Case No: HC08C03022
Neutral Citation Number: [2010] EWHC 812 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 23/04/2010

Before :

MR JUSTICE VOS
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Between :

	(1) Derek Dennard
(2) Michael Gearon
(3) Graham Turner
(4) Colin Peter Dixon
	Claimants	
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	PricewaterhouseCoopers LLP	Defendant	

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Mr Paul Downes QC and Ms Sonia Nolten (instructed by Allen & Overy LLP) for the Claimants.
Mr Justin Fenwick QC and Mr Simon Salzedo (instructed by Barlow Lyde & Gilbert LLP) for the Defendant.

Hearing dates: 9th to 11th, 15th to 19th, 23rd to 25th, 29th to 31st March 2010
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Judgment
Index to Judgment
Section	Para	
Introduction	1	
		
PFI projects	4	
		
Background	8	
		
Factual Chronology	15	
		
The terms of PwC’s Engagement Letter dated 1st November 2004	84	
		
Issues	86	
		
Claimants’ witnesses 	87	
		
PwC’s witnesses	100	
		
Expert witnesses	106	
		
Issue 1:  Were the terms of the Engagement Letter applicable to PwC’s retainer to undertake the valuation?	116	
		
Issue 2: Did PwC owe the Claimants a common law duty of care in addition to any contractual duty? If so, was it subject to the contractual limitation of liability?	127	
		
Issue 3:  Did each of the Claimants (a) actually rely on the valuation; and (b) reasonably rely on the valuation; and (c) were they contractually entitled to rely on the valuation, when agreeing to sell their interests in the RBIL portfolio to BEIF in January 2006?	129	
		
Issue 4:  Did PwC’s minor mathematical corrections to the valuation amount to “confirming and repeating of the valuation to the Claimants albeit with a minor adjustment” between October 2005 and January 2006?	132	
		
Issue 5:  Was PwC negligent in preparing the valuation in relation to various factors?	133	
		
Issue 6:  Was PwC negligent in preparing the valuation in failing to attribute appropriate value to (a) gains from possible refinancing, (b) the sinking fund upside, and (c) residual value upsides?	177	
		
Issue 7:  Was PwC negligent in preparing the valuation in failing to revise its valuation in or before January 2006?	186	
		
Issue 8:  What value would the Defendant non-negligently have ascribed to the RBIL Portfolio (a) as at May 2005 (b) as at January 2006?	187	
		
Issue 9:  Would the sale to BEIF have proceeded in the event that PwC had given a non-negligent valuation?	192	
		
Issue 10:  Can the Claimants claim their valuation losses by reference to the subsequent sale in December 2006 to SMIF, or, if not, what losses can they claim?	208	
		
Issue 11:  If PwC is liable, were the Claimants’ valuation losses caused by their own negligence and if so to what extent?	210	
		
Issue 12:  Was PwC affected by an unresolved conflict of interest that meant they should not have accepted the valuation retainer, and did the Claimants give their informed consent to, or waive, the conflict?	211	
		
Issue 13: If there was a conflict, are the Claimants entitled to damages for PwC’s breach of duty in acting for them when affected by an unresolved conflict of interest, and, if so, on what basis, and how much?	223	
		
Issue 14: If the terms of the Engagement Letter apply to the valuation retainer, does the time limitation and/or the limitation of liability satisfy the requirement of reasonableness, and, if so, are they applicable to any or all of the Claimants’ claims?	224	
		
Issue 15:  What damages are the Claimants entitled to for each breach of contract and/or duty relied upon?	227	
		
