Case No: 2001/111
Neutral Citation Number: [2002] EWHC 1229 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEENS BENCH DIVISION
COMMERCIAL COURT

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 19 June 2002

B e f o r e :

THE HONOURABLE MR JUSTICE TOMLINSON
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	LOGISTIC RESOURCES LTD	Claimant	
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	EASTGATE GROUP LTD	Defendant	
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Mr. M.  Lazarus instructed by Messrs Gouldens for the Claimants
Mr. J. N. Gruder Q.C. instructed by Messrs Lawrence Graham for the Defendants

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Judgment
Mr Justice Tomlinson  : 

1.	The Claimants to whom I will refer as “LRL” were founded in 1994 and between 1994 and 2001 operated as a small boutique computer software designer and developer specialising in bespoke software systems for the insurance industry.  LRL started as effectively a two-man company, being the principals Mr Stephen Devonald and Mr Patrick Shiel.  In early 1995 six people were working in the company.  At the height of the business with the Defendant with which this action is concerned—broadly the three year period mid 1998 to mid 2001, the Claimants employed up to 40 people.  Mr Devonald provided the computer software expertise.  Mr Shiel’s experience and expertise lay more in management, particularly insurance related.  He is also an accountant.
2.	The Defendant company, formerly known as Eastgate Group Ltd, was formed in January 1995 as a result, in part, of the amalgamation of Trinity Square Services Ltd (“TSS”) and City Run-Off Ltd (“CRO”).  TSS had provided run-off administration services to insurance companies.  CRO had provided run-off administration services to Lloyd’s syndicates.  CRO changed its name to Eastgate Syndicate Management Ltd at the end of 1996.  The third business merged to join Eastgate Group Ltd on 1 January 1995 was Randall Insurance Services.  Between January 1995 and November 2000 Mr Ken Randall was Chief Executive of Eastgate Group Ltd, to which I will refer as “Eastgate.”  A subsidiary of Eastgate was Eastgate Management Services Ltd.  It was responsible among other things for IT matters.  Between 1995 and 1999 Mr Tony Hart was Chief Executive Officer of Eastgate Management Services Ltd.  As such he had overall responsibility for IT matters within the group, answerable to Mr Randall.
3.	Mr Devonald, Mr Shiel, Mr Randall and Mr Hart had all known each other since at least the early 1990’s.  Mr Randall had been Chief Executive of Merrett Holdings plc between 1985 and 1991.  In that capacity he took on Mr Hart as Systems Director.  Mr Hart in turn employed Mr Devonald and Mr Shiel.  They enjoyed a good working relationship involving mutual trust and mutual respect for each other’s abilities.  That relationship accounted to some extent for the lack of rigour and formality which attended their subsequent dealings, with which this action is concerned.  LRL had been formed following the demise of Merrett in 1993.  
4.	Eastgate acquired, with its purchase of TSS, a computer system called EROS, an acronym for “Electronic Run Off System.”  It catered for the insurance company market served by TSS.  It was a software system which handled run-off for individual insurance companies.  It was unsuitable for use in the Lloyd’s market without substantial enhancement since it had no facility to process standard Lloyd’s electronic messages.  More importantly, it could not process claims at a market-wide level.  In the administration and particularly the run-off of Lloyd’s syndicates there was the potential for large efficiencies if risks written or participated in by many syndicates and the claims arising therefrom could be processed once by a single entry of the relevant details, which could then be disseminated market-wide and incorporated electronically into each syndicate’s programme.  What was needed was a system which concentrated on the fact that many syndicates participated in a single risk and sought to collate information on a market-wide basis, rather than catering simply for the needs of a single syndicate or managing agency as if the business written by that syndicate or managing agency were unique.  
5.	In the early part of 1995 the Lloyd’s market was in a state of flux.  It was well known in the insurance market that Lloyd’s hoped that it would prove possible to reinsure the many syndicate years from the 1980’s which remained open into a new company initially called “Newco” ultimately “Equitas.”  Initially it was thought that all open years up to and including 1985 would be reinsured into the new entity.  By May 1995 it was expected that all open syndicate years up to and including 1992 would be reinsured into Equitas.  By July 1995 this was being talked of as the probable outcome.  
6.	Hand in hand with this development went Lloyd’s related proposal, first published to the market in February 1995, progressively to “migrate” the administration of syndicates and run-off from the large number of run-off service providers then providing such services to a reducing number of more efficient providers and/or to Equitas itself.  It was anticipated that Equitas might also sub-contract run-off administration functions to a “handful” of approved organisations.   The approved organisations would of course be those which were cost-effective.  
7.	In early 1995 Eastgate was already providing run-off administration services to 21 syndicates hitherto managed by Gooda Walker and by Poland and Bromley (by now merged) and was about to acquire similar work for a further 26 syndicates from the Turret managing agency, formerly Archer.  There is no doubt that the climate in the early part of 1995 was that the impending developments at Lloyd’s presented both opportunities  and risks.  The most efficient and cost-effective run-off service providers had the prospect of securing lucrative work from Equitas or arising out of the reorganisation which would follow implementation of the proposal to use Equitas as a vehicle for reinsurance and syndicate administration.  The less efficient run-off service providers faced the prospect not just of failing to secure further work but of losing such work as they already had as the administration of syndicates whose run-off they already handled was progressively migrated to Equitas.  
8.	Eastgate recognised that crucial to their ability to position themselves successfully in this new market environment was the development of a computer system similar to Eros for companies that would be suitable for use in the Lloyd’s market.  The project became known as Eros for Lloyd’s.  Whilst at the Merrett group Mr Devonald and Mr Shiel had worked on a system similar to that now envisaged.  It was natural that Mr Randall and Mr Hart should turn to LRL to develop a suitable system.  LRL understood the requirement and had relevant experience in the field.  As a newly formed small company it was eager for work and able to offer rates that would be highly competitive when judged against those of the very largest players in the field.  Above all Mr Randall and Mr Hart had confidence in the ability of Mr Devonald and Mr Shiel to deliver a suitable product within the tight time scale that was required if Eastgate was to keep pace with the developments at Lloyd’s, where the Equitas scheme was expected to become effective in early 1996.  
9.	Initially it was thought by both Eastgate and LRL that it would be possible to re-use part of the Eros for companies system in developing a new Eros for Lloyd’s system.  On 23 February 1995 LRL presented to Eastgate a “Proposal for the development of Eros for Lloyd’s Run-Off Business.”  It envisaged the enhancement of Eros for companies.  A price was quoted of £71,500 for the planning and analysis phases, with a time scale of 4 and 6 weeks respectively.  For design, construction and implementation LRL quoted the price of £390,000, with time scales of 10-12 weeks for design and 20-32 weeks for construction and implementation.  Section 8 of the document is headed “Assumptions.”  Clause 8.1 recites:-
“Ownership of System
LRL will act as agents of the Eastgate Group in developing the Eros software, and all rights to the Eros software will remain with the Eastgate Group.”
10.	The planning and analysis phases were carried out pursuant to an agreement dated 27 February 1995.  On 5 April 1995 Mr Randall, Mr Hart and Mr Devonald, amongst others, participated in a “scoping workshop” at Eastgate’s premises at the Oast House, East Malling in Kent.  The document that was subsequently produced by Eastgate to encapsulate the matters discussed and agreed recorded Eastgate’s business objectives.  There appeared the following passages:-

“1.3 Business Aims
This section presents the business rationale for City Run-Off (CRO) which will directly or indirectly be supported by EROS for Lloyd’s .  It describes the strategic direction for the business and the specific business objectives that must be addressed.
1.3.1. Business Mission
The Mission Statement is a concise description of what Eastgate Group aims to accomplish.  It is defined as follows:
The mission of City Run-Off is to :
Provide run off services for Lloyd’s syndicates, clearly positioned at the high value added end of the market, specialising in “difficult” classes of business on lead lines.
1.3.2. Business Objectives
The mission statement is underpinned by a number of specific business objectives, each with a definition, these are represented hierarchically in this section.  The first diagram represents the top level, each of the first four objectives has been further decomposes in the diagrams that follow…….
SATISFY CLIENTS
The platform for successful growth will be provided by the current client base.  It is therefore essential that these clients are satisfied with the service provided.  An essential element of this is to communicate what we can provide, and then deliver it.
