in breach of a warranty of authority.  

(b)	If so damages in respect of the said breach of warranty of authority.

The issued share capital in Whitefield Construction Limited at the relevant time was held as follows:  Patrick Brock as to 50% thereof and Paul McKeon, Declan Hogan, Adrian Hegarty, David Taylor and Patrick O’Dowd each as to 10% thereof.  Whitefield Construction Limited owns lands at Rochestown Avenue, Dun Laoghaire known as Eaglewood and obtained planning permission for the development of the same the development consisting of the refurbishment of an existing house and its conversion into apartments, the construction of some town houses and the construction of apartment blocks designated A, B, C, C1, D and E.  At the time of the events with which I am concerned with the exception of  Block A and B the development of Eaglefield had been completed and sales either completed or agreed.  The development was carried out by Patrick Brock & Sons Limited, a company effectively controlled by Patrick Brock the third named Defendant pursuant to contract with Whitefield Construction Limited.   Patrick Brock & Sons Limited is a long established and experienced building contractor but had not previously been involved in speculative building.  For this reason Patrick Brock involved investors in the development and incorporated Whitefield Construction Limited.  The first and second named Defendants are chartered accountants.  Adrian Hegarty the sixth named Defendant is the Chief Executive Officer of Friends First.

When planning permission was obtained early in 2002 for the development of Eaglewood the shareholders in Whitefield Construction Limited considered the options of selling on the lands or building out.  Adopting the former course would then have yielded a profit of £400,000 and it was anticipated that the latter course would yield a significantly higher profit and accordingly the latter course was adopted.  At that time the Plaintiff had an interest in acquiring Eaglewood and had discussions in relation to so doing which did not come to fruition.

The shareholders in Whitefield Construction Ltd held a meeting on the 4th June 2002 at which date the development with the exception of Blocks A and B had been completed and effectively sold.  Notwithstanding that considerably higher prices per unit had been achieved on sales, due to escalating building costs the profit on the development to that date was approximately £400,000.  The shareholders were aware that a similar development had been constructed at £95 per square foot whereas their development costs at Eaglewood  were £135 per square foot.  The discussion centred upon whether it would be more beneficial to dispose of the remainder of Eaglewood to another builder or to build out.  The former course was more attractive to the first and second named Defendants while the latter was preferred by Patrick Brock the third named Defendant.  On the 14th June 2002 the second named Defendant prepared a note of that meeting which is as follows:

“Frank/Pat presented figures on the costs to complete both phases 1 and 2 and estimated selling prices for phase 2.  Frank/Pat confirmed that the costs were fixed in all respects except for sales incentives which might be required by the auctioneers.  It was confirmed that the only variables then remaining were the selling prices and the costs of sales incentives.

The figures were presented showing the cost of another apartment development at £95 a sq ft compared to £135 per sq ft for Eaglewood.  It was noted that there could be many contributory factors to this difference including design differences and quality of finishes apart from basic cost differences.

Consideration was given to selling off the remaining site to a builder on the basis that it appeared that if a unit price of €70/€80K per apartment could be achieved that it would be advantageous to the development company to sell.  It was agreed that Pat would contact Ross McParland, Declan would contact McNally Handy and HOK and Paul would contact a builder.

It was agreed that Paul would prepare final projections based on the information supplied to the meeting by Pat and Frank.”

The attendance at the meeting included all the shareholders with the exception of David Taylor and in addition Frank O’Donnell a quantity surveyor.  In effect it was decided that both options should be investigated – that the market for the sale of the lands be tested and that projections should be prepared upon the basis of building out.

On the 11th June 2003 the first named Defendant met with Gerry Tierney who was then a bank manager with Ulster Bank whose branch dealt with the accounts of both the Plaintiff and Whitefield Construction Limited.  The first named Defendant kept manuscript notes of the said meeting from which he dictated a note of the meeting when the present litigation was threatened:  the manuscript notes have not been discovered.  The note dictated reads as follows:

“I told Gerry that we were interested in selling Phase 2 of Eaglewood and asked him to find out if McGill Construction was interested.  I told Gerry that we wanted approximately €3.85 million for the phase 2 site plus whatever cash remained in the company after Phase 1.  I told him we would probably be willing to deal at a figure of €3.62 million.  I provided Gerry with information regarding the proposed selling prices of the apartments in Phase 2 (prepared by Frank O’Donnell).