Conclusion	228	

Mr Justice Vos:
Introduction
1.	The Claimants allege that PricewaterhouseCoopers (“PwC”), the Defendant, negligently under-valued their interest in 11 Private Finance Initiative (“PFI”) projects in the sum of £5.1 million.  As a result, the Claimants contend that they sold their interest to a subsidiary of Barclays Bank plc (“Barclays”) for £5.5 million. Had PwC properly valued their interest, as it is said it should have done, at around £15-£20 million, the Claimants say they would have retained their shares.  In that event, they say they would have been able to sell them 11 months later, as Barclays itself did, at nearly 8 times the price they received – some £40 million.   The difference between that sum and the £5.5 million they actually obtained is sought by the Claimants by way of damages for breach of contract.  
2.	As a second string to their bow, the Claimants allege that PwC was affected by a serious conflict between its personal interests and the interests of the Claimants, because PwC had a long-standing relationship with Barclays and wanted the deal with Barclays to go through so that it (PwC) would be “first in line” to advise Barclays on the lucrative refinancing project expected to follow from the transaction.  The consequence of this alleged breach of duty is said to be the same as flows from the negligent under-valuation, save that the Claimants contend that the damages for this breach would not be restricted to £1 million by the limitation of liability clause upon which PwC rely as one of several defences to the negligence claim.   Of course, the Claimants argue on various grounds that the limitation clause does not anyway apply.
3.	As the trial progressed, the issues narrowed significantly, so that the central points of contention ultimately concerned only four main matters: the applicability of the limitation clause, the correct discount rate to apply to Discounted Cash Flow (“DCF”) valuations of the PFI projects, the correct approach to the valuation of the possible future refinancing of the PFI projects, and the alleged conflicts of interest.  As will appear, the parties have agreed a more extensive list of issues, but it is in these areas that the bulk of the evidence and argument has been focused. 
PFI projects
4.	PFI projects, as part of Public-Private Partnerships (“PPP”), were introduced by the Government in 1992.  The objective was to involve the private sector in the provision of all kinds of capital intensive public services, including the provision of care facilities.  PFI projects are of various kinds and the sector has been developing rapidly since its introduction.  Broadly stated, a private sector company will raise capital to finance the construction or improvement of a property asset, and will assume the risks of both the building project and the operation and maintenance of the facility thereby created.  The public sector body will then pay a unitary charge for the use of the facility over a period of, say, 25-30 years.  Thereafter, the facility will either revert to the public body or to the private sector investors.  The public sector user of the facility can either pay on a demand basis (i.e. as and when it needs the facility) or an accommodation basis (i.e. when the facility is available for use).  The latter provides a more constant and reliable income flow for the private sector investor.  The assets in this case were all accommodation assets.
5.	PFI projects are normally structured so as to be financed as to a large percentage (often 90%) by senior debt, as to a lesser percentage (often 10%) by subordinated debt, which is often held together with (or ‘stapled’ to) the equity.  Most private sector investors make use of single purpose vehicles (“SPVs”) to own the equity in an individual PFI project.
6.	Over time in the early 2000s, a secondary market developed in the shares of companies owning equity, and in the debt, in PFI projects.  Often, the original private sector investors were building contractors, whose business was unsuited to the long term commitment required for such projects over their entire life.  The future cashflows produced particularly by established (or ‘built out’) PFI projects were attractive to private equity firms.  The risks of the projects are obviously somewhat greater during the construction phase.  
7.	It is common ground that the valuation of PFI projects should be undertaken on a DCF basis, and that a DCF valuation is essentially a function of 3 variables: (a) the cashflows which are likely to be produced by each project over its remaining life (perhaps 20 or 30 years), (b) the discount rate, which as a matter of judgment, should be applied to reflect the net present value (“NPV”) of the cashflows, and the risks inherent in the project and its operation, and (c) the upsides that should be applied to the valuation to reflect present or future added value, like, for example, the presence of cash trapped in the project which could be released, or the possibility that the debt might advantageously be refinanced at lower interest rates, creating a profit margin.
Background
8.	The Rydon Group included Rydon Construction Limited, Rydon Homes Limited, Rydon Commercial Limited, and Rydon Property Maintenance Limited.  The names are broadly self-explanatory as describing the activities of the different parts of the group.  Rydon Homes, however, had a valuable land bank that made it particularly attractive.  The Claimants had a controlling interest in the Rydon Group.
9.	In 1996, the Claimants established Ryhurst Limited (“Ryhurst”), separately from the Rydon Group, to bid for PFI projects which mainly involved building and operating health care facilities.  Each Claimant owned 160 out of 1000 issued shares in Ryhurst (i.e. 16% of the equity), and the other shares were held by other key players in the business, including Ms Alison Montague (“Ms Montague”) who later became Ryhurst’s managing director.
10.	When the Claimants came to sell Ryhurst in 2006, it had essentially 3 parts to its business: (a) its project management business whereby it contracted with the SPVs to manage the PFI projects that it had acquired; (b) a 50% interest in the portfolio of 11 PFI projects, held through SPVs, which were themselves owned by the joint venture company called Ryhurst Barclays Infrastructure Limited (“RBIL”), in which a subsidiary of Barclays called Intermediate Care Limited (“ICL”) held the remaining 50%; and (c)  Ryhurst Lift Investment Limited (“Ryhurst Lift”), so named because it was engaged, not in elevators, but in financing projects through Local Improvement Finance Trusts.  LIFT projects are similar to PFI projects, but at the time of sale, Ryhurst Lift only had one such project in its portfolio.
11.	RBIL’s 11 PFI projects were all in the care sector in various parts of England.  In essence, RBIL’s SPVs contracted with Government entities to construct and manage care facilities, retaining an equity interest.  The projects were almost all funded in the traditional way described above, save that the Bexley project had no subordinated debt.  Barclays funded the bulk of both the senior and the subordinated debt for the projects.
12.	In January 2006, the Claimants sold their shares in Ryhurst (amounting, with the interests of others, to a 72% stake), save that the fourth Claimant, Mr Colin Dixon (“Mr Dixon”), retained some of his shares, to Barclays European Infrastructure Fund (“BEIF”), another Barclays subsidiary, for £5,500 per share, indicating a value of £5.5 million for the whole of Ryhurst’s interest in RBIL.  The price the Claimants accepted was, at least, informed by PwC’s valuation in May 2005 of £5,100 per share.
13.	The foundation of the Claimants’ complaint in these proceedings is that their shares in Ryhurst were re-sold by BEIF only 11 months later, in December 2006, to Secondary Market Infrastructure Fund (“SMIF”) for £40,475 per share, an increase of some 736%.  They say that this open market sale value represented the true value of their Ryhurst shares 11 months earlier in January 2006, and they claim the difference between £5,500 and £40,475 per share by way of damages from PwC.
14.	Central to PwC’s defence is the contention that its valuation was undertaken with all proper skill and care, and that the later sale to SMIF is in no way comparable to the earlier sale to BEIF.  PwC says that Barclays had confidentiality rights under a shareholder agreement between ICL and Ryhurst, and pre-emption rights under the Articles of Association of RBIL, both of which it used or threatened to use to ensure that there was in practice only one purchaser in January 2006.  Moreover, in December 2006, Barclays was selling both equity and stapled subordinated debt, which, says PwC, is a far more attractive commercial proposition.  At the heart of this case lies the question of whether PwC simply took too high a discount rate in valuing the Claimants’ shares.
Factual chronology
15.	In the early 1970s, Messrs Derek Dennard (“Mr Dennard”), Graham Turner (“Mr Turner”) and Michael Gearon (“Mr Gearon”) worked for Croudace Limited. But in December 1976, these 3 Claimants established the Rydon Group to undertake construction and property development projects, and on 1st January 1978, the new Rydon Group began to trade.
16.	In 1996, Ryhurst was incorporated with Messrs Dennard, Turner and Gearon holding 16% of the 1,000 issued shares each.  Ryhurst was to bid for PFI projects. Colin Dixon was brought in to become Ryhurst’s managing director at that time, and he too was allotted 16% of the shares in Ryhurst.
17.	On 18th September 2001, PwC issued a financial due diligence report to its then client, Barclays Private Equity (“BPE”) in relation to “Project Mirror”, by which Ryhurst sold its 4 current PFI projects (by selling the shares in the 4 SPVs) to RBIL, which was owned as to 50% by Ryhurst and 50% by ICL.  The 4 projects were Bexley, Black Country, Redbridge and Essex & Herts. Ryhurst also sold 100% of the subordinated debt in the projects to BEIF.  PwC’s report included the following: “In each case we have provided NPV of the blended equity/subordinated debt cashflow taken at a 13.0% discount rate”. 
18.	On 5th April 2002, Ms Montague, Mr Bob McClatchey (“Mr McClatchey”) of Barclays, Mr Andrew Matthews, and Mr Dixon became directors of RBIL.
19.	On 25th April 1992, ICL, Ryhurst and RBIL entered into a shareholders’ agreement (the “Shareholders Agreement”) relating to the operation of RBIL.  It contained the following provisions:-
i)	Clause 16 which provided that the ICL and Ryhurst undertook to keep all information concerning RBIL’s business confidential.
ii)	Clause 17.2 which provided that if either ICL or Ryhurst wanted to refinance the debt, and they did not agree, then either side would have the right to refer the merits of the proposed refinancing to an expert independent financial adviser, whose opinion would be final and binding.
20.	The Articles of Association of RBIL were concluded at about the same time as the Shareholders Agreement.  Articles 11-17 provided detailed pre-emption rights allowing existing shareholders to buy any stake that another shareholder wished to sell at a price determined by an expert independent accountant, and preventing any sale to an outside third party unless the other shareholders refused to buy at the “Prescribed Price”.
21.	In July 2002, HM Treasury issued a paper entitled “Standardisation of PFI Contracts”, saying that PFI refinancing gains should be split 50/50 between the public and private sectors after July 2002.  Prior to that, a sharing of 30/70 between public and private sectors had been indicated.
22.	In October 2002, HM Treasury issued a voluntary code of conduct on PFI refinancing deals entitled: “Refinancing of Early PFI Transactions – Code of Conduct” setting out good practice on PFI refinancing transactions.
23.	On 20th April 2003, Mr Dennard was 60 years old.  He was the oldest of the triumvirate of Messrs Dennard, Turner, and Gearon, and they decided that this was the time to start exploring the possibility of retirement and a sale of their businesses. 
24.	On 21st April 2004, Mr Dominic Wilkinson (“Mr Wilkinson”) of PwC met Messrs Dennard, Turner and Gearon for an initial planning meeting relating to the proposed sale of their interests in both the Rydon Group and Ryhurst.
25.	On 14th June 2004, PwC made a presentation to the Claimants on the proposed sales, code-named “Project Normandy”.  The presentation valued Ryhurst’s equity interest in RBIL at £2.3 million, although it is not clear how that valuation was arrived at.  In September 2004, PwC prepared a valuation update for a meeting on 15th September 2004, which repeated the same valuation for Ryehust’s equity in RBIL at £2.3 million, but recorded that Barclays had valued its 50% interest in RBIL in 2002 at £2.62 million.  Again, it has not become clear how either of these valuations was calculated.
26.	At the 15th September 2004 meeting between PwC and Messrs Dennard, Turner and Gearon, the Claimants decided to “go ahead with a sale using PwC”.  In the result, PwC’s engagement was divided into 3 parts as follows:-
i)	Project Normandy 1: concerning the sale of the main Rydon businesses.
ii)	Project Normandy 2: concerning the sale of Ryhurst and Ryhurst Lift.
iii)	Project Normandy 3: concerning the sale of two smaller companies, Civilscent Limited and Linfold Limited.
27.	On 1st November 2004, PwC wrote its engagement letter for ‘Project Normandy 2’ addressed to the Claimants, Ryhurst, and Ryhurst Lift (the “Engagement Letter”). It concerned the proposed disposal of Ryhurst and Ryhurst Lift, and expressly excluded a valuation.  It was signed personally by Messrs Dennard, Turner, Gearon and Dixon, and by Mr Dixon (for Ryhurst) and by Ms Montagu (for Ryhurst Lift) between 23rd and 25th November 2004.  I shall return to the detailed terms of the Engagement Letter in due course.
28.	On 1st February 2005, Ms Montague sent Mr Paul Cleal (“Mr Cleal”) of PwC the latest cashflow forecasts for RBIL’s PFI projects, and reminded him that the forecasts used by Ryhurst and BPE for the purposes of valuation in Project Mirror might also be of interest.  These documents were sent to PwC in connection with a proposed refinancing that Ryhurst and Barclays were jointly consulting PwC about at that time.
29.	On 8th February 2005, Mr Oliver Jennings (“Mr Jennings”) of Barclays provided Mr Conrad Williams (“Mr Williams”) of PwC (copied to Ms Montague) with a series of sheets giving details of each of RBIL’s PFI investments.
30.	On 14th February 2005, Mr Wilkinson of PwC made a file-note recording that Mr McClatchey (of Barclays) had told him that Barclays would be tendering an offer for Ryhurst’s share in the SPVs.  Accordingly, it seems that it would have been at about this time that it became apparent to PwC at least that it would be impracticable to sell Ryhurst’s interest in RBIL in the open market, because Barclays wished to acquire Ryhurst’s interest and because of (a) Barclays’ pre-emption rights in RBIL’s Articles of Association, and (b) ICL’s confidentiality rights under the Shareholders Agreement, which meant that no information could be passed to an outside bidder.
31.	On 18th February 2005, Mr Cleal signed a letter, drafted by Mr Williams, addressed to Mr Jennings by which PwC quoted to Barclays for the work it would do in relation to the proposed refinancing of the PFI projects.  The letter was copied to Ms Montague, and suggested an equity value (for 100% of RBIL) of £10 million, and suggested that a refinancing could be worth some £5 million to £7.5 million.
32.	On 22nd February 2005, Mr Cleal emailed Mr Williams in the following terms.  It is this internal email that forms the back-bone of the Claimants’ case on conflicts of interests:-
“I caught up with Oliver [Mr Jennings of BPE] this morning …
It turns out that the shareholders of Rydon want to sell both Rydon and Ryhurst.  We (Andrew Pirrie [of PwC]) have the disposal mandate. As part of this work we (IGU [the Infrastructure Government & Utilities department of PwC]) will need to do a valuation of RBIL.  Oliver would like to buy Ryhurst out of RBIL.  And therefore suggests putting the proposed group refinancing mandate on hold until such time as the sale can be concluded.
This seems to me to be a good outcome particularly given as I said earlier our proposal might look a bit thin versus DWPF [David Wilde Project Finance].  I checked and I sent you all the models on 1 feb and again on the 7th just to make sure. Anyway there is clearly no point in proceeding with the refinancing mandate before a sale to Barclays is concluded.
Once the sale happens complete [sic] we will have been paid to review the portfolio which will necessarily include looking at refi [refinancing] upside.  At that point Oliver [Mr Jennings of Barclays] will want the refi work done (assuming Barclays win the sale) and we will be first in line because we will have recently valued the portfolio.  I think we are ok on conflicts as Oliver would be happy to employ us after the sale goes through and Ryhurst won’t have any grounds to object as long as they are happy with our initial valuation.  We would then work for BEIF who we don’t as of today consider to be a SECRAC [SEC registered audit client] although this could be subject to change given recent developments…”.
	The emphasised passage is that relied most heavily upon by the Claimants as showing that PwC had a conflict of interests.
33.	In response, Mr Williams emailed Mr Cleal on 22nd February 2005 saying “I’ve just checked my emails and did receive the models.  For some reason I got this file mixed up with the spv summary. My f*** up. Sorry”.  It seems, therefore, that Mr Williams had not perhaps done quite such a good job in preparing his proposal letter to Barclays for the proposed refinancing as he would have done if he had looked at the cashflow models that Mr Cleal had sent him, and Barclays had provided for the purpose.
34.	On 28th February 2005, Mr Cleal wrote to Mr Andrew Pirrie (“Mr Pirrie”) of PwC saying:-
“I had a call from Alison Montague this morning.  She is clearly anxious that we in IGU provide a valuation for their portfolio of PFI equity interests as part of your mandate.  This is so she can benchmark the initial price that she is due to receive from Barclays this week.
We have all the financial models for the projects as we hav just pitched for a refinancing mandate in connection with the RBIL portfolio.  I would think we could do the work in a couple of weeks to the level of detail required but would need to start asap.
I understand that there is some doubt about whether such a valuation is included in your mandate? Alison asked about extra cost so lets discuss”.
35.	On Wednesday 2nd March 2005, there was an important exchange of emails between Mr Cleal and Mr Williams of PwC and Ms Montague concerning a proposed valuation of the RBIL portfolio.  The debate about the incorporation  into the valuation engagement of the limitation of liability clause contained in the Engagement Letter has centred on these emails:-
i)	On 2nd March 2005 at 12.18, Mr Cleal emailed Ms Montague saying: “I called earlier and left a message.  I’ve contacted Andrew Pirrie and his view was that this work would be additional to the work he is already doing and that we should charge you separately (albeit that administratively it is probably easiest to set it up as an extension to his engagement).  We think it sounds like approximately £25,000 of work depending on the exact scope to which my colleague, Conrad Williams is giving some thought.  We would propose that these fees would not (unlike Andrew’s disposal mandate) be contingent on the sale of the companies …”.
ii)	On 2nd March 2005 at 15.12, Mr Williams emailed Ms Montague more formally entitled “Valuation of the RBIL portfolio” saying (C2/249): “Further to Paul’s email of earlier today I set out below the suggested scope of work for the valuation of the RBIL portfolio to assist you in your discussions with Barclays.  I have also commented on the team who we would propose to use …”.  The email then sets out in detail both the ‘Scope of Work’ and the ‘Fees & Team”, though it does not revisit the terms that Paul Cleal had suggested in his original email, to which Mr Williams had referred in the first line of his email.
a)	Under the heading “Scope of Work”, Mr Williams wrote: “The first part of our work would be to develop a valuation model.  This would read in and aggregate the relevant cashflows from the individual project models.  
We would then provide a “basic” valuation of your interest using a range of discount rates, together with a commentary on rates we see being applied in the market.  This would include consideration of differential discount rates that may, for example, be applied for equity and subordinated debt holdings, “pre” and “post” completion assets and also whether investors typically pay a premium for acquiring a controlling equity stake.  In forming a view on the most appropriate range of discount rates we would also like to understand more about the lifecycle arrangements and overall performance of the assets.  The output of this stage would be to provide a “basic valuation” range.  
We would then consider the potential to enhance this aggregated basic valuation by reviewing the financial models for simple upsides such as the removal of trapped cash, reduction of reserve accounts and more generic improvement in finance terms.  We would highlight and attempt to quantify any major changes in tax and/or accounting that could also provide enhanced value.  We would also consider whether changes in risk allocation (such as lifecycle responsibility) could also be financially attractive.
We would also consider and model indicatively how the “enhanced value” could be further increased through a portfolio refinancing.  This would include a summary of the structure, the finance terms and an illustrative cashflow.
All of the above would be summarised in a valuation report”.
b)	Under the heading “Fees & Team”, Mr Williams wrote: “we estimate the work would take approximately two to three weeks and propose a fixed fee of £25,000.  
We would propose to use the same team as set out in our recent proposal. As such, Paul [Cleal] would have overall responsibility, Libby Daniells and I would be your principal points of contact”
iii)	On 2nd March 2005 at 15.28, Ms Montague emailed Mr Williams in the following terms: “Conrad, this seems fine.  I have tried to phone and have left my numbers.  BPE is hoping to provide an offer Thursday/ Friday. Will providing this information to you help or hinder your exercise?  It may amend the scope of work.  Can we discuss”. 
iv)	On 2nd March 2005 at 16.39, Mr Williams emailed Mr Cleal saying: “Good news tried to get hold of Alison.  my view is that the fact that they [Barclays] are providing a valuation should not be a problem for us.  id prefer we start with a blank sheet rather than work towards a target anyway. i doubt whatever barclays suggest will affect our scope as i believe what weve suggested is what needs to be done.  we could however compare notes in say a weeks time to see how far apart we (Barclays and us) are. we could then curtail the scope if Ryhurst wish subject to a minimum fee of say £[15]k (assuming weve just done the first bit) or whatever is on our code?  libby can start immediately so we could just get going. let me know if you disagree”.
36.	On 4th March 2005, Ms Libby Daniells (“Ms Daniells”) of PwC sent Mr Williams an internal email valuing either Ryhurst’s holding in RBIL or the whole of RBIL at between £10.5 million at a discount rate of 14%, and £28.5 million at a discount rate of 8%.
37.	On 11th March 2005, Mr Williams emailed Ms Daniells suggesting some amendments to her draft report including many that were later included in the 14th March 2005 draft.
38.	Mr Wilkinson and Mr Piero Tumini (“Mr Tumini”) of PwC put together a draft Information Memorandum which Mr Wilkinson sent to Mr Dixon on 14th March 2005.  The Information Memorandum related to the overall disposal, but included a specific section on Ryhurst.
39.	Also on 14th March 2005, Mr Cleal commented on the revised draft that Ms Daniells had prepared, taking on board Mr Williams’s detailed comments. That draft employed discount rates between 10% and 12%, putting a value of £4.3m on Ryhurst’s interest before upsides, the rates having been increased and the value decreased significantly from Ms Daniells’s first draft.  Mr Cleal said the following about discount rates: “I don’t think 8-12 is a realistic range for PURE equity where there is a significant amount of subdebt.  This will obviously change quite a few of the numbers in the text”.
40.	After Mr Cleal’s email, he and Mr Williams met to discuss the appropriate discount rates in PwC’s offices.  This has become known as the “Whiteboard Meeting”, since they apparently used such a board to aid their discussion on discount rates.
41.	Later on 14th March 2005, PwC produced a first draft “Valuation of Ryhurst’s interest in the [RBIL] Portfolio” valuing Ryhurst’s holding in RBIL at up to £4.1 million (the “Draft Report”), which Mr Williams sent by email to Ms Montague at her husband’s email address, for reasons of confidentiality.  The Draft Report is important, because, although PwC later updated it in May 2005, it never issued a final report or valuation.  The covering email said as follows:-
“Please find attached the first draft of our report. As discussed this takes into account the 10 PFI projects but not the LIFT that I note you have now forwarded to me.  It also includes a revised estimate for the refinancing upside (I mentioned I thought the previous number was too low) which now looks healthier and takes the total value to around £4 million.
Please treat as WIP at this stage. We have some more checks to conduct and we will add in the LIFT as requested.  You will also note there are a few points where some clarification would assist us…”
42.	The Draft Report included the following:-
i)	In the Methodology and Assumptions section: “the preliminary analysis is based on Net Present Value (“NPV”) analysis of the latest project financial models supplied to us by Ryhurst …”
ii)	In the Indicative Valuation section:- 
a)	“We are currently seeing a lot of secondary market activity with strong competition for quality assets”.
b)	“Particular care is needed in the choice of discount rates as there are a number of factors need to be considered.  These include:
-	Nature of the assets – projects which include demand or residual value risk are generally considered more risky than basic availability style accommodation projects, and hence, discount rates for such projects are often higher.
-	Stage of development/ asset performance – where portfolios include a large number of non-operational assets and/or assets that are performing below expectation, discount rates are usually higher to reflect the increased risk.
-	Nature of Investment – the investments being sold in many asset portfolio sales are the full equity interests (i.e. both subordinated debt and equity).  We have not seen the RBIL shareholder agreement, but assuming the subordinated debt holder has rights senior to those of pure equity (as you would often expect) the discount rate would usually be higher to reflect the increased risk of payments to the equity holder being eroded.
-	Equity risks – we understand that within the RBIL portfolio, in many cases, lifecycle risk is passed down through the sub-contracts and, as a result, the equity exposure is arguably lower than is the norm.  This would suggest a lower discount rate is applicable.
-	Return profile – most, if not all, of the principal secondary market investors want a smooth profile of returns.  Where equity flows are highly variable year on year, some investors will not be interested at all; those that are, are likely to materially increase their discount rate”.
c)	“We would suggest that, at the current time, a mid market discount rate for an equity portfolio sale is approximately 10%, assuming:
-	Most of the assets are performing well;
-	Most assets are accommodation assets with availability style payment mechanisms;
-	Most assets are operational; and
-	Both the pure equity and subordinated debt interests are being sold together”.
d)	“In this case we believe the “blended” discount rate for Ryhurst’s interest would be materially higher than 10% as:
-	the two largest projects – Avon Wilts and Lymington – that together represent approximately 60% of the portfolio will not become operational until December 2006;
-	All projects except Bexley have subordinated debt that (we believe) is serviced before pure equity.  The resulting equity value is much smaller than the subordinated debt value.  The subordinated debt is already owned by Barclays.
-	The equity value in the portfolio is very back-ended.  Dividend payments in 7 out of the 10 projects are not forecast to start until 2015 or later. …”
e)	The Base Case Valuation provided as follows:-
i)	“The table below sets out a Base Case portfolio valuation, applying different discount rates to each project.  These values are gross of potential transaction costs:”
ii)	“In summary, we have used:
-	10% for Bexley, which has no subordinated debt and is operational;
-	12% for Black Country, which is operational and has some subordinated debt – but around equity value accounts for 75% of the total equity and subordinated debt value;
-	14% for Redbridge, which like Black Country is operational but the equity proportion of value is lower at approximately 50%; and
-	18% for the remaining projects, all of which have low equity proportions of value and some of which are non operational”.
f)	   “Project		Discount Rate (%)	NPV £’000”
Avon Wilts		18%				0.2
Bexley		10%				1.3
Black Country	12%				0.6
Essex Herts	18%				0.1
Hertford		18%				0.0
Liskeard		18%				0.0
Lymington		18%				0.1
Redbridge		14%				0.3
South Essex	18%				0.1
West Mendip	18%				0.0
Total Portfolio value				2.7
iii)	In relation to Simple Upsides as to “Removal of Trapped Cash”:-
a)	“We have reviewed the level of trapped cash within each of the financial models to determine the potential to enhance the aggregated basic valuation through early release of this trapped cash.  A review of the models suggests that greatest value could be achieved through releasing cash in the following 4 projects – Black Country, Essex Herts, Liskeard and Redbridge”.
b)	“The table sets out a revised portfolio valuation based on the release of trapped cash in the 4 projects detailed above…”.
c)	“Our analysis indicates that releasing the trapped cash in these projects, based on distributing all cash balances irrespective of retained reserves, could increase the valuation from £2.7 million to £3.1 million”
d)	   “Project		Discount Rate (%)	NPV £’000”
Avon Wilts		18%				0.2
Bexley		10%				1.3
Black Country	12%				0.7
Essex Herts	18%				0.1
Hertford		18%				0.0
Liskeard		18%				0.1
Lymington		18%				0.1
Redbridge		14%				0.5
South Essex	18%				0.1
West Mendip	18%				0.0
Total Portfolio value				3.1
iv)	In relation to “Other” Simple Upsides:-
a)	“Reductions to Reserve Accounts – we have reviewed the level of reserve accounts in the financial models to determine whether there is any potential to increase the valuation through reductions to these reserves.  At this stage, however, any potential upside seems limited as a number of projects already contain Debt Service Reserve Facilities, rather than more expensive Debt Service Reserve Accounts.  In addition, a number of the projects do not appear to contain any provision for maintenance reserves or sinking funds”.
b)	“Lifecycle Upsides – we have not yet reviewed the potential to enhance the valuation through lifecycle upsides, and we would need to discuss this with you”
v)	In relation to Indicative Refinancing Upsides:-
a)	“In our recent proposal [i.e. the one sent to Mr Jennings and Ms Montague on 18th February 2005] we suggested it may be possible to effect a refinancing through a debt novation and a private placement to lower the cost of finance.  Whilst we have not modelled this structure in detail we have undertaken some preliminary modelling to estimate the potential increase in value”.
b)	“In essence, we have simply adjusted the debt margins to a value more reflective of the current private placement market which we estimate to be 50 basis points over swaps”.
c)	“The table below sets out a revised portfolio valuation, based on replacing the current operating margins in each of the models with a margin of 50 basis points …”.
d)	“The Bexley and Black Country terms have not been amended as interest is hard coded in the model”.
e)	  “Our analysis indicates that improving the finance terms could increase the basic raw valuation from £2.7 million to £3.7 million.  These values do not include any upside from the release of trapped cash”.
f)	   “Project		Discount Rate (%)	NPV £’000”
Avon Wilts		18%				0.9
Bexley		10%				1.3
Black Country	12%				0.6
Essex Herts	18%				0.1
Hertford		18%				0.0
Liskeard		18%				0.1
Lymington		18%				0.3
Redbridge		14%				0.4
South Essex	18%				0.1
West Mendip	18%				0.0
Total Portfolio value				3.7
vi)	PwC’s Preliminary Conclusions summarised what is set out above and said:-
a)	“Our preliminary analysis indicates a raw valuation of £2.7 million” and “[the potential increase from a refinancing through a debt novation and a private placement] with the upside achieved through the release of trapped cash suggest an overall valuation of £4.1 million”.
b)	“The analysis performed to date is preliminary and has been based on the existing financial models.  At this stage it should be recognised that time has not allowed a detailed analysis of all the projects and a number of assumptions need to be checked within the models.  There may well be issues within the individual projects that affect value, such as current performance, tax and accounting changes, insurance premia and macroeconomic variables”.
43.	On 17th March 2005, Mr Tumini emailed Mr Williams the figures for the Epping PFI project that had been omitted from the Draft Report, at Ms Montague’s request.
44.	On 19th March 2005, Mr Dixon left the Rydon Group and Ryhurst.
45.	On 20th March 2005, Ms Montague emailed Mr Williams in response to the Draft Report:-
i)	First, she informed Mr Williams that she had indicated some concern to Messrs McClatchey and Jennings about Barclays’ initial offer (which was for £4 million).
ii)	Secondly, she said that Barclays was aware that PwC had produced an indicative valuation and that she had some comments: “Once we have got over these initial comments it is proposed by BPE that you and they sit down an[d] analyse their bid.”
iii)	Thirdly, she said that “Their methodology is reasonably different from yours, however this is probably to be expected.”
iv)	Fourthly, she raised a number of specific queries including:-
a)	“[Avon & Wilts] is phased, one of the most significant facilities (£20m) is being handed over in Sept. 05. Our contractor has never handed over a PFI project late, this must have some impact on discount rates”.
b)	“the discount rates selected seem, in the main very high.  We would like to understand your rationale for some of the levels chosen. The resultant valuations thus mean nil or low values for certain projects.  I would advise the shareholders that it is probably better to hold some of the schemes than sell for a poor return”.
v)	After a number of detailed points on specific projects and upsides including cash, sinking funds, refinancing and insurance, she concluded by saying “the broad parameters of the valuation are understood. I really need Ryhurst’s accountant [Mr Nigel Dodds] to get involved with the detail”.
46.	On 24th March 2005, Mr Williams emailed Ms Montague indicating that they had re-run their numbers and that their revised upper valuation was £4.5 million before any transaction costs or potential sharing of refinancing gains.
47.	On 8th April 2005, Ms Montague and Mr Williams met Messrs McClatchey and Jennings of Barclays to discuss the respective valuations.  Ms Montague led the negotiations with Barclays, and Mr McClatchey is said to have adopted an aggressive stance.  Mr McClatchey rejected Ms Montague’s suggestion that Barclays should pay a premium for control, and it became clear that PwC and Barclays had indeed been using different valuation methodologies.  Barclays said it wanted to understand PwC’s case on trapped cash and refinancing, but said that it would not in any circumstances do a covert refinancing (i.e. one that did not follow the Treasury’s guidelines on sharing).  It appears that the main differences in methodologies were (a) that Barclays was not valuing any upsides, but was using lower discount rates, and (b) that Barclays had at some stage adjusted some of the cashflows, so as to reduce the overall expected income, but to bring it forward in time.  From Mr Williams’s point of view, the outcomes were that Barclays disclosed the discount rates that it was using in its valuation of RBIL’s portfolio (though PwC never disclosed its discount rates), Barclays agreed to provide the cashflows that it had been using, and Mr Williams understood that Barclays was only going to increase its valuation and its offer if it could be persuaded that the cashflows it was using were wrong. 
48.	On 13th April 2005, Ms Daniells emailed Ms Montague asking her to approve a memorandum addressed to Barclays “which provides them with some detail of the valuation upsides we discussed”.   The memorandum dealt with both trapped cash and refinancing, the two being intimately related, since trapped cash can be used in any refinancing.  The memorandum included the following:-
i)	In relation to trapped cash: “Initial analysis indicates that the release of trapped cash in these projects then this could increase the equity value by approximately £0.8 million (ignoring tax), in today’s terms at secondary market rates of 10% to 12%”.
ii)	In relation to the proposed refinancing, for which PwC had pitched: “Simply replacing the existing project margins with 50 basis points increases the overall equity value by approximately £2.5 – 3 million in NPV terms. This is before any further gearing that could be introduced into the projects… Further gearing, however, would clearly increase such liabilities but also offer a material cash extraction and hence increase in NPV.  Preliminary analysis suggests this could be up to around a £5 million enhancement on the base case cashflows before gain share or transaction costs”.
49.	On 14th April 2005, Mr Jennings of Barclays had a drink with Mr Williams of PwC.  It appears that Ms Montague was present as well.   Thereafter, Mr Williams emailed Mr Cleal as follows:-
“Saw oj [Mr Jennings] this evening.  Think they will go to 5 [million] for the portfolio. He accepts that they have taken a very simple approach and that [things] like [insurance] cost savings, trapped cash and maybe [refinancing] mean they will have to up their offer. He suggested that as we were at 6 [million] and they were at 4 [million] then about 5 [million] was where things would end up.  If they move to that I think that’s a good deal for Alison [Ms Montague]. Can you [forward] the [Mirror Report] just so I can check not [missed] anything …
[In relation to new business] What’s your view on [Barclays] though? Mentioned them earlier today but can I try to get position or should I assume Nigel c et al will eventually [veto] and focus elsewhere?”.
	It became clear that it had been Ms Montague that had suggested that PwC were valuing the portfolio at £6 million, and Mr Williams, understandably, did not want to contradict her in front of Mr Jennings.
50.	An unredacted version of Mr Williams’s 14th April 2005 email was disclosed in the course of the trial.  The parts of the email that had been redacted dealt with PwC’s interest in other work from Barclays, though I do not think that the details take the Claimants’ allegations as to conflicts of interest much further.
51.	On 15th April 2005, Mr Cleal emailed Mr Williams saying that he did not have the Mirror Report, but did not see why they should not pursue Barclays as a client. On the same day, Mr Montague emailed Ms Daniells to ask her to chase Barclays for their cashflows.