		Clients include: GW, P& B, Turret
DELIVER TOP QUALITY SERVICE
This can be seen as a critical factor for CRO.  By delivering a top quality service, effectively and efficiently, CRO will differentiate itself from the competition and provide a baseline for expansion and the acquisition of new clients.
ACQUIRE NEW CLIENTS
The acquisition of new clients is critical to the expansion plans of the company.  Key to achieving this is the delivery of a top quality cost effective service combined with pre-eminence in the market.  It must be made easy for new clients to come on board and attractive to Equitas to utilise CRO as a more effective and efficient organisation than the competition.
ACHIEVE TECHNICAL PROFICIENCY
Best practice must be encouraged and developed within the company.  Technical proficiency must be rewarded and demanded in order to meet the evolving demands of clients.
OFFER NEW SERVICES
Specialised services should be specific to functions rather than to clients.  Potential clients of new service include:
•	Names
•	Lloyd’s / Equitas
•	Members Agents
•	Others Agents
In addition, CRO may become an IT provider.  The EROS for Lloyd’s solution must reside on a single agreed platform.  There may be an opportunity to provide the EROS for Lloyd’s solution to Equitas, on a bureau or purchase basis……
…………
1.3.2.3. BUSINESS OBJECTIVES: ACQUIRE NEW CLIENTS
………
BECOME LICENSED
It is important to the future positioning of Eastgate Group that CRO achieves a ‘licence to operate’ in the Lloyd’s run-off market.  This will attract further clients and will inhibit the ability of other players to offer competing services.
ESTABLISHED PROVIDER TO EQUITAS
CRO wishes to establish itself as a primary and preferred provider of run-off services to Equitas.”
11.	At some stage between May and July 1995 it became clear that no part of the Eros for companies system could be re-used and that a completely new bespoke system required to be developed.  What is at issue in these proceedings is whether in the light of this discovery there emerged an agreement pursuant to which in return for undertaking the development of such a system at a fixed and, LRL says, uneconomic price, LRL would become entitled to a share in the success of Eastgate’s exploitation of the system, by whatever means that was achieved.  It is clear that there were constraints on how much Eastgate could afford to and/or were prepared to spend.  Mr Randall, who did not pretend to perfect recall of the detail of the discussion, did recall that it was mentioned by him in discussions that Eastgate was not to spend more than £1million.  Mr Randall also hoped and expected that he would be able to recover this by way of charges to the existing managing agents for whom Eastgate already carried out or were about to carry out run-off services, namely Gooda Walker, Poland & Bromley and Turret.  The figure may well have been made up of, broadly, £390,000 for design, construction and implementation and £590,000 as the anticipated cost of converting the data from those existing 47 syndicates so as to render it compatible with the new system.  Whatever the derivation of the figure, LRL were aware of the limit.  There were also time constraints.  On 19 May 1995 Mr Hart wrote to Mr Devonald in these terms:-
“I know that we have not yet finalised details of the Design and Construction phase of the Eros for Lloyd’s project, pending completion of the Business Requirements documentation process.  
However, recent business developments indicate a high degree of probability that CRO will acquire considerable additional run-off business in the fairly near future, dependant on guaranteed availability of the Eros system by 1.1.96.  Consequently, I should like to bring forward the time scale for system design and application proto copying, to give us increased contingency in the time scales towards which we have been working.  Naturally, if events result in Eastgate’s cancellation or postponement of the Eros project before we have agreed contractual arrangements with Logistics Resources Ltd (LRL) for the Design and Construction phase, then Eastgate will reimburse LRL for any additional costs incurred through this approach.  This would apply if any other  factors were to cause a situation in which LRL were not the appointed supplier for this phase of the project.
Please let me know if you have any problems with this approach. ”
It is unclear whether this letter was written before or after it had become apparent that Eros for companies could not be modified but that is immaterial—the time constraint was the same whatever the nature of the project, albeit arguably more difficult to meet if it was a development of a wholly new system.  That however begs another question which was in issue between the parties, which was whether the anticipated cost of developing a wholly new system was in fact substantially greater than the anticipated cost of modifying Eros for companies.  It was not explored at trial whether the £390,000 in the February proposal was itself a discounted cost.  Mr Devonald says that once it became apparent that a new system was required it was his estimate that a commercial price for the design, construction and implementation phases would be £1.5million, excluding the cost of converting data.  However he does not suggest that he discussed this figure with Mr Hart or Mr Randall.  His evidence was that LRL started from the premise that LRL would build the system for the price that the managing agents Gooda Walker, Poland and Bromley and Turret would pay to Eastgate.  He appreciated even after discovering that there was little or no re-usable functionality in Eros for companies that LRL had to build to this figure if the project was to go ahead.  What he suggests however is that by the stage of discussions in July 1995 which led to an agreement subsequently enshrined in a document it was clear to Mr Hart and Mr Randall that in proceeding on that basis LRL would be supplying the Eros for Lloyd’s system at a large discount to the price which Eastgate would have had to pay to any other supplier.  
12.	The conflict of evidence on this point is therefore more apparent than real.  Mr Hart accepted that the price which might have been charged for the work by one of the large software houses, such as IBM, Andersens or EDS, starting from scratch, would probably have been of the order indicated by Mr Devonald.  The expert evidence of Mr White confirmed this impression.  What that evidence does not really assist me on at all is whether the cost to LRL of developing a system from scratch, using their Powerbuilder Object Library, was in fact substantially greater than the £435,000 included in their July proposal.  It is common ground that the increase of £45,000 over the February price was not intended to reflect any element of increased cost arising out of the inability to modify Eros for companies.  It reflected some additions to the specification in terms of training and additional documentation as well as increases in functionality.  Mr Hart described it as a method of upping the price as well, but not in terms of any attempt to reflect an increase in costs.  He said that the good news from Mr Devonald was that it would not really cost a great deal more to build a new system as opposed to modifying the existing system, because it could use more up-to-date techniques from the start.  Mr Randall said that his understanding from Mr Hart was that it was going to cost more but not significantly more.  I do not think Mr Randall had focused on the increase from £390,000 to £435,000 except to the extent that it confirmed his view that the increase in cost was not significant.  
13.	Mr Hart thought that another comparable small software house without LRL’s advantage in immediately relevant experience and expertise would be likely to have charged something of the order of £550,000 but nothing approaching a price of the order of £1.5million which one of the very large operators would be able to command having regard to the resources they would make available and the guarantee that employing such an organisation is supposed to attract.  There is simply no evidence of the actual cost to LRL, still less of the comparative cost of modification and starting from scratch.  Mr White records in his expert report that “because of the fixed price nature of the contract, accurate time records were not maintained.”  In carrying out his exercise Mr White was attempting to calculate what an independent company at arm’s length might have charged.  He had in mind principally one of the big systems integration or development companies or one of the big accountancy firms who have branched out into systems delivery.  I was not persuaded that the exercise conducted by Mr White was of any real relevance to an assessment of the actual direct cost to LRL of doing this work.  LRL undoubtedly started with some significant advantages over any other software house that might have been employed to do the job.  Furthermore Mr Devonald was, as I infer, exceptionally talented.  LRL was keen to do the work for at least two reasons.  First because of the anticipated benefits which would accrue in the event that Eastgate was successful in capturing the Equitas run-off work.  There would be conversion work, converting the syndicates’ data to make it compatible with the Eros system.  This was repetitive high volume work and was highly profitable.  There was also anticipated maintenance and updating work, enhancements to the system and the development of additional functionality.  Secondly it would of course redound greatly to the credit of LRL in the market place if they succeeded in delivering this new system on time.  
14.	The issue of what development of the system might have cost had it been entrusted to a company other than LRL simply never arose—it was never put to the test.  Mr Randall and Mr Hart never had any intention of asking anyone else to do the work and Mr Devonald and Mr Shiel never gave them any occasion to think that they were not enthusiastic to do the job and moreover content to do so at a fixed fee of the order which Eastgate was able and willing to pay.  I would accept that both Mr Randall and Mr Hart appreciated that the price charged by LRL was highly competitive and that they would have had to pay more elsewhere.  Mr Randall at the least would not have had any confidence that any other software house could have delivered the project in the time required at a comparable price.   However I do not accept that either Mr Randall or Mr Hart thought that LRL was undertaking the job at a price which was uneconomic, in that the immediate cost of carrying out the work would be greater than the fixed fee.  I am fortified in this finding by the manner in which Mr Devonald put the matter in his Witness Statement.  At paragraph 36, in the context of his discussion of a meeting to which I must shortly turn, Mr Devonald says this:-
“I said [at the meeting] words to the effect that we would only be able to perform the development work down to a price of £435,000 (meaning by this that it was only financially viable at that price) because we would use our copyright Powerbuilder Object Library, by which we could keep down the cost to LRL of building the system.”
