Neutral Citation Number: [2013] EWHC 1556 (Comm)
Case No: 2011 FOLIO 1549
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 19/06/2013

Before :

HIS HONOUR JUDGE MACKIE QC
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Between :

	NICHOLAS DAVID TELFER	Claimant	
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	COSTAS SAKELLARIOS	Defendant	

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Laurent Sykes (instructed by Spring Law) for the Claimant
Alan Gourgey QC and Hui Ling McCarthy (instructed by Davenport Lyons) for the Defendant

Hearing dates: 15 to 17 April 2013
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Judgment

Judge Mackie QC : 

1.	This is a claim for payment of about £930,000 under a Deed (“the Deed”) which required the Defendant to make a series of payments to the Claimant. The liability is undisputed in principle but the Defendant claims that he should have deducted PAYE on past payments and also on those now overdue but not yet made. The dispute raises issues of tax law, the application of which depends on differences about the construction of the Deed and about the facts.
2.	Under the Deed dated 4 January 2007 between the parties the Defendant, Mr Sakellarios, agreed to make payments totalling £2,820,000 to the Claimant, Mr Telfer, in accordance with the instalment plan contained in the Schedule. By 7 May 2010, he had paid a total of £1,940,301 but had fallen behind with the payment schedule. By a supplemental deed (“the Supplemental Deed”) dated 7 May 2010, the Deed was varied to give more time for payment. Since 7 May 2010, Mr Sakellarios has made further payments totalling £155,000.
3.	 The Deed provides by clause 6.1 that all amounts due shall be paid in full without any deduction or withholding other than as required by law. The Defendant’s case is that each of the payments made or required to be made under the Deed constitutes employment income under the Income Tax (Earnings and Pensions) Act 2003. He says that he was obliged by law to make a deduction from the payments. He claims the right to deduct tax from future payments and to be reimbursed for what he should have deducted in the past. The Claimant contends that the Defendant’s claim is misconceived on numerous grounds. 
4.	Both parties have been at fault in not accounting for tax due on the Deed and the transactions which surround it. Both are subject to investigation by HMRC and I have indicated that the Court will not make a final order in this case unless and until it is clear that its terms will not prejudice the public’s ability to recover tax that one or both parties should properly pay. There is some confusion about quite what has been disclosed to HMRC by each party and with what result as disclosure on this issue was limited and given very late.
5.	At the trial I heard evidence from each party, there were no other witnesses. While there was fundamental disagreement about what was said and why things were done at various times many facts are agreed or not much in dispute.
Facts agreed or not much in dispute
6.	The Defendant, Mr Sakellarios, is a director and the only shareholder of Pisani (Holdings) Limited (“Holdings”) and its subsidiary, Pisani Plc (“Pisani”). Pisani carries on the business in the UK of the sale and supply of marble and granite. The Claimant, Mr Telfer, joined Pisani in 1986 and was until 23 March 2011 a director of Pisani and of Holdings. He was until 30 March 2011 an employee of Pisani. The factual disputes about the events leading to the Claimant’s departure concern mainly the nature of the 20% interest which he came to have in Pisani and whether it was agreed between the parties that the Defendant would pay any tax the Claimant became liable for on payments he  received under the Deed. 
7.	Holdings acquired Pisani in June 1996. The management team of Pisani at the time included the Claimant. There was discussion about the management team acquiring shares on the takeover but, in the event the Defendant, through Holdings, acquired all the shares in Pisani. Pisani prospered. Discussions subsequently took place between the Defendant on the one hand and the Claimant and other members of the management board on the other about the possibility of being awarded shares in Holdings to incentivise them and recognise their contribution to the business. These discussions led to letters in 2002 in which the Defendant confirmed that the Claimant had a “10% interest of my holding. Such interest will, at some time in the future, be formalised and incorporated in and be subject to the terms of a shareholders’ agreement”. 
8.	In March 2003, Pisani dismissed Mr Lamb, the then managing director, as an employee and director of Pisani. The Claimant and his colleagues Mr Kilpatrick and Mr Bruce were appointed directors of Pisani. The Defendant agreed at this point that each of them would have an interest in the company, “fully paid shares”, with the Claimant having 10%. This agreement is recorded in Pisani’s Board Minutes for 4 and 5 March 2003. The Minutes record that Pisani’s accountants, Tenon, were “to advise on procedure for transfer”. That transfer never happened for reasons that are in dispute. The Claimant says that at this time the Defendant agree that the 10% would be increased to 20% and that he began to receive notional dividends at the 20% level (on which he accepts that he paid no tax). The Defendant agrees that the percentage went up to 20% but only later in 2003.