52.	On 19th April 2005, Mr McClatchey wrote a long email to Ms Montague, Ms Daniells and Mr Williams in preparation for the meeting that had been fixed for Friday 22nd April 2005.  He indicated that Barclays’ valuation was £4 million, and asked to see PwC’s discount rates, models and cashflows.  He concluded by saying: “The basic point is that if you want us to increase our valuation of what we think 50% of the equity is worth, you need to give us good, valid, well thought through reasons to do so.  If both [of] us can’t get there, then we might as well move on and start thinking about the portfolio refinancing with both parties represented in RBIL as currently … apologies if the above is a little blunt”.
53.	Later on the 19th April 2005, Ms Montague responded to Mr McClatchey’s email by sending emails:-
i)	To Ms Daniells asking what PwC’s valuation would be using Barclays’ discount rates and Ryhurst’s cashflows; and
ii)	To Ms Daniells and Mr Williams to say that “the real issue is that we don’t think that the price is fair, in which case surely the main point of dispute would be the discount rate?”
54.	Although Mr Williams made clear in his evidence that feeding in Barclays’ discount rates to PwC’s models was like comparing apples and pears, it appears that Mr Chris Williams, the most junior member of the PwC valuation team, did just that, coming up with a result of £5.9 million before upsides.  In submissions put forward after the trial, the Claimants have contended that the cashflows used by Barclays and by PwC were the same for 4 projects, namely Avon & Wilts, Hertford, Lymington and West Mendip, but differed for most of the remainder.  I cannot resolve the question of precisely how the Barclays’ cashflows differed from PwC’s cashflows, and I am not at all certain that the precise differences matter.  It is common ground that, on some projects at least, Barclays were not using the same cashflows as PwC was using.
55.	It appears that Mr Jennings sent Mr Williams the cashflows that Barclays were using on the 19th or 20th April 2005. PwC had not had access to Barclays’ cashflows before this time.  Mr Williams forwarded them to Ms Montague on 20th April 2005.
56.	On 22nd April 2005, Ms Montague met Barclays again, but this time Mr Williams did not attend the meeting.
57.	On 10th May 2005, Mr Williams emailed Mr Cleal, saying that Mr Chris Williams of PwC and Ms Daniells had spent 60 hours work since the Draft Report, and that “going forward we are going to have to do quite a bit of number crunching”.  Mr Williams had obviously spoken to Ms Montague about fees going forward, because he records that “she wanted some certainty in terms of cost, but does appreciate that we are helping them get the price up and its difficult to give a fixed quote, given we don’t know how many further iterations we will do”.  He asked Mr Cleal whether he was OK with 80% scale rates capped at £25,000 to the end of May 2005, with a further £20,000 cap to the end of June 2005.  Mr Cleal responded by saying that it was difficult to justify less than 100% given the size of the job.
58.	It appears that during April and May 2005, Ms Daniells and Mr Chris Williams continued working with Mr Nigel Dodds and Ms Montague on various calculations and models.  Ultimately on 17th May 2005, Mr Chris Williams produced a schedule to Mr Dodds and Ms Montague updating the Draft Report showing a revised valuation of £5.1 million or £5,100 per share, and saying “the main difference is obviously a result of the base case models being updated to reflect actuals/reality”.   The valuation was broken down as to £3.4 million for the “base case”, £0.3 million for the “upside of 2.7% inflation”, £0.5 million for the “upside of trapped cash”, and £0.9 million for the “upside of re-financing”.  This is the valuation on which the Claimants contend they relied, and it is referred to in this judgment as the “May Valuation”.  
59.	On 18th May 2005, Mr Nigel Dodds emailed the PwC team saying he wanted to discuss the use of the 18% discount factor in the valuations, and that he was not sure of the “rationale for this (during Project Mirror in 2002 a DF of 13% was used)”.
60.	In early June 2005, Mr Williams drafted a fee proposal to Ms Montague saying they had done £42,000 worth of work up to 17th May 2005, and suggesting a cap of £40,000 to the end of May 2005, and an additional £25,000 to the end of June 2005.  It appears that this email was not sent, but PwC undoubtedly continued working on the numbers with Mr Dodds and Ms Montague.
61.	On 20th June 2005, PwC sent Ms Montague a risk management letter saying she was not their client, and that they were acting for the named addressees to Engagement Letter only.
62.	On 8th August 2005, Mr Dodds emailed Mr Williams and Ms Daniells asking them for the current position on the SPV valuations.  His postscript indicated that he had identified insurance savings of £200,000 per annum when all schemes are operational.
63.	On 11th August 2005, Barclays wrote to Ryhurst making a revised non-binding offer for BEIF to acquire Ryhurst’s 50% interest in RBIL for £5 million.
64.	On 30th September 2005, Mr Williams dropped in to a meeting between Mr Wilkinson and Messrs Dennard, Turner and Gearon.  PwC alleges that Mr Williams said that he was seeing an increased interest in PFI projects in the market which could have an impact on value, but Mr Gearon responded that “we are where we are: the deal’s going ahead” implying that he had no wish to re-open the valuation.  Mr Williams told me that base discount rates had moved down by about 1% by this time and that was what he communicated to Mr Gearon.   Mr Gearon, on the other hand, did not think that that was what Mr Williams had said, although he accepted that Mr Williams might have said that there was some movement in valuation.  I accept that Mr Williams mentioned the movement in rates, but it does not seem to me that this conversation was intended by either party to have any significance.  It simply made the Claimants broadly aware (of what they probably anyway already knew) that PFI values were moving upwards.
65.	There followed a period of negotiation with Barclays in which Mr Wilkinson, but not Mr Williams, was mainly involved.  On 3rd October 2005, Barclays increased its offer to £5.25 million, to take account of insurance savings, and on 7th October 2005, Barclays increased its offer again to £5.5 million, expressed to be final, to take account of sinking fund benefits, provided Ryhurst retained those benefits.  Meanwhile, deals were done which allowed Ryhurst management to retain their shares, Ms Montague to increase her shareholding, and Mr Dixon to retain 7% of his 16% holding.
66.	On 3rd October 2005, Mr Dixon told Mr Gearon that he had been advised not to sell his shares in Ryhurst.  On 11th October 2005, Mr Gearon accepted the £5.5 million offer in principle, and instructed the Claimants’ lawyers to draft the Heads of Agreement, and on 14th October 2005, Mr Dixon signed the Heads of Agreement.
67.	On 27th October 2005, Mr Dodds emailed Ms Daniells highlighting an error in one of the assumptions in the Essex & Herts valuation, and enclosing a revised cashflow model.
68.	On 1st November 2005, Ms Daniells emailed Mr Wilkinson saying that the new numbers decreased the valuation by approximately £100,000 at the 10.5% discount rate that Barclays suggested for Essex & Herts.
69.	On 2nd November 2005, Mr Dodds emailed Ms Daniells and Ms Montague suggesting some valuation improvements for Lymington and for inflation, which, he said, counteracted the effect of the NPV adjustments for Essex & Herts.
70.	On 3rd November 2005, Ms Montague responded to Mr Dodds saying “that’s really helpful – you could get blood from a stone, we have gone very far from the PwC valuation advice anyway. In reality I would be surprised if [Mr McClatchey] reduces his offer … if he does we have plenty of ammunition now”.
71.	On 23rd November 2005, the Revenue refused tax clearance for the then proposed hive up structure to a new Ryhurst company, whereby Ryhurst would end up parting with its interest in RBIL to BEIF.  It was after this that the structure of the proposed transaction changed, so that it was proposed that the shareholders in Ryhurst would sell their shares directly to BEIF.
72.	On 23rd December 2005, PwC invoiced Rydon Group Limited for £25,000 for “Fees in relation to the valuation of the RBIL portfolio of PPP projects”.
73.	On 16th January 2006, at Ms Montague’s request, PwC re-issued the invoice to the “Cost Bearing Shareholders of Ryhurst Limited” for £25,000 for “Fees in relation to the valuation of the RBIL portfolio of PPP projects”.
74.	On 21st January 2006:-
i)	Each of the Claimants sold their 160 shares in Ryhurst (save for Mr Dixon who sold 90 shares only) at £5,500 per share to BEIF (£880,000 for each of Messrs Dennard, Turner and Gearon, and £495,000 for Mr Dixon). In total, as I have said, 72% of Ryhurst was sold to BEIF. 
ii)	The Claimants sold the Rydon Group, in a management buy-out backed by HBOS, for nearly £40 million, from which Mr Dennard was paid some £12.6 million, Mr Turner some £12.7 million, and Mr Gearon some £7.2 million, because his ex-wife had an interest in his stake.  
75.	HBOS made its offer on the basis that the whole group would be acquired including the trading arm of Ryhurst.  Moreover a large number of consents were required from BPE under credit agreements, inter-creditor deeds, project documents and management agreements.  In addition, Barclays’ consent to the transfer of Rydon shares was required under a parent guarantee between Barclays, Rydon Group and Ryhurst St Margaret’s Limited.  Thus, at the very least, it can be said that Barclays co-operation was highly desirable in allowing the entire deal to proceed as it did.
76.	On 31st January 2006, Mr Wilkinson wrote a post-transaction file note recording that “PwC Corporate Finance was retained by Rydon’s principal shareholders to advise them on their strategic options and ultimately in the successful sale of their business”, and that “Retainer 3” raised a fee of £25,000.
77.	In September 2006, Barclays issued its “Project Maze” prospectus concerning the intended sale of the Ryhurst PFI portfolio of 11 projects, by then owned 100% by Barclays.  This document was often referred to in the trial, since it portrayed an asset that was described as far more valuable than Ryhurst’s equity interests in the RBIL portfolio had been thought to be, less than 12 months before.  The Maze prospectus was described as a “Rolls Royce job”, but in essence the cashflows on which it was based had been radically re-worked since the discussions a year before, and the discount rates applied to value what was then on sale varied between 5% and 7%, which was a quite different range from the figures under discussion in 2005.  These discount rates were said expressly to “reflect recent transactions in the secondary market”.  Both parties tried to make much of the disparity in the discount rates attributed in the prospectus, and by bidders, to equity on the one hand and subordinated debt on the other.  Since, however, the two were being sold together, and there was no evidence that anyone ever contemplated their being ‘unstapled’, I am far from sure that a very great insight can be gained from this approach.  I will say more about this when I come to consider the premium in the discount rate (if any) attributable to the fact that the portfolio valued in this case was equity alone.
78.	On 19th October 2006, Mr Williams emailed Mr Wilkinson saying that he was working on the Ryhurst disposal (this time by Barclays) for a potential acquirer, Infrastructure Investors Limited.  On 20th October 2006, Mr Wilkinson replied saying that he had been told that the Ryhurst portfolio was being sold for £70 million, and that he recalled that Mr Williams had valued 50% of it at about £7 million, and saying “it would be good to understand why our value was so far off”.
79.	On 20th October 2006, Mr Williams responded to Mr Wilkinson saying that he had valued at around £6-7 million in the end (which he had not in fact), and that the valuation was not far off.  He said that his valuation did not relate to what is now being sold: “we are comparing apples and pears”.  He made the point that pure equity was being sold before, but equity and subordinated debt was now being sold: “a very different asset”, and that yields had “really come on” in 2006.
80.	On 8th December 2006, the interests previously held by Ryhurst were re-sold by BEIF to SMIF for the equivalent of £40,745 per share.  The total price paid for the equity and debt was some £121.9 million, with about £39.9 million for the subordinated debt, making some £82 million for the equity alone.
81.	On 8th January 2007, Mr Williams sent a report to Mr Cleal (addressed to Mr Quentin Humberstone, the lead PwC partner) explaining why the valuation was so much less than the sale price to SMIF.  The draft contains some important explanations of PwC’s rationale for the May Valuation and the surrounding events.  In addition, Mr Williams included the following concerning the PFI secondary market and the discussions with Barclays:-
i)	“There was some trading of infrastructure equity dating back to around 2001 but the main secondary funds (SMIF, Henderson and Infrastructure Investors) only really started to become active in early 2004.  The activity increased through 2004 and since then has continued to grow. Pricing has continued to become more and more aggressive such that in today’s market, it’s very hard to see how they can justify the prices they are paying – in some cases the implied discount rates are below UK gilt rates.
One of the main exercises we undertook in mid 2004 was to help Innisfree (a PPP investor) sell a portfolio of projects to M&G. PwC were engaged to undertake a study on secondary market activity and also provide a view on value. Our view of value at that time implied a discount rate of approximately 10% across the portfolio, but the characteristics of the investments in the portfolio were very different to Ryhurst’s interests: [larger projects, both equity and subordinated debt, and yields more even]”.
ii)	“During the discussions it was suggested that clearly the value to Barclays was greater than the value a non-connected third party may pay but their view – probably to be expected – was “so what?”. They would only pay what any other investor would pay – this was made quite clear.”
82.	On 4th December 2007, Allen & Overy wrote a letter before action on behalf of Messrs Dennard, Turner and Gearon, and on 28th March 2008, PwC’s solicitors responded.  On 19th December 2007, Hyde Law wrote a letter before action on behalf of Mr Dixon.  On 28th March 2008, Barlow Lyde & Gilbert, on behalf of PwC, responded to Allen & Overy rejecting the claim.  On 17th April 2008, Barlow Lyde & Gilbert replied to Hyde Law also rejecting his claim, and saying that Project Normandy 2 was an “entirely separate retainer” from the valuation engagement.
83.	On 28th October 2008, the Claim Form was issued in HC08CO3022 by Dennard, Turner and Gearon.  On 12th November 2008, the Claim Form was issued in HC08CO3192 by Mr Dixon.  On 17th December 2008, the Particulars of Claim were served, and on 12th February 2009, the Defence was served.  Amended pleadings were exchanged in due course.
The terms of PwC’s Engagement Letter dated 1st November 2004 
84.	PwC’s engagement letter of 1st November 2004 for Project Normandy 2, countersigned by the Claimants, included the following provisions:-
i)	“We [PwC] are pleased that [the Claimants] (the “Shareholders”) and Ryhurst Limited and Ryhurst Lift Limited (together the “Companies” and collectively the “Initial Addressees”) have appointed us [PwC] as your exclusive financial adviser and intermediary to provide the financial advisory services set out in this letter of engagement and its appendices …”
ii)	“In the event that a potential conflict of interest arises between PwC providing particular Services to both the Companies and to the Shareholders we will notify the Companies…In such circumstances, those particular Services in relation to which a potential conflict has arisen shall be provided to and for the benefit of the Shareholders alone”.
iii)	“This Engagement will continue for an initial period of 12 months from the date of your agreement to its terms [23rd and 25th November 2004].  The agreement will then be subject to termination by either party giving one month’s notice in writing expiring at any time on or after the end of the initial 12 month period”.
iv)	“With regard to paragraph 7.1.4 [of the Terms and Conditions] the limit of our liability to you shall in no circumstances exceed the higher of five times the aggregate fees paid and payable by you in respect of the Services, or £1 million”.
v)	Section B of Appendix 1 delineated the Services provided to the Companies and to the Shareholders as follows “Throughout the period when we are providing Services to the Companies and the Shareholders under this Section B we will be (i) updating our initial strategic advice to the Companies and providing ongoing advice to the Companies on the disposal strategy; (ii) providing strategic advice to the Shareholders as part of the intermediary service to assist them with the decision whether to proceed with the disposal strategy; and (iii) monitoring the implications of the process in respect of the other strategic options available and advising the Companies and the Shareholders accordingly”.
vi)	Section C of Appendix 1 delineated the Services outside the scope of the Engagement including: “A formal valuation is unlikely to be cost-effective since a true market value will emerge from the competitive tender process and our fees as set out in Appendix 2 do not include this”.
vii)	Appendix 2 contained a description of the fees and expenses payable making it clear that “our fee will be fully contingent on the successful disposal of the Businesses”.  The success fee was 1.5% of the Consideration.
85.	PwC’s UK Terms and Conditions were annexed to the Engagement Letter.  They included the following provisions:-
i)	Paragraph 1.1: “Reliance on drafts – you shall not place reliance on draft reports, conclusions or advice, whether oral or written, issued by us as the same may be subject to further work, revision and other factors which may mean that such drafts are substantially different from any final report or advice issued”.
ii)	Paragraph 3.1: “Provision of information and assistance – our performance of the Services is dependent upon you providing us with such information and assistance as we may reasonably require from you from time to time”.
iii)	Paragraph 3.2:  “Information from outside the Engagement – We shall not be deemed to have knowledge of information from previous engagements for the purposes of the provision of the Services, except to the extent specified in the Letter of Engagement.  If you intend us, or any other [PwC] Entity to use any information already made available to another team within PwC … as part of another engagement, you should inform us of this in writing and provide such information to us”.
iv)	Paragraph 7.1: “Limitation of our liability”:-
a)	Paragraph 7.1.1: “We will use reasonable skill and care in the provision of the Services”.
b)	Paragraph 7.1.2: “We will accept liability without limit for (i) death or personal injury …(ii) any fraudulent pre-contractual misrepresentations …; and (iii) any other liability which by law we cannot exclude or limit.  This does not in any way confer greater rights than you would otherwise have by law”.
c)	Paragraph 7.1.3: “If you are an intermediate customer, or a private customer who has been reclassified as an intermediate customer, nothing in this paragraph 7 or elsewhere in these terms will exclude or restrict any liability or duty we may have to you under the Financial Services and Markets Act 2000 (“FSMA”) or the rules of the FSA when supplying you with services which constitute mainstream regulated activities (as defined in the FSA Handbook)”.
d)	Paragraph 7.1.4: “Our liability to pay damages for all losses, including consequential damages, economic loss or failure to realise anticipated profits, savings or other benefits, incurred by you as a direct result of breach of contract or negligence or any other tort by us or any other PwC Entity in connection with or arising out of the Engagement or any addition or variation thereto shall be limited to that proportion only of your actual loss which was directly caused by us or any other PwC Entity and, subject to paragraph 7.1.2, our liability shall in no circumstances exceed in the aggregate the amount specified in the Letter of Engagement (“the Limit”)”.
e)	Paragraph 7.1.5 provided that: “where there is more than one Addressee, the limit of liability specified in paragraph 7.1.4 above will have to be allocated between Addressees.  It is agreed that such allocation will be entirely a matter for the Addressees who will be under no obligation to inform us of it …”
v)	Paragraph 7.4:  “Commencement of legal proceedings – you accept and acknowledge that any legal proceedings arising from or in connection with the Engagement (or any variation or addition thereto) must be commenced within 2 years from the date when you became aware of or ought to have become aware of the facts which give rise to our alleged liability and in any event not later than 4 years after any alleged breach of contract or act of negligence or commission of any other tort”.
Issues
86.	The parties agreed some of the issues before the Court at the beginning of the trial.  Since I allowed the Claimants to amend to rely on the alleged conflicts of interest, and PwC to rely on a plea that its exclusion clauses were reasonable, I redrafted the issues and provided the redraft to the parties.  Taken together with some small additions that the parties suggested, the issues that arise for determination are as follows:-
i)	Issue 1:  Were the terms of the Engagement Letter applicable to PwC’s retainer to undertake the valuation?
ii)	Issue 2: Did PwC owe the Claimants a common law duty of care in addition to any contractual duty?  If so, was it subject to the contractual limitation of liability?
iii)	Issue 3:  Did each of the Claimants (a) actually rely on the valuation; and (b) reasonably rely on the valuation; and (c) were they contractually entitled to rely on the valuation, when agreeing to sell their interests in the RBIL portfolio to BEIF in January 2006?
iv)	Issue 4:  Did PwC’s minor mathematical corrections to the valuation amount to “confirming and repeating of the valuation to the Claimants albeit with a minor adjustment” between October 2005 and January 2006?
v)	Issue 5:  Was PwC negligent in preparing the valuation in relation to its choice of discount rates, and in particular (a) in the analysis it undertook of the projects in the portfolio, (b) in taking the wrong base discount rate, (c) in the importance it attached to the fact that the portfolio comprised equity only, (d) in the importance it attached to the fact that Avon & Wilts and Lymington were under construction, (e) in failing to build up discount rates, (f) in failing to review comparables, (g) in ignoring previous discount rates used for the same portfolio, and would a non-negligent valuation have increased the discount rate as a result of the confidentiality and pre-emption provisions? 
vi)	Issue 6:  Was PwC negligent in preparing the valuation in failing to attribute appropriate value to (a) gains from possible refinancing, (b) the sinking fund upside, and (c) residual value upsides? 
vii)	Issue 7:  Was PwC negligent in preparing the valuation in failing to revise its valuation in or before January 2006?
viii)	Issue 8:  What value would the Defendant non-negligently have ascribed to the RBIL Portfolio (a) as at May 2005 (b) as at January 2006? 
ix)	Issue 9:  Would the sale to BEIF have proceeded in the event that PwC had given a non-negligent valuation?
x)	Issue 10:  Can the Claimants claim their valuation losses by reference to the subsequent sale in December 2006 to SMIF, or, if not, what losses can they claim?
xi)	Issue 11:  If PwC is liable, were the Claimants’ valuation losses caused by their own negligence and if so to what extent?
xii)	Issue 12:  Was PwC affected by an unresolved conflict of interest that meant they should not have accepted the valuation retainer, and did the Claimants give their informed consent to, or waive, the conflict?
xiii)	Issue 13: If there was a conflict, are the Claimants entitled to damages for PwC’s breach of duty in acting for them when affected by an unresolved conflict of interest, and, if so, on what basis, and how much?
xiv)	Issue 14: If the terms of the Engagement Letter apply to the valuation retainer, does the time limitation and/or the limitation of liability satisfy the requirement of reasonableness, and, if so, are they applicable to any or all of the Claimants’ claims?
xv)	Issue 15:  What damages are the Claimants entitled to for each breach of contract and/or duty relied upon? 
Claimants’ witnesses
87.	Each Claimant was called to give evidence in the first week of the trial, and then recalled, after a second witness statement was filed, in the early part of the second week of the trial.  The supplementary witness statements were served to deal with the issue of the reasonableness of PwC’s limitation of liability clause, and the allegations of conflicts of interest in accepting the valuation engagement.  Mr Paul Downes Q.C., counsel for the Claimants, agreed that he should not be permitted to use the second statements to improve any evidence that had already been given orally by the time they were put in. And on that basis, Mr Justin Fenwick Q.C., counsel for PwC, did not object to their admission.  It seems to me, however, that the second statements of the Claimants added little of importance, except on the conflicts point.  
88.	On the conflicts issue, the Claimants’ thesis was that 2 documents most clearly demonstrated PwC’s conflicts of interest.  First, PwC’s draft pitch to Barclays dated 17th February 2005 concerning the proposed refinancing of RBIL’s PFI projects.  That draft apparently included a very high valuation of the potential refinancing upside in the portfolio, which seemed irreconcilable with PwC’s eventual May Valuation.  Mr Williams, however, served a second statement explaining how the draft was incomplete, and why the apparently huge valuation related to another project for which the draft had originally been prepared.  At that stage, the Claimants’ allegations based on the 17th February 2005 draft were dropped.  Secondly, as I have already mentioned, the Claimants alleged that the 22nd February 2005 email showed that PwC wanted to be “first in line” for the refinancing work if the sale to Barclays was completed.  
89.	Mr Michael Gearon was the first witness called by the Claimants.  He was mostly candid and straightforward, but he was not a man who paid careful attention to documentation.  He accepted that he had either not read, or in some cases ‘skim read’, many of the crucial documents in the case including the Engagement Letter.  Several of the answers he gave were at variance with the witness statement that had obviously been drafted for him.  In each case, I prefer what he said, often with disarming candour, in the witness box, to what he had said in his statement.
90.	I summarise below the more important parts of Mr Gearon’s evidence:-
i)	Mr Gearon said that it was convenient, but not absolutely essential, to dispose of Ryhurst to the person to whom they sold Rydon.  There was linkage and synergy, and the Claimants wanted to sell them together.
Engaging PwC to undertake the valuation
ii)	Mr Gearon accepted that they had discussed instructing various other firms, but he could not recall which they were.  He said that they leant towards PwC as the biggest player and the best, in acting on the sale of groups such as theirs.
iii)	Mr Gearon said he read the Engagement Letter before signing it, although in later re-examination, he said he only spent about 5 minutes looking at it.  He said that he understood that the Engagement Letter contained strict limits on liability for negligence.  He said he had signed it so he “must have lived with it anyway”.  He did not recollect the level of the limitation, but he was content to sign it in relation to a £50 million transaction.  He realised he could go to other firms, and that he could negotiate it, but he decided to sign.
iv)	Mr Gearon knew that the valuation was an extra of some sort, but it did not occur to him that PwC would do the valuation on the same terms as Project Normandy 2. He had no active thought about that.  But he would not have been surprised to know the valuation was being done on the same terms.  Had he known that the valuation was on the same terms, he would have responded as before, by saying ‘OK’.
v)	Mr Gearon did not recollect ever seeing the 2nd March 2005 email saying what PwC would do, although he was told about the fee.
The position of Barclays
vi)	There were strict confidentiality rights.  In practice, it became impossible to sell the interest in the RBIL joint venture freely on the open market.  Mr Gearon accepted that they had only one purchaser if they were to sell it.  He said that it was clear that they needed Barclays on board with their proposal from an early stage, and Barclays had said they wished to acquire the balance of the joint venture. Mr Gearon said that there was not a huge amount of negotiation with Barclays.
What would have happened with a higher valuation?
vii)	Mr Gearon said that if Barclays had not been prepared to pay £20 million to £40 million, and they had been told that was what it was worth, they would have stopped the sale of the whole group.  Barclays would have been very resistant if they had not sold them the equity, and they had no power to force Barclays.
viii)	It follows that if Mr Gearon had been told that the PFI secondary market might continue to improve, and that he would get another 50% for the equity, that would not have changed his mind as to whether to sell at £5.5 million, as there was a double uncertainty of whether the market would rise and whether Barclays would sell. 
ix)	Mr Gearon said he would not have wanted to rock the boat unless there was a very clear reason for doing so.  The gist of his evidence was that if there had been another £20-30 million, he would have wanted to stop and work out how to get it. 
Reliance
x)	Mr Gearon said he only read the part of PwC’s Draft Report on value concerning the bottom line saying it was worth £4.something million.  He scanned it for 5 minutes.  He did not read the body of the Draft Report, and he did not have a copy.  He read the figure of £2.7 million.  He told Messrs Dennard and Turner about the number, and about the work Ms Montague and Mr Dodds were doing to update the valuation.  Mr Gearon knew they had done a base case plus upsides, trapped cash, insurance benefits and that sort of thing.
xi)	Mr Gearon assumed that Barclays had reached a value based on PwC’s valuation.  He believed that there was communication between PwC and Barclays, but he would have expected PwC to ask Ms Montague’s permission before disclosing their valuation. 
Updating the report
xii)	Mr Gearon said he was not expecting PwC to revisit their initial assumptions.  He knew that PwC was still involved in May-August 2005, but he did not ask for an up to date valuation, and he did not expect PwC to go back to square one and revalue without his asking them to do so. 
91.	Mr Colin Dixon was a rather more defensive witness than Mr Gearon.  He seems to have provided Mr Jonathan White, the Claimants’ expert, with much of the more contentious information that he relied upon.  The important parts of Mr Dixon’s evidence can be summarised as follows:-
Limitation of liability
i)	Mr Dixon realised that the Engagement Letter contained a limitation of liability, and that most major accountancy firms had a standard set of terms, and that the terms were perfectly normal for the scope of the works in the Engagement Letter.
ii)	Mr Dixon assumed that the valuation engagement would be subject to an engagement letter of some sort, but he would be surprised if it were the same as the Engagement Letter for the disposal, as the jobs were undertaken by different teams.  He said that he would have expected the limitations of liability to be different.  I found this part of Mr Dixon’s evidence hard to accept. 
iii)	Mr Dixon said that it was Mr Turner’s forte to deal with these kinds of documents and he would have trusted his judgment.  Mr Dixon did not have a view as to whether there was a separate engagement letter.
Reliance
iv)	Mr Dixon did not ask to see a copy of the Draft Report. He did not see the May Valuation and did not ask to see it, but he did ask whether there was an allowance for excess sinking funds, which was his pet subject.
v)	Mr Dixon said that he was content to accept £5.5 million as it had been validated by PwC’s valuation.
What would have happened with a higher valuation?
vi)	Mr Dixon accepted that Barclays held the whip hand in relation to the disposal of the Ryhurst business.  But Mr Dixon said that he had little confidence in the management buyout team.  He was disappointed when he was told in August 2005 that his 3 co-Claimants had agreed to sell.  
vii)	Mr Dixon said that he meant what he had said on 18th December 2005 about the business rapidly going downhill.  
viii)	Mr Dixon said that, if he had been told that the value was 100% or more than PwC’s valuation, he would not have sold.  He would have simply kept his shares. And if that meant that McClatchey said the deal was off, then the deal was off.  He would have been prepared to lose the deal for that.  
ix)	Mr Dixon took a commercial decision that retaining 70 shares, and selling 90 shares, was an appropriate balance, based on PwC’s advice.  He said he knew that Barclays would turn the investment at some stage, and he expected a 50% uplift.
92.	Messrs Dennard and Turner broadly confirmed Mr Gearon’s evidence, and, very sensibly, the parties agreed that Mr Fenwick did not need to cross-examine them all on exactly the same points.  There were aspects of each of their statements, however, which had plainly been drafted for them, and which they could not really support orally.  In particular, I do not accept that either of them had any real contemporaneous view about whether or not the valuation engagement was separate from or on the same terms as the Engagement Letter.   The passages in their statements saying that they believed that the valuation engagement was separate from the Engagement Letter was obviously affected by hindsight, and I do not believe either of them would have had any view at the time.
93.	Both Messrs Turner and Dennard said that, had they been told that the shares were worth double what Barclays was paying for them, they would have negotiated again.  The implication was that, below that figure, they would have gone ahead with the deal with Barclays if they had been unable to obtain an increase in the price.
94.	Like the other Claimants, Mr Turner was recalled on Tuesday 16th March 2010, after his second statement had been put in.  Mr Turner signed his second statement in the witness box after he had been recalled.  He said in cross-examination that he had skim-read Mr Williams’s second statement “last night”.  That statement explained, as I have already mentioned, how Mr Williams had prepared his 17th February 2005 draft letter to Barclays concerning a possible refinancing, and how the reference in that letter to a refinancing gain of £20 million to £30 million was cut and pasted from another unrelated project, but had not at the time the print-out was made yet been worked on or deleted as being irrelevant to the RBIL case.   Mr Turner was asked, if he had read Mr Williams’s second statement, how he could have confirmed the truth of paragraph 8 of his second statement complaining that PwC’s reference in its 17th February 2005 draft letter to a refinancing gain of £20 million to £30 million was evidence of a conflict of interest.  Mr Turner eventually accepted in cross-examination that, had he thought about the matter, he would have wanted to say that, if Mr Williams’s second statement were true, it dealt with the concern he had expressed in paragraph 8.  In re-examination, Mr Turner confirmed that, as he had said in cross-examination, he had indeed skim-read Mr Williams’s second statement and not Mr Cleal’s second statement as he had said in cross-examination.
95.	At that point, Mr Downes applied, without objection, to call Mr Rainer Evers, an associate in Allen & Overy, the Claimants’ solicitors, who told me that he had not sent Mr Turner a copy of Mr Williams’s second statement the night before, but only at 7.11 a.m. that morning.  That evidence seemed to me of no moment, because Mr Turner could easily have been sent the statement by another partner in Allen & Overy, and could have included 7 a.m. as within “last night”, so that he meant he had read the statement after 7.11am, when he said “last night”.  Either way, I am entirely satisfied that Mr Turner had indeed skim read Mr Williams’s second statement as he told me he had, and that it would have been far better if he had mentioned that fact before confirming the truth of paragraph 8 of his second statement without qualification.
96.	Ms Alison Montague was managing director of and a shareholder in Ryhurst.  She was primarily responsible for dealing with PwC in relation to the valuation exercise.  Ms Montague said in her statement that, when she first contacted Mr Cleal, she asked him for “a proper market value and not, for example, a figure by which to “benchmark” any offer from Barclays, nor a figure reflecting the fact that Barclays seemed to be the only likely buyer”.  The first part of this statement is perhaps somewhat at odds with the 2nd March 2005 emails, to which I have already referred, which make clear that the valuation is intended to assist in their discussions with Barclays.
97.	Ms Montague made clear that her recollection was that the valuation was the subject of a separate engagement letter from Project Normandy 2, although she accepted that no such engagement letter had been found.  She also said in her statement that PwC viewed the valuation exercise as a separate engagement.  Whilst I accept that the valuation was regarded a separate project, I do not think that this is the real issue.  The central question is whether it was agreed that the valuation exercise should be an extension of the Project Normandy 2 Engagement Letter.  This is a matter of construction of the emails that passed between the parties (primarily on 2nd March 2005), and of any other relevant contacts between them.  I shall return to this question under Issue 1 below.
98.	Ms Montague was generally a straightforward witness, although I have not been able to accept everything she said.  I am sure she made no attempt to mislead, but rather she did not have a particularly good recollection, and at times allowed herself, I think, to reconstruct events rather than speaking only as to what she actually recalled.  She too had had her statement drafted for her, and I broadly prefer what she said orally to what had been drafted for her.
99.	Ms Montague’s evidence included the following matters:-
Choosing PwC
i)	PwC acted for Barclays in the Mirror transaction.  Ms Montague discussed with Mr Gearon whether to use PwC given how close they were to Barclays.  They decided that it was helpful as they knew the portfolio.  They knew that PwC would continue to work for Barclays anyway.
ii)	She and Mr Gearon made the decision to instruct PwC jointly.  They were probably deciding on behalf of Ryhurst at that stage.  Mr Gearon was Chairman of Ryhurst, and he spoke for the shareholders.  Ms Montague was acting for the shareholders, but she was not clear as to which of the two she was acting for at the time.
Barclays 
iii)	Barclays controlled the rights of pre-emption and of confidentiality, so there was no choice but to offer the shares to Barclays first.  And Barclays had rights which could make it difficult to separate Ryhurst from the SPVs.  Barclays was keen to acquire RBIL.
Engagement Letter
iv)	Ms Montague said she read the Engagement Letter.  She read and noted the limitation clause and understood what it was saying.  She thought it was sufficiently reasonable that she should sign it.  She qualified this in re-examination by saying that she signed only on behalf of Ryhurst Lift, but I think that she saw herself as reviewing the terms of the Engagement Letter on behalf of the Claimants generally.