	On the other hand it very probably was apparent to Mr Randall and Mr Hart that the fee agreed could involve little or no profit, and that LRL’s enthusiasm to do the work at the price derived from their expectation of sharing in Eastgate’s future success.  The question is therefore in what manner it was anticipated and agreed that they should so share.  I reject the Claimants’ assertion that the discussion on this issue was initiated because of or was driven by an increase in cost consequent upon the discovery that Eros for companies could not be modified.  On the other hand I accept that the discussion was informed by the circumstance that LRL would be producing a wholly new product, rather than modifying a system the intellectual property rights in which already belonged to Eastgate.  In my view this point is of some significance, both in understanding how the discussion came about and progressed and in understanding the manner in which that was reflected  by the documents which were created.
15.	I have already referred to Clause 8.1 of LRL’s proposal of 27 February 1995.  On a date in May LRL put forward a draft Agreement for the Supply of the Eros for Lloyd’s System.  It is plain from the content of the draft agreement, dated by Mr Devonald the “nth” day of May that it was prepared prior to the realisation that Lloyd’s for companies could not be modified.  Mr Hart made manuscript notes on his copy of the draft agreement setting out areas for  discussion.  Note 5 reads “We will want all rights to the developed system, documentation, intellectual property rights etc.”  This reflects the fact that the draft agreement contained no provision giving effect to what was stated at Clause 8.1 of the earlier proposal to be one of the assumptions on which it was based.  
16.	On a date between 6 and 19 July 1995 there was a meeting between Mr Devonald, Mr Hart and Mr Randall at the Oast House.  However prior to that date there had been various discussions between Mr Devonald and Mr Hart.  Those discussions must no doubt have embraced points highlighted by Mr Hart in his notes on the draft agreement.  One topic raised was the question of a royalty to which LRL would be entitled from Eastgate.  Mr Randall recalls that prior to the Oast meeting Mr Hart was lobbying him to agree some royalty arrangement because Mr Devonald felt that he should get more out of the deal than simply the payment of the cash.  Mr Hart’s evidence was to the effect that the agreement he reached with Mr Devonald prior to the meeting was that a royalty would be payable in the event that Eastgate sold or licensed the Eros for Lloyd’s software to someone or if Eastgate provided an IT bureau service to another using that software.  A bureau service would be one where Eastgate permitted a third party customer to use its own computer terminals to access Eastgate’s computer hardware located at Eastgate’s premises and on which the Eros for Lloyd’s software would be running.  In such a case the customer purchases computer services from Eastgate and, on this example, what is being purchased is the remote use of the Eros for Lloyd’s software the functionality of which the third party customer would then employ in its own run-off administration.  This envisaged royalty would of course be additional both to the fixed fee and to the revenue which LRL would earn from conversion, maintenance and enhancement work.  Eastgate did not at this stage have any licensing business nor did it offer computer bureau services.  Mr Hart was however very keen to develop this aspect of the business and he thought that demand for and interest in the Eros for Lloyd’s software would be significant.  Mr Hart was supported at board level although the development of services of this sort was not a priority for Mr Randall.  He was to an extent humouring Mr Hart, although Mr Hart was successful in obtaining a £2million per annum computer services contract with Canon in 1996.  This had nothing to do with Eros for Lloyd’s but bears out his evidence that the development of the provision of services of this type was something which he actively pursued.  Later on in 1998 a Mr Last was appointed to spearhead the sales effort in this regard.  
17.	The account given by Mr Devonald and Mr Shiel of the discussions prior to the Oast meeting is very different from that of Mr Hart.  Mr Devonald says that discussion of the royalty arrangement began when it became apparent that Eros for companies could not be modified.  In his Witness Statement at paragraph 31 he says this:-
“It was at this point that we began to discuss a royalty arrangement under which LRL would limit the fixed price for developing Eros for Lloyd’s including data conversion to less than £1million in return for a share in the commercial success of the new system.  This principle was eventually agreed, initially between Patrick Shiel and myself for LRL and Tony Hart for Eastgate in informal discussions over a period of months, culminating in the 6 July Proposal agreed at the July 1995 meeting at the Oast House.  During these discussions we drew no distinction between the different ways in which Eastgate might choose to explore Eros for Lloyd’s.  We agreed that LRL should have a share, to be determined, of any success of the new system.  Tony Hart only distinguished between new business to be acquired in the future by Eastgate, in relation to which he agreed that Eastgate’s possession of Eros for Lloyd’s would be vital, and existing Eastgate managed syndicates, which Eastgate intended to migrate from older systems onto Eros for Lloyd’s.  He included, within the second category, the 26 Turret syndicates which we were told that Eastgate was close to acquiring.  For our part, Patrick and I accepted that these 47 existing, or almost acquired, syndicates should be left out of any arrangement for LRL to share in the revenue to Eastgate from Eros for Lloyd’s.”
Before turning to the 6 July Proposal which Mr Devonald describes as the culmination of his discussions with Mr Hart I must also record what Mr Shiel says, although the discussions were I think principally between Mr Devonald and Mr Hart.  At paragraph 34 of his Witness Statement he says this:-
“Tony Hart was well aware that the cost of a new bespoke system would be far in excess of the cost of adapting Eros for companies.  He asked Stephen and me to consider the risks and to participate in the rewards of building a brand new bespoke run-off system for Eastgate.  This was something that Tony said that he had already discussed in principal with Ken Randal.  Ken was said to be keen to pursue this urgently, to cater for the valuable emerging Equitas run-off administration market, where he saw great threats and great opportunities.  Tony reasoned that if Eastgate obtained even 10% of the Equitas business, it would produce significant royalties for LRL-based on a percentage of anticipated Eastgate revenues over say 5 years.  At the end of this time, we would expect Equitas to have consolidated onto its own systems.  Even at this low level of market penetration, Tony argued, our foregone profits by not developing other opportunities in the Equitas market would be an insignificant loss when compared with the percentage of the revenue accruing to Eastgate. If Eastgate were more successful than this—and we all agreed that there was a good chance of success if we could develop a suitable IT facility—we would all become millionaires by concentrating all our resources on the Eros build.  I and LRL had therefore to balance short term opportunities for modest profit with a long term opportunity for substantial profit.”
18.	The 6 July 1995 Proposal is an important document.  Under “Background” there appear the following three paragraphs, significantly different from their precursors in the February document to account for the fact that it had been discovered that Eros for companies could not be modified:-
“TSS has its own in-house EROS system, developed to handle its company run-off business portfolio; CRO and Turret are currently reliant on a number of third-party suppliers to provide applications support for their Lloyd’s run-off business.  It has been decided that the group will capitalise on the advantages of an in-house system, and this process is to be effected by developing the EROS functionality to deal with the Lloyd’s market.
Planning and Analysis for this development has already been carried out by Logistics Resources, and prototypes for the “Eros for Lloyd’s” system have already been developed and demonstrated internally.  It is expected that Equitas review teams will shortly be inspecting the Requirements documentation form the Planning and Analysis stages, and will also be provided with the opportunity to review the prototypes thus far developed.
In these circumstances, Logistics Resources Limited (LRL) are pleased to put forward this proposal for completion of the EROS system to cater for Lloyd’s run-off business.”
Section 7 contained the new fixed price of £435,000 for design, construction and implementation.   At Section 8 under the rubric Assumptions there appeared the following new paragraph 8.1:-
“8.1	Ownership of System
LRL will act as agents of the Eastgate Group in developing the EROS software and associated intellectual property rights will remain with the Eastgate Group; with the following exception.
In consideration of the fact that LRL is proposing a fixed price development, and is utilising its in-house developed Powerbuilder Object Library in building the Eros for Lloyd’s system; while granting the Eastgate Group a license in perpetuity to utilise the objects contained therein for support and ongoing development of the Eros for Lloyd’s system, LRL reserves the right to benefit from any future financial gain to the Eastgate Group through making its Eros for Lloyd’s system available to a third party through sale, rent or any other means.