9.	A slide which the Claimant produced as part of his evidence, undated but prepared around that time refers under the heading “PHL Shares” to the Claimant’s 10% being “3.3% under EMI Scheme. Balance offered under phantom scheme.” This split is consistent with a letter of advice from Tenon dated 20 February 2004. The writer refers to his understanding that the Defendant had “an informal agreement with [his fellow directors] whereby, when the opportunity arose, you would arrange for the company to pay to them, or for their benefit, bonuses, pension contributions and other remuneration. The method of payment would be dependent upon the tax legislation and the valuable tax mitigation strategies at that time. This bonus payment would be in recognition of past services to the company.” 
10.	The letter went on to advise that part of the reward to management could take the form of a share option scheme, an Enterprise Management Incentive Scheme. This Scheme was put in place shortly afterwards but, in order to deliver the tax benefits that such a scheme offered, the Claimant’s option entitlement was limited to 3.3% of the shares in Holdings for which, if exercised, he would have to pay just over £97,000. The same letter recorded that the scheme would not give the Claimant and the other directors the full amount of their agreed proportion of the company’s share capital. It recommended that the balance could be dealt with either by way of a “phantom share scheme”, said to be in effect a bonus scheme, or use of an unapproved option scheme. 
11.	The Defendant says that the directors were not interested in taking shares in Holdings because of these potential tax consequences. The nature of the Claimant’s “interest” in the shares of Holdings was subsequently defined in documents which the Defendant produced for signature by the Claimant, being his contract of employment and agreements of October and December 2005.
12.	 The Claimant says that he produced a formal contract of employment “to record the details of my arrangements with Costas more formally”. There are two versions, one referring to the Claimant having a 10% interest (known at the trial as the public contract) and the other (known at the trial as the private contract) to him having a 20% interest. The Defendant accepts that he signed the public contract and that the relevant page of the private contract bears his signature.
13.	 Features of both contracts are as follows. The Claimant’s 10% or 20% “interest” arises under his contract of employment and is stated to be part of his remuneration as a director of Pisani. The Defendant is not a party. The “interest” awarded was not shares in Holdings but a right to be paid 10%/20% of the Group profits per annum and 10%/20% of the full value of the Pisani Group of Companies. A mechanism was provided for the determination of the value.  Pisani agreed that in the event of the Claimant leaving his employment or dying, he or his personal representatives would be paid the full value of these benefits by Pisani. 
14.	Another agreement drafted by or on the instructions of the Claimant is dated 1 October 2005 (“the October Agreement”). It is stated to be between Pisani and the Claimant, though the Defendant has been added in manuscript as party (but he undertakes no obligations under the agreement). The document records “the remuneration and reward scheme” between Pisani and the Claimant “Company” [defined as Holdings, Pisani and their subsidiaries] agrees that the Claimant“has a 16.67% beneficial interest in the value of the Company” and agrees to pay him 16.67% of any profits for distribution and 16.67% of the value of the Company to be agreed by an independent valuation. Clause 8 records that “The Company agrees that the 16.67% beneficial interest relates to total value or share of profits as opposed to any shares that might have been issued by the Company” ( the 16.67% is 20% less the 3.3% attributable to the Enterprise Scheme). Errors in the October Agreement not material to the issues were corrected in what has become known as  the December Agreement and this time the Defendant was not only included as a party to the agreement, but undertook payment obligations with the Company jointly. Clause 9 of this December agreement provided that “The Company and CJS agree that the 20% beneficial interests relate to total value and or share of profits of the Company as opposed to any shares that might have been issued by the Company”.
15.	The Deed arose against the backdrop of an indicative offer for Holdings made by third parties. The Claimant proposed that he should have the cash benefit of his beneficial interest in Pisani. Negotiations took place over the amount. A figure of £2.82 million was eventually agreed. The Claimant contends that the figure was arrived at on the basis that it represented a net sum payable to the Claimant with the Defendant being responsible for any tax.
The Deed
16.	The Deed was drafted by solicitors acting for Pisani on the Claimant’s instructions. The firm Spring Law now act for the Claimant in this case. The Defendant was not separately represented. The Deed must of course be read as a whole and in context but the particular provisions relied upon by the parties are as follows.
Introduction

The purpose of this Deed is to set out how NDT’s Beneficial Interest is to be valued and the basis on which NDT will be able to realise his Beneficial Interest and the responsibilities of CJS to make payments in relation to NDT’s Beneficial Interest as set out below.