Refinancing
v)	The business plan for Ryhurst prepared in late 2004 showed that Ryhurst’s board’s view was that potentials for refinancing were likely to be substantial. The shareholders were informed of that view.
vi)	Ms Montague knew that PwC had started to look at the potential refinancing exercise, and had signed a confidentiality agreement, and she sent PwC information for that exercise.  PwC’s refinancing proposal dated 18th February 2005 was sent to both Ms Montague and Mr Jennings. The draft of 17th February 2005 mentioning that the refinancing could be worth £20-30 million was not sent to her, but she did not know if Mr Jennings received it.
vii)	When the shareholders decided to sell, Ms Montague thought that that was the catalyst which stopped the refinancing.  Barclays did not know that the Engagement Letter had been signed in November 2004, and the parties had not formally decided to go ahead with the refinancing at that stage.  Barclays became aware of PwC’s engagement in February/ March 2005. 
The valuation engagement
viii)	Ms Montague accepted that Mr Cleal’s 2nd March 2005 email said that the valuation would be easiest as an extension to the Engagement Letter, but she said she neither accepted that suggestion nor turned it down.  She thought it seemed reasonable, but she did not think they crystallised it one way or the other.  
ix)	Ms Montague accepted that the parties entered into the agreement for the valuation engagement in the 2nd March 2005 emails, unless there was a document that is lost.  But she thought there was some other correspondence suggesting it was a separate engagement. 
The Draft Report
x)	Ms Montague read the Draft Report.  She is 90% sure that she gave a copy to Mr Gearon, and she cannot believe she did not discuss it with Mr Gearon.
Negotiations with Barclays
xi)	On 14th May 2005, Ms Montague indicated to Mr Jennings that PwC thought the value was £6 million in the hearing of Mr Williams, when the three of them went out for a drink.  She was trying to get the price up.  Mr Jennings said that they would probably meet in the middle, but he was not really involved in the deal.
xii)	At some stage, Ms Montague says that she authorised PwC to let Barclays see the PwC valuation including the discount rates, but she did not know if the Draft Report was actually disclosed.  I am satisfied from all the evidence that PwC never disclosed its valuation to Barclays orally or in writing. 
xiii)	Ms Montague felt that ultimately they had extracted as much from Barclays as they could.  
Ryhurst’s business
xiv)	Ms Montague did not agree with Mr Dixon’s view that Ryhurst’s business was going downhill rapidly.
xv)	Ms Montague bought the additional 3% of Ryhurst as she did not want to see Ryhurst sold, and she did not want to sell her shares in the SPVs.  She thought it would be worth more after the marriage value between equity and debt had been realised, and after Avon & Wilts was completed.  The Claimants were aware that she did not want to sell and that she thought the value would be greater later for these reasons, but they had decided to retire and sever their links with the business. 
Reliance
xvi)	In April 2005, PwC had shifted into assisting in the negotiations.  Their work drifted into that once Ms Montague had their valuation figures.  From the May Valuation, she expected PwC to keep her abreast of where the valuation was, as she only had a draft valuation.  Ms Montague said that Mr Nigel Dodds asked PwC for a final valuation.   In this regard, I should say that there was no reliable evidence before me that anyone asked PwC to finalise its Draft Report, and I do not think it was ever asked to do so.  Had PwC been so asked, it would surely have done so.  Both sides proceeded on the basis that it had done what it had been asked to do by preparing the Draft Report and updating it in the May Valuation.
Authority for the Claimants
xvii)	Ms Montague said that she did a lot off her own bat with Mr Dodds, although big issues were discussed with Mr Gearon, but she did not think she was authorised by the Claimants to waive any objection to conflicts or to agree to limitation clauses.  I find this latter evidence hard to accept.  It seems to me that the Claimants (with the limited exception of Mr Dixon) left everything concerned with Ryhurst and RBIL to Ms Montague, and that there is no basis for the suggested limitations on her authority, which seem to have been inspired only by hindsight. 
PwC’s witnesses
100.	PwC called 3 witnesses.  Mr Downes made much of the complaint that other relevant PwC personnel were not called, and that inferences could be drawn against PwC as a result.  I am bound to say that I do not think that PwC failed to call truly relevant personnel.   Mr Cleal was in charge of the valuation engagement; Mr Williams was in charge of the day to day work on the valuation project, and Mr Wilkinson was the point man engaged on the larger Project Normandy engagements.  It is true that Ms Daniells would have been able to shed some light on some of the details of the valuation exercise with which Mr Williams was less familiar, but she was no longer with PwC, and I see no force in the criticism that she was not called.  In reality, Mr Downes suspected, from one perfectly sensible reading of the documents, that Ms Daniells would have favoured a far higher valuation of the SPVs, and, therefore, thought that he could have made capital from cross-examining her, and showing that her views on discount rates had been over-ruled by Messrs Cleal and Williams.  It seems to me, however, that Mr Downes did not need to cross-examine Ms Daniells to show this.  Ultimately, Mr Cleal was responsible for PwC’s valuation, and it is his view of discount rates on which the Claimants relied.  If he was wrong, then the Claimants will succeed, and no amount of embarrassment caused by exposing internal differences of view in PwC’s team will make any difference.
101.	Mr Paul Cleal is now a partner in PwC’s Corporate Finance Department.  He became a partner in 2001, and was head of PwC’s IGU valuation team at the time of the valuation.  He is not himself an accountant, but he is an associate member of the Institute of Chartered Accountants of England and Wales (“ICAEW”).  Mr Cleal told me that, before undertaking this valuation, he had done 4 or 5 PFI valuations for strategic advice purposes, and 4 or 5 valuations for transactions in the PFI secondary market.  
102.	Mr Cleal was a confident, perhaps just slightly over-confident, witness, but nonetheless straightforward and credible.  He was clear thinking and incisive, and answered questions concisely and directly.  Apart from some technical areas on matters of judgment where I preferred other expert testimony, I have accepted his evidence as truthful and reliable.  The important matters on which he gave evidence may be summarised as follows:-
The valuation retainer
i)	Mr Cleal said that Ms Montague was very price sensitive, and they had agreed to do a desktop valuation without looking under all the rocks. The purpose was to have a benchmark of what the value would be without the confidentiality and pre-emption rights.
Reliance
ii)	Mr Cleal accepted that the Claimants were wholly reliant on PwC in relation to the discount rate and the refinancing. 
Discount rate generally
iii)	Mr Cleal said that financial investors are not typically interested in cashflows that are very long-dated. The more exotic the market, the thinner it is.
iv)	Mr Cleal thought that the market had strengthened from mid-2004 to March 2005, though it was hard to say by how much.  It continued to strengthen thereafter.  There was a bubble in the PFI market in 2006/2007.
v)	Mr Cleal thought that the rates of 5-7% used in the Project Maze prospectus were very low, but were not an unfair reflection of the market at the time.  Rates were certainly lower in 2006 than in early 2005 by some distance. Mr Cleal accepted an estimate of about 3% as the difference between early 2005 and mid-2006.  He thought that Barclays’ Maze prospectus might have cherry picked the rates, as there was an element of ‘estate agency’ in the sale process.
vi)	Mr Cleal said that he would not change the discount rate during the construction period, as things can go wrong late in the day, and that is the way financial investors look at it.  He gave no credit for the fact that the contract was on time with no known defects, or for the good track record of the contractor.  
vii)	Mr Cleal was pressed to agree that all that really mattered was the income stream, and that the level of the coupon on the subordinated debt was irrelevant.  He agreed subject to the possibility that the coupon is so high that HMRC questions whether it is genuine debt and, therefore, tax deductible to the SPV.
viii)	In undertaking the valuation, Mr Cleal did not carry out market research, or a detailed investigation of previous comparable rates, so he could not say precisely what part of the rates he used was for the pure equity point. He thought his approach at the time was reasonable, but analysis has become more detailed in recent years.  He accepted that one methodology was to add up rates, but just because that was done did not mean that the resulting number was correct.
ix)	Mr Cleal accepted that Mr Williams had told him that he had a disagreement with Ms Daniells as to discount rates, and that he was given the numbers and probably thought they were too low. 
x)	Mr Cleal said he had done research on discount rates when PwC had evaluated that the mid-market discount rate was 10% for Innisfree in 2004.  Moreover, he said that he spent every day talking to people in this market, so PwC was current as to the market rate at the time.  Mr Cleal did not agree that he thought that 10% was at the lower end of the range in May 2005.
Valuing equity alone
xi)	Mr Cleal said that he had never advised on the sale of equity alone, without the subordinated debt, but he accepted that holding the equity as well as the subordinated debt does not affect the risk and vice versa, although holding the equity as well as the subordinated debt does allow more flexibility to restructure.
xii)	Mr Cleal said that, when a bank is financing, all the volatility and risk is in the top slice of subordinated debt and equity, and as a result, when things go wrong, payment to shareholders can be postponed.  The subordinated debt holder can be paid first, and out of the next instalments, because they are in the front of the queue.
xiii)	Mr Cleal thought that the discount rate for debt would be lower than equity.