He asked me if Pat was ok with this and I said yes.  He said he would contact Hugh McGill and revert to me.”

Implicit in the note is the intention that the disposal should be carried out by 
the extraction from Whitefield Construction Limited of the profit to date and 
the sale on of the entire issued share capital in Whitefield Construction Limited rather than that there should be a sale and conveyance of the undeveloped portion of Eaglewood.   The show apartment in the developed portion had not been sold and some arrangement would have to be made in relation to the same.  Again as I understand it the common areas and roads of the entire of the Eaglewood development would remain in the company.  Gerry Tierney met with Hugh McGill a Director of the Plaintiff on the 13th June 2002.  Mr. Tierney furnished Mr. McGill with written details of the Eaglewood Development in these terms:
•	Whitefield Construction Ltd has full Planning Permission for a total of 84 X 2-bed apartments in five 3 & 4 storey blocks along with 5 terraced 2-storey houses.
Construction of Phase 1 is complete and comprises:
Block C  – 25 apartments over 4 floors
BlockC1 – 15 apartments over 4 floors
Block D  - Refurbishment of McKenna house to give 6 apts.  Over 4 floors
Block E  - 5 terraced 2 storey houses

•	Entry to the site is from Rochestown Avenue at the ‘T’ junction with Johnstown Road.  On entry all units in Phase 1 are visible.

•	Phase 1 is effectively sold out (Ross McParland Auctioneers) – unit no. 15 in Block C1 is under negotiation and the Show Apartment (no. 8 Block C1) is not on the market and can be used as a show unit for Phase 2.  The attached sales schedule reflects actual prices achieved by the company.  Looking in isolation at Blocks C & C1, and excluding units sold at discount to McKenna (land vendor) and Gallagher (appeased neighbour), total build area excluding common areas amounts to 25,871 sq. ft. against which gross revenues were £7,606k i.e. a sale price achieved of  £294 p.s.f.  The average apartment size is 808 sq. ft. And sold for average £235k.  The bulk of sales are to owner occupiers.

•	Wyse & Assoc. have been appointed to incorporate and manage the Management Company that has responsibility for the apartment complex.

•	Phase 2 comprises:
Block A – 8 X 2-bed apartments and  9* X 1-bed units over 4 floors with 
Common Room, Office and staff room.
Block B – 24 apartments over 3 floors.
(*note – To meet “Social Housing” requirements they have agreed to sell 9   
one bed units (equiv. to 6 2-bed units) to Cheshire Barrett Homes for £1.5m 
net of V.A.T.).

•	Given  the realised costs associated with the development of the site and construction of Phase 1, the directors have decided to investigate all possibilities prior to embarking on construction of Phase 2 themselves.  Consideration is being given to the possible sale of the remaining site subject to a satisfactory price being offered.  In that regard the following is relevant:
-	All contributions to relevant authorities (per planning permission) have been paid.
-	They are willing to leave the ‘show’ apartment available to a new buyer subject to a suitable arrangement.
-	The site is ready for construction immediately.
-	To minimise Stamp duty (6% - c.£170k) on sale of sites they are willing to on sell Whitefield Construction Ltd (with, I assume, the usual ‘warranties’ being available to protect the buyer).
-	A sale price in the order of £2.9m/£3.0m will be genuinely considered reflecting individual site cost £79k based on 38 X 2-bed sites.
	(note:  the 6 X 2-bed sites for Cheshire Homes reflects a sale price of £250k
	net of VAT).