The parties have agreed that NDT’s Beneficial Interest is worth at least the Minimum Sum and CJS hereby agrees to pay such Minimum Sum (and potentially more) in accordance with the schedules to this Deed which set out the Standing Payments, Bonus Payments and Uplift Payments that are payable under the terms of this Deed.

1. Definitions

“Beneficial Interest” means NDT’s beneficial entitlement to 20% of all PHL share capital issued and allotted to CJS, such beneficial entitlement being constituted historically as follows:

a)	an initial 10% shareholding gifted of which 3.33% equates to NDT’s rights to 37 shares pursuant to the EMI plan; and

b)	a second 10% shareholding in the Group granted under an Agreement dated 21 December 2005 between CJS, NDT and PP (the “Remuneration  and Reward Scheme Agreement”, a copy of which is attached at Schedule 5).

For the avoidance of doubt, NDT shall not be liable for any sums owed to CJS pursuant to the Remuneration of Reward Scheme Agreement and all such sums have and are hereby irrevocably waived by CJS on the basis that the Minimum Sum has been calculated by the Parties taking into account the terms and conditions of the EMI Plan and Remuneration and Reward Scheme Agreement;

6. Payments

6.1 All amounts due under this Deed shall be paid in full without any deduction or withholding other than as required by law and the Defendant shall not be entitled to assert any credit, set-off, deduction, counterclaim or abatement of any nature whatsoever against the Claimant in order to justify withholding payment of any such amount in whole or in part.

7. Warranties and Undertakings

7.1 (the Defendant) “warrants and undertakes that, as the date of this Deed, “(d) he has the legal right and entitlement to grant to the Claimant the Beneficial Interest and has the right, power and authority to enter into this Deed; (e) The Claimant is fully entitled to the Beneficial Interest without any encumbrance and all rights and benefits attaching to the Beneficial Interest”.

8. Liability

8.1 The Defendant shall be liable to the Claimant, in contract, tort (including negligence) or for breach of statutory duty or in any other way for:

(a) any economic loss (including, without limit, loss of revenues, profits, contracts, business or anticipated savings);

(b) any loss of goodwill or reputation; or

(c) any indirect or consequential losses,

in any case whether or not such losses were within the contemplation of the parties at the date of this Deed, suffered or incurred by the Claimantarising out of or in connection with any matter under this Deed.

12. Confidentiality

12.1 Each Party undertakes that it will not, at any time hereafter use, divulge or communicate to any person, except to its professional representatives or advisers or as may be required by law or any legal or regulatory authority, the terms and conditions of this Deed or any confidential information concerning the business or affairs of another Party, which may have or may in future come to its knowledge and each Party shall use its reasonable endeavours to prevent the publication or disclosure of any confidential information concerning such matters.

15.7 This deed, and the documents referred to in it, constitute the entire Deed and understanding of the Parties and supersedes any previous Deed or arrangement between the Parties relating to the subject matter of this Deed.

15.8 Each Party acknowledges and agrees that, in entering into this Deed, and the documents referred to in it, it does not rely on, and shall have no remedy in respect of, any statement, representation, warranty, understanding, promise or assurance (whether negligently or innocently made) of any person (whether party to this Deed or not) other than as expressly set out in this Deed.