The form and extent of any such apportionment of future benefit will be agreed and included in the final contract.”
19.	It is the Claimants’ case that it was in this paragraph that Mr Devonald encapsulated the agreement or understanding which he had reached with Mr Hart.  I accept that this paragraph reflects the discussions and the agreement and understanding reached but it is in my judgment highly significant that what is recorded is under the rubric “Ownership of System.”  I cannot accept that by the use of this language under this heading Mr Devonald had any intention to reflect any agreement or understanding that LRL would be entitled to a share in Eastgate’s income derived from run-off administration contracts secured as a result of the availability of Eros for Lloyd’s or performed using that facility.  It is plain to me that the thinking behind this paragraph was that Eastgate’s ownership of the intellectual property rights in the new system would prevent LRL from selling or licensing to third parties the system which they were about to develop.  The thinking therefore was that if Eastgate chose not just to use the system in the provision of run-off administration services but also simply to sell the system to others, for their use in their business, then LRL should be entitled to a share in that revenue.  It would have been a source of revenue available to LRL had not Eastgate insisted on ownership of the intellectual property rights which, be it noted, although this is not followed through in the amendment of the paragraph from its previous February form, was not now simply an insistence that intellectual property rights should remain with Eastgate but rather that the newly created intellectual property rights in the new system should vest in Eastgate.  The Claimants’ case is that their entitlement to share in Eastgate’s income derived from the utilisation of Eros for Lloyd’s in the provision of run-off services is intended to be captured by the catch-all phrase “or any other means.”  Mr Devonald said in evidence that he used this expression rather than referring expressly to run-off administration contracts because one other possibility was that the system would be used to assist in active or live underwriting.  He said that this was his attempt to catch everything.  Mr Devonald may well have had in mind a modification to the system which would enable an underwriter in his box at Lloyd’s to input risk details as written either through the use of modified Eros software on his own system or by making use of the software by telephone connection to Eastgate—a bureau system.  I cannot however accept that Mr Devonald intended by his “catch-all” phrase to capture use by Eastgate itself of Eros for Lloyd’s in the provision of run-off administration services.  I should stress that that is a conclusion which I have reached only after consideration of all the issues in the case, looking at the matter in the round.  The thrust of the relevant sentence in Clause 8.1 is the reservation of a right to benefit from Eastgate selling the system to third parties or otherwise in some manner making it available to others for them to use.  It has nothing whatever to do with use of the system by Eastgate for its primarily intended  function, assistance in the provision of run-off administration services.  
20.	I reject the suggestion that at the Oast meeting there was any discussion of LRL having an entitlement to a share in Eastgate’s income from the provision of run-off administration services.  That was a meeting at which Mr Randall was in expansive mood and there is no doubt that he and Mr Devonald discussed their plans in grandiose terms.  Equally I have no doubt that the language used was of LRL sharing in any success of the system.  But LRL stood to gain substantially from the success of the system in the shape of the work they would consequently be awarded by Eastgate.  Indeed LRL did gain substantially from the success of the system in this manner, to the extent of £9.5 million earned from conversion work, various enhancements to the Eros system including enhancements driven by Equitas, maintenance work and add-on modules specifically related to actuarial type functionality.  All this was as a direct result of Eastgate securing the volume of run-off administration business which they did.  Reverting to the July 1995 meeting at the Oast, Mr Randall found it easy to make an additional concession in the shape of a royalty of not less than 5% on sales of the software because he did not himself, unlike Mr Hart, foresee huge scope for securing such sales.  
21.	Thereafter Mr Devonald drew up an agreement dated 19 July 1995, which he and Mr Hart signed.  That provides, at Clause 4:-
“4.	Software Ownership
LRL undertakes to act as an agent of the Eastgate Group in developing the EROS software, and agrees that all rights to the EROS software and associated intellectual property rights will remain with the The Customer; except that in consideration of the inclusion within the Eros for Lloyd’s product of LRL’s copyrighted Powerbuilder Object Library and associated Rapid Development Methods and Techniques, The Customer undertakes to pay LRL not less than five per cent of income attributable to the sale or rental or licensing of the Eros for Lloyd’s software to any Third Party: and further undertakes to pay LRL not less than five per cent of income attributable to the provision of services based on the facilities comprised within the Eros for Lloyd’s system to any Third Party.  In return LRL undertakes to provide its best endeavours in assisting The Customer with any such sale or offering of service to a Third Party.”
It is pursuant to this clause that LRL assert their entitlement to a percentage of all income earned by Eastgate derived from run-off administration contracts secured as a result of the availability of Eros for Lloyd’s or performed using that facility.  Of course it was not at that stage known how very successful Eastgate would in fact be in securing such contracts, culminating in draft Heads of Agreement with Equitas signed on 20 May 1998 containing a three year run-off administration agreement on the basis of lump sum payments of £22.5million for 1998/99, £19.5million for 1999/2000 and £14.5million for 2000/2001.  Even so, the whole purpose of the venture on which LRL and Eastgate were engaged was to secure the valuable Equitas work, and if it had been agreed that LRL were to have the entitlement which now they assert I would expect that very much more prominence would have been accorded to this in the document which enshrined their agreement.  As it is, the language on which they rely is again under the rubric “Software Ownership,” indicating to my mind clearly that the context is as I have already described it, viz., the inability of LRL to exploit the software by selling it to third parties or by licensing them to use it.  The first matters dealt with in the relevant sentence are indeed sale, rental or licensing to any Third Party.  It would be very odd if what was envisaged to be the principal source of revenue should be tacked on as an afterthought in language which makes no express reference to the principal activity expected to be performed using the software,  viz., the acquisition and performance of run-off administration contracts.  I have no doubt that had the parties intended to encompass the performance of run-off administration contracts in the activities which would generate an entitlement to this royalty they would have said so in plain and explicit language.  Equally I have no doubt that the language actually used was intended to catch the provision of what later was described as “pure IT services” by some process short of full scale sale, rental or licensing as in the provision of bureau services or similar arrangements of that nature: in short, exploitation of the software by making it available to be used by third parties in a manner which was not open to LRL as a result of their agreement that intellectual property rights should vest in Eastgate.  I should perhaps add that having seen Mr Randall and considered his evidence in the light of the objective probabilities, I consider it wholly implausible that he would, at this stage in the project, agree to give 5% of the revenue, not the profit, to be derived from business which he was not certain of getting and where he did not know the terms upon which he would, if successful, obtain it.  There is also a central absurdity in LRL’s position.  Part of the revenue derived by Eastgate consisted of the very substantial payments referable to the cost of converting syndicate data to make it compatible with Eros for Lloyd’s.  These were passed on to LRL who were paid for conversion work at commercial rates.  In fact in this action LRL excluded from their claim commission on conversion costs paid to them but if their claim is otherwise well founded there is no logical reason why those costs, part of the revenue derived from the run-off administration contracts, should not equally attract payment of the royalty.
22.	Mr Lazarus for LRL sought to derive some assistance from the fact that the formula agreed was “not less than 5%” rather than a fixed percentage.  He suggests that a range of 5-15% had been discussed at the Oast because the proportion of Equitas income which it would be appropriate to pay depended on the profitability of the Equitas business which could not be known until later.  In my judgment the discussion which took place was not so precisely focused and in particular it did not focus upon an entitlement to a share in the Equitas income.  The parties at the meeting were enthusiastic about their project, particularly Mr Randall and Mr Devonald.  Mr Hart described the meeting as emotional rather than as savouring of a routine business meeting.  He said that the discussion of the range and the adoption of the not less than 5% formula were born out of a desire to give more if Eastgate was doing well, but it would be more in relation to software deals, not in relation to Eastgate’s business generally.  I accept that this was the thrust of the discussion.  There was no discussion premised on LRL having a share in the income derived by Eastgate from the provision of run-off services using Eros for Lloyd’s in that process as opposed to a share in the income derived from allowing others to use the software.  I would also however accept that the spirit of the meeting may have been such that Mr Devonald could quite easily be persuaded three years later that what must have been promised was a more broadly-based share in Eastgate’s prosperity.  Having heard the evidence of Mr Randall and Mr Hart, weighed it against the probabilities and considered the matter in the round I am in no doubt whatever that this was not in fact discussed.  