Identity of the client
xiv)	Although the pleadings show that the valuation work was admitted to have been for the shareholders and for Ryhurst, Mr Cleal did not at the time believe it was for the shareholders.
xv)	Mr Cleal said that, by the time of the 28th February 2005 email, he had spoken to the potential client who presented herself as the managing director of Ryhurst.
Conflicts
xvi)	Mr Cleal did not accept that PwC was desperately pursuing Barclays as a client; otherwise, he said PwC would not have overlooked looking at the models for 2 weeks in early February 2005.
xvii)	 Mr Cleal denied that his 22nd February 2005 email showed that he saw PwC as the front runner for the work for refinancing RBIL.  He said that he would have expected David Wilde Project Finance (DWPF) to have quoted lower fees, and to have done more work, so he concluded there was a good chance that DWPF’s bid would be stronger than PwC’s.
xviii)	Mr Cleal accepted that he would have had to have given some thought to conflicts at the end of February 2005. He thought a possible conflict was Barclays saying that PwC did not do a proper job on the refinancing, because they were in bed with Ryhurst.  Mr Cleal said that he looked at conflicts more broadly than the legal profession does, for example because of confidential information, and that was the Ryhurst conflict that he had referred to in his 22nd February 2005 email.  
xix)	Mr Cleal placed emphasis on the fact that Ms Montague knew that PwC had made a refinancing proposal.
xx)	Mr Cleal did not agree that it would give rise to a risk of conflict, if he were actively pursuing a counterparty to the same transaction as a client.  He did not think there was a risk of conflict in this case.  He did not think PwC’s valuation work was likely to be biased by the prospect of refinancing work for Barclays.
xxi)	When Mr Cleal was recalled, PwC had disclosed some more communications with Barclays and had prepared a table of PwC’s engagements for Barclays or entities connected with Barclays between September 2004 and May 2005.  The fees included £20,000 for Alma Mater, £100,000 for Emirates Stadium refinancing, £380,000 for the Tricomm refinancing, and £490,000 for the Alert refinancing.
xxii)	In the result, PwC was prevented for acting for funds associated with Barclays after this valuation, as Mr Cleal had predicted, because of the SECRAC issue.

What if the valuation had been higher?
xxiii)	Mr Cleal accepted that, if the valuation had been higher and they could not have agreed a deal, Barclays might have suggested getting on with the refinancing co-operatively whilst the Claimants remained as shareholders, as Mr McClatchey’s 19th April 2005 email suggests.
103.	Mr Conrad Williams was, for the most part, a straightforward and credible witness.  He made no attempt to gloss his evidence.  I have broadly accepted his factual evidence, but have not, in all respects, accepted the expert view that he and Mr Cleal adopted at the time.  He became a chartered accountant in 1995, having trained at Price Waterhouse.  Thereafter, he progressed through the firm in its project finance department or IGU, as it was known for some of the time, eventually becoming a partner in PwC in July 2007.  At the time of the events that are relevant to this case, Mr Williams was a ‘director’.
104.	The more important parts of Mr Williams’s evidence can be summarised as follows:- 
Discount rates
i)	Broadly, Mr Williams agreed with Mr Cleal’s evidence on valuation.  He drew attention to the fact that PwC’s valuation produces a very similar result to Barclays’ valuation by a very different methodology.
ii)	Mr Williams did not agree that the positive factors took the discount rate down to the bottom of a range of 8-12%, although he accepted that if there was a competition for the assets, and the mid-market rate was 10%, the outcome might be below that. Mr Williams’s starting point was around 10% at the time, applicable to operational availability assets.
iii)	Mr Williams denied that he had a disagreement with Ms Daniells on discount rates.  I think he must have forgotten this, as I am sure he did disagree with her proposed discount rates.
iv)	Mr Williams’s thoughts on the risk factors affecting discount rates were as follows:-
a)	Demand assets increased the risk and the discount rate.
b)	A small number of projects would not necessarily make the portfolio higher risk than a large number of projects.
c)	The complexity of the projects generally increases the risk, subject to mitigating factors including insurance.
d)	The risk does not diminish as the construction of the project develops. Sophisticated market investors take the view that risk is only mitigated at the point where you get past the completion tests.  John Laing plc’s (“Laing”) approach is an example.  Mr Williams considered a 2% differential as referable to construction risk at the time. 
e)	A risk free record of construction is not irrelevant but would not necessarily reduce the discount rate applied by investors.
Valuing equity alone
v)	Mr Williams explained that PFI schemes are structured with subordinated debt and equity so as to make them tax efficient, and to make them more certain in aggregate because there are less accounting restrictions (on dividend distribution, the point being that a company can pay interest on debt without having sufficient distributable profits, but could not pay dividends without them).
vi)	Owning subordinated debt as well as equity does not affect risk, but does affect your flexibility, in that you can defer payments.  The market views them both together as more attractive.  99% of PFI investments are structured as stapled equity and subordinated debt.
vii)	Most institutional investors are backed by pension funds and are looking for long term assets to back their liabilities, and are looking for a steady stream of income, which is why they will look on pure equity as unattractive. 
viii)	Mr Williams denied that PwC had become fixated with the pure equity factor, but he accepted that the pure equity point was a very significant factor when PwC increased the discount rates on 14th March 2005, and he accepted that he had not done market research on the point at the time.
ix)	Mr Williams did not know which of equity or subordinated debt was more attractive to investors, because he was comparing equity with equity and subordinated debt together.  
x)	Mr Williams had recently approached a Mr Alan Ritchie, a well-known figure in the PFI market, who had said that he put them in order of attractiveness: (1) equity and subordinated debt (2) equity alone (3) subordinated debt alone.
Conflicts
xi)	Mr Williams accepted that he had an existing relationship with Barclays, although the only active engagement was the Alert refinancing, where Barclays was one of 3 shareholders. Barclays had been a client in 2004 as one of the sponsors on the Bromley Hospital refinancing.   Mr Jennings was an ex colleague and a friend.
xii)	Mr Williams said that the issue of conflict did not cross his mind at the end of February 2005.
Dealings with Barclays
xiii)	Although Ms Daniells’s first discount rates on 4th March 2005 were very close to Barclays’ rates, Mr Williams was sure that PwC had not had any dialogue with Barclays at that stage.  
xiv)	PwC was paid £75,000 for providing modelling support to Infrastructure Investors (II) in relation to Project Maze. Ms Rachel Keys and Mr Liam Foulkes (both from PwC) were stationed at II’s offices working directly for them.  Mr Williams did not know that II were looking to bid £70 million for the equity.
105.	Mr Dominic Wilkinson is a director in PwC’s Corporate Finance Department.  He is a member of the Association of Chartered Certified Accountants.  His evidence was largely uncontested, and I found him a reliable witness.  He told me that:-
i)	He would not have raised Barclays as a possible conflict in relation to past or possible future work.
ii)	Mr Wilkinson got involved with Mr McClatchey in August or September 2005.  He found him a reasonable but firm person. 
iii)	If the valuation had been much higher, from what Mr Wilkinson saw, there was nothing to suggest that Barclays would have gone to £10 million, since it took 6 months to get them to £5 million, and 3 months to get them up a further £½ million.
Expert witnesses
106.	Mr Jonathan White of KPMG (“Mr White”) gave expert valuation evidence for the Claimants.  I am afraid I did not find him a very impressive expert.  First, he had plainly not properly understood many of the decisions that his team had taken in preparing aspects of his valuation.  Secondly, one could not help but think that his original agenda had been to arrive at the highest possible sustainable valuation, rather than the valuation or a range of valuations which a reasonably competent valuer, using the information available to PwC, might have produced in May 2005.  Thirdly, he was strikingly unfamiliar with the parts of his report concerned with refinancing.  Fourthly, as his evidence progressed, he admitted that segments of his report were simply wrong, and that many of the most significant assumptions made by both PwC and Mr Gary Neville (“Mr Neville”), PwC’s expert (which had been expressly or impliedly rejected in his reports), were ones that a reasonably competent valuer could have made.
107.	Mr White’s initial view as to the crucial issue of the discount rate applicable to the base case cashflows were as follows:-
i)	8% for the eight projects in operation; and
ii)	10% for the three projects under construction.
108.	Mr White’s original report had valued the portfolio as between £19 million and £22 million as at May 2005.  His second report reduced that valuation to between £14 million and £16 million.   Thus, when he began his oral evidence, he valued Ryhurst’s 50% interest in RBIL as at May 2005 at approximately £15m, made up of £10.5 million for the base case, £3.5 million for the refinancing upside, £0.45 million for the insurance upside, and £0.55 million for the residual value upside.
109.	In giving evidence, however, he accepted some important changes to this valuation, as explained in the following sub-paragraphs.  The significant parts of his evidence may be summarised as follows:-
Discount rates
i)	Mr White did not consider that there was any significant difference between discount rates in May 2005 and in January 2006, but there was a change in discount rates for the 8-10 months before May 2005.
ii)	In relation to the build up of discount rates generally, Mr White cautioned against constantly adding up all the way along. Whilst accepting that it is useful to segment out risks, he said that one needed to be sure that the ultimate figure was not something inappropriate to the portfolio.
iii)	Mr White said first that he had not included anything in his discount rate for the existence of Barclays’ pre-emption rights or the fact that the portfolio consisted of equity only.  But later in his cross-examination, he said that he had taken the pre-emption rights into account by using comparables that valued minority interests that would inevitably also be subject to pre-emption rights.
iv)	Mr White disagreed with Mr Neville’s 2% factor for pre-emption and confidentiality rights because he said that he had been asked to value the portfolio on the basis of a willing buyer/willing seller transaction with access to all relevant information.  He thought the effect of pre-emption rights depended on the way the asset was marketed.  He accepted, however, that his valuation had not taken into account the fact that a 3rd party purchaser would have been buying an asset that would be less easy to sell because of the continuing pre-emption and confidentiality rights. 
v)	In any event, Mr White said that he did not think that the restrictions made a huge difference to value, because: (a) secondary buyers always face pre-emption rights (b) the vendor might underwrite the bid costs, which would not be great, perhaps £½m for due diligence costs, and a secondary buyer may take the risk.
vi)	Mr White did not take into account the fact that after the sale, the buyer will be subject to a confidentiality clause.  He thought it could affect the discount rate.
vii)	Mr White accepted that the pre-emption rights were a disincentive to outside bidders. Ultimately, Mr White did not consider Mr Neville’s 2% premium for pre-emption rights and confidentiality unreasonable, but he did not agree with it.
viii)	Mr White said that he was actively involved in the PFI Infrastructure transaction in July 2004.  Page 28 of the Prospectus prepared by KPMG showed discount rates of 9.7% to 12.1%.  He said that the transaction was a key moment in the secondary market, and that he had considered it in deciding what discount rates to apply in this case.
ix)	The PFI Infrastructure transaction had a similar mix of projects, those under construction and those completed, to the RBIL portfolio, but Mr White thought the discount rates were completely out of date by May 2005.  He did not know why he had omitted a reference to this transaction from his report.  When asked to say which transactions had occurred between July 2004 and May 2005, which demonstrated that rates had moved, Mr White was unable to identify any.  Instead he pointed to two transactions (Wates and Miller) that post-dated May 2005.  
x)	Mr White said that he did not think a reasonably competent accountant could have regarded 10% as a mid-market rate in May 2005.  He continued, however, by saying that 10% was “a little bit higher than what people with knowledge in the industry would agree – would consider was about right”, and later that he thought in relation to the base rate of 10% that PwC used:  “you could use that as a starting point”.
xi)	Mr White said in his report that average discount rates in company reports in 2005 were between 8% and 10.6%.  But he accepted that the following rates were used, although pointing out that directors’ rates were usually higher than transaction rates:-
a)	Laing used a discount rate of 10.6% in 2004, with 15% for the Project Chiltern railway.  Mr White said in his appendix 5 that 9 out of 46 projects in the Laing portfolio are highly comparable with the RBIL portfolio.
b)	Laing’s March 2005 report also used a discount rate of 10.6%, and a base rate of 7.5% plus 6% = 13.5% for the construction phase.  Mr White said that a construction premium of 6% was in his view beyond a reasonable range.
c)	PFI Infrastructure’s March 2005 accounts used a weighted average of 9.3%, with 11.5% for construction, 9.5% for ramp up, and 0.5% to 4% premium for other risks, including refinancing discount.  
xii)	Mr White accepted that a 3.5% premium for construction was in a reasonable range, and a 2% premium for a project in ‘ramp-up’ was not unreasonable.
xiii)	Mr White said he had placed no weight on the fact that Barclays’ valuation used indicative discount rates of 10.5% and 12.5%.
xiv)	Mr White said that he had adopted a linear approach to the premium to be added to discount rates for construction.  He had applied premiums between 1% and 1.9%.   He accepted that no public document had ever adopted such an approach, and agreed that a reasonably competent valuer could decide that a linear approach was inappropriate.
Effect of selling equity alone
xv)	Mr White said that there was no logical reason for an increase in the discount rate as a result of the offering being equity only, although he later agreed that a 2% premium on the discount rate for equity only was something that a reasonable valuer could come to.
xvi)	Mr White accepted that equity and subordinated debt are normally sold together, and that discount rates normally reflect that practice.  He accepted that equity is riskier than subordinated debt.
xvii)	Mr White referred in his report to the market soundings he had taken in 2005 to the effect that subordinated debt alone was unattractive as compared to equity alone.  But he accepted at one point that stapled equity and subordinated debt together was generally preferred to equity alone, thinking that the differential discount rate between the two would only be up to ½%.  Thereafter, he retracted this saying that the people he spoke to in 2005 gave no indication that there was an additional value to having equity and sub debt together.
xviii)	Mr White looked at the Project Maze financial model and accepted that it showed a discount rate of 10% for equity and for subordinated debt, and a rate of 7.5% for the two together.  He accepted that this was open to the interpretation that a reasonably competent valuer could conclude there should be a significantly higher discount rate for equity alone than for equity and subordinated debt, and that on one calculation, that equated to a premium of 4% on a discount rate of 12%.  He still did not think, however, that it was appropriate in 2005 to attribute different discount rates to equity and to equity and subordinated debt together. 
Residual values
xix)	Mr White was subjected to a sustained cross-examination on his assessment that there was a residual value upside between £0.5 million and £0.6 million.  It turned out that he had calculated those figures using the Project Maze valuations prepared by CB Richard Ellis in 2006, long after PwC’s valuation, adjusted to make the end dates 2038 and 2040.  But he accepted that it would be dangerous to undertake a 2005 valuation using figures only available in 2006.  
xx)	Mr White ultimately accepted that a reasonably competent valuer in May 2005 would have used the figures that PwC used as derived from the 30th April 2005 email, rather than the figures he had used derived from Mr Dixon. He accepted that if the figures for Bexley and Black Country of £29 million and £12 million include that residual value upside, his evidence on residual value upside between £0.5 million and £0.6 million was wrong.  
Refinancing
xxi)	Mr White made at least 5 assumptions on refinancing:-
a)	That a 70 basis point margin over LIBOR could be achieved for the old debt (as opposed to the existing margin of 125-150 basis points), and for the new debt, taken on as result of the refinancing.
b)	That the average debt service cover ratio (ADSCR) could be reduced from 1.20:1 to 1.15:1 for every project after completion (this is the ratio of income to debt acceptable to lenders). 
c)	That the appropriate discount rate for the enhancement to the cashflows occasioned by the refinancing was 10% for new debt, rather than his original 8%, as the enhancements to the cashflows are more risky than underlying cashflows that come out of the projects themselves.  
d)	That additional debt of some £20.7 million would be taken on across the portfolio beyond the level of the original debt taken on at financial close, factoring in assumptions as to improved cashflow and property revaluations.
e)	That the dates of the assumed refinancing of each project were different and were across a period from 30th June 2005 to 1st April 2007, and many of them shortly after completion.  
xxii)	As to these 5 assumptions, Mr White said that he was not able to say whether PwC’s approach was reasonable or reasonably competent, because he was not a refinancing expert.  PwC’s approach assumed a 50 basis points margin, an ADSCR staying at 1.20:1, and no increase in debt.  He accepted that a different valuer could reach a different view on these issues.
xxiii)	On the second day of his evidence, Mr White said that he recognised that some of the dates that he had taken for the proposed refinancing were too early individually.  He thought that the 1st April 2007 was a better assumption for a whole portfolio refinancing.  Taking that date, the refinancing gain was reduced from £3.5 million in his report to £2.7 million.  He said he had made a mistake about this and had got it wrong.  After he finished his evidence, he revised this figure twice more, first to £3.0 million, and then to £2.9 million.
xxiv)	Though Mr White was reducing both the margin and the ADSCR, he did not regard his assumptions as aggressive, although when he was asked to identify transactions in which similar assumptions had been used, Mr White was unable to do so.
xxv)	Mr White accepted that some of the specific project focussed assumptions in Mr Neville’s appendix 8 were reasonable including:-
a)	A period of 2 years from completion of construction to refinance (in March 2009) in respect of Avon & Wilts.
b)	Refinancing to the level of the original debt.
c)	Refinancing South Essex was uneconomic as the transaction costs were likely to exceed the benefit.