17.	After the Deed had been entered into the Defendant made payments but in time fell behind. Further negotiations led to a “Supplemental Deed “between the parties dated 7 May 2010. Pisani’s fortunes waned over time and the Defendant caused his advisers to carry out ‘due diligence’ of his affairs and those of Pisani. As a result the Defendant was advised that he should have deducted tax on the payments under the Deed and should do so in respect of future payments. He informed the Claimant and then ceased further payments. Relations deteriorated further and in March 2011 the Claimant was suspended from his employment. He claimed that he had been constructively dismissed and brought action. The Claimant also served a statutory demand on the Defendant.
The Deed- outline of the positions of the parties
18.	The nature of the transaction recorded by the Deed affects its treatment under PAYE. If the Claimant is right no deductions should be made from payments and he only has to pay Capital Gains Tax on them (although there may also be tax on an earlier stage of these transactions if it is not too late for HMRC to collect it).
19.	The Claimant contends that as at the date of the Deed 20% of the shares in Holdings were held on trust by the Defendant for him. He contends that if (which he denies) the December Agreement provides otherwise it should be rectified. He relies on the wording of the Deed (drafted by Spring Law on his instructions) which refers to him having a beneficial interest in the shares in Holdings. 
20.	The Defendant’s case is that the payments were in discharge of the obligations owed by Pisani and the Defendant under the December Agreement (an agreement confirming the Claimant’s remuneration scheme as a director and employee of Pisani), being obligations to make payments to Mr Telfer based on a determination of 20% of the value of Holdings including PLC and 20% of post tax and interest profits.  The Defendant denies that Mr Telfer had any shareholding, legal and/or beneficial, in Holdings and points to the express provision in the December Agreement (drafted by or on the instructions of the Claimant) which makes that clear.
21.	The Claimant contends that the factual matrix included two important features. First Mr Telfer claims that he was giving up a shareholding to which a substantial discount of forty per cent had been applied relying on his evidence and what Mr Sakellarios apparently said during a recent interview with HMRC. Secondly the Claimant says that it was believed by both parties that there would be no tax on receipt of the payments by him. His belief was based on assurances by Mr Sakellarios who also promised to pay any tax if it did become due. 
The evidence
22.	The witnesses were different in their command of detail. Mr Telfer was originally responsible for the supply of machinery and equipment for Pisani’s raw material but over time became a senior manager and director. He was understandably concerned that his interest in Holdings be properly documented and this led to the series of documents prepared by him and at his request to which I have referred. He took a close interest in detail - his first witness statement runs to forty two pages. In contrast Mr Sakellarios, a Greek citizen who spent much time in Greece where he and his father had extensive business interests and who was not resident here for tax purposes until  sometime after June 2008, looked at things much more broadly leaving the detail in this area to Mr Telfer.
23.	Mr Telfer frequently insisted that he had shares, more than just an interest in the value of the company. When shown documents which might suggest otherwise in cross examination he forcefully disagreed with that suggestion using expressions such as “I had shares” and “the shares were mine”. At one point when asked why he had not paid tax on what the parties called his dividends he said that this was because he had shares. Mr Sakellarios to an extent agreed. He said, at another point, that Mr Telfer would have “been entitled to a share of proceeds of sale” any point. Indeed he said “For reasons beyond my control no one has exercised their free option.”  
24.	However this agreement was limited. Mr Sakellarios saw and accepted the wish of Mr Telfer and the other directors to avoid tax as the reason why the proposed transfer of shares did not happen. As part of this from 2003 to 2010 he made payments to the directors from his gross dividends for what he saw as their respective interests in the profits of the company. In contrast Mr Telfer insisted that the documents from 2004 onwards were directed to finding tax efficient ways of transferring shares in which he already had a beneficial interest. He asserts that in 2005 before deciding whether to exercise his option to acquire the 3.3% EMI shares he already “held” 20% of the shares. This assertion is literally not true, it is inconsistent with what the documents say in particular with the picture presented, at the instigation of Mr Telfer, in the December Agreement.
25.	Mr Telfer claimed that the payments under the Deed were to be net of tax and that Mr Sakellarios had agreed to pay any liability that arose. Further he said that he believed he would have had to pay no tax because of assurances to that effect from Mr Sakellarios. Indeed he insisted that the Deed would otherwise “make no sense”. He relied on contemporaneous documents that refer to tax efficiency as many dialogues about a deal do, but as I see it, they give no support to this claim. Mr Sakellarios also writes “Under normal circumstances you should at least be burdened with the 10% tax which would have been the least you would have paid even for the EMI at some point”.   Other references “all tax efficient manner”, “my Greek tax people” “tax efficiently mostly upfront and with no interest” do not, particularly when read in context, bear out the Claimant’s claim. He also relied on a remark attributed to Mr Sakellarios by HMRC in the course of an interview several years later that Mr Telfer’s interest had by the Deed been acquired at a substantial discount. That remark seems to me to have been misreported or made by the Defendant for some self serving reason in the tax investigation. 