23.	LRL duly completed the design and development of Eros for Lloyd’s by January 1996.  During 1995 and 1996 LRL converted the Gooda Walker, Poland and Bromley and Turret data to render it compatible with the new system.  As I have already indicated, LRL were paid at commercial rates for this work.  On 12 August 1996, by four contracts in identical form, Eastgate contracted to supply Equitas with run-off administration services for one year in respect of the 47 Gooda Walker, Poland and Bromley and Turret syndicates and a further Johnson Heath syndicate whose business Eastgate had acquired since July 1995.  The four contracts with Equitas were extended indefinitely subject to three months notice of termination by letter from Equitas dated 23 July 1997, signed by Eastgate on 29 July 1997.  During 1997 Equitas transferred the run-off administration of a number of additional Lloyd’s syndicates to Eastgate.  This was done on a confidential and relatively informal basis because of the political sensitivity of the reallocation of run-off business from one service provider to another.  The position was formalised on 8 January 1998 when Eastgate signed a letter of agreement extending the 12 August 1996 agreements to cover the 17 syndicates transferred during 1997.  Of course, the winning of this business led to further lucrative conversion and other IT work for LRL, as I have already described.
24.	In late 1997 Eastgate and Equitas began negotiating a new run-off administration agreement to cover both those syndicates already administered by Eastgate and a substantial number of additional syndicates to be transferred from other service providers.  Outline terms were agreed in early May 1998 and incorporated into signed “Heads of Agreement” on 20 May 1998.  It was agreed that the new contract would be for three years beginning on 1 April 1998 with fixed annual charges of the order which I have already indicated.  There was also to be a further single fixed fee of £4.5million in respect of set-up/take-on costs for the further 45 syndicates to be migrated to Eastgate in 1998.  LRL was not aware of the existence of the Heads of Agreement prior to disclosure in the action.  A formal contract was not in fact signed until 29 October 1998.
25.	The London insurance market is a relatively small world.  It is notoriously transparent and leaky.  By mid April and May of 1998 LRL either had learned indirectly or had been told by Eastgate that Eastgate would be allocated a substantial number of further syndicates for which LRL would be asked to carry out data conversion work.  Market rumour was that Eastgate would shortly obtain a three-year contract from Equitas.  It is in this context that discussions between Mr Devonald and Mr Hart which took place at around this time must be seen.  In fact Mr Hart was not himself involved in the negotiations with Equitas for a run-off administration contract.  He knew what was going on in that regard, but he was himself more closely involved in attempting to obtain from Equitas a facilities management contract, to which end he had extended discussions with Mr Bennett and Mr Chapman at Equitas.   Mr Devonald and Mr Hart evidently met fairly frequently for a drink.  From about the beginning of 1998 Mr Devonald had on such occasions from time to time suggested that LRL might have an entitlement to share in the revenue derived by Eastgate from the provision of run-off administration services.  Mr Hart never took these suggestions seriously.  He regarded them as a “try-on” initiated, he thought, by Mr Shiel.   Mr Shiel, an accountant and the business brain at LRL was he thought becoming excited, as were others, about the amount of money which seemed to be generated by Equitas and the work which Equitas was distributing.  Mr Hart thought that Mr Shiel put Mr Devonald up to these suggestions, and that Mr Devonald may have convinced himself and come to believe that this was indeed the nature of the arrangement which had been made in 1995.  It is no doubt possible that the suggestion made by Mr Devonald may have been pursued with greater persistence as market rumours suggested that a lucrative contract between Equitas and Eastgate was becoming more imminent, but I do not accept that this consideration informed Mr Hart’s thinking on the matter in any respect.  Mr Hart treated these suggestions so lightly that he did not report them to Mr Randall.  He dismissed them with the typical retort “don’t kid a kidder” and an invitation to another drink.  
26.	In March 1998 Mr Hart suffered a serious fall.  He fractured his skull and broke his hand.  He had not enjoyed good health before this incident and had numerous absences from work.  After this incident his health deteriorated and his absences became more frequent and prolonged.  It became apparent to him that his effective days at Eastgate were numbered.  He wished to sort out whilst he was still able the precise level of commission to which LRL would be entitled on sale of the software.  This had always been an area of greater interest to him than the acquisition of run-off administration contracts and, as I have mentioned above, despite Mr Randall’s initial lack of enthusiasm a salesman, Mr Last, had by May 1998 been appointed to spearhead the marketing effort in this regard.   
27.	Mr Hart drafted a letter which he proposed to send to Mr Devonald with a view to securing his agreement to its terms.  He showed the draft to Mr Randall.  The letter as sent to Mr Devonald dated 21 May 1998 reads as follows:-
“As promised I write to clarify the position regarding ongoing payments to be made by Eastgate to Logistics Resources Limited in relation to the commercial sales of EROS products/services.
I would take this opportunity of outlining the historic situations that have lead to my ultimate decision on the percentage that I believe to be fair given the levels of business  that our respective organisations now engage in.
Clause 4 (Software Ownership) of our agreement For Supply of :- ‘ERPS for Lloyd’s System’ dated 19th July 1995 states that the payment to LRL will not be less than 5%.  You will remember that this clause was agreed to be written in this way in order that Ken and I could exercise flexibility when it became appropriate.  This was necessary at the time due to the uncertain business climate in which both companies then operated.  I would confirm that Ken did state at a  contract discussion meeting held at the Oast in mid’95 that he would expect the figure to  be nearer 15% than 5%.  However, as with all arrangements made between both companies at that stage of developments this was a ‘best guess’ and not able to be a firm commitment.
Steve, I would therefore propose that given the high amounts of business that we have, and I trust will continue to transact, the firm figure for the future be set at 10% of any annual licence or service fees charged by Eastgate to any external organisation (for the avoidance of doubt this means any company that uses EROS for pure IT services and is not a member of the Eastgate Group).  The amount of the fee to be notified to you upon contract signing and paid to you quarterly in arrears upon receipt of an appropriate invoice from you.  In the event of any such contract being terminated for whatsoever reason by either party (i.e. client or Eastgate) payment to you will terminate at the point that the last full quarter  was completed.
I do hope this clarifies the position to your satisfaction and would ask that you sign, date and return the attached copy of this letter to acknowledge your full agreement tot he arrangements outlined.
I look forward to informing you of our first contracted client in the near future.”
	Mr Randall may have been responsible for the ultimate appearance in the letter as sent of the passage in the first set of brackets in the fourth paragraph, i.e. the words “for the avoidance of doubt this means any company that uses EROS for pure IT services and is not a member of the Eastgate Group.”  I do not think it ultimately much matters who is responsible for the passage in brackets save only that if Mr Randall was responsible for them plainly the “doubt” was not raised by Mr Devonald’s suggestion that LRL might be entitled to commission on revenue from run-off administration contracts, as Mr Gruder submitted might be the case, because Mr Randall was at this stage not aware of that suggestion.  However I do not consider that the “doubt” has anything to do with the previous discussions between Mr Hart and Mr Devonald.  
28.	Mr Devonald signed this letter on 26 May 1998.  I do not accept that he did so in reliance on assurances from Mr Hart as to what the letter meant or was intended to mean.  I am not sure that Mr Devonald actually gave evidence to the effect that Mr Hart assured him about the meaning of  the letter or that he relied on such assurance on signing it.  The closest Mr Devonald came to this was in suggesting that Mr Hart told him that all services which Eastgate provided by operating Eros for Lloyd’s were included within LRL’s percentage entitlement but that specialist insurance consultancy services unconnected with the use of Eros for Lloyd’s were excluded.  However I do not accept that Mr Hart said either of these things.  There was simply no discussion along those lines.  Mr Hart gave no assurances whatsoever as to the meaning of the letter.  
29.	I note also that Mr Devonald gave no evidence at all in support of the assertion that he was called out of a meeting on 18 May 1998 to see Mr Hart and that it was in the course of that meeting that the figure of 10% was agreed upon, still less that he reported this back to the meeting.  In relation to this latter point Mr Shiel said in his Witness Statement:-
“When Stephen rejoined our meeting he told us that Tony had agreed 10% as the percentage figure applicable to our contract and that this would apply to the Equitas account.”