Barclays and Project Maze cashflows
xxvi)	Mr White did not contest that PwC’s cashflows were far more aggressive than Barclays’s cashflows:  some £132 million against some £48 million.  He also accepted that, if Barclays was asked to use more aggressive cashflows, it could well have wanted to apply a higher discount rate.
xxvii)	Mr White accepted that the Maze cashflows were quite different to the cashflows provided to PwC by management.  He agreed that it is common for a valuer to use the cashflows provided by management as PwC had done.  It was clear, therefore that Mr White had been wrong to say in paragraph 3.4.1 of his report that there had been no material changes in the performance or status of the assets between May 2005 and Project Maze.
Sinking funds
xxviii)	Mr White accepted on the second day of his evidence that there was insufficient appropriate evidence for the figures on sinking funds that he had included in his report.  He said he should not have included any figure for the sinking fund in the valuation.  He had originally included £5 - £6 million by way of upside for this item.  
110.	If I were to factor in the changes that Mr White accepted as errors, his valuation, even assuming the correctness of his discount rates, had come down to about £13.4 million at the end of his evidence (£10.5 million plus £2.9 million for refinancing gain).  I will deal in due course with my findings on discount rates.
111.	Mr Gary Neville of Birwood Advisors Limited was a contrast to Mr White.  He was careful and methodical, and seemed to have an insight into the market with which he was concerned.  He has not practised as a professional accountant, but is a Fellow of The Chartered Institute of Management Accountants, who worked for Laing, one of the market leaders in PFI, from 2001-2007.  In general, I preferred Mr Neville’s evidence, whilst not being able to accept all his views, as will become apparent in due course.
112.	Mr Neville’s initial view as to the discount rate applicable to the base cash flows were as follows:-
i)	12% for the six projects in operation; 
ii)	14% for the 2 projects he seems to have regarded as being in ramp-up (Hertford and West Mendip), although in fact Liskeard and South Essex seem also to have been in ramp up in that 2 years had not expired in May 2005 since construction had been completed; and
iii)	16% for the three projects under construction (Avon & Wilts, Epping and Lymington).
113.	Mr Neville valued Ryhurst’s 50% interest in RBIL as at May 2005 at approximately £5.4 million, made up of £4.2 million for the base case, £1.1 million for the refinancing upside, and £0.1 million for the insurance upside.  His own preference, however, would have been to use a blended, rather than a single, discount rate, which takes account of the fact that the discount rate will fall after completion and ramp-up.  That method allows greater values during construction and ramp-up, and would add £0.9 million to Mr Neville’s valuation making it up to approximately £6.3 million.  He was at pains, however, to make clear that he regarded the use of a single discount rate method as a reasonable approach for PwC to have adopted.
114.	The significant points in Mr Neville’s evidence were as follows:-
Discount rates
i)	Mr Neville first explained something that is, in my judgment, quite important to understand.  There are usually at least 3 different sets of cashflows for each project:-
a)	Cashflows modelled as at financial close;
b)	A base case cashflow model periodically updated for macroeconomic assumptions; and
c)	Cashflows showing potential upsides in the project to add to the base case cashflows.
Different parties to a transaction may be applying discount rates to different sets of cashflows, and may, for that reason, be quite legitimately applying different discount factors in their valuation method.  This is exemplified by the fact that Barclays were using more pessimistic cashflows, but were applying rather lower discount rates, and still came out with lower valuations than PwC. 
ii)	Mr Neville was asked about the relevance of Weighted Average Cost of Capital (“WACC”) to discount rates.  In terms of PFI projects, WACC is a calculation of the expected rate of return from the investment in equity and subordinated debt, weighted to reflect the balance between the different sources of capital invested.  Mr Neville said that WACC was illogical as a starting point for discount rates, but he had nonetheless used WACC as a cross check comparison with the risk-free part of the discount rate.  He had done this because Laing did so, whilst he was there, because (a) the Stock Exchange had taken a great interest in how the company performed versus Laing’s WACC, (b) Laing was a listed company which had to report its costs of capital; and (c) Laing was a leader in PFI and wanted a consistent valuation rate.  Whilst the logic is hard to understand, it may be that the risk free rate is the starting point for a discount rate assuming the project is just that – risk-free.  That aspect of the calculation, therefore, represents what would need to be produced by the capital invested even if there were no risks, and therefore how much the value should be discounted to allow for that return.
iii)	Mr Neville did not do market research:  he applied his experience to the particular circumstances of the transaction, which was not an open market transaction.  Mr Neville said that his valuations were neither at the top or bottom of the range – they are somewhere around the middle of the range.   
iv)	Mr Neville assumed that PwC had built up their rates and gone through the same process.  That building up approach is one approach that is reasonable.  It is a good methodology, which a reasonable valuer would adopt.
v)	The secondary market gained momentum in 2004, and increased in 2005.  Infrastructure was seen as a distinct asset class in 2005.  Acquisition prices for infrastructure assets rose markedly during 2005.  One or two people thought the market had gone too far, but not everyone agreed it would last too long. The number of secondary market participants increased in 2005.  Rates were falling between 2004 and 2005.  There is a real danger of generalising without looking at specific assets.  Rates probably moved downwards by 1 or 2% between 2004 and 2005.
vi)	Mr Neville agreed with Mr White’s point about the risk of keeping adding on to the discount rate.  He said it was equally dangerous to do the same in reverse, by starting with a mid-market rate and adding upsides.
vii)	Mr Neville said that he thought that 10% was a reasonable start point, though it is not a precise science.
viii)	Mr Neville agreed with Mr White’s build up, or thought his figures were generally reasonable, except for equity, pre-emption rights and confidentiality.  For those items, he thought that it would be hard to justify adding no premium. 
Mid market rates
ix)	PwC came up with a mid-market rate of 10% in 2004.  The market strengthened all the way through to the end of 2006.  It was a general trend, but it is on the basis of transactions.  Project Maze gave 5-7% in 2006.
x)	Mr Neville did not think that the 6% mid-market rate in Project Maze was comparable to his start point of 10%, as Barclays had used mid-market rates as applicable to the base case.   Mr Neville thought that the Project Maze memorandum was a marketing document in 2006 for other institutions.  It combined equity and subordinated debt.  He did not know how comparable the transaction was.
xi)	Mr Neville accepted that you could look at the mid-market rates as 10% in 2004, 8% in 2005, and 6% in 2006, as an indication of the overall open market for all types of assets, but you then need to look at the specific projects.
xii)	Any reasonable valuer should have looked at whether the market had moved from 12 months before, if he was using research from 12 months before.
Blended discount rate
xiii)	The blended rate prevents you being penalised for being in the construction period.  You take 3 figures for discount rate, for construction, ramp-up and steady state periods, but you can derive a single figure. 
xiv)	Mr Neville said there were two acceptable methodologies in use at the time, but he used PwC’s approach because he concluded the approach they used was reasonable, although he had started out using both methods.  Using the blended rate, you use the same figure to discount future cashflows from the end of construction back to the present day.
Implied discount rates
xv)	An implied discount rate is one which takes the value of an asset including all of the upsides and then back-solves from that value against a different model which could be the base case model, which is approved by the bank, or the financial close model, which is also approved by the bank, and derives an implied discount rate that you would have needed to have applied to those cashflows in order to get back to the value that was started with.
Premium for pre-emptions and confidentiality
xvi)	On pre-emptions, Mr Neville said that it was true that a buyer is often faced with pre-emptions, but Laing would seek a prior waiver, and if it could not get that, it would apply a premium.
xvii)	Pre-emption rights mean that there cannot be a competition in the market, without underwriting the outside bidders’ costs.  That could amount to £1.5 million for 3 bidders.  Laing’s M40 project proves that the value is about 2%, as Laing sold 50% having earlier acquired it and changed the articles, and obtained an increase in value indicative of a 2.8% decrease in discount rate.
Discount rate for equity alone
xviii)	The practical fact of the matter is that nobody in the PFI industry faced with the choice of whether to buy equity, debt or equity and debt ever bought one without the other.  The choice arises where equity and debt are not legally stapled together.  Mr Neville said that Laing never asked anyone to sell it just the equity when both were available. 
xix)	Mr Neville accepted that the Maze model showed that it was valuing equity more highly than subordinated debt (though this was later suggested to have been on a false basis).
xx)	Mr Neville’s expectation would be that the market would prefer combined equity and debt to either individually.  You cannot generalise on whether an investor would prefer debt alone or equity alone.  It would depend on the investment strategy. 
Construction stage and the discount rate
xxi)	Mr Neville explained how the discount rate is not affected until a project is actually completed, but the value does, of course, increase because the anticipated income streams draw closer.  The discount rate remains the same until completion, because the risk to an investor is wholly dependent on completion, because there is no income until completion, and many factors can prevent the income starting to come on stream.
xxii)	Mr Neville thought that the premiums applicable for construction and ramp up would be the same whether you were using a single discount rate or a blended rate.
xxiii)	Mr Neville’s construction rate was 4%, and ramp-up rate was 2%, both on top of 2% for operations.   It would be difficult to use 2% for construction and to use the blended rate, but it could be reasonable.   The risks in the ramp-up period include snagging and bedding down of operations. 
Contractor’s track record and discount rate
xxiv)	Mr Neville said that the contractors’ track record is relevant to discount rate, but is taken into account in a negative way, by adding more risk premium if the contractor has a bad record, and not by reducing the rate for a good record, because every contractor has a good track record until the first project that goes wrong.
Residual values
xxv)	Mr Neville considered the residual values for Bexley and Black Country (the latter in his supplemental report), but did not think there was any evidence to show that there was extra value beyond PwC’s cash flows.  He assumed that the values at financial close were still valid.
xxvi)	Mr Neville looked at the revaluations in Project Maze, and at the assumed break for Bexley in 2025, but did not see how that could have been assumed in 2005.
Sinking Fund
xxvii)	Mr Neville said that the risk of the sinking funds had been passed to Ryhurst.  He explained that a reduction to the discount rate was not appropriate simply because that risk had been passed to Ryhurst. If the responsibility for the sinking fund was retained by the SPV, it would be required by the lenders to hold additional cash, so if it has passed the risk over, it can make use of that cash, increasing the cashflow, at the bank’s insistence.  Effectively, the requirement to have a reserve is replaced by passing the risk and the upside to Ryhurst.  The reduction in risk is reflected in increased availability of cash in the SPV, which would otherwise have had to have been retained. 
Refinancing
xxviii)	Mr Neville valued the upside for a possible refinancing at £1.1 million to £1.3 million.  His assumptions were:-
a)	That a 90 basis point margin over LIBOR could be achieved (as opposed to the existing margin of 90-150 basis points).  He thought PwC’s assumption of a reduction to 50 basis points was too aggressive.
b)	That the average debt service cover ratio (ADSCR) could not be reduced from 1.20:1, and each would be the same as they would be refinanced either as soon as possible or at the end of the ramp-up period.
c)	That debt could be topped up to the level at financial close, because there was an increasing resistance from the public sector to increasing termination liabilities as representing value for money. 
d)	That the dates of the assumed refinancing of each project were different and were across a period from 31st March 2006 to 31st March 2009, which were intended to be the end of the model period or the end of ramp-up.  He accepted that, in some cases, the assumed dates were pushed forward a little pessimistically, but he thought the timings were when the refinancings could actually have taken place in practice.
e)	That the existing swaps would not be broken.
f)	That there would be a 30% sharing with the public sector across the board, although the more recent ones would have to have been at 50% in reality.
xxix)	Mr Neville explained that margin compares with actual swap rate in each case, so that the margin reduction would be a reduction to or saving on the long term swap rate.
115.	Mr Neville did not alter his valuation in his oral evidence, but he did accept that his build up showed that he, like Mr White, had used a base case discount rate of 8%, leaving aside the contested issues of the premiums to be applied for the equity only nature of the portfolio, construction and ramp up, and confidentiality and pre-emption rights.
Issue 1:  Were the terms of the Engagement Letter applicable to PwC’s retainer to undertake the valuation?
116.	The key question here is whether the agreement to provide a valuation was an extension or variation of, and covered by, the terms of the Engagement Letter.
117.	I did not find the Claimants’ own evidence on this point helpful.  Mr Gearon accepted in cross-examination that he knew that the valuation was excluded from the Engagement Letter, and that it was an extra of some sort, but that he had no thought as to the nature of the engagement beyond that, despite what he had said to the contrary in his witness statement at paragraphs 24 and 25.
118.	Ms Montague’s evidence that she thought she had neither accepted nor rejected the suggestion that the valuation engagement should be treated as an extension to the Engagement Letter, turns on the terms of the 2nd March 2005 emails themselves.
119.	I turn then to the construction of those emails passing between Ms Montague and PwC on 2nd March 2005.  There has been no relevant evidence of any conversations or other dealings between the parties at around that time outside the emails themselves.   
120.	In the first place, Ms Montague’s response to Mr Williams on 2nd March 2005 timed at 15.28 must be taken to be a response to both Mr Williams’s email timed at 15.12 and Mr Cleal’s email timed at 12.18, because Mr Williams opened his email with the words: “Further to Paul’s email of earlier today” indicating that he was reiterating, in effect, what Mr Cleal had said.  In fact, Mr Cleal had not directly proposed or offered that the valuation would be performed on the terms of the Engagement Letter.  He had said something rather more mercurial, namely that Andrew Pirrie’s “view was that this work would be additional to the work he is already doing and that we should charge you separately (albeit that administratively it is probably easiest to set it up as an extension to his engagement)”, and that he proposed that the fees for the valuation: “would not (unlike Andrew’s disposal mandate) be contingent on the sale of the companies”.
121.	Mr Downes has argued that the terms of the Engagement Letter were singularly inappropriate to the valuation engagement. The team undertaking the disposal mandate was quite different from the valuation team, and the remuneration proposed was different as the first email made clear: a fixed fee as opposed to a success fee.  The timescale was quite different too: 3 weeks as opposed to a year.   But most important of all, Mr Downes submits that the limitation of liability to £1 million or five times the fees was quite unfair when expanded to include the valuation engagement as well as the disposal mandate.  In answer to this latter point, Mr Fenwick said that, since the fees were being increased, the 5 times fees limitation could, in theory, have exceeded the £1 million limitation.  In practice, however, he accepted that Mr Downes was right; the effect of the incorporation of the limitation was to make it applicable to both the original Project Normandy 2 engagement and to the new valuation engagement, thus imposing a more severe limitation on liability. 
122.	I accept that there were significant differences between the ways in which each mandate was to be delivered, but I do not accept that the terms contained in the Engagement Letter were as inapt to the valuation engagement as the Claimants suggest.   I suspect that, if a new engagement letter had been prepared for the valuation engagement, it would have looked much like the Project Normandy 2 Engagement Letter, although, of course, it would have stated different scope of work, personnel and time periods, and it would probably have had its own £1 million limitation of liability dedicated to it.  Moreover, the context of the valuation engagement was Project Normandy 2 and the disposal of Ryhurst and Ryhurst Lift.  The valuation advice was needed as a step in the disposal, occasioned by the fact that Barclays might be buying the stake in RBIL rather than an arm’s length open market purchaser.  
123.	Most importantly, however, it seems to me that the words that Mr Cleal and Mr Williams used can only be taken to have meant that they were proposing that the valuation engagement would be undertaken “as an extension” to Mr Pirrie’s engagement, which can only have referred to the Engagement Letter.  Had Ms Montague given the emails a moment’s thought, she would have realised that PwC was suggesting that the terms of the Engagement Letter should apply to the valuation engagement mutatis mutandis, so as to save the time and effort of creating another engagement letter and getting it signed.  Had the parties looked back at the terms of the Engagement Letter, clause 7.1.4 expressly contemplated that a limitation on liability should apply to breaches “arising out of the Engagement or any addition or variation thereto”, and clause 7.4 referred again to additions or variations.   
124.	Ms Montague’s evidence does not, as I have already indicated, affect these conclusions.  She had thought that she had neither accepted nor rejected the suggestion in Mr Cleal’s email, but she did not think such a proposal to have been unreasonable. It seems to me that, objectively viewed, she was clearly accepting that suggestion by the words she used in her response email. Ms Montague thought she had a recollection that some other correspondence suggested that the valuation engagement was entirely separate.  In my judgment, that recollection was mistaken.
125.	Mr Downes relied on two further matters.  First, he argued that the line of authorities, beginning with J. Spurling Ltd v. Bradshaw [1956] 1 WLR 461 per Denning LJ at page 466, demonstrated that exclusion clauses would not be incorporated unless they were very clearly pointed out.  Amiri Flight Authority v. BAE Systems [2003] EWCA Civ 1447 per Mance LJ at paragraph 14, showed more recently that the more extreme the exclusion clause, the clearer the notice that will be required before it will be regarded as having been incorporated.  Here, however, the exclusion was not ‘extreme’ at all in the sense mentioned in these cases.  It was a well known type of limitation of liability clause.  It was actually known to and understood by Ms. Montague, who acted for the Claimants, and the Claimants themselves are businessmen, who would have expected PwC to include a limitation of liability clause;  so, this was not an unexpected kind of exclusion that could be assumed to have taken the Claimants by surprise. Secondly, Mr Downes relied on PwC’s response to the pre-action protocol letter, in which it claimed that the valuation engagement was a free standing agreement, contrary to its present stance.  It does not seem to me that a lawyer’s argument put forward at an early stage can have any bearing on the true construction of the documents that passed between the parties.
126.	In these circumstances, therefore, I am satisfied that the terms of the Engagement Letter were indeed agreed to be applicable mutatis mutandis to the valuation engagement, so that the limitation of liability clause contained in clause 7.1.4 of the Engagement Letter applied to it.
Issue 2: Did PwC owe the Claimants a common law duty of care in addition to any contractual duty?  If so, was it subject to the contractual limitation of liability?
127.	This issue turned out, in the end to be irrelevant.  PwC thought it had been raised because the Claimants were contending that they could rely on a common law duty of care to avoid the contractual limitations of liability in the Engagement Letter, if they were applicable to the valuation engagement.  But the Claimants, rightly in my view, disavowed this point.  It, therefore, became irrelevant whether a common law duty of care was owed in addition to the accepted contractual duty.
128.	Mr Fenwick also argued that the contractual duty was not owed to the Claimant shareholders at the outset, because the proposed transaction, until tax clearance was refused on 23rd November 2005, only involved Ryhurst disposing of its shares in RBIL, and not the Claimants selling their shares in Ryhurst.  Again, this point seems to me to have no substance, since Mr Fenwick accepts that (a) the Claimants were parties to the Engagement Letter and the valuation extension to that Engagement Letter, and (b) anyway after 23rd November 2005, the Claimants were entitled to rely on the valuation.   No loss can have been sustained until January 2006, when the Claimants sold their shares in Ryhurst, if they did so in reliance on the valuation.  At that point, any loss would have crystallised, and at that point also, there is no argument but that the Claimants were the parties entitled to rely on the valuation.  Whether they actually did so is the subject of the next issue.  
Issue 3:  Did each of the Claimants (a) actually rely on the valuation; and (b) reasonably rely on the valuation; and (c) were they contractually entitled to rely on the valuation, when agreeing to sell their interests in the RBIL portfolio to BEIF in January 2006?
129.	The Claimants all told me that they relied on PwC’s valuation exercise, and I accept that evidence.  Ms Montague acted for the Claimants, but she kept Mr Gearon (and to a lesser extent, Mr Dixon) informed as to progress.  The Claimants were fully aware that PwC had been instructed to undertake the valuation and understood the purpose of it, namely to assist them in their discussions with Barclays.  They may not have been interested in the detail, but on my view of the facts, this is quite irrelevant.  The Claimants had deputed Ms Montague to negotiate with Barclays and to deal with PwC.  She, together with Mr Dodds, did so.   Ms Montague was fully involved in the detail, including the detail of the value of the possible upsides including sinking funds, residual values, insurance and refinancing.  PwC knew full well that Ms Montague was acting for the shareholders as well as for Ryhurst – which was no doubt why they included the shareholders in the Engagement Letter.  PwC cannot have it both ways.  It cannot claim that the Claimants are caught by the limitation clause in the Engagement Letter and then say that they were not entitled to rely on the valuation work done pursuant to the valuation extension they allege to have been agreed to pursuant to the Engagement Letter.  Indeed, PwC does not push this argument all the way, as Mr Fenwick’s closing submissions accept, rather grudgingly, that “the existence of such a valuation formed part of the background to [the Claimants’] decision to adopt the transaction for themselves”.
130.	PwC’s other arguments on reliance are both unmeritorious and wrong on the evidence.  The Claimants were fully entitled to rely on the work PwC was doing for their benefit with Ms Montague and Mr Dodds.  PwC gave continuing valuation assistance on various upsides, on which the Claimants reasonably relied when Ms Montague negotiated increases in the price with Barclays through the latter part of 2005.  As it turns out, this advice is not, in itself, the subject of specific attack, so these reliance issues are not of any great importance.  But I find it surprising that PwC should seek to call into question whether the Claimants were truly relying on their advice in these circumstances, merely because they stood behind their agent, Ms Montague. 
131.	In my judgment, each of the Claimants actually and reasonably relied on the valuation, as they were contractually entitled to do, when they were agreeing to sell their interests in the RBIL portfolio to BEIF.
Issue 4:  Did PwC’s minor mathematical corrections to the valuation amount to “confirming and repeating of the valuation to the Claimants albeit with a minor adjustment” between October 2005 and January 2006?
132.	Mr Downes did not, in the end, submit that the mathematical corrections to the valuation were of any consequence, save as to reliance.   He accepted that he could only succeed if he could show that the May Valuation was negligently prepared and wrong.  
Issue 5:  Was PwC negligent in preparing the valuation in relation to its choice of discount rates, and in particular (a) in the analysis it undertook of the projects in the portfolio, (b) in taking the wrong base discount rate, (c) in the importance it attached to the fact that the portfolio comprised equity only, (d) in the importance it attached to the fact that Avon & Wilts and Lymington were under construction, (e) in failing to build up discount rates, (f) in failing to review comparables, (g) in ignoring previous discount rates used for the same portfolio, and would a non-negligent valuation have increased the discount rate as a result of the confidentiality and pre-emption provisions?
133.	Before dealing with the facts on PwC’s alleged negligence, I should say what I understand to be the state of the law as it affects allegedly negligent valuations.  The parties were agreed that the decision of Lewison J in Goldstein v. Levy Gee [2003] EWHC 1574 (Ch) [2003] PNLR 35 neatly summarised the latest position, although Mr Downes reserved the right to argue on appeal that the decision was wrong.  Lewison J was unable wholly to reconcile some conflicting authority, but in the end he opted (rightly in my opinion) to follow the Court of Appeal’s decision in Merivale Moore plc v. Strutt & Parker [1999] 2 EGLR 171.  In reality, it is that decision that Mr Downes reserved his right to criticise hereafter.
134.	Lewison J’s reasoning carefully explains the present position, which is that, where a valuation figure is attacked, the claimant must show, not only that the valuer fell in some way below the standards to be expected of a reasonably competent professional, but also that the valuation fell outside the range within which a reasonably competent valuer could have valued the asset.  If the valuation is within such a range, then the valuer will not be held to be negligent since the claimant will have suffered no loss, even if some aspect of the valuation process can be criticised as having fallen below reasonably competent standards.  This leaves open the possibility that a claimant may be able to demonstrate some other loss flowing from some negligent advice given in the course of the valuation process, even if the figure was within an acceptable range.
135.	The whole of paragraphs 39-69 of Lewison J’s judgment in Goldstein could usefully be incorporated here.  I will only set out the following (already somewhat lengthy) extracts from that passage, which repays reading is full:-
“39. I was referred to a number of authorities. I find it difficult to reconcile them all, and to extract a coherent and principled approach to the question of valuer's negligence. It may be that the divergent streams of authority will have to be resolved by a higher court. But that is not a task for me.
40. In Zubaida v. Hargreaves [1995] 1 EGLR 127 Hoffmann LJ said:
“In an action for negligence against an expert, it is not enough to show that another expert would have given a different answer. Valuation is not an exact science; it involves questions of judgment on which experts may differ without forfeiting their claim to professional competence. The fact that a judge may think one approach better than another is therefore irrelevant... The issue is not whether the expert's valuation was right, in the sense of being the figure which a judge after hearing the evidence would determine. It is whether he has acted in accordance with practices which are regarded as acceptable by a respectable body of opinion in his profession: see Bolam v. Friern Hospital Management Committee [1957] 1 W.L.R. 582 at p. 587, a well-known citation”
41. This is in line with the general principle that a professional does not warrant a result. He agrees only to use reasonable skill and care in forming his opinion or giving his advice. In other words it is the process that must be examined rather than simply the end result. That is not to say that the end result is irrelevant. First, the end result may be very far from opinions given by other experts, or may be falsified by some empirical outcome, with the result that one must infer that something has gone wrong with the process. Second, a professional may have a duty, as part of the process, to stand back and look at the end result in the round to see if it accords with his instinctive feel.
42. In Lion Nathan Ltd v. C-C Bottlers Ltd [1996] 1 W.L.R. 1438 Lord Hoffmann, giving the advice of the Privy Council, said:
“As has been said, a forecast is always the forecaster's estimate of the most probable outcome, the mean figure within the range of foreseeable deviation. The judge appears to have assumed that if a figure would have been within the range of foreseeable deviation from the mean of a properly prepared forecast, it must follow that it would have been proper to put that figure forward as the mean. This proposition has only to be stated to be seen to be fallacious. There is no connection between the range of foreseeable deviation in a given forecast and the question of whether the forecast was properly prepared. Whether a forecast was negligent or not depends upon whether reasonable care was taken in preparing it. It is impossible to say in the abstract that a forecast of a given figure “would not have been negligent.” It might have been or it might not have been, depending upon how it was done. Assume, for example, that the vendor had forecast $1.25m. and that the limits of foreseeable deviation would have been regarded as $50,000 either way. Assume that the forecast was unexceptionable in every respect but one: there had been a careless double counting of sales which, if noticed, would have reduced the estimate by $25,000. To that extent, the estimate has not been made with reasonable care. If on account of some compensating deviation the outcome is $1.25m. or more, the purchaser will have suffered no loss and the vendor will incur no liability. But if the outcome is less than $1.25m., their Lordships think that the purchaser is entitled to say that if the estimate had been made with reasonable care, the figure put forward by the vendor as the mean and upon which he relied in fixing the price, would have been $25,000 lower. To this extent, he has suffered loss by reason of the breach of warranty. It is nothing to the point that the outcome is still within what would have been predicted as the limits of foreseeable deviation. His complaint is that the whole range of possible outcomes would have been stated as $25,000 lower. The purchaser has accepted the risk of any deviation attributable to factors which were unforeseeable, unknown or incalculable at the time of the forecast. He has accepted the risk of such deviation whether its true extent would have been foreseeable at the time of the forecast or not. But he has not accepted the risk of any deviation which is attributable to lack of proper care in the preparation of the forecast. The only tolerable forecast is one which, on its facts, was prepared with reasonable care.---(Underlining added)
43. This passage, as it seems to me also focuses on the process of preparing the valuation or forecast, rather than the end result. Lord Hoffmann says explicitly that there is no connection between the range of foreseeable deviation in a forecast and the question whether it was properly prepared. He also says explicitly that whether a forecast was negligent or not depends upon whether reasonable care was taken in preparing it. Moreover, his example clearly shows that a forecaster (or valuer) may be negligent even though his final figure falls within the limits of foreseeable deviation (i.e. within the “margin of error”). Accepting, as one must, that in valuation cases many questions are matters of judgment, the client is in effect saying to his valuer: I will accept your judgment on all the questions that will arise in the course of preparing your valuation, provided that you exercise your judgment with reasonable skill and care”. Although a decision of the Privy Council is only persuasive authority, the reasoning is, in my view, very persuasive indeed.
44. In South Australia Asset Management Corporation v. York Montagu [1997] A.C. 191 (often referred to as SAAMCO or Banque Bruxelles Lambert) the House of Lords considered the measure of damages for negligent valuation. However Lord Hoffmann also considered the basis on which a valuer might be liable at all. He said:
“Before I come to the facts of the individual cases, I must notice an argument advanced by the defendants concerning the calculation of damages. They say that the damage falling within the scope of the duty should not be the loss which flows from the valuation having been in excess of the true value but should be limited to the excess over the highest valuation which would not have been negligent. This seems to me to confuse the standard of care with the question of the damage which falls within the scope of the duty. The valuer is not liable unless he is negligent. In deciding whether or not he has been negligent, the court must bear in mind that valuation is seldom an exact science and that within a band of figures valuers may differ without one of them being negligent. But once the valuer has been found to have been negligent, the loss for which he is responsible is that which has been caused by the valuation being wrong. For this purpose the court must form a view as to what a correct valuation would have been. This means the figure which it considers most likely that a reasonable valuer, using the information available at the relevant date, would have put forward as the amount which the property was most likely to fetch if sold upon the open market. While it is true that there would have been a range of figures which the reasonable valuer might have put forward, the figure most likely to have been put forward would have been the mean figure of that range. There is no basis for calculating damages upon the basis that it would have been a figure at one or other extreme of the range. Either of these would have been less likely than the mean: see Lion Nathan Ltd. v. C. C. Bottlers Ltd., The Times, 16 May 1996.”
45. Although Lord Hoffmann recognises that within a band of figures valuers may differ without one of them being negligent, it does not seem to me that he was saying that the only way to establish negligence or breach of contract is to prove that the valuer's particular figure falls outside that band. If that is what he meant, his reference to the Lion Nathan case would surely have been qualified. …
47. However, there is a line of authority which focuses on the final figure, rather than the process by which the valuer reached the final figure. That line of authority begins with Singer & Friedlander v. John D Wood & Co [1977] 2 EGLR 84. In that case Watkins J said:
“The valuation of land by trained, competent and careful professional men is a task which rarely, if ever, admits of precise conclusion. Often beyond certain well-founded facts so many imponderables confront the valuer that he is obliged to proceed on the basis of assumptions. Therefore he cannot be faulted for achieving a result which does not admit of some degree of error. Thus, two able and experienced men, each confronted with the same task, might come to different conclusions without anyone being justified in saying that either of them has lacked competence and reasonable care, still less integrity, in doing his work. The permissible margin of error is said by Mr Dean, and agreed by Mr Ross, to be generally 10 per cent either side of a figure which can be said to be the right figure, i.e. so I am informed, not a figure which later, with hindsight, proves to be right, but which at the time of valuation is the figure which a competent, careful and experienced valuer arrives at after making all the necessary inquiries and paying proper regard to the then state of the market. In exceptional circumstances the permissible margin, they say, could be extended to about 15 per cent, or a little more, either way. Any valuation falling outside what I shall call the “bracket” brings into question the competence of the valuer and the sort of care he gave to the task of valuation.”
48. This is, I think, the first mention, in a reported case, of the “margin of error”. Watkins J, at least in this passage, treats a valuation of property which falls outside the margin of error merely as evidence of lack of care and competence. In the course of his lengthy and careful judgment he examined in detail the process by which the valuer in that case came to his final figure. The deficiencies he identified were deficiencies in the process of valuation, rather than simply a disparity between the final figure and what he called “the right figure”. However, in a later passage in his judgment he said:
“Pinpoint accuracy in the result is not, therefore, to be expected by he who requests the valuation. There is, as I have said a permissible margin of error, the “bracket” as I have called it. What can properly be expected from a competent valuer using reasonable skill and care is that his valuation falls within this bracket.”
49. This passage does, in my opinion, concentrate on the final figure rather than the process. Moreover, it uses the margin of error in another way, namely to provide the valuer with a defence to a claim of negligence if his figure falls within the bracket, no matter how he arrived at his figure.
50. In Mount Banking Corporation Ltd v. Brian Cooper & Co [19921 2 EGLR 142 the plaintiff submitted that where the final valuation figure is within the Bolam principle, an acceptable figure, albeit towards the top end, but where none the less the valuer has erred materially in reaching that figure, the plaintiff can succeed in his claim because of those negligent errors, even though the total valuation figure was not negligent. Mr Robin Stewart QC, sitting as a deputy judge of the Queen's Bench Division, rejected that submission. He said:
“If the valuation that has been reached cannot be impugned as a total, then, however, erroneous the method or its application by which the valuation has been reached, no loss has been sustained, because, within the Bolam principle, it was a proper valuation.”
51. Plainly this passage focuses on the end result rather than the process by which the valuer reached the end result. In reaching his conclusion on the facts, Mr Stewart said:
“I conclude, therefore, on this section, that though there was a fault in the process of calculation, none the less a proper and acceptable process could properly have resulted in no, or no perceptible, difference to the end valuation; that is to say that the figure in fact reached by Mr Cohen was acceptable on the Bolam principle.”
52. In Craneheath Securities v. York Montague Ltd [1996] 1 EGLR 130 at 132 Balcombe LJ (with whom Otton and Aldous LJJ agreed) said:
“Since Craneheath did not establish that the figure of £5.25m was wrong, then I agree with Mr Stow that Craneheath's action must fail. It would not be enough for Craneheath to show that there have been errors at some stage of the valuation unless they can also show that the final valuation was wrong. If authority be needed for so self-evident a proposition, it can be found in Mount Banking Corporation Ltd v. Brian Cooper & Co [1992] 2 EGLR 142 at pp. 144-5, 149.”
53. These are the passages from Mr Stewart QC's judgment that I have just quoted, and in my view are direct approval of his approach by the Court of Appeal. In the same case Otton LJ said:
“In the light of this the plaintiffs faced a formidable task in discharging their burden of proving that the figure of £1.1 m as an assessment of current turnover was erroneous. Without such a finding there could be no finding of negligence.” …
58. I come now to Merivale Moore plc v. Strutt & Parker [1999] 2 EGLR 171. I find this a difficult case. This was a case in which the valuer was instructed to prepare an appraisal of a proposed purchase. The property was to be acquired for development. The valuer prepared an appraisal which attempted to value the completed investment, in order for the purchaser to decide whether a purchase at the asking price would be a sensible transaction. In order to prepare the valuation, the valuer had to estimate the cost of the development, the rent at which the completed development could be let, and the yield to be applied to that rent in order to arrive at a capital value of the completed development. The task was made more difficult by the fact that the interest on offer was a lease with an unexpired term of 46 years. The valuer took as his starting point a rent for the principal areas of £60 per square foot, and adopted a yield of 7.5 per cent. The trial judge found that taking a rent of £60 per square foot was negligent. He also found that although a yield of 7.5 per cent was ‘too low’ it was not, in itself, negligent. He made an express finding to that effect. However, he found that the yield should have been qualified by a warning about its reliability. The failure to append a qualification was negligent. The valuer appealed to the Court of Appeal. That court, by a majority, reversed the judge's finding of negligence on the question of the rental value. However, the valuer's appeal was dismissed, on the ground that the judge's finding that the yield should have been qualified was one which was open to him. The result of the appeal, therefore, was that although the valuer had adopted a rental value which was not negligent, and a yield which was, in itself, not negligent, he was still liable in negligence because of the failure to qualify the yield with a warning. Simply looking at the result, one might have thought that this was a case in which the process, rather than the end result in figures, was all-important. However, examination of the judgment of Buxton LJ shows that this may not be so.
59. Buxton LJ began by explaining the structure of the trial judge's inquiry. He said at page 173:
“In order to determine whether the advice contained in the 12 June assessment was negligent, that is to say, whether the figures set out in the assessment were negligently stated, it was necessary, or if not necessary almost inevitable, that the court should form a view as to what was the correct or true value of the property; that is what would have been the correct figures to include in the assessment. That step has to be taken because a necessary step in determining whether a particular valuation was negligent is to consider the extent to which the valuation diverged from what would have been a correct valuation, and the reasons for that divergence.”
60. This passage suggests, first, that there is a “correct or true value” of a property, rather than simply a “bracket” and, second, that the court must decide that true value before embarking on the question whether the impugned valuation was negligent. In deciding that question the court must consider both the extent of the divergence from the true value, and the reasons for the divergence. Absent empirical proof of the “true value” of a property on a given day (e.g. an open market sale of that property on that day), the “true” value must mean the figure at which the court values the property, having heard expert evidence. However, if the acid test of liability is whether the impugned end result falls outside a bracket, it is not clear why the court must decide what the “true” value of the property was, rather than simply deciding the bracket. Buxton LJ then reviewed the evidence given to the trial judge. Before coming to his own conclusions, he set out “some indication of the guidance to be obtained from recent authority as to the correct approach to a complaint of negligence against a valuer.”
61. At 176 Buxton LJ said:
“It has frequently been observed that the process of valuation does not admit of precise conclusions, and thus that the conclusions of competent and careful valuers may differ, perhaps by a substantial margin, without one of them being negligent: see for instance the often quoted judgment of Watkins J in Singer & Friedlander Ltd v. John D Wood & Co [1977] 2 EGLR 84 at p. 85G; and the House of Lords in Banque Bruxelles Lambert S.A. v. Eagle Star Insurance Co Ltd [1977] A.C. 191 at p 221 F-G. That has led to the courts adopting a particular approach to claims of negligence on the part of valuers.  In the general run of actions for negligence against professional men:
“it is not enough to show that another expert would have given a different answer. the issue is ... whether [the defendant] has acted in accordance with practices which are regarded as acceptable by a respectable body of opinion in his profession”: Zubaida v. Hargreaves [1995] 1 EGLR 127 at p 128 A-B per Hoffmann LJ, citing the very well-known passage in Bolam v. Friern Hospital Management Committee [1957] 1 WLR 582 at p 587
However, where the complaint relates to the figures included in a valuation, there is an earlier stage that the court must be taken through before the need arises to address considerations of the Bolam type. Because the valuer cannot be faulted in any event for achieving a result that does not admit of some degree of error, the first question is whether the valuation, as a figure, falls outside the range permitted to a non-negligent valuer. As Watkin J put it in Singer & Friedlander at p 86A:
“There is, as I have said, a permissible margin of error, the “bracket” as I have called it. What can properly be expected from a competent valuer using reasonable skill and care is that his valuation falls within the bracket.”
A valuation that falls outside the permissible margin of error calls into question the valuer's competence and the care with which he carried out his task. .. But not only if, but only if, the valuation falls outside the permissible margin does that inquiry arise. ...
Various further considerations follow. First, the “bracket” is not to be determined in a mechanistic way, divorced from the facts of the instant case. ... Second, if it is shown even at the first stage that the valuer did adopt an unprofessional practice or approach, then that may be taken into account in considering whether his valuation contained an unacceptable degree of error. ... Third, where the valuation is shown to be outside the acceptable limit, that may be a strong indication that negligence has in fact occurred. ... Some caution at least has to be exercised in this respect, because the question must remain, in valuation as in any other professional negligence cases, whether the defendant has fallen foul of the Bolam principle. To find that his valuation fell outside the “bracket” is, as is held by this court in Craneheath and also, I consider, by the House of Lords in Banque Lambert, a necessary condition of liability, but it cannot in itself be sufficient.” (Underlining added)
62. Buxton LJ contrasts the position in the “general run” of actions against professionals with the particular case of negligent valuers. Yet the passage he quotes to illustrate the test applicable in the “general run” of cases, as contrasted with the “particular approach” in negligent valuation cases, is itself taken from a valuation case. It may be that the “particular approach” in valuation cases is appropriate only where the complaint is a complaint about the “figures included in a valuation” rather than to the method of valuation. This would be consistent with the outcome of the appeal in that case, since the finding of negligence was upheld, not because the yield figure was negligent as a figure, but because it appeared unqualified by a warning. Nevertheless, the complaint in Zubaida was itself a complaint about the figures in the valuation. It is noticeable, moreover, that Lion Nathan was not mentioned in the judgment.
63. Be that as it may, it is clear that Buxton LJ holds that in cases where the figures are impugned as figures, it is a necessary precondition of liability that the impugned figures fall outside the “bracket”. That being so, it is not easy to see why, at that stage of the inquiry, it matters whether the valuer has adopted an unprofessional practice or approach. Either his final figure falls within the “bracket”, or it does not. If falling outside the “bracket” is a precondition of liability, why should it matter how the valuer arrived at his figure, as long as it is within the “bracket”? There is, I think, another problem. If the “bracket” is the end result, and the end result depends on a number of variables, should the bracket be assessed by arriving at a bracket for each of the variables, or only for those variables that are alleged to have been negligently assessed? Logically, in my opinion, the approach in Merivale Moore leads to the first possibility.
64. The passage quoted from the judgment of Buxton LJ is, in my view, part of the ratio of the majority of the court. It unequivocally emphasises the decisiveness of the end result, as opposed to the process by which the valuer reached the end result. It also interprets Balcombe LJs use of the word “wrong” as meaning “outside the margin of error”, as opposed to “incorrect”. However, it seems to me to be confined to a case where the complaint is about the figures as figures, rather than some other aspect of the valuation. …
67. In Arab Bank plc v. John D Wood Commercial Ltd [2000] 1 W.L.R. 857 the Court of Appeal again considered the question whether it was a precondition of liability in negligence that a valuer's valuation should fall outside a margin of error. Counsel for the valuers conceded that normally, and on the facts of the actual case, there was such a precondition (para. 20). Mance LJ reviewed the authorities. He referred to the decision of the Court of Appeal in the Merivale Moore case (which I have already quoted). He continued at para 23:
“Where, as in the present case, criticism is addressed to factors such as rental value and yield which bear proportionately on the ultimately assigned value, the issues of the permissible range and of negligence are on any view inseparably linked. The value estimated results from the estimated rental values and yields. Where there is some discrete error, like that postulated in Lion Nathan Ltd v. C-C Bottlers [1996] 1 W.L.R. 1438, it may be appropriate to examine more closely the nature of the valuer's engagement. Is it simply to produce an end result and to do so within the range of “reasonable foreseeable deviation?”. Or may it be to exercise reasonable skill and care in the circumstances (including whatever instructions may have been given) both informing and in expressing an opinion on value? In Banque Bruxelles Lambert S.A. v. Eagle Star Insurance Co Ltd [1995] Q.B. 375 when it was before this court the judgment given by Sir Thomas Bingham M.R. at pp. 403-404 lends some support to the latter analysis. On that basis, if, as a result of clearly identifiable negligence, a valuer arrives at a figure lower than he would otherwise have put forward, the line of reasoning indicated in the Lion Nathan case [1996] 1 W.L.R. 1438 might still be applicable, although the end figure could not itself be said to fall outside the margin of legitimate valuation by valuers generally. It is however unnecessary to consider this point further on this appeal.”
68. The decision of the Court of Appeal in the Arab Bank case may indicate that that court would reinstate the possibility of applying the approach displayed in the Lion Nathan case, if the valuer's engagement is to do more than merely produce a result within the range of reasonably foreseeable deviation. In that event, it would be necessary to explore and define more closely the distinction between an error that is discrete, and an error that is not. However, the fact remains that Merivale Moore is ratio while the passage I have cited from Arab Bank is clearly obiter. In my judgment, consistently with Currys Group, and whatever my own doubts about the coherence of the law on this question, I must follow the ratio of Merivale Moore.
69. Mr Howe goes on to argue that even if the distinction drawn by Mance LJ is right, this is a case in which all that Levy Gee were required to do was to produce an end result. He says, with force, that since in the normal case a valuer of shares will produce a “non-speaking” award, the reasoning process should not be subject to independent scrutiny. The inquiry should focus on the final figure. The practical difficulty with this submission is that both the experts arrived at their final figures by considering the component parts of the valuation separately. In order to reach a conclusion on the validity of the final figure, it seems to me that I must replicate that process.”
136.	It seems to me that I must embark on the same exercise as Lewison J undertook.  But before doing so, a question arises as to whether I should be looking for the range within which a reasonably competent valuer could have assessed each factor in the valuation process, or whether I should be looking to establish the figure which I judge a reasonably competent valuer would have arrived at, and then establish the range within which the reasonably competent valuer might have departed from that mean.  The former process in this case would risk arriving at a conclusion for discount factors that might vary widely.  Indeed, Mr Fenwick submitted that the range for discount rates for projects under construction was between 14.5% and 23%, when he adopted this process.   This kind of wide range was described as absurd by Staughton LJ in Nykredit Mortgage Bank plc v. Edward Erdman Group Limited [1996] 1 EGLR119 at pages 120 and 121.  It seems to me that there is a danger also in treating every factor identically, because the evidence has been different in relation to different aspects of the valuation.
137.	In my judgment, there are two aspects to the process.  First, since the main allegation is that PwC’s valuation was wrong, I must establish what I find to be the value that a reasonably competent valuer would have advised, and the range of values around that value that could have also been reached by a reasonably competent valuer in the position of PwC.  In ascertaining the range, as appears hereafter, the methodology may have to be different in relation to different aspects, because of the nature of the particular valuation process with which I am dealing in this case.  Secondly, I need to consider any allegations that go beyond the simple case that the value was wrong.  Here, for example, the Claimants contend that PwC adopted a methodology that was such as no reasonably competent valuer could have used.  If I were, for example to hold that PwC’s ultimate value fell within a reasonable range, I would still have to ascertain whether any loss could nonetheless be said to have been caused by any other breach of duty (if any is found) affecting the valuation process or the advice given arising from it, as Mance LJ alluded to in his judgment in Arab Bank plc v. John D Wood supra, in explaining how Lord Hoffmann’s reasoning in Lion Nathan Ltd v. C-C Bottlers supra might still be applicable even whilst one was applying the decision in Merivale Moore.
138.	Mr Fenwick submits that I should establish a wider range in this case than might be appropriate in valuing an ordinary domestic property, where he says the range might normally be 10-15% either side.  First, he says that the scope for the end result to be different is greater if there are more variables as there are in this case, and secondly, he says that here there is not a general well known market but rather a very thin market and virtually no transactions, making the opportunity for differences between those acting competently that much greater.
139.	I accept that the valuation of equity interests in PFI projects in 2005 was a somewhat rarefied exercise, and that the market was limited, in the sense that the evidence has shown that there were probably only 5 or 6 serious players in the secondary market for PFI projects at that time.  I also accept that equity, as opposed to stapled equity and subordinated debt, was almost never sold.  But these factors do not seem to me to give the valuer licence to come up with almost any figure.  The evidence of the experts in this field has made it clear to me that there were indeed valuation practices in this field that would be regarded as acceptable by a respectable body of opinion within the small cohort of professionals qualified to value PFI projects.  In short, there was a clear valuation process and a number of factors that any reasonably competent valuer would consider in reaching his or her conclusion.  As appears below, therefore, I have not found it as problematic as might have been thought, on the evidence, to say where a reasonably competent valuer would have come out, or the range within which reasonably competent professionals could reasonably have differed.   In the result, however, probably for the reasons Mr Fenwick gave, the range that I have decided upon is indeed rather broader than might be expected in a case where there was a more actively traded market in the assets concerned.
140.	Many of the allegations made by the Claimants have ultimately proved to be without real foundation, or without any significance to the outcome.
141.	Only four substantive allegations have proved to be of importance.  They concern (i) the base discount rate (ii) the premium allowed for the fact that equity alone was being sold, (iii) the premium allowed for construction and ramp-up, and (iv) the premium to be allowed for the fact that the 50% stake being sold was affected by confidentiality and pre-emption rights.  In the first 3 of these areas, PwC is alleged to have fallen below the standards of a reasonably competent valuer.  In relation to confidentiality and pre-emption rights, Mr Fenwick accepts that PwC did not expressly mention them in the Draft Report, but says that in ascertaining the range, I should apply a premium to the discount rate for this factor, as a reasonably competent valuer would have done so.
142.	I will deal first, however, with the allegations of breach of duty as regards methodology, since this will have a bearing on the way in which I approach the process that I have already indicated I need to undertake.  The allegations here are the failures: (a) to analyse the projects in the portfolio, (b) to build up discount rates, (c) to review comparables, (d) in ignoring previous discount rates used for the same portfolio.
143.	I do not believe that PwC fell below the standard of a reasonably competent valuer in the analysis it undertook of the projects in the portfolio.  Its understanding of the projects increased, quite naturally, as Ms Montague and Mr Dodds provided increasingly detailed information, and certainly by the time of the Draft Report, PwC had something less than a complete picture of the projects and all their intricacies.  But they had not been asked to undertake due diligence.  They had been asked to provide a valuation to assist in the discussions with Barclays, and the evaluation of Barclays’ expected bid.  For that purpose, I am entirely satisfied that their analysis of the projects was adequate.  In the result, the real complaints have not anyway arisen from any supposed lack of analysis, but from the specific errors that I have mentioned.
144.	It is true that PwC neither built up its discount rates as both experts before me have done, nor sought direct comparables to assist it in identifying appropriate discount rates.  I do not regard either failure as evidence of negligence, without more.  Messrs Cleal and Williams had significant experience in this difficult developing field and were fully aware of the market and the discount rates being used by that market.  It is true that seeking comparables, conducting market research and building up their rates might have prevented them falling into error, but I do not think that any of these things can in themselves be regarded as evidence of negligence.  A perfectly competent valuer could, quite properly, have reached a perfectly correct valuation by using his or her experience in the field, without doing any specific research for comparables for the project in question.  As has often been said, the valuation exercise is not a completely scientific one.  It is an exercise of judgment based on experience and a proper understanding of the market at the time in question.  Both experts have warned against adding up particular percentages for particular factors, since one might easily thereby reach the wrong result.  It seems to me that an expert valuer would be quite justified in adjusting a perception of a current mid-market discount rate for a pool of relevant factors affecting the portfolio, without going through the formal process that Messrs White and Neville undertook.  They were, as Mr Fenwick said, making their method transparent to assist the Court as experts.  The absence of transparency does not automatically render the valuation negligent.  Indeed, as I shall explain in due course, PwC’s valuation did, in fact make its reasoning reasonably transparent. The Draft Report starts from a “mid market discount rate” of 10%, and builds up on stated bases from there.  PwC explained the factors that had influenced its thinking, but had not built up the discount rate mechanically – a process against which both experts warned, as I have already said.
145.	I am also far from convinced that PwC should have had greater regard to the Project Mirror discount rates or to the rates being used by Barclays in respect of the portfolio.  As to Barclays, they were the counterparty, and the Claimants wanted PwC’s own expertise applied to the valuation exercise to allow them to negotiate with Barclays. It is true that seeing Barclays apply lower discount rates might reasonably have alerted Mr Cleal to a potential problem with his approach, but beyond that I do not think that Mr Cleal’s and Mr Williams’s failure to pay heed to Barclays’ rates or methodology was in itself negligent. Barclays was undoubtedly using a somewhat different methodology, based on at least some different cashflows, and apparently refusing to build in upsides.  It may have been for that reason that it employed lower discount rates.  To compare Barclays’ discount rates with those used in PwC’s methodology would probably have been less than straightforward. And in any event, PwC did not actually obtain access to Barclays’ cashflows until 19th or 20th April 2005.  Thereafter, the junior staff in PwC’s team did see what happened when they applied Barclays’ discount rates.  The Project Mirror rates were many years before and of no particular continuing value in 2005. 
146.	In these circumstances, unless the discount rates used or the upsides valued can be shown to have been wrong, I am unpersuaded that PwC can be criticised for the way in which they went about the valuation exercise.
147.	This brings me to the four issues that form the backbone of the allegations against PwC as to discount rate.
Base case or mid-market discount rate
148.	Mr Downes relies first and foremost on the fact that PwC took a mid-market or base discount rate of 10%, when, it is argued, both experts accepted that the appropriate base case rate was around 8%.  Mr Downes says that a 2% difference is material, that PwC knew that rates had declined since July 2004, when they themselves had adopted a rate of 10% in the Innisfree project, and that they acted as no reasonably competent valuer could have done in failing to recognise the market movement.  
149.	The first point to make is that PwC’s mid market rate, and the experts’ base case rate is not exactly the same thing.  The experts built up their base case using identified factors upon which they were broadly agreed starting from a risk free rate around 4.5%.  Conversely, PwC’s mid-market rate was the rate that Mr Cleal and Mr Williams had observed in the market as being the basic rate being used for availability assets in a steady state without specific risk factors added.  This difference does not mean that the two are wholly incomparable, but the experts’ 8% is a rather more scientific measure, and might be expected to be a modicum lower than PwC’s figure.
150.	Though I accept the experts’ evidence that they have started, quite properly, at 8%, I do not think it is established that PwC acted as no reasonably competent valuer could have acted in adopting a mid-market rate of 10% as at early 2005.  There are a number of reasons for this:-
i)	It is true that both experts and Messrs Cleal and Williams agreed that the market discount rates had fallen since 2004, and that PwC had themselves taken a rate of 10% when they valued for Innisfree in mid- 2004.
ii)	But the mid-market rate that PwC took was a rather higher measure than the base case rate that the experts built up.  
iii)	The validity of the base rate depends on the way in which it is increased to take account of other risks.  Thus, it would be perfectly reasonable to take a base rate of 10% if, for example, it was increased by a rather lesser amount for the risks of construction.  
iv)	There is no absolute rule that the experts have been able to point to requiring the use of a built up base case rather than a mid-market rate. 
v)	I have taken into account the rates indicated in the annual accounts to which the experts referred and in the PFI Infrastructure transaction in July 2004.
vi)	Mr Neville did not think that PwC’s 10% was unreasonable.
vii)	PwC actually took the mid-market rate as being approximately 10% for “an equity portfolio sale”, thus they may have been building in a small uplift for the nature of the asset at this stage.  I will return to the validity of an equity uplift in due course.
151.	The next question is what is an appropriate range for the base figures.  This is difficult because of the use of different measures by the experts and by PwC.  At this stage, I think I can say no more than I have formed the view that for a base case rate a range of 7-9% would have been reasonable, and for a mid-market rate a range of 8-10% would have been reasonable.  Anything outside those parameters would, on the evidence I have heard have been hard to justify.  8% was, I think quite low in early 2005; though rates were falling, there had been no secondary market transaction since the PFI Infrastructure deal in July 2004, when KPMG itself showed discount rates of 9.7% to 12.1%.  Laing’s March 2005 report used a base rate of 7.5%, but with a large construction uplift of 6%.  PFI Infrastructure’s March 2005 accounts used a weighted average of 9.3% with a far smaller construction uplift of 2.2%, and the mix of projects was fairly comparable with the Ryhurst portfolio.  
Equity only premium in the discount rate
152.	The second main error relied upon was the premium of at least 4% that PwC applied for the fact that equity alone was being valued rather than stapled equity and subordinated debt.   Mr Neville preferred 2% and Mr White argued strenuously that no premium was appropriate.
153.	It is useful first to see what PwC actually did, according to the Draft Report.  It explained its approach to equity only quite clearly as follows:-
i)	First, PwC said that “assuming the subordinated debt holder has rights senior to those of pure equity (as you would often expect) the discount rate would usually be higher to reflect the increased risk of payments to the equity holder being eroded”.
ii)	Secondly, PwC said about the return profile that “most, if not all, of the principal secondary market investors want a smooth profile of returns.  Where equity flows are highly variable year on year, some investors will not be interested at all; those that are, are likely to materially increase their discount rate”.
iii)	Thirdly, PwC said that “All projects except Bexley have subordinated debt that (we believe) is serviced before pure equity.  The resulting equity value is much smaller than the subordinated debt value.  The subordinated debt is already owned by Barclays”.
iv)	Fourthly, PwC said that “the equity value in the portfolio is very back-ended.  Dividend payments in 7 out of the 10 projects are not forecast to start until 2015 or later”.
v)	Finally, they explained the disparity between the discount rates taken for the various projects as follows: 
a)	“10% for Bexley, which has no subordinated debt and is operational”;
b)	“12% for Black Country, which is operational and has some subordinated debt – but around equity value accounts for 75% of the total equity and subordinated debt value”;
c)	“14% for Redbridge, which like Black Country is operational but the equity proportion of value is lower at approximately 50%”; and
d)	“18% for the remaining projects, all of which have low equity proportions of value and some of which are non operational”.
154.	The reasons contained in these passages from the Draft Report have not been specifically challenged in cross examination.  It has not, for example, been suggested that the fact that the equity slice was very ‘thin’ did not affect its attractiveness to investors.  Nor has it been suggested that the fact that the equity cashflows were very back-dated and did not start in many cases to produce income until 2015 was not a relevant factor, nor that the irregularity of the income from the equity might put off investors.
155.	For a number of reasons I have concluded, therefore, that some premium on the discount rate was appropriate.   In the first place, it is quite clear that nearly all PFI projects sold in the secondary market offered equity and stapled debt together, rather than either alone.  Investors were, therefore, accustomed to that offering, and unfamiliar with anything else.  That fact alone made the stapled product more attractive and better understood in the market at that time.  Secondly, equity is undoubtedly the most risky cashflow from any project since dividends are paid at the end of the line, and can only be paid when the company law requirements for distributable profits are satisfied.  It is true that equity provides the only prospect of higher returns, and that different investors with different investment strategies might prefer equity over subordinated debt or vice versa.  But that does not mean that an investor in the stapled product would not expect to pay more for the flexibility and control that the two together allow.  
156.	As for the size of the appropriate premium, it seems to me that PwC were almost certainly justified in allocating more by way of premium to the back-dated equity cash-flows and to the thinnest slices of equity, but I do not think that they were justified in attributing a premium in excess of 4% pretty well across the board, which (with the exception of Black Country), they seem to have done.  
157.	I was impressed by Mr Neville and I think a normal premium for the equity only factors that PwC identified would be 2%, with a premium up to 4% for the projects with long-dated cashflows and the thinnest equity slices.  
158.	As will appear from my project by project analysis below, therefore, I have taken the clear view that PwC over-egged the pudding on this ground.  It was suggested that Mr Cleal and Mr Williams had become fixated about the premium that had to be applied for the fact that equity alone was being sold, and I think there was a measure of truth in that allegation.   In short, I think PwC got the importance of the fact that equity alone was being sold somewhat out of proportion.  As to whether they acted as no reasonably competent valuer could have done, the position is not the same for each project, but as appears from my own evaluation below, I think in some cases it did. 
Construction premium
159.	The third important factor is the premium to be added for construction and ramp up.  Mr White added 2% for construction on a decreasing basis as construction progressed, and nothing for ramp-up.  Mr Neville added 4% until construction was concluded, and 2% during ramp-up.  But he would have preferred a blended rate that would, as I have recorded above, have ameliorated the effect of applying such a large premium to the cashflows long into the future, when the construction and ramp-up phases would be long completed.  PwC seem to have applied a rate of 2%, although Mr Williams’s evidence on this was not very transparent.
160.	It was not suggested that it was negligent to use a fixed, as opposed to a blended, rate that Mr Neville preferred.  So, the only allegation of negligence that could possibly be sustained in relation to the construction and ramp up premium is the failure to reduce the premium in a linear fashion to take account of the stage of construction as Mr White has done.  It seems to me that this allegation is wholly unsustainable.  Mr White’s approach was apparently devised for this case.  No previous valuation was shown to have adopted it, and I accept the evidence of Mr Neville and the PwC witnesses that the normal and accepted approach is to use the same premium throughout the period of construction, because things can go wrong until construction is certified as complete and because no income streams can begin to flow until that time.
161.	Thus, PwC’s construction premium of 2% seems to me to have been entirely orthodox.  I do not see how an allegation of negligence can be sustained on the basis of it.   A normal range for the construction phase of between 2 and 4% seems wholly justified on the evidence.
162.	I also think that some premium could be justified for projects in the ramp up phase, but I would not expect more than 1% to be added for this in a normal situation.  A range of 0-2% for ramp up might be regarded as reasonable.
Confidentiality and pre-emption rights
163.	The fourth aspect is the question of whether any, and if so, what premium in the discount rate is appropriate to take account of the fact that the articles of association of RBIL gave Barclays pre-emption rights, and that the Shareholders’ Agreement contained confidentiality provisions preventing an outside bidder from having access to the necessary basic information it would require.  
164.	On this aspect, the first question is whether, as the Claimants contend, the valuation was implicitly understood to have been an open market one ignoring the existence of confidentiality and pre-emption rights.  Mr Cleal accepted that that was the basis of his valuation, and I accept his evidence.  Mr Fenwick urged me to say that his evidence was not clear, but I disagree. The following exchange took place between Mr Downes and Mr Cleal:-
“Q. And the context, I think you have accepted this, is that what the shareholders, what Ryhurst needed was an idea of what this was worth on the open market to Barclays?
A.  What it was worth on the open market full stop, yes.  
Q.  What I mean is without confidentiality and pre-emption provisions in there?
A.  Oh, yes”.
165.	Moreover, there is nothing in the Draft Report itself to indicate that a premium has been added on to the discount rate for the existence of confidentiality and pre-emption rights, and the other factors upon which PwC relied are indeed mentioned.   I do not believe that was an oversight.  It seems to me that Ms Montague and Mr Williams must have agreed that the valuation was to be, as Mr Cleal described it a value on the “open market full stop”.   
166.	There is also another reason why it seems to me that PwC was not considering pre-emption rights. Ms. Montague was obviously seeking a willing seller/ willing buyer valuation on the basis of full information being available (just as the experts were asked to provide).  This was, as I have said, for the purpose of assisting in her discussions with Barclays.  By April 2005, Barclays had refused point blank to consider paying any premium for the fact that it was obtaining control.  The quid pro quo for that may well have been that it was not negotiating on the basis that it was entitled to a discount as the preferred bidder which could prevent third parties obtaining the information to allow them to bid, or which could exercise its pre-emption rights.  It is true that, even if the confidentiality clause could have been overcome, prospective outside bidders would probably only have been prepared to bid, had their costs been underwritten, because of the risk that they would be trumped by Barclays’ pre-emption rights.  But none of this mattered to the exercise PwC was undertaking.  It was valuing Ryhurst’s 50% share in RBIL in the open market, and, for that exercise, any added premium for confidentiality and pre-emption rights was inappropriate.  That said, if it had been appropriate, I would have been quite satisfied that a premium of something like 2% should be added to the discount rate for these factors, if they could not be negotiated away.  This was Mr Neville’s evidence and experience from the M40 project, and accords, in my judgment, with perfect common sense.
167.	Mr Downes urged that if this reasoning was right, then it should apply to the equity alone premium that PwC applied.  Though this argument has a certain logic to it, I disagree.  PwC made it perfectly clear in its Draft Report that it was adding hefty premiums for the equity only nature of the portfolio.  Ms Montague read the report and understood what PwC had done.  She would have queried what PwC had done on equity if she had thought they were valuing on a false basis.  
168.	Thus, illogical though it may have been, Ms Montague did not expect and was not given (a) a valuation which had a reduced discount rate for Barclays gaining control (b) a valuation that had an added discount rate for confidentiality and pre-emptions rights, nor (c) a valuation that took account of the fact that Barclays had the subordinated debt, so that the equity only factor could be ignored in a sale to Barclays. 