26.	 Mr Telfer’s account is, he says, supported by the low level of the payments agreed. He claims that the figure of £2.82 million in the Deed was arrived at by taking a gross value of £5.4 million, deducting a debt of £500,000 and then negotiating a net figure of about £3,000,000. In cross examination Mr Telfer was taken through a sequence of documents between 361 and 381 in the bundle which show that the course of negotiation and the basis for the agree figure were quite different. Mr Gourgey QC for the Defendant submitted that Mr Telfer had given an account which was untrue and that he must know it to be untrue. I accept that submission.
27.	The sums in this case are substantial, the parties had means and they had professional advisers who assisted them with tax and prepared their tax returns. Mr Telfer is a successful, intelligent and literate businessman. Mr Telfer claimed that he received assurances about tax from Mr Sakellarios, a Greek businessman with no UK tax expertise. He did not therefore seek his own tax advice or even tell his accountants about the payments. He claimed that his reason for not telling his accountants and thus HMRC was that this might break confidences he owed to Mr Sakellarios. I find this explanation to be untrue. As was put to him in cross examination the Deed, by Clause 9 expressly permitted the disclosure of these matters to professional advisers. It is incredible that Mr Telfer would rely on advice from Mr Sakellarios (which I find that he did not receive) so heavily that he would not over years disclose very large receipts to his own accountants and thus to HMRC.  Counsel for Mr Telfer has persuaded me that it would not be appropriate for me to express a view about his client’s reasons for not disclosing the matter as that is an issue for decision by HMRC not this court.
28.	Similarly I do not believe that the Defendant agreed to pay the Claimant’s tax on the payments. This would be an unusual provision and thus, if agreed, would be particularly likely to have been put into the Deed or in writing elsewhere. Furthermore Mr Telfer was careful if not anxious to put things in writing. The account of Mr Sakellarios was more plausible and consistent with the commercial probabilities and the contemporaneous documents. 
29.	On both the issues which the Claimant says are relevant to the factual matrix I prefer the evidence of the Defendant. 
Interpretation of contract - the law and the positions of the parties
30.	There is of course no dispute about the applicable principles. The construction or meaning of a contract is what a reasonable person with all the relevant background knowledge of the parties at the time when the contract was made would have understood them to mean by the language of the contract – Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] AC 1101, [2009] 4 All ER 677 and ICS Ltd v West Bromwich Building Society [1998] 1 All ER 98, [1998] 1 BCLC 493, [1998] 1 WLR 896. The meaning of a contract is to be determined by reference to what a reasonable person with all the relevant background knowledge available to both parties would have understood it to mean at the time it was made. Sometimes it is apparent from the background to the contract that the language chosen by the parties is less apt than it might be to express their intention and in such cases, provided the parties’ intention can be ascertained with reasonable confidence, the court will give effect to it despite an infelicitous choice of language. That is more easily achieved if the parties have contracted in an informal manner. However, where the parties have made their agreement in writing, one starts from the presumption that the written instrument, given its ordinary meaning, correctly embodies their intention. As Lord Hoffmann said in ICS at page 913:
“The “rule” that words should be given their “natural and ordinary meaning” reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents.”
31.	Mr Sykes for the Claimant says that the key to this aspect of the case is that the parties considered that changes to the register were determinative for tax purposes (for capital gains as well as income tax). Accordingly they did everything they could to give ownership of shares to Mr Telfer without putting them into his name. This was sufficient to give rise to a declaration of trust. The transfer did not happen because the parties were concerned about disposals arising for tax purposes, Mr Telfer was happy that he was being treated as the rightful owner in any event and did not wish to offend Mr Sakellarios.  Mr Sakellarios however confirmed that he would have given the shares freely to Mr Telfer had he asked for them.  He also confirmed that not even the tax which he imagined he might be charged with was a problem for him. A trust once declared is not undeclared. 
32.	Mr Sykes submits that “Beneficial Interest” is defined “historically” as “a) an initial 10% shareholding gifted of which 3.33% equates to NDT’s rights to 37 shares pursuant to the EMI Plan; and b) a second 10% shareholding in the Group granted under an Agreement dated 21 December 2005”. The Deed was intended to put the position beyond doubt – hence clause 7.1(d) and (e) – which look to the present ability of the Defendant - and hence the word “historically” in relation to the agreement referred to.  Clause 15.7, the entire agreement clause and 15.8 are relevant. “This Deed, and the documents referred to in it” is referring to the attachments to the Deed in their capacity only as attachments.  
33.	Mr Gourgey contends that the Deed was not intended, and does not purport, to grant the Claimant any new interest in Holdings, but to deal with payments to be made to the Claimant in discharge of such rights as he already held. The reference in the Deed to an interest in shares is directly contradicted by the terms of the December Agreement (produced by the Claimant) to which the Deed expressly refers. He submits that as a matter of construction, or as a result of rectification, the reference to “Beneficial Interest” in the Deed should be read as referring to the right of the Claimant to payment of 20% of the value of “the Company” (Holdings, Pisani and subsidiaries). Further the Deed was drafted by the Claimant’s solicitors on his instructions. The Deed does not identify the consideration being given by NT for the payments being made. It is obvious that the Claimant must have been intended to give something up in return for the payments made. It is equally obvious that what he was giving up was performance by Pisani and the Claimant of their obligations under the December Agreement. The purpose of the December 2005 Agreement was self-evidently to set out Mr Telfer’s rights and to set out the obligations of Pisani and Mr Sakellarios.  Whilst the definition of “Beneficial Interest” only refers to that agreement in connection with the second 10% shareholding, it is apparent from the December 2005 Agreement that the agreement deals with the entirety of the 20% interest. That interest was in the value of the company (rather than in its shares).