	In cross examination Mr Shiel accepted that he might well there not be quoting Mr Devonald in context, and that he may very well not have said this on that occasion.  He thought it more likely that Mr Devonald had said “I’ve agreed the number with Tony and its 10%.”  Mrs Devonald and Mrs Shiel were present at this meeting, which was a shareholders’ meeting.  Shortly before trial they put in Witness Statements dealing with the disappearance of Mr Devonald to speak to Mr Hart and what he said on his reappearance.  Mrs Devonald confined herself to saying that she could not recall what her husband had said on returning to the room but that he was pleased with the outcome of the discussion with Mr Hart.  Mrs Shiel’s statement was more specific.  She said:-
“Stephen was very pleased with the outcome of his conversation with Tony Hart and said something along the lines of “we fixed it at 10%.”
I asked what he meant and he said it was 10% of all Eastgate’s run-off business.”
	During the course of cross-examination of Mrs Shiel it transpired that as little care had gone into preparation of this Witness Statement as was true of the equivalent passage in her husband’s Witness Statement.  On being asked by Mr Gruder:-
“Q.	With due respect, he did not say, “its 10% of Eastgate’s run-off business” did he?”
	Mrs Shiel replied:-
“A.	He did mention the word “run-off”.  He certainly said the words, “we fixed it at 10%”, and he did mention the word “run-off”. Because at that moment I knew that I had been aware of City Run-Off and it is such a strange name for  a company, and its just—I mean, it describes what it does, I suppose, to people who know, but it seemed a strange name to me at the time, but I knew it did exist.  So when he said “run-off” I knew there was something called “run-off”.
	Mrs Shiel had no appreciation whatsoever of what the expression “run-off business” meant.  I do not regard this evidence from Mrs Shiel as a sufficient basis for concluding that Mr Devonald reported in terms that he had secured the agreement of Eastgate to paying a royalty of 10% on all their run-off business, not least because her recollection is in this regard contradicted by the evidence of her husband.  
30.	In my judgment the letter of 21 May 1998 is entirely consistent with the terms agreed in July 1995.  It fixes the percentage prospectively but it does not bring about a variation in the terms first agreed.  In fact it was common ground that the later letter was not intended to and did not effect a variation of the earlier contract.  That is in my judgment of some significance for the letter is in my view fatal to LRL’s case.  The first paragraph identifies the context. It is the commercial sale by Eastgate of Eros products/services.  I do not believe that this is an apt description of the utilisation by Eastgate of Eros for Lloyd’s in the provision of run-off administration services.  It is plain that what Mr Hart was referring to was the sale, rental or licensing of Eros for Lloyd’s to third parties or the provision to them of the use of the software, as in the provision of bureau services.  Mr Lazarus valiantly argued that the reference in the fourth paragraph to service fees charged by Eastgate to any external organisation could properly be read as including the fee paid by Equitas for the provision of run-off administration services.  I agree that if the expression was used in isolation it could perhaps just bear that meaning, although I do not think that anyone would in fact have referred to the fixed annual amounts agreed to be paid by Equitas as “service fees.”  If however the intention had been to refer to these amounts I would find it astonishing that they should not be mentioned first, as opposed to coming after licence fees, which plainly relate to licensing of the software.  The matter is put beyond doubt by the bracketed words.  It is obvious that the expression “pure IT services” is intended to encapsulate use of the software by a third party through the means already discussed, viz. sale, rental, licensing or bureau services.  In relation to run-off administration work ceded by it to Eastgate, Equitas could not conceivably be described as an external organisation using Eros for pure IT services.  The first contracted client about which Mr Hart looked forward to informing Mr Devonald was plainly not Equitas—nor did that reference relate to the 42 newly acquired syndicates the conversion work in respect of which was formally advised to Mr Devonald by letter from Mr Hart of 22 May 1998, i.e. the day after the crucial letter,  which letter Mr Devonald likewise countersigned on 26 May.  Mr Hart rounded off his letter in this way because he did not actually know who would be the first contracted client or when that contract would be made.  
31.	The foregoing is sufficient to dispose of LRL’s claim but my conclusions thus far are in part informed by my conclusions as to what happened  thereafter.  
32.	At some stage there came into existence a document in the shape of a letter from Mr Shiel to Mr Hart dated 26 May 1998.  That letter reads as follows:-
“						26th May 1998
Dear Tony
Thank you for your letter of 21st May.
Clause 4 of our Agreement dated 19th July 1995 states:
“Software Ownership
….The Customer undertakes to pay LRL not less than five per cent of income attributable to the sale or rental or licensing of the Eros for Lloyd’s software to any Third Party: and further undertakes to pay LRL not less than five per cent of income attributable to the provision of services based on the facilities comprised within the Eros for Lloyd’s system to any Third Party.  In return, LRL undertakes to provide its best endeavours in assisting The Customer with any such sale or offering of services to a Third Party.
I cannot understand your interpretation of this point, as it was clearly our intention at the time that our agreement should cover two sets of circumstances: one being the direct use of EROS as a system by a third party and the second being where services were supplied by Eastgate particularly run off services, where the use of Eros for Lloyd’s was an essential part of the service being provided.  In both cases LRL were to benefit with Eastgate from the growth of business. 
You will recall that we built Eros for Lloyd’s at an uncommercial price, intending that the risk we were taking would provide benefits in the future if Eastgates Group’s insurance services developed based on a highly sophisticated system platform.  I do not think your interpretation reflects our discussions or intentions at the time.
Stephen has signed your letter in order that we can at least get the invoicing underway, although we do not agree with your interpretation.  We do not wish to get into a dispute about this point, but we would ask you to re-read the clause in question, think back to the meetings we had at the time and consider this matter further.  While this matter is being reviewed we will pro-tem invoice in the manner you suggest but we have to reserve our right to have these matters dealt with as originally intended and agreed.
Yours sincerely

PE SHIEL
Director”
The letter was never sent to Mr Hart.  However a copy of the letter was on 17 August 1999, i.e. in the following year, sent to Mr Haslam of Eastgate in circumstances which I will describe.  The document a copy of which was sent to Eastgate was not signed by Mr Shiel but it was initialled by him. 
33.	Mr Shiel was on holiday in Cyprus between 24 and 31 May 1998.  He says that when he returned from holiday he saw a copy of Mr Hart’s letter to Mr Devonald of 21 May which had been left by Mr Devonald for his perusal and he was concerned by it.  He therefore composed a response, without reference to Mr Devonald who was at the time working in another office for another customer. Mr Devonald was not in fact far away—he was at Warburgs in Broadgate.  At all events it was Mr Shiel’s evidence that he composed the letter without reference to Mr Devonald but intended to discuss it with him before sending it.  According to Mr Shiel in due course they did discuss it.  Mr Devonald told him that he had discussed with Mr Hart in detail his letter of 21 May and that Mr Hart had explained to him that what he was trying to do by the inclusion of the bracketed words was to separate Eros from non-Eros services and that that was why he had used the term “pure IT.”  Mr Shiel said that he would like to write to Mr Hart to clarify matters whereupon Mr Devonald became a little annoyed.  Mr Shiel felt that Mr Devonald resented his intervention and Mr Devonald also suggested that it would upset Mr Hart to be written to in that manner, and that if Mr Shiel was still concerned about it he should talk to Mr Hart.  Mr Shiel says that in the light of this discussion he did not send the letter to Mr Hart but that he did then have a meeting with him sometime in the middle of June.  In his Witness Statement Mr Shiel said this:-
“Following my conversation with Tony I was content that the services he was seeking to exclude were simply those which did not need Eros for Lloyd’s data involvement, such as Nick Readings consultancy work for Equitas and activities planned by Eastgate for the USA.  I assumed from this that Eastgate would contract and invoice separately for run-off and other services and I was content that if any issue arose about apportionment it would be discussed and resolved between us in accordance with the good relationship between LRL and Eastgate.  Tony assured me that run-off administration depended on the use of Eros for Lloyd’s and was of course fully included.  I was therefore content to leave the matter as agreed as it is not possible for Eastgate to provide run-off services without the use of Eros for Lloyd’s.  My letter dated 26th May was not therefore sent.  However, I did not destroy it and it remained on file.”
	It was not suggested to Mr Hart that these discussions had taken place.  