The overall discount rate
169.	That brings me then to determine what a reasonably competent valuer would have taken to be the appropriate discount rates.  It is, of course, perfectly possible that PwC may have made negligent errors in the process, but nonetheless come up with a non-negligent valuation within the range that a reasonably competent valuer could have adopted.
170.	In my judgment, a reasonably competent valuer would have taken 8% as the base case.  In addition, looking at the projects individually, a reasonably competent valuer would have added the following premiums for the equity nature of the investment and the other connected factors identified by PwC
i)	0% for Bexley, since it had no subordinated debt.
ii)	2% for the remaining projects, notwithstanding the distinction between Black Country and Redbridge on the one hand, where the equity slice was thicker, and the other 8 projects where the equity slice was thinner.
171.	Notwithstanding this view, I have taken the view that a reasonably competent valuer could properly have considered that a premium of up to 4% was appropriate for the 8 remaining projects, but I do not think a premium of more than 2% could have been appropriate for Black Country and Redbridge.
172.	A reasonably competent valuer would then have added 1% for ramp-up, and 2% for the projects under construction, although, as I have said, rates of between 0-2% for ramp-up and 2-4% for construction could have been justified.
173.	Thus:
i)	For Bexley, the reasonably competent valuer would have used a base discount rate of 8%, but rates between 7 and 10% could have been justified.
ii)	For the steady state projects in Black Country and Redbridge, the reasonably competent valuer would have used a base discount rate of 8%, and added 2% for the equity factor, making 10%, but rates between 8 and 12% could have been justified.
iii)	For the steady state project in Essex Herts, the reasonably competent valuer would have used a base discount rate of 8% and added 2% for the equity factor, making 10%, but rates between 9 and 14% could have been justified.
iv)	For ramp up projects (Hertford, Liskeard, South Essex and West Mendip), the reasonably competent valuer would have used a base discount rate of 8% and added 2% for the equity factor, and 1% for ramp-up, making 11%, but rates between 9% and 15% could have been justified.
v)	For projects under construction (Avon & Wilts, Lymington and Epping), the reasonably competent valuer would have used a base discount rate of 8% and added 2% for the equity factor, and 2% for construction, making 12%, but rates between 10% and 16% could have been justified.
174.	 It will be observed that these figures are not just a mathematical addition of the various factors in respect of which I have made determinations.  Nor is the figure which I consider the correct one necessarily in the middle of the possible range.  That is because the scale is not linear.  The lower the figure, the bigger the difference that small changes make.  I have tried to reach figures which accord with the parts of the expert evidence I have accepted.  
175.	Thus, in tabular form, these are my findings on discount rates:-