Interpretation of contract-decision
34.	Mr Sykes for the Claimant in very able and detailed submissions puts forward an argument that there was a trust over his client’s interest in the company and thus he in effect held the shares. It is quite clear that the Defendant recognised the Claimant as having an interest in the 20% and would have transferred share of that value to him. But the Claimant had it in mind, rightly or wrongly (because he took no detailed advice) that if the shares were transferred to the Claimant there would be a liability to tax. It is clear to me that the Tenon advice was in the Claimant’s mind. He is an articulate and watchful person who repeatedly required what he thought his interest to be to be recorded in writing. He was much more concerned with these issues than the Defendant. The last thing the Claimant wanted was a transaction which transferred the shares or the beneficial interest in them to him. Clause 9 of the December agreement was a careful and considered statement of the parties’ intentions at that time, as formulated by the Claimant himself. Mr Sykes suggests ingeniously that Clause 9 was a non dilution clause. I reject that. It means what it says.  Further it is common ground that one cannot have a beneficial (as opposed to a contractual) interest in “value”, as opposed to an asset and no question of a trust can arise on the facts as I have found them to be.  That is the background against which the Deed must be construed.
35.	The Deed was intended to bring about realisation for the Claimant of the interest which he had acquired in Pisani over the years. The payments could have had no other purpose. The Definition of Beneficial Interest refers to shares but in the context of recording ‘historically’ but inaccurately the existing rights of the Claimant. He was not being granted any new rights and there was no reason for him to receive anything additional.  I do not see that Clause 7 assists and Clause 15 is ultimately circular in this context. The definition of Beneficial Interest refers to and annexes the December agreement. That agreement is available to explain the flaws in the definition. Further the Deed was not drafted at arm’s length. There is no sign that Mr Sakellarios had any input at all. The draft was not negotiated by solicitors for both sides and this is no doubt one reason why it is such a poor document. The Deed does not have the qualities of other more considered documents which cause one to hesitate before concluding that something has gone wrong with the language. The Deed must as I see it be construed in the way contended for by Mr Gourgey. In addition that approach is clearly the more commercially sensible of the rival interpretations. See Rainy Sky SA v Kookmin Bank [2011] UKSC 50, [2011] 1 WLR 2900 at §14.  
36.	It follows that it is unnecessary for me to consider the arguments of each side for rectification of the Deed in the different ways they seek.
Claim for indemnity under Clause 8 of the Deed
37.	The Claimant seeks a declaration that the Defendant is liable to indemnify him for any tax liability on the part of the Claimant arising by reason of the 2007 Deed of Obligation or the 2010 Deed of Obligation, and any associated liability including but not limited to interest, and any costs or expenses incurred by the Claimant including but not limited to costs and expenses incurred in dealings with HMRC.
38.	The argument appears to be based on reading Clause 8, which with the word ‘not’ in the obvious place is a fairly standard damage limitation clause, literally so that Mr Sakellarios assumes liability for an almost infinite range of damage whether within the contemplation of the parties or not and whether recoverable by a recognised cause of action or not. There are three immediate problems with this submission. First if the word ‘not’ is excluded it still does not cover the loss claimed. Secondly it is absurd to suggest that anyone would assume such an extraordinarily wide range of liability intentionally. Thirdly if the word ‘not’ has been deliberately omitted it reflects badly on both Mr Telfer and Spring Law. This claim is hopeless and fails.
PAYE and the obligation to deduct tax
39.	Having reached a view about the meaning of the Deed, I turn to the relevant tax law where four issues divide the parties.
•	 Were the payments under the Deed “payments of employment income”?
•	Was the Defendant an “other payer”?
•	Did the Defendant have sufficient tax presence in the UK to be obliged to deduct?
•	At what rate should any deduction be made?
Were the payments under the Deed “payments of employment income”?
40.	The relevant legislation is complex and I asked Counsel for detailed briefing about this when they prepared their closing. I was very grateful for that but I need not set the legislation out in detail as it is largely common ground.
41.	The rules relating to PAYE are contained in the Income Tax (PAYE) Regulations 2003 (SI 2003/2682) (the “2003 Regulations”). The power to make these rules is contained in the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA 2003”) which is that part of the tax code dealing with employment income.  
42.	PAYE obligations under the 2003 Regulations apply to payments of PAYE income.  Whether an amount is PAYE income depends ultimately on whether it is “earnings” as defined in s62 ITEPA 2003 and “from” the employment as required by s9 ITEPA 2003.  
43.	The relevant section in Chapter 1 of Part 3 is s.62 which defines “earnings” as:
62 Earnings

