Pagel & anr v Farman [2013] EWHC 2210 (Comm)

WTLR Issue: November 2013 #134






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.

Counsel details

Nicholas Elliott QC and Christopher Burdin (3 Verulam Buildings, Gray’s Inn, London WC1R 5NT, tel 020 7831 8441, email, instructed by Taylor Wessing LLP (5 New Street Square, London, EC4A 3TW, tel 020 7300 7000), for the claimants. Philip Marshall QC and Andrew Moran (Serle Court, 6 New Square, Lincoln’s Inn, London WC2A 3QS, tel 020 7242 6105, email, instructed by Boodle Hatfield LLP (89 New Bond Street London, W1S 1DA, tel 020 7629 7411), for the defendants.