Project 		PwC rate	RCV 		RCV		RCV			RCV 
Rate		Range 	Value £000		Range: £000
Avon & Wilts	18%		12%		10-16%	1089			1628-533
Bexley		10%		8%		7-10%	2482			3052-1724
Black Country	12%		10%		8-12%	1030			1494-751
Epping		18%		12%		10-16%	332			485-168
Essex Herts	18%		10%		9-14%	384			478-166
Hertford 		18%		11%		9-15%	224			341-99
Liskeard		18%		11%		9-15%	196			302-86
Lymington		18%		12%		10-16%	576			838-301
Redbridge 		14%		10%		8-12%	596			860-419
South Essex	18%		11%		9-15%	250			351-134
West Mendip	18%		11%		9-15%	219			321-105
Totals								7378			10150-4486
176.	As appears from the above table, PwC’s discount rates fell outside what I have determined to be a reasonable range in all cases except Bexley and Black Country.  On one analysis, therefore, the valuations of Bexley and Black Country (which were the 2 most valuable projects) were not negligent, and should be excluded from further consideration.  This was not a submission made by PwC, but I have considered it nonetheless.  It seems to me that it is inappropriate for two main reasons.  First, PwC was instructed to value the entire portfolio of 11 projects.  The Claimants were overwhelmingly concerned with the bottom line rather than with the detail, and PwC knew that their valuation was to be used in the negotiations with Barclays.  It would, therefore, be wrong to exclude the 2 projects that were not negligently valued, and consider only those that were negligently valued, when what had been contracted for was, in effect, a competent professional valuation of the overall portfolio.  Secondly, even if one were to exclude Bexley and Black Country from further consideration, no different outcome would be obtained.  PwC valued Bexley and Black Country at the lowest level that a reasonably competent valuer could have adopted.  Thus, if one took PwC’s valuation instead of the lowest possible reasonably competent valuation, one would (since the two figures are the same) obtain the same result for the lowest figure in the range of reasonably competent valuations of the entire portfolio that I have arrived at.  In short, therefore, even if one excludes Bexley and Black Country, PwC’s valuation still falls short of the lowest figure in the range of reasonably competent valuations.
Issue 6:  Was PwC negligent in preparing the valuation in failing to attribute appropriate value to (a) gains from possible refinancing, (b) the sinking fund upside, and (c) residual value upsides? 
177.	It is clear that one of the main gains available from a portfolio of mature PFI projects is that to be obtained from a refinancing.  In essence, the value is obtained by replacing the senior debt with cheaper borrowing.  The process requires the consent of the public sector partners, and the gains have to be shared with the public sector.  
178.	PwC attributed £0.9 million in its May Valuation to the refinancing upside, together with £0.5m for the release of trapped cash, making a total of £1.4 million.  The two are related because the trapped cash would be used in any future refinancing.  Thus, PwC’s figure should be regarded as being £1.4 million.  Mr White, however, finally settled upon £2.9 million as the appropriate figure, as compared to Mr Neville’s £1.1 million.  
179.	As I have already indicated in dealing with the expert evidence, the differences lie in the assumptions that are made about the manner in which the proposed refinancing will be undertaken, and the likely upside assumptions.  PwC assumed that a margin of 50 basis points was achievable, which was significantly more aggressive than either Mr Neville or Mr White.  In other respects, however, PwC made no changes to the portfolio in the assumed refinancing, so the aggressive margin rate change was used, in effect, in place of making other assumptions.  PwC also, of course, adopted the discount rates that have been criticised above.  That fact, in itself, means that PwC’s valuation of the refinancing upside was not a satisfactory one.  Overall, however, the level of the refinancing upside adopted by PwC does not seem to me to be unreasonable – it was very close to the estimation made by quite a different methodology by Mr Neville.  I do, however, think that Mr Neville’s assumptions were themselves quite conservative.  
180.	I should say briefly how I regard the various assumptions made by the experts in re-assessing the appropriate level of refinancing:-
i)	The assumption of 70-90 basis point margin seems to me far more sensible than the 50 basis points assumed by PwC.  But PwC’s assumption was on the basis that other aspects did not change, so cannot really be compared with the more technical exercise undertaken by the experts.  
ii)	I do not think that Mr White was justified in assuming that the average debt service cover ratio (ADSCR) could be reduced from 1.20:1.  In this regard, I accept Mr Neville’s evidence.
iii)	Likewise, I do not think that it was reasonable to think that the debt could be increased by some £20 million.  Again, I accept Mr Neville’s evidence that there was significant resistance to increasing liabilities. 
iv)	As for the dates of the assumed refinancing, both Mr White and Mr Neville took different dates for different projects.  That would have made a portfolio refinancing impossible.  I would have preferred a single date after the completion of all the projects in December 2006, probably the 31st March 2007.
v)	I would have assumed that it was too costly to break the existing swaps.
vi)	It was surprising that Mr Neville assumed only 30% sharing with the public sector across the board, whereas in reality some of the more recent projects would have to have been shared at 50%.  It seems to me that the real sharing rates should have been assumed.
vii)	It seems to me that the appropriate discount rate for the assumed refinancing should have been the same as I have found they should have been above. 
181.	If some of the discount rates applied by PwC had not been negligent, I would not have been prepared to say that PwC’s refinancing valuation was such as no reasonably competent valuer could have undertaken.  But since its valuation is affected almost across the board by the discount rates, it seems to me that the refinancing valuation must also be held to have been negligently undertaken.
182.	It is a far more difficult exercise to evaluate what a competent valuer would have taken as a figure or as a range of figures for the refinancing and trapped cash upsides.  The parties have not been able to agree a sensitivity model as they have done for the base case, though each side has prepared sensitivity models for its own calculations.  I have not, therefore, been provided with the means of feeding in to a model the assumptions that I have held should have been made by a reasonably competent valuer.  I have been left, therefore to do the best I can on the evidence adduced.  In the result, I have formed the view that PwC’s valuation of the refinancing gain at £1.4 million was what a reasonably competent valuer would have reached.  Mr White’s assumptions were far too aggressive and produced far too high a figure.  Mr Neville’s assumptions were reasonable but cautious.  Doing the best I can, I would put the range of reasonable valuation of refinancing and trapped cash between £1.1 million and £1.7 million.  This is something of a guesstimate, but I doubt it is very far off the reality of the situation.  
183.	It is worth noting here that if Bexley and Black Country are excluded again, since PwC’s valuations of their refinancing upside was not negligent, it still does not take PwC into the overall reasonably competent range.  PwC’s overall refinancing figure was £1.4 million, but it is not entirely clear what part of that figure was attributable to Bexley and Black Country.  On the most favourable analysis to PwC, it could be assumed that PwC took only £0.1m (for trapped cash in Black Country).  This seems at least possible from a review of the Draft Report and the May Valuation.  The latter said it was including new figures for Bexley and Black Country on both trapped cash and refinancing, but did not seemingly increase the overall figures for those items.  But it is not easy to say what a reasonably competent valuer would have attributed to the refinancing of Bexley and Black Country so as to make a proper comparison.  But even if the whole amount by which PwC’s refinancing and trapped cash valuation over-topped the bottom of the reasonable range (£0.3 million) is added to PwC’s valuation on the basis that it is all attributable to the other projects, and would therefore cause a relative increase if Bexley and Black Country were stripped out, it would still not bring PwC to the bottom of the overall reasonably competent range, since their valuation was £0.5 million short of it (see below).
184.	The sinking fund and residual value upsides can be dealt with far more easily.  The sinking funds had been sub-contracted to Ryhurst, and any upside had, therefore, been removed from the SPVs.  For the reason given by Mr Neville, I do not accept that any upside can be attributed to the fact that the risk of sinking fund deficiencies had been removed from RBIL.  The SPVs already had the benefit of having sub-contracted the sinking fund risk, by having larger cashflows occasioned by the absence of a need to hold precautionary deposits.  Thus there was no upside attributable to the sinking funds, and PwC was right to attribute nothing to them.  
185.	As for residual values, again, I am quite satisfied that PwC adopted the right approach, relying as it did on the residual values found in the cashflows, for the Bexley and Black Country projects, that had been supplied by Ryhurst.  The suggestion that they should have undergone the exercise adopted by Barclays in Project Maze and assumed a break in 2025 for Bexley or revaluations by CR Richard Ellis for both projects seems to me to be far fetched.
Issue 7:  Was PwC negligent in preparing the valuation in failing to revise its valuation in or before January 2006?
186.	In closing submissions, Mr Downes did not press this submission.  He accepted, as I have said, that if the May Valuation was not negligent, then the January 2006 valuation was in the same position.  In these circumstances, I do not need to deal with the proper valuation as at January 2006.  
Issue 8:  What value would the Defendant non-negligently have ascribed to the RBIL Portfolio (a) as at May 2005 (b) as at January 2006? 
187.	For the reasons I have given, I need only deal with the position as at May 2005.   
188.	The non-negligent valuer as at that date would have valued the portfolio at £7.4 million for base case plus £1.4 million for the refinancing upside, making a total of £8.8 million.  The range of non negligent values would have been between £4.5 and £10.1 for the base case and £5.6 million and £11.8 million for the total.
189.	Thus, PwC’s valuation of £5.1 million fell outside (although not far outside) the lower limit of the range I have determined.  This is the case whether or not Bexley and Black Country are disregarded, which I take the view they should not be, for the reasons I have given.
190.	I have tried to cross-check this outcome against the evidence of discount rates and valuations generally, and it seems to me to accord quite well with the body of available comparables as a whole.   It is true that Barclays had valued the portfolio at £4 million, but they were using aggressively reduced cashflows, alongside moderate discount rates, and refusing to contemplate upsides.  I also accept that Mr Neville’s figure was £5.4 million just below my range.  But I think he was less than entirely happy with the single discount rate, and his more reliable view was £6.3 million, well within my range. It is also true that a year later, SMIF valued the portfolio much more highly, but there were special features about that sale, which did not apply in May 2005.  The PFI Infrastructure sale compares well with the discount rates I have found, allowing for strengthening market and the equity factor (which tend towards cancelling each other out).  Moreover, the annual accounts that were referred to in the evidence are very much in line with the rates that I have chosen.
191.	I should mention by way of postscript that in determining the bracket within which a non-negligent valuation might have ranged, I have followed Lewison J’s interpretation of the Merivale Moore decision at paragraph 63 of his judgment in Goldstein, where he said that it implied that the bracket should be assessed by arriving at a bracket for each of the variables, rather than only for those variables that are alleged (or found) to have been negligently assessed.
Issue 9:  Would the sale to BEIF have proceeded in the event that PwC had given a non-negligent valuation?
192.	The Claimants contended that the valuation should have been well over £11 million, and based on the oral evidence of the Claimants, that, in that event, they would not have proceeded with the sale to Barclays unless it had significantly increased its price, which they said Barclays would not have done.  Accordingly, the Claimants contend that I should find that Mr McClatchey would have done precisely what he suggested in his email of 18th April 2005, namely that “we might as well move on and start thinking about the portfolio refinancing with both parties represented in RBIL as currently”.  If that had happened, the Claimants contend that the SMIF sale would have gone ahead, but with their owning their share of the equity in the SPVs, so that they would have obtained the increased price actually realised by Barclays in December 2006, or possibly a slightly lower price just a little earlier.
193.	As appears from what I have found above, I do not think that a reasonably competent valuer ought to have valued the portfolio at double the sale price, but rather at approximately £8.8 million.  Since I accept the preponderance of the Claimants’ evidence that they would have gone ahead with the Barclays sale unless they had received a valuation of something like double the price Barclays were paying, it is clear that the sale to Barclays would indeed have gone ahead.
194.	Much of Mr Fenwick’s cross-examination of Messrs Gearon and Dixon concerned this causation issue.  In addition to what I have found above, I formed the clear view from the evidence of all the Claimants’ witnesses that there was indeed, as Mr Fenwick was suggesting to them, a significant imperative to ‘get the deal done’.  There were a host of reasons for this.  Not least amongst them were:-
i)	The fact that the Claimants (except Mr Dixon) wished to retire.
ii)	The business was strong in 2004 and 2005, but was perceived as being prone to go less well as time progressed.
iii)	Barclays could, in theory, have prevented the sale of the Rydon Group going ahead.
iv)	Since Barclays held pre-emption and confidentiality rights, it was, in practice, the only likely purchaser for the shares in RBIL held by Ryhurst.
v)	The Claimants would have been unable to sell in the future at a time of their choosing, if they walked away from the deal in 2005.
vi)	The HBOS offer for Rydon was already well above expectations, and was being chipped away as time progressed.
195.	The conclusion that the Claimants would not have walked away from the deal, even if they had been told that the valuation was higher than £5,100 per share, is, therefore, inevitable.  And, as I have said, had the Claimants been told that the valuation had increased to a figure below £11 million, they would still have wanted to go ahead with the deal.  Had they been told that the value was more than £11 million, they would probably not have proceeded with the sale to Barclays unless Barclays had increased its offer significantly. Barclays would have been reluctant to increase its offer, even if it had been told that PwC had valued the portfolio, as I have held it should have done, at £8.8 million.   As appears from what follows, it is hard to say precisely what Barclays would have done, partly because the evidence on this point was exiguous.  But one thing was, in my judgment, clear, namely that Barclays would have been most unlikely to increase its offer to over £11 million, so the deal would certainly not have gone ahead had the valuation been at that level.  That point is, however, academic since I have not held that such a valuation would have been produced by the reasonably competent valuer (as opposed to being at the very top end of a range that a reasonably competent valuer could have arrived at).
196.	In closing argument, Mr Downes mounted an alternative case, on the basis that he might not succeed in showing that the valuation ought to have been around or more than double the price Barclays paid.  The alternative case was based on the loss of a chance, in that Mr Downes argued that, had PwC valued significantly over £6 million (which was the figure at which Barclays was told by Ms Montague that PwC was valuing), and, had Barclays been told about that valuation, it would have agreed to increase its offer.  Thus, the argument runs, the Claimants have anyway lost the chance that they would have obtained a higher price.
197.	Mr Fenwick argued that claiming for the loss of a chance was not open to the Claimants because, he said, it was not expressly pleaded.  Indeed, it is true that paragraph 36 of the Particulars of Claim alleges that the sale would not have proceeded at all in any event, but paragraph 39 pleads in the alternative that the sale would have proceeded “at or close to the upper end of the valuation PwC should have provided as at January 2006 i.e. £24.5 million”.  It is only the figure at the end of that pleading that makes it inapt to this situation.  And I think it must be open to the Claimants to claim that they have, on the facts that I have found, lost the chance that Barclays would have paid more.
198.	Mr Fenwick argued next that he had not had the opportunity to adduce evidence to meet the new case on loss of a chance.  I do not think that is right.  He had every opportunity, for example, to call Barclays’ witnesses but chose not to do so.  More importantly, however, it was PwC’s case that Barclays was hard-nosed and would not have raised the price they were prepared to pay, on almost any basis.  Conversely, Mr Downes argued that Barclays was a fair and reasonable counter-party as evidenced by Mr McClatchey’s 18th April 2005 email.
199.	The legal principles in Allied Maples v. Simmons & Simmons [1995] 1 W.L.R. 563 are agreed to be applicable in the event that the point is open to Mr Downes.  Stuart Smith LJ said this at page 1614, much of which is pertinent to this case: “In that case (Davies v. Taylor  [1974] A.C. 207) the court was not concerned to distinguish between causation and quantification of loss.  But, in my judgment, the plaintiff must prove as a matter of causation that he has a real or substantial chance as opposed to a speculative one.  If he succeeds in doing so, the evaluation of the chance is part of the assessment of the quantum of damage, the range lying somewhere between something that just qualifies as real or substantial on the one hand and near certainty on the other.  I do not think that it is helpful to seek to lay down in percentage terms what the lower and upper ends of the bracket should be.  All that the plaintiffs had to show on causation on this aspect of the case is that there was a substantial chance that they would have been successful in negotiating total or partial (by means of a capped liability) protection.  In his findings (2) and (5) the judge went further than this and consequently further than he need have done, because he held that as a matter of probability the plaintiffs would have succeeded in negotiating one of the alternative solutions.  The problem about this is that there may be further evidence at the quantum hearing from Gillow or Theodore Goddard as to what the attitude of the vendors would have been.  Such evidence would be admissible, though I have some doubt how helpful it may prove to be because I suspect that Gillow or Theodore Goddard may well say that they cannot answer the hypothetical question, since it all depends on the perception of the strength of the other side's bargaining position and how strongly they felt on this point.  I think the judge may have expressed his opinion in terms of probability because he thought that both parties had invited him to do so.  Be that as it may, in my opinion Mr.  Moxon Browne was correct to accept that the judge is free on the quantum hearing to assess the chance of successful negotiation as greater or less than 50 per cent. in the light of any further evidence, and is not bound to hold that it was greater than 50 per cent”.
200.	The process is, therefore, a two stage one:-
i)	First, as a matter of causation, the Claimants must show that they had a real or substantial chance as opposed to a speculative one, that Barclays would have paid an increased price; and
ii)	Secondly, as part of the assessment of quantum, the court must assess the percentage chance that such a price would have been achieved.
I will, of course, also need to assess what increased price would be likely to have been achieved if the first stage is surmounted.  Logically, it seems to me that this latter question might be regarded as one of assessment of quantum rather than causation, yet it seems to me to be important to consider it alongside the causation question.  I say this because, on the facts of this case, there might (in theory) be a real and substantial chance of Barclays increasing its offer by £100,000, but no such chance (in theory) of Barclays increasing its offer by £3 million.  No argument was addressed on this point, and I have not been able to find much help in the authorities (see paragraphs 8-031 to 8-092 in McGregor on Damages 18th edition 2009, and, for example, John D Wood (Residential & Agricultural) v. Knatchbull [2003] 1 EGLR 33, where the point seems to have been rather skated over).   
201.	In my judgment, Barclays was indeed a tough counter-party.  It took months for it to be persuaded to increase its offer, and then it only did so by small increments of £1m, then £¼ million.   Barclays already ‘knew’ that PwC had valued at £6 million, and PwC had tried looking at a number of upsides to persuade Barclays to improve its offer, without huge success.   If PwC had indeed valued at £8.8 million, I have no doubt that Ms Montague would have used that valuation to full advantage, and would have tried to force Barclays up on the basis of it.  But the reduced discount rates that PwC would have been using would not have been that much use, because Barclays were already using discount rates at or around the same levels.  In reality, the differences were almost certainly in the fine detail.  Barclays was using different cashflows, and was not applying upsides, but small differences of discount rates particularly for the 3 biggest projects at Bexley, Black Country and Avon & Wilts, can make big differences in value.  
202.	Taking the Allied Maples stages, I am firstly satisfied that, if PwC had valued at £8.8 million, there was a real and substantial chance as opposed to a speculative one that Barclays would have paid some increased price.  I make this finding because I accept that Barclays was reasonable, if tough, in negotiation, and had no particular wish to block the deal.  It might at any time have walked away and left the Claimants with their shares in Ryhurst, but I am still sure it would have been prepared to negotiate and would have been likely to have improved its offer somewhat.
203.	It seems appropriate, before considering the percentage chance that such an improved offer would have been made to consider, on the balance of probabilities, the level to which it is likely Barclays would have gone.  What needs to be considered here is the balance of power in the negotiations.  Both sides wanted a deal.  Barclays would not have blocked the Rydon transaction had they failed to agree a price for RBIL, but the Claimants were keen to have a clean break.  I have considered the timing and manner of the negotiations that actually took place, and the different approaches to valuation that would have become apparent had a valuation of £8.8 million been disclosed or discussed with Barclays.  My clear inclination is to say, that whilst I think there was a good chance that Barclays would have gone up (and, of course, bearing in mind my finding that, if Barclays had not gone up, the Claimants would have done the deal at £5.5 million anyway), it would have been hard to push Barclays very far.   Doing the best I can, I think Barclays would have been persuaded to go to £6.5 million (an increase of £1 million) on the basis of PwC’s significantly higher valuation of £8.8 million (an increase of £2.8 million on what it in reality thought was PwC’s valuation).  Barclays went to £5.5 million against what they thought was PwC’s valuation of £6 million.  PwC’s actual valuation of £5.1 million was irrelevant to Barclays thinking as it did not know about it.  Had Barclays known that PwC was valuing at £8.8 million, that would have been well above its own figures – but I am sure that Barclays knew its figures were conservative in methodology and figures.  On the evidence, I would not expect the Claimants to have held out too strongly, as they too wanted very much to conclude the deal for the reasons I have given.
204.	I have considered whether in the situation in this case, I should also establish a range within which Barclays might have moved.  That, as it seems to me, would serve no purpose.  The Allied Maples tests are clear.  It is the chance that the third party would have acted in a particular way that must be valued.  The level of movement that Barclays would have made is an evaluation of the chance that was lost, and I must reach a decision as to its most likely level on a balance of probability on normal principles. If I established a range, it would be bound to start at zero, since Barclays was not certain to move at all.  It is better therefore to evaluate, as best one can on the evidence, where Barclays was most likely to move to, if it moved at all.
205.	The next question is what is the percentage chance that Barclays would indeed have improved its offer to the level I have determined as the most likely, namely £6.5 million.  I have thought about this in the light of the evidence I heard about the extensive dealings between Ms Montague, Mr Dodds, Mr Williams, Ms Daniells and Mr Jennings and Mr McClatchey.  I think there is a good chance that the offer would have gone up to the level I have determined.  I evaluate that chance at 75%.  
206.	On the basis, therefore, that the Claimants sold 57% of Ryhurst, they have lost 75% of 57% of £1 million, namely £427,500.  
207.	I should add by way of postscript that it seems to me that the exercise I have adopted takes proper account of the possibilities that Barclays would have increased its offer by both less than and more than £1 million.   Plainly, on the findings I have made, there would be a less than 75% chance of the offer being increased by more than £1 million, and a more than 75% chance of the offer being increased to lower levels.  It is impossible to say whether the scale is precisely linear or not, but this level of detail cannot matter.  This consideration acts as a cross-check on the method I have adopted, and seems to me to make it clear that the evaluation I have made fairly compensates the Claimants for the loss of the chance that, had PwC valued the portfolio as it should have done, the Claimants would have obtained a higher price from Barclays.
Issue 10:  Can the Claimants claim their valuation losses by reference to the subsequent sale in December 2006 to SMIF, or, if not, what losses can they claim?
208.	It is obvious on the basis of the facts that I have found that the Claimants are not entitled to claim their losses based on the SMIF sale, which took place in December 2006.  The Claimants would, in my judgment, have sold to Barclays even if PwC had provided a reasonably competent valuation at the presumed figure that I have found.  It is irrelevant that there might have been different consequences if PwC had valued at the very top of the range or bracket I have established.
209.	It is perhaps worth noting that, in any event, the sale by Barclays to SMIF in December 2006 was affected by a large number of new factors, not least of which were very much improved market conditions, a strengthened PFI market, the fact that Barclays owned 100% of the equity and subordinated debt, and the fact that Barclays was selling both together without confidentiality or pre-emption rights, and on the basis of far more optimistic and hugely improved cashflows.  Also, by the time of the SMIF sale, the projects were all at the end of the construction phase, and Barclays engaged in a highly professional marketing exercise and in detailed due diligence in the Project Maze information memorandum.
Issue 11:  If PwC is liable, were the Claimants’ valuation losses caused by their own negligence and if so to what extent?
210.	The allegation of contributory negligence was not seriously pursued in closing, so I have no need to deal with it.
Issue 12:  Was PwC affected by an unresolved conflict of interest that meant they should not have accepted the valuation retainer, and did the Claimants give their informed consent to, or waive, the conflict?
211.	The Claimants’ case on conflicts of interest was introduced shortly before the trial began.  In closing argument, Mr Downes submitted that, if the Claimants were right about the conflict, it would get them over the hurdle of the limitation of liability clause if it were otherwise applicable, because on the proper construction of the Engagement Letter, there was no limitation applicable to damages arising from the existence of such a conflict of interests.  In the result, therefore, the conflicts case is superfluous because I have found that the Claimants are only entitled to damages below the £1 million limit of liability.  I will, nonetheless, deal briefly with the conflicts issues in case the matter should go further.
212.	The central allegations are in paragraph 30A of the amended Particulars of Claim, which it is worth setting out as follows:-
“Further or alternatively [PwC] was in breach of the Engagement and/or the FSA Rules by not informing the Claimants and each of them that they had a conflict of interests in valuing Ryhurst’s interests in the RBIL Portfolio and by continuing to act without the express informed consent of the Claimants and each of them.  The conflict arose because in January 2005 BEIF had asked [PwC] to put forward proposals for the refinancing of the subordinated debt within the RBIL Portfolio and maximising value for the shareholders of RBIL. On 22nd February 2005 Barclays instructed [PwC] that it would not go ahead with the refinancing until after it had acquired full control of RBIL, thus meaning that Barclays intended to obtain the full benefit of any refinancing for itself and not to share it with the Claimants.  In the premises as from 22nd February 2005, at all material times, it was in the direct financial interests of [PwC] (in the form of anticipated fee income) to produce a valuation that was at or below the price that they perceived BEIF would pay for control of RBIL; and it was in the indirect interests of [PwC] to assist BEIF (as a prospective client in relation to the refinancing) to acquire Ryhurst’s interests in the RBIL Portfolio at as low a price as possible and within any valuation to attribute as low a figure for refinancing gains as possible”. 
213.	This pleading breaks down into 2 allegations, based on PwC’s knowledge that Barclays wanted to refinance after acquiring the RBIL Portfolio:-
i)	It was in PwC’s financial interests to value at a low price that it thought Barclays would pay, so it could obtain the future refinancing work.
ii)	It was in PwC’s indirect financial interests (a) to help Barclays acquire the RBIL Portfolio at a low price, and (b) to attribute a low value to refinancing gains, so it could obtain the future refinancing work. 
214.	As it seems to me, these allegations are based on a non sequitur.  The Claimants’ thesis is that, because PwC would want to pick up work from Barclays in the future refinancing, it would be in its interests to ‘help’ Barclays by valuing the RIBL portfolio at a low level.  Thus it is suggested that PwC would be more likely to obtain the future work if it did an incompetent job, and was seen by Barclays to have been doing an incompetent job for the Claimants.  As it seems to me, this inappropriately assumes corruption on the part of PwC and also possibly Barclays.  It is rather more likely, in my judgment that Barclays would choose PwC for the future work (a) because PwC had acquired knowledge in valuing the RBIL portfolio which any competitors would not have, thereby meaning that PwC could do the refinancing work more economically, and (b) because PwC had done a competent job for the Claimants, rather than the reverse.  Barclays is accepted as being a sophisticated client, which has its own valuation expertise in-house.  It must be assumed that it would know if PwC’s valuations for the Claimants were too low.  I would expect Barclays to be unimpressed rather than pleased by such a situation.  Of course, if PwC had deliberately put a low value on the RBIL portfolio to help Barclays, that would have been a breach of fiduciary duty, a breach of the valuation retainer, and possibly a fraud.  But that is not what is alleged, although Mr Downes’s cross-examination of PwC’s witnesses came close to it at times.
215.	Major accountancy firms, like major legal firms, frequently attract business by acting against their prospective client.  They do that by impressing that prospective client with their professionalism and competence, not by showing that they are willing to act against the interests of their own client.  If the prospective client once thought that its prospective adviser had a propensity to act in breach of fiduciary duty, it would, if well advised, run in the other direction.
216.	This point does not, however, dispose of the conflict allegation.  The essential question remains whether PwC’s personal interest in obtaining the fees from Barclays’ future refinancing, providing an incentive to see to it that the deal goes through, is in conflict with the Claimants’ interest in having an accurate valuation.
217.	PwC initially submitted that this could not be a conflict unless PwC had a contractual right to the future fees.  Mr Simon Salzedo, who argued this part of the case for PwC, submitted that, in fiduciary terms, this would, if it were a contractual entitlement, amount to a secret profit.   In argument, however, Mr Salzedo conceded that, in some circumstances, something less than a contractual entitlement might suffice to create a conflict.  For instance, if Mr Jennings had said to Mr Williams that Barclays would see to it that PwC got the refinancing work, provided the sale went ahead, that could have amounted to such a conflict.  
218.	In my judgment, what matters is the perverse incentive.  Thus, if the facts give rise only to the indication that the professionals will do a particularly good job for their client in order to impress them and obtain future work, no question of conflict will arise.  A corrupt and contra-intuitive motive will not be inferred without a factual premise for that inference.  But if there are some facts that give rise to the inference that the professionals actually have a perverse incentive to achieve a result that may be at odds with the interests of their client, a conflict may be held to exist.
219.	It seems to me that the Claimants’ allegations of conflict are, in reality, different from and rather more limited than the pleading.    The substantive claims are:-
i)	That it was in PwC’s personal interests to see the deal with Barclays go through, because PwC was more likely, as a result, to obtain the refinancing project that Barclays was then expected to pursue.
ii)	That PwC had a “long track record” of working for Barclays in the past.  In fact, PwC and its predecessor firms have been Barclays’ auditors for many years.  But this is public knowledge and cannot be relevant to the issues that arise here.
220.	Put this way, it can be seen that there is no evidential basis for the allegation of conflict.  There is no allegation that PwC had been promised the refinancing work if the sale went through.  The allegation is simply that the 22nd February 2005 email expressed Mr Cleal’s view that PwC would be “first in line” for that work, because it would already be familiar with the portfolio.  That is not a perverse incentive, but an entirely transparent and acceptable one.  If PwC impressed Barclays by doing a good job for the Claimants and Ryhurst, and by demonstrating its familiarity with the portfolio, Barclays would be more likely to want to use them in the future for the refinancing.  Moreover, there was no allegation that Barclays had given PwC any indication that it would be more likely to be awarded the refinancing work if the deal went through.  There was, therefore, in my judgment no factual basis on which it could properly be inferred that PwC had a perverse incentive to achieve a result that might be at odds with the interests of its client in the way I have described.
221.	The second allegation, namely that PwC had a long track record in working for Barclays, is not of much consequence in this case, because the Claimants (through Mr Gearon, who discussed such matters with the other Claimants) and Ms Montague (who acted for all the Claimants) knew very well that PwC worked for Barclays and regarded that relationship as an advantage rather than the reverse.  This informed consent would not, however, have been enough to dispose of a conflict of the first kind that I have discussed had it existed.  Because the Claimants and Ms Montague were not aware that PwC had been promised future work (which in fact they had not), and could not be presumed to have consented to such a conflict.
222.	In these circumstances, it does not seem to me to be necessary for me to decide whether the consequence of such a conflict would be to allow the Claimants a way round the limitation clause, on the grounds that clause 7.1.3 applied, because PwC was in breach of a duty under FSMA or the rules of the FSA in supplying services which constitute mainstream regulated activities (as defined in the FSA Handbook), so as to negate the limitation of liability in clause 7.1.4.  Nor do I need to decide whether the 2-year limitation clause in clause 7.4 would have applied to prevent the claim for damages for breach of duty arising from the alleged conflict.  These matters, as it seems to me, can await a future case in which they need to be determined. 
Issue 13: If there was an unresolved conflict, are the Claimants entitled to damages for PwC’s breach of duty in acting for them when affected by an unresolved conflict of interest, and, if so, on what basis, and how much?
223.	This issue also does not arise, for the reasons I have explained above.
Issue 14: If the terms of the Engagement Letter apply to the valuation retainer, does the time limitation and/or the limitation of liability satisfy the requirement of reasonableness, and, if so, are they applicable to any or all of the Claimants’ claims?
224.	This issue is also now irrelevant in the light of previous findings.  But, in case the matter goes further, I will express my views briefly.
225.	It is common ground that section 2(2) of the Unfair Contract Terms Act 1977 is applicable to the limitation clause and the limitation of liability clause in the Engagement Letter.  Section 2 provides as follows:-
“(1)     A person cannot by reference to any contract term or to a notice given to persons generally or to particular persons exclude or restrict his liability for death or personal injury resulting from negligence.
(2)     In the case of other loss or damage, a person cannot so exclude or restrict his liability for negligence except in so far as the term or notice satisfies the requirement of reasonableness.
(3)     Where a contract term or notice purports to exclude or restrict liability for negligence a person's agreement to or awareness of it is not of itself to be taken as indicating his voluntary acceptance of any risk”.
226.	It is also common ground that the guidelines for the application of the reasonableness test contained in Schedule 2 to the 1977 Act are relevant to an application of the reasonableness test under section 2(2).  Applying those factors, I have formed the view that, had it been relevant, the limitation of liability clause in the Engagement Letter would, in the circumstances of this case, have satisfied the requirement of reasonableness. My reasons can be summarised as follows:-
i)	The parties in this case were not of equal bargaining position.  PwC was in the strongest position, but the Claimants were powerful and experienced business people, and their companies had considerable commercial influence.  The Claimants were fully aware of the possibility of going elsewhere for their valuation advice and even contacted DWPF before deciding to instruct PwC.  The Claimants were not in any sense presented with a fait accompli.  They chose to use PwC, knowing that it employed limitation clauses, because they thought that it would be useful to them to have that firm undertaking the valuation they needed for a variety of reasons.
ii)	The Claimants either knew or ought reasonably to have known of the limitation of liability term.  Ms Montague was acting for them, and could very easily have considered the matter and realised that what was being offered was an extension to the Engagement Letter, which she knew contained the limitation on liability.  The Claimants are not to be regarded as innocents abroad.  They were entirely capable of protecting their own interests.   They knew and understood that accountancy firms customarily limited their liability by clauses of this kind, but chose not to discuss or negotiate the limitation.
Issue 15:  What damages are the Claimants entitled to for each breach of contract and/or duty relied upon?
227.	For the reasons given above, the Claimants are entitled to recover £427,500 by way of damages for breach of the valuation engagement.  The allocation of such damages is a matter for the Claimants and the other addressees of the Engagement Letter under clause 7.1.5, but it seems likely that the fair result would be to allocate the damages in proportion to the Claimants’ holdings in Ryhurst that were sold to Barclays.
Conclusion
228.	The evaluation of appropriate discount rates was not an entirely straightforward process in the narrow and developing secondary market for PFI investments.  It is for that reason that I have found a rather wide bracket of discount rates which a reasonably competent valuer might have employed.  PwC was not far away from the bottom of a reasonably competent range, but, as it seems to me, it went awry by increasing too much the discount percentage it used for the fact that it was valuing equity alone rather than equity and subordinated debt stapled together.   That was its main error.   For that breach of contract, I have found that the Claimants are entitled to recover £427,500 by way of damages for the loss of the chance that they would have obtained a higher price from Barclays had they been able to deploy a higher valuation from PwC.
229.	I would like to thank all 4 counsel and the solicitors for their careful preparation and measured presentation of the arguments.  Their efforts have much assisted me in deciding the issues between the parties. I will hear counsel on the question of costs.