(1)This section explains what is meant by “earnings” in the employment income Parts.

(2)In those Parts “earnings”, in relation to an employment, means—

(a)any salary, wages or fee,
(b)any gratuity or other profit or incidental benefit of any kind obtained by the employee if it is money or money’s worth, or
(c)anything else that constitutes an emolument of the employment.

(3)For the purposes of subsection (2) “money’s worth” means something that is—

(a)of direct monetary value to the employee, or
(b)capable of being converted into money or something of direct monetary value to the employee.

(4)Subsection (1) does not affect the operation of statutory provisions that provide for amounts to be treated as earnings (and see section 721(7)).
44.	 “Earnings” (under s.62 ITEPA 2003) is synonymous with “employment income” (see s.7 (2) ITEPA 2003).
45.	The relevant requirement to deduct is imposed by Regulation 21(1) of the PAYE Regulations which provides:
“(1) On making a relevant payment to an employee during a tax year, an employer must deduct or repay tax in accordance with these Regulations by reference to the employee’s code, if the employer has one for the relevant employee.”
46.	It is common ground that Mr Telfer received employment income at some point, whether, as he argues, when he received some form of rights from Pisani and the Defendant or at the subsequent point of receiving cash payments from the Defendant, as Mr Sakellarios contends. Mr Sykes argues that what Mr Telfer was disposing of when he entered into the 2007 Deed of Obligation was a beneficial interest in shares.  It was the conferral of that right (i.e. those shares) which represented employment income.  Any subsequent disposal of the right did not give rise to PAYE income but rather capital gains tax.  This is because its source is the disposal of the right, not the employment. However I have found that the Defendant’s position is correct and in that sense it follows that these payments are to be treated as employment income.
47.	Mr Sykes has an alternative argument as follows. If the rights being disposed of or renounced for consideration under the 2007 Deed of Obligation did not amount to a beneficial interest in shares but a different chose in action or bundle of rights, the analysis would be the same provided these rights represented money or money’s worth when first conferred on him.   The case of Abbott v Philbin [1961] AC 352 governs the receipt of the right: the market value of the right is taxable as employment income.  When the right (be it shares or a different right which is convertible into money) is encashed or sold, employment taxes do not apply (absent specific statutory intervention).  Capital gains tax does apply. Mr Telfer was disposing of something when he entered into the 2007 Deed of Obligation. That interest was convertible into money and was therefore money or money’s worth. It follows that the receipt of that right gave rise to employment income but the subsequent buy out or discharge of that right, even if it was not shares, attracts capital gains tax and not a charge to employment income. 
48.	Mr Gourgey responds as follows. Whether something is capable of being converted into money is determined by whether it can be turned to pecuniary account as the House of Lords held in Abbot-v-Philbin. So in order for an income tax charge to be triggered at the point of the receipt of rights by the Claimant, he  must have been able to dispose of whatever rights he acquired to his advantage (in other words, in return for money).There is no evidence that the Claimant had an immediate right to call for payment. There is no such clause in the December 2005 Agreement.  The Claimant’s argument that his rights could be turned to pecuniary account because he could trigger payment at any time by resigning is illogical (and wrong).  It cannot reasonably be suggested that a provision in an employment contract for compensation to be paid to an employee in the event that his employment is terminated should be taxed other than at the point of termination.  The position should be no different for the December 2005 Agreement (which is expressed as being a “remuneration and reward scheme”).  Whatever rights the Claimant had acquired immediately before the 2007 Agreement was entered into, they were not by their nature realistically capable of being turned to money.
49.	As I see it this secondary argument of Mr Sykes cannot succeed once it is appreciated that the rights could not have been realised unless and until the Deed made that possible. That was its purpose. The concept of some triggered resignation is unrealistic for the reasons given by Mr Gourgey. The position is clearer still when one applies the facts to the guidance of the very experienced Special Commissioner, later tax judge, Mr Wallace in Bootle v Bye [1996] STC (SCD 58):
“The rights were not by their nature realistically capable of being turned to money at anything approaching their intrinsic value.”-55 and (considering explicitly the Speech of Lord Radlciffe in Abbot-v-Philbin) “although these rights were theoretically realisable they could not realistically be given a monetary value”-57. The rights in this case failed that test.