At the conclusion of the meeting Hugh McGill told Mr. Tierney that he was interested and that he would pursue the matter.  Immediately thereafter he met with the Plaintiff’s solicitor and accountant and instructed the solicitor to investigate the company.  The solicitor carried out a Companies Office search and on the 3rd July 2002 reported on the same.  Hugh McGill met with the first named Defendant thereafter and was assured by him that he had authority to negotiate a deal on behalf of all the shareholders in Whitefield Construction Ltd.

Hugh McGill went on holidays and was away until the 27th or 28th June 2002.  While he was away the matter was progressed to some extent on behalf of the Plaintiff by Shane Mcgill and Leonard McGill.  On the 19th June they had a meeting with the first named and second named Defendants at which it was made quite clear to them that the transaction could only proceed by way of a sale of the issued share capital in Whitefield Construction Limited.  On the 20th June Shane McGill and Leonard McGill inspected the show apartment.  By the 25th June there had been a conversation between the solicitors to the Plaintiff and the Defendants.  On the 24th June Leonard McGill telephoned the first named Defendant and offered a sum of €3,500,000.  The first named Defendant informed him that this was unlikely to be acceptable to the shareholders but that he would revert to him.  On the same day the 24th June there was a meeting of the shareholders.  The first named Defendant took a manuscript note which he subsequently dictated.  The manuscript note is not available.  The note dictated reads as follows:

“The meeting was called to discuss the offer from McGill Construction.  Paul prepared a sheet that outlined the difference between selling the company now or holding the company and finishing the development.  This showed a difference of €336,000 (potential extra profit from building out).

Pat suggested there would be legal difficulties in selling at stage and gave as examples the Home Bond and Brocks £1 million guarantee to CIF.  If the company was sold he would want his guarantee removed.  He also suggested a difficulty with the structural guarantee on the listed house and how the common areas would be affected.

Pat also confirmed that a planning application had been lodged the previous Friday in relation to changes requested by Cheshire.  The contract with Cheshire was now dependent on this planning being obtained.

Pat also confirmed that 21 bookings had been taken on phase 2.

Pat Brock and Pat O’Dowd queried the accounts situation.  Paul informed the meeting that the accounts were up to date but needed to be audited.  It was agreed that this would be done as soon as possible.

Regarding the offer from McGills Paul suggested that McGills would probably go to €3.7 million for the free site or thereabouts.  It was agreed that the negotiations with the McGills would continue.”

The difficulty alluded to by Patrick Brock was that as a condition of membership of the Construction Industry Federation Homebond Scheme he had given a personal guarantee for £1,000,000 and further either he or Patrick Brock & Sons Limited had given a structural guarantee in relation to apartments constructed within the original house on the site and he would wish to be relieved of these.

A meeting took place on the 26th June between the first named Defendant, the second named Defendant, Shane McGill and Leonard McGill.  The first named Defendant indicated that the offer of €3,500,000 was unacceptable.  Following that meeting the Plaintiff consulted its solicitor and it is quite clear from a note of that meeting that a number of matters required to be resolved.  The note sets out these in cryptic form usually a single word followed by a question mark.  The matters set out included the Homebond Guarantee, the construction contract between Whitefield Construction Limited and Patrick Brock & Sons Limited, the management structure, details of the contract with Cheshire Homes, planning permission for internal alterations to one block to enable that contract to be fulfilled and what would happen if that planning permission was not forthcoming.

On the 28th June there was a telephone conversation between Hugh McGill and the first named Defendant.  Again the first named Defendant took a manuscript note of this and subsequently had it reduced to typescript.  The manuscript note is no longer available.  The note dictated reads as follows:
“Hugh McGill called me twice on the 28th June to enquire about revised plans and planning applications.  I told him I would hopefully have same later that day or on Monday.

I queried if he had checked with his accountants and he said he met them that morning and there was no obstacle to purchasing the shares.  All would be subject to receiving audited accounts and completing a due diligence on these.  He wanted confirmation that Whitefield was only involved in one development.  I confirmed this and he suggested that agreement would be straightforward.  He asked who would prepare the necessary agreements if we agreed to deal and I suggested Paddy O’Sullivan would prepare the agreements.”