34.	I find it odd that Mr Shiel should have backdated his letter to 26 May, and I do not regard the fact that Mr Devonald countersigned the 21 May letter on 26 May as providing a very convincing reason for dating this supposed response 26 May.  The letter would have been equally effective if correctly dated.  I was also wholly unconvinced by Mr Shiel’s explanation of how the document came to be initialled.  It was certainly not Mr Shiel’s invariable practice to initial a copy of letters he sent or documents he prepared—see for example the Claimants’ copy of Mr Shiel’s letter of 13 July 1999 which was at bundle G pages 71/72.  The suggestion by Mr Shiel that it was a check for him, indicating that he had seen the document, makes no sense when it was a document which Mr Shiel had himself created on his own machine.  Before making my findings in relation to this episode I must sketch out the later developments.  
35.	In the summer of 1998 Mr Hart asked LRL to prepare a proposal to develop a single computing platform for Lloyd’s and companies business.  This became known as the convergence project and it was envisaged that it would be built by LRL in 1999.  Towards the end of 1998 Mr Hart suffered yet further medical complications involving him in an emergency operation.  He therefore began progressively to drop out of the picture.  Mr Devonald and Mr Shiel knew that he was unwell and that he had suffered head injuries earlier in 1998.  In November 1998 Eastgate made a major corporate acquisition, acquiring from the Hambro Group for about £50million a company called Hambro Legal Protection.  This acquisition did not prove the success which obviously it was hoped it would be and it led to litigation between Eastgate and the vendor in which Eastgate made allegations of breach of warranty.  Questions arose concerning the accuracy of the balance sheet.  It was said that debtors were over-stated which led to cash flow projections in turn being seriously over stated.  At all events the acquisition caused serious cash flow difficulties for Eastgate and placed a strain on its banking relationships.  The time of senior Eastgate personnel including Mr Randall was increasingly devoted to dealing with this problem.  In the course of such meetings with him as LRL did have Mr Randall strung them along concerning the convergence project, never committing himself or Eastgate to it but giving grounds for optimism that it would go ahead.  LRL devoted resources to preparation for the convergence project, keeping on more staff than they would otherwise have done.  Mr Randall recognised that he had not really done the right thing by LRL in this regard.  Without giving any commitment he had led them on.  He had hoped and believed that Eastgate would eventually agree the commitment, and he had kept promising that the commitment was coming, but it never did.  Eventually in December 1999 Eastgate indicated that the convergence project could not proceed.  Throughout 1999 Eastgate was delaying payment to LRL of undisputed invoices.  In the absence of Mr Hart, the introduction of new personnel and Mr Randall’s increasing preoccupation with other concerns the hitherto happy and relatively informal relationship between LRL and Eastgate was rapidly becoming soured.  
36.	On 6 July 1999 there took place a meeting attended by Mr Devonald, Mr Shiel, Mr Randall and Mr Quilter.  Many matters were discussed but Mr Devonald took the opportunity to raise with Mr Randall a query concerning LRL’s entitlement to a commission on the money Eastgate was earning on its work for Equitas.  It was not expressed in the form of a formal claim or an assertion to an entitlement.  It was more in the nature of a point to be raised whilst Mr Randall was there for other matters.  So far as he was concerned the principal topic of discussion at this meeting was convergence.  The point about commission came across to Mr Randall as something raised rather in the spirit that since Eastgate was still letting down LRL in relation to convergence had they considered that they might by the wording of the contractual arrangements be exposed to a claim from LRL for ongoing commission in respect of the Equitas work.  Mr Randall was dismissive but was encouraged by Mr Devonald and Mr Shiel to study the contract and the paperwork and he agreed to do so.  
37.	Shortly thereafter Mr Chris Haslam at Eastgate was asked, probably by Mr Duncan who had taken over from Mr Hart, to look into the commission arrangements.  The immediate context was probably the calculation of commission due on a bureau services contract with Owen and Willoughby.  However on 12 August 1999 Mr Haslam sent an e mail to Mr Shiel which read, under the heading “Owen and Willoughby—Commission” 
“Pat 
I’ve sent you this brief note just in case we don’t get to speak today as I’m on holiday from tomorrow for two weeks.
I have been asked to look into the agreements made between Eastgate and yourselves with regard to commission.  
1. OWL
How was the commission fee arrived at.
2.  GENERALLY
Peter Goddard has some concerns with regard to the clarity of the principal agreement.
I believe that the intention of the agreement was that LRL would receive commission for income received from third parties specifically for the use of Eros.  In the case of a bureau service this would in effect be the licence fee.
Follow up on this issue when we are both back from holiday.”
38.	Mr Shiel responded on 17 August by letter which read:-
“Dear Chris 
Thank you for your email dated 13th July.
I attach copies of Tony Hart’s letter of 21st May 1998 and my reply date 26th May, which sets out our understanding of the relevant clause in our Agreement.”
It is unclear whether Mr Shiel did in fact enclose with that letter a copy of Mr Hart’s letter of 21 May 1998 but he did send a copy of his own letter dated 26 May 1998 which had of course never been sent to Mr Hart.
39.	Mr Devonald had said nothing whatever in his Witness Statement about Mr Shiel’s “letter” of 26th May.  That may be explicable on the basis that he did not write it.  It was the Claimants’ pleaded case:-
“That during the final discussion on 26 May 1998 before Mr Devonald signed the letter dated 21 May 1998, Mr Hart agreed with Mr Devonald that the effect of the letter was that the Claimant would be entitled to receive 10% of such of the Claimant’s income from the provision of run-off services as derived from services which the Defendant provided by operating Eros for Lloyd’s (i.e. that this was what was intended to be referred to by “…service fees charged by Eastgate to any external organisation (for the avoidance of doubt this means any company that uses Eros for pure IT services…”) and Mr Devonald signed the said letter in reliance on Mr Hart’s said agreement.”
	—Amended Particulars of Claim Paragraph 14 D (3).
The content of Mr Shiel’s letter is of course quite inconsistent with this pleaded case.  I have already noted that I do not regard that pleaded case as supported by Mr Devonald’s evidence.  Paragraph 51 of his Witness Statement comes close but stops short of saying that there was a discussion as to the intended meaning of the language used.  Mr Shiel’s letter is equally inconsistent with what was contained in Mr Devonald’s Witness Statement on this point, and I might have expected Mr Devonald to deal with the letter if only to explain that it had been drafted without reference to him.  However that may be Mr Devonald was of course asked about it in cross examination.  He was palpably uncomfortable when being questioned about the letter.  He was first asked about it on the first day of the trial, a Thursday.  He said that Mr Shiel had drafted it without first discussing the matter with him.  They had then had a discussion which became fairly heated as Mr Devonald resented Mr Shiel’s interference.  Whilst Mr Shiel’s letter may have been on his Mr Shiel’s desk during the discussion he Mr Devonald did not actually read it.  He said he first saw it when Mr Shiel replied to Mr Haslam in August 1999.  He plainly meant to imply by this that that was the first occasion on which he had read the letter.  On the following Monday morning of the trial Mr Devonald resiled from this position, suggesting that it was not until documents had been collated in the following year 2000 for the purpose of submission to solicitors that he had seen the letter.  He suggested that he and Mr Shiel had had little discussion concerning Mr Haslam’s intervention or Mr Shiel’s response to it.  
40.	Mr Devonald was obviously highly embarrassed about Mr Shiel’s letter.  The royalty or commission payment was potentially worth millions of pounds to Mr Devonald and to Mr Shiel personally.  In my judgment it is likely that any communication on the subject from Eastgate in mid 1999 would have been the subject of close discussion between Mr Devonald and Mr Shiel.  Mr Shiel for his part suggests that when he sent the copy letter to Mr Haslam he overlooked or forgot the fact that he had not actually sent it to Mr Hart the previous year, so that he did not then realise that his letter to Mr Haslam was capable of giving rise to a most misleading impression.  If there had been a heated discussion between Mr Shiel and Mr Devonald on the matter in June 1998 in consequence of which Mr Shiel did not then send the letter I cannot accept that Mr Shiel would have overlooked or forgotten it only one year or so later.  I also think it most unlikely that Mr Shiel would in June 1998 have written a letter in these terms without first discussing the matter with Mr Devonald. I have already indicated that I find unconvincing the suggested explanation for the letter having on 2 or 3 June been backdated to 26 May and for it having been initialled.  
41.	I am afraid that I am reluctantly driven to the conclusion that this letter was first drafted by Mr Shiel in August 1999.  It was dated 26 May 1998 so as to give the impression that it was contemporaneous with Mr Devonald’s acceptance of the terms of Mr Hart’s letter.  It was initialled so as to give it the air of a copy taken from the file.  It is unnecessary for me to decide whether Mr Devonald was at the time party to this attempted deception, although I am afraid that I think it likely that, as he at first accepted in evidence, he did see the letter in August 1999.  Whether Mr Devonald then saw the letter or not, he has been prepared to give incorrect evidence concerning its genesis.  Furthermore, whether Mr Devonald saw the letter in August 1999 or not, the sending of a letter in this form in August 1999 is obviously wholly inconsistent with the notion that Mr Devonald’s signature to Mr Hart’s letter of 21 May 1998 had been appended in reliance on assurances as to the letter’s intended meaning, another matter which Mr Shiel could not have failed to remember if Mr Devonald had so told him in June 1998.  Furthermore, had Mr Shiel himself received assurances in mid June 1998 from Mr Hart as to the letter’s intended meaning I would again regard it as wholly inconceivable that he would in August 1999 have regarded it as appropriate merely to send a copy of a letter which had been drafted prior to the giving of those assurances.  I also have little doubt that Mr Shiel thought that he would get away with this deception because of Mr Hart’s supposed incapacity and virtual disappearance from the scene.  
42.	The remaining history can be shortly told but it is important because it provides yet further support for my conclusion that this is a manufactured claim.  On 11 October 1999 Mr Randall wrote to Mr Devonald as follows:-
“At our meeting some time ago with Alan Quilter, you raised a query regarding whether you are entitled to an ongoing commission in relation to EROS arising out of the work we do for Equitas.
Please accept my apologies for the delay in responding, but having now reviewed the agreement we signed when we commenced the original EROS development, I see no obligation to make any payment where EROS is used by us in connection with processing on behalf of Equitas.  The Equitas contract requires us to process transactions up to the point where we identify reinsurance recoveries and raise a collecting note.  The use of EROS is incidental to the service provided.  However, there are instances with other clients, where we are providing EROS as the key component of the service.  In such cases, payment has been, and will continue to be, made to you.
When you raised the query, I did discuss the matter with Tony Hart who agrees with my interpretation.”
The first paragraph is a reference to the meeting of 6 July to which I have already referred.  On 23 December 1999 Eastgate finally indicated that the convergence project could not proceed.  LRL put forward an alternative proposal in an attempt to salvage something from the time and effort which they had already devoted to it.  They were however unable to elicit any response from Eastgate as to their intentions concerning their future trading relations with LRL.  A meeting took place on 7 February 2000 attended by Mr Devonald, Mr Shiel, Mr Duncan and Mr Milne.  A number of matters were discussed including late payment of invoices but no mention was made of LRL’s claim to be entitled to a royalty or commission.  Mr Shiel prepared a letter dated 10 February 2000 summarising the points discussed in which he said that LRL’s major concerns had now been discussed.  The letter was copied to Mr Randall.  No mention was made in it of an outstanding entitlement in LRL to recover millions of pounds worth of royalties from Eastgate.  
43.	On 22 March 2000 there was a meeting between Mr Shiel and Mr Milne of Eastgate in the course of which Mr Shiel outlined the history of the relationship between LRL and Eastgate detailing in particular the initial Eros build, the strategic partnership, the benefits recognised by Eastgate in its having enabled the fulfilment of their ambition to become the single largest run-off company in London, the fact that a key component thereof was the best single platform computer system for the Lloyd’s run-off business and the conclusion that the original strategic vision shared by Ken Randall, Tony Hart, Alan Quilter, Steven Devonald and Patrick Shiel had been substantially realised.  Notwithstanding this reference to all the factors which are now said to militate so strongly in favour of there having been an agreement as to revenue sharing of the sort upon which LRL rely, no mention was made at this meeting of any claim to or entitlement in respect of commission or royalty.  Mr Shiel did say that LRL believed that there was a contractual commitment by Eastgate to the convergence project. Mr Milne denied that this was so and asked Mr Shiel to put his submission in writing.  Mr Shiel did so on 30 March.  Eastgate took some time to recover and to review their internal files, but on 23 June 2000 Mr Milne wrote refuting the suggestion that Eastgate had made a contractual commitment to LRL in connection with the convergence project.  It was hard on the heels of this, on 10 July 2000, that Eastgate for the first time, in a letter from Mr Shiel to Mr Randall, put forward the claim which has been pursued in this action.  
44.	In view of my conclusions I do not need to grapple with the exercise with which otherwise I would have been confronted of attempting to apportion that part of the income derived by Eastgate from the provision of run-off administration services which can properly be regarded as “attributable to the provision of services based on the facilities comprised within the Eros for Lloyd’s system.”  It is not sensible to suggest that all the income derived by Eastgate from the run-off contracts was attributable to the provision of services based on the facilities comprised within the Eros for Lloyd’s system or was derived from services which were directly connected with the use of the Eros for Lloyd’s software.  Much of the income derived from specialist services provided by about 200 Eastgate employees, many of them specialists in their respective fields.  Eros was a tool which assisted them in the performance of their duties.  The fact that no-one could suggest any principled basis on which I could apportion between income which derives from services which were directly connected with the use of Eros for Lloyd’s and income which was not militates strongly against there ever having been an agreement to the effect contended by LRL.  
45.	I should finally mention four miscellaneous points.  First Mr Lazarus suggested that the genuineness of LRL’s claim was underlined by their acceptance that there was excluded from their entitlement the income derived from the 47 syndicates whose business Eastgate already had, or was about to acquire, in July 1995.  I regard this as an entirely false point.  Eastgate never accepted that a limitation of this sort had been agreed—by definition it could not have been, since there was no underlying agreement to which it could relate.  Equally however by definition the business which would generate an entitlement to commission would be new business, because Eastgate could not sell, lease or license Eros for Lloyd’s or sell direct access to it until it had been developed.  LRL seeks to elevate a necessary feature of the agreement which was made into a virtuous self denying ordinance on their part in relation to a wholly different entitlement which was never in fact discussed.  
Secondly, never at any stage did Eastgate make provision in its accounts for an actual or contingent liability to pay commission and nor did LRL ever make provision in its accounts for a contingent or actual debtor represented by the entitlement to commission.  
Thirdly I have at all times tried to look at the matter in the round, weighing my conclusions against the inherent probabilities and not reaching a conclusion in relation to any one part of the case without first looking at the picture as a whole.  At the end of the day however I have to form a view as to the credibility of the four principal actors.  Neither Mr Hart nor Mr Randall has any continuing connection with Eastgate and they have no financial interest in the outcome of these proceedings.  Mr Randall has an ongoing business relationship with Mr Devonald, holds him in high regard and would have every incentive to assist him if honestly he could do so.  Mr Devonald and Mr Shiel by contrast have a very substantial financial interest in the claim which was ultimately quantified, subject to liability and apportionment, at about £4.5million.  Neither Mr Hart nor Mr Randall ever gave me any cause for concern that they might be anything other than honest or straightforward in their evidence.  I am sorry to have to record that I cannot say the same of Mr Shiel and Mr Devonald, although the latter was I thought a reluctant and embarrassed accomplice.
Fourthly, it emerged on disclosure of documents, and very shortly before trial, that Eastgate had failed to notify LRL of the making of three or four contracts for the provision of bureau services in relation to which LRL had an unquestioned right to receive a 10% royalty.  The Baker and Willoughby contract was the only such contract the making of which was notified to LRL pursuant to the obligation undertaken by Eastgate in Mr Hart’s letter of 21 May 1998.  This did not reflect very well on Eastgate but it was not suggested that it had any relevance to the issues which I have to decide.  I suspect that it owes more to the disappearance from the scene of Mr Hart,  the upheavals in Eastgate and the changes in personnel generally than to anything more sinister.  At all events the amount due from Eastgate to LRL was as I understand it paid before trial and so I need not say any more about it.
46.	Accordingly the Claimants’ claim fails and must be dismissed.  There must be judgment for the Defendants.
47.	I am indebted to both Counsel for their very great assistance in the shape of economical and focused opening and closing submissions of great clarity.