From this note it appears that any offer to be made would be subject to receiving audited accounts and completing a due diligence on the same.  Also it is clear that the Plaintiff envisaged the preparation of a written agreement if agreement on price could be reached the agreement to be prepared by the shareholder’s solicitor.

Up to this point I am satisfied that the typescript of the notes dictated by the first named Defendant represent an accurate record of the meetings and phone calls to which they refer.  I am so satisfied notwithstanding the circumstance that the manuscript notes upon which they were based are no longer available and that they were dictated at a time when litigation was contemplated.  I am also conscious however that they were dictated in the context of the concerns of the shareholders and accordingly do not necessarily record those matters which were of concern to the Plaintiff and which were raised and so they may not be complete.  In this regard I accept the evidence of Leonard McGill that at the meeting held on the 19th June he enquired of the first named Defendant and the second named Defendant if they had authority to negotiate for all the shareholders and that they told him that they had.  Further he enquired as to whether Patrick Brock was satisfied to exit the arrangement he had with Whitefield Construction Limited and that he was told that he was.  Again in the phone call of the 24th June Leonard McGill made an offer of €3.5m “for the site” and the first named Defendant informed him that he would have to refer back to the shareholders.  At the meeting of the 26th June Leonard McGill stipulated that on the purchase normal warranties would be in:  however he had no experience of and was not au fait with the purchase of shares but felt that this stipulation represented a sufficient protection.  On the evidence of Mr. Liam Grant I am satisfied that the first named Defendant and the second named Defendant being chartered accountants would have been fully aware of the complexity which attends the purchase of a company which has traded, of the difficulty of clearing out the accounts of the company so that it would retain only the site which was intended to be passed, in terms of dealing with its liabilities including tax liabilities, its creditors, future claims of whatever nature including claims in respect of the area already developed, its debtors, its retained profits and its other assets including in this case the show house which had not  been disposed of.  In short there were differing perceptions on the part of the Plaintiff and the shareholders in Whitefield Construction Limited as to what would be involved in finalising the transaction.  This remained the position on the 2nd July.  On that day Hugh McGill telephoned the first named Defendant.  Again the first named Defendant made manuscript notes of this phone conversation and subsequently dictated them.  The dictated note of the telephone conversation is as follows –

“Hugh McGill called me on my mobile.  He was chasing me on the revised plans and application.  I told him I’ll call Pat/Patricia Mangan again to get copies and get them to him as soon as I could.

He also asked for a copy of the contract between Brocks and Whitefield Construction.  I didn’t agree to provide this to him as I was uncertain why he wanted it.  He also reminded me of the Chesire contract.

He asked me had I agreed a price with Leonard.  I told him we had no agreement on price.  I reminded him that 3.5 million was not enough for the phase 2 site.  I told him we were looking for IR£80k per site but would probably be able to deal at a figure lower than that.

He suggested an offer of £75,000 per site (€3.62 million).  I said I thought we would be able to deal at this level but would get back to him after talking to the others.”

The account of this telephone conversation given by Hugh McGill differs materially from this.  He made an offer of  €3,550,000 which was rejected.  He then offered €3,600,000 and this was accepted by the first named Defendant who said – 
“Ok.  €3.6 it is.  We have a deal at €3.6”.

 Hugh McGill was satisfied that he had a deal and told this to his solicitor, his accountant, Shane McGill, Leonard McGill and Gerry Tierney.  Gerry Tierney was “delighted”.   On the 14th July the Plaintiff’s bankers were approached in relation to finance.

Having regard to the foregoing findings it is necessary to consider whether or not there was a concluded oral agreement for the sale of the entire issued share capital in Whitefield Construction Limited.  In the course of the negotiations which I have detailed the phrase “due diligence” was used both by those carrying on negotiations on behalf of the Plaintiff and on behalf of the shareholders in Whitefield Construction Limited and their respective solicitors.  The phrase “due diligence” as I understand it means no more than to act without negligence or to take reasonable care:  see Riverstone Meat Co. Pty. Limited v Lancashire Shipping Co. Ltd. 1961 1All ER 495.  However in the present context while there appears to have been no discussion as to what was envisaged by due diligence I am satisfied that the parties understood that the affairs of the company would be investigated by an accountant and solicitor to ensure that on completion of the purchase of the shares the company would be entitled to the lands the acquisition of which was the true object of the transaction with good title and free from encumbrances and free from other liabilities.  

The Plaintiff’s representatives were unaware of the formality and complexity which normally attends the sale of a company which has traded.  Normally such a sale will entail the preparation of a detailed contract providing for full disclosure of the company’s accounts and in particular its liabilities.  Detailed warranties will be required from the vendor shareholders who will also be required to execute indemnities in respect of any breach of warranty which in the ordinary course will be directed to the warranties agreed to be given.  I have no evidence that there is such a concept in these circumstances of “usual warranties”.  Provision will be made for the investigation of the company’s financial affairs and liabilities by the purchaser’s accountant.  Where the company holds land very often standard conditions such as the Law Society of Ireland conditions of sale will be incorporated together with special conditions.  Usually there will be a provision for the payment of a deposit.   The first and second named Defendants being chartered accountants were fully aware of the complexity which attends such a transaction and would expect such matters to be dealt with in a written share sale agreement.  Indeed it was not just the shareholders in Whitefield Construction Limited who envisaged a formal agreement.  In the course of the phone calls of the 28th June 2002 Hugh McGill enquired as to who would prepare the agreements and it was suggested to him that this should be done by the solicitor to the shareholders.

As to what occurred in the course of the telephone conversation between Hugh McGill and Paul McKeon on the 2nd July 2002 there is a conflict of evidence.  On Mr. McGill’s account he made an offer of €3.6m and Mr. McKeon responded –

“Ok.  €3.6 it is.  We have a deal at €3.6”.

Mr. McKeon’s account is that when he received the offer of €3.6m he said he thought he would be able to deal at that level but that he would get back to Mr. McHugh after talking to the other shareholders.  It is however not necessary for me to resolve this conflict or to prefer one account to the other.  I am satisfied that if agreement was reached at this meeting in the terms given in evidence by Hugh McGill it was an agreement on price only.   There were many other matters yet to be agreed and resolved before a concluded agreement could exist.  Both parties I am satisfied envisaged a formal agreement of the nature normally involved in the sale of the issued share capital in a company which has traded with warranties and indemnities tailored to meet the circumstances of the particular company.  There was no discussion or agreement with regard to a deposit.  There had been no consideration given as to how the taxation liabilities of Whitefield Construction Limited in respect of the development which it had carried out would be dealt with:  on the evidence of Liam Grant it would take a considerable period of time to ascertain the liability and discharge the same.  No closing date was agreed.  There was no agreement in relation to the show apartment.  All these matters suggest to me that there was no concluded agreement.  Again both parties envisaged a formal agreement for the sale of shares being executed and the terms of this or of the indemnities were not discussed or agreed.  In these circumstances I am driven to the conclusion that all that was agreed on the 2nd July 2002 was the price which the Plaintiff was prepared to pay and the shareholders were prepared to accept and that even accepting the account of the conversation on the 2nd July given in evidence by Hugh McGill a great deal more remained to be agreed and reduced to writing.   In these circumstances there was no concluded agreement.  Indeed on the basis that all that was agreed was the price at which the parties were prepared to deal there was I am satisfied no intention at that time to create a contractual relationship on either part.  The conduct of the Plaintiff after the 2nd July 2002 in approaching its bank to arrange finance is more consistent with the view which I have taken that an agreement on price only was reached on the 2nd July 2002 rather than that a complete oral agreement had been concluded as this is a matter which one would normally expect to have been attended to prior to the Plaintiff committing itself to a concluded agreement.

The Plaintiff has failed to satisfy me that a concluded oral agreement was reached and accordingly fails in its claim for damages for breach of contract.  As my finding that there was no concluded agreement is not based on any want of authority in Paul McKeon the first named Defendant the Plaintiff’s claim for damages for breach of warranty of authority also fails.