Was the Defendant an “other payer”? 
50.	It is common ground that obligations to account for income tax can apply under the 2003 Regulations to persons who are not the employer if they are making a payment of PAYE income.  Such a person is treated as an “employer” for the purposes of the 2003 Regulations. Such a person (the “other payer”) is not however treated as an employer for the purposes of ITEPA 2003, not even those parts of it which deal with PAYE.  This is because the 2003 Regulations have their own definition of employer, while ITEPA 2003 has its separate definition which it looks at who is the real employer.
51.	In R (on the application of Oriel Support Ltd) v RCC [2009] STC 1399.  Kenneth Parker QC, as he then was, in the High Court (with whom the Court of Appeal agreed) determined that a payer is an “other payer” for the purposes of the PAYE Regs where he makes a payment to another’s employee in discharge of the payer’s own obligation (and not in discharge of the employer’s obligation under the recipient’s contract of employment). An  example of an “other payment” situation is given in the Court of Appeal’s judgment:
“[17] …a bonus paid by a manufacturer of a particular type of motor car to an employee working within a dealership. Such a payment is not received under the contract of employment but clearly it is taxable since its source is employment. Hence the need for references to ‘other payer’ and ‘other payee’ in reg 2.”
52.	It is common ground that the Defendant was an “other payer” but there is disagreement about the consequences of this.
Did the Defendant have sufficient tax presence in the UK to be liable for PAYE?
53.	On the face of the legislation there is no express territorial limitation but before the obligation to operate PAYE can be imposed, an employer must have a sufficient nexus with the UK, known as a “tax presence”.  Clark v Oceanic Contractors [1983] 2 AC 130 (but references below are to the STC report used at the hearing) was concerned with the question of whether there was implied into certain PAYE legislation a territorial limitation. Lord Scarman stated that the general presumption is that UK legislation is applicable only to British subjects or to “foreigners who by coming to the United Kingdom, whether for a short or a long time, have made themselves subject to the British jurisdiction.” Lord Scarman put the matter at 43g: “[t]he only critical factor, so far as collection is concerned, is whether in the circumstances, it [ie collection] can be made effective…”.  Lord Wilberforce gave similar reasons and Lord Roskill agreed.
54.	Mr Sykes emphasises that the requirement for a tax presence arises as a matter of construction (see at 41c per Lord Scarman).  The process is to determine the scope of the PAYE Regulations and the extent to which they apply extra-territorially.  The reason for the nature of “tax presence” being dependent on the obligations being imposed is because the obligations must be practically enforceable. Lord Scarman put it thus: “How can the PAYE duties be enforced? How can the system be made to work? How can it be supervised? How can the necessary documents be obtained for inspection by the revenue, unless the foreign corporation is compliant? It all adds up to a practical impossibility of enforcing or monitoring the system against an uncooperative employer outside the United Kingdom making payments outside the United Kingdom.” In Oceanic this was met because there was a trading presence and an address for service– in other words, the company. Mr Sykes says that it is clear that the practical enforceability necessary to determine the required “tax presence” required in construing any particular legislation must be tested against a hypothetical unwilling employer, and not by reference to the specific facts. The presence in the UK must be linked to the obligations in question.  Lord Lowry put it thus (at 52(d)-(e)): “the tax presence, to be effective, must be relevant to the income in question and not merely coincidental.”  This was also the position adopted in Goldman Sachs International (No 2) (TC00507): [67,77,90,92] “The first is that jurisdiction here is not limited to the in personam jurisdiction for court proceedings. It is a continuing obligation to meet the administrative duties of being an employer and the fiscal obligations to pay the secondary contributions” and “The test has to reflect continuing enforcement and the administrative and fiscal obligations and not merely the limited kinds of presence for the modern rules of service”.
55.	On the application of the test Mr Gourgey points out that his client was and is a director of both Holdings and Pisani, UK companies. He held and still holds shares in a UK company, Holdings. He was an employee of Pisani and had a contract of employment covering his UK activities. (He had a separate contract of employment for his overseas activities).He paid tax to HMRC on the salary earned in the UK. He filed UK tax returns. He had from 2006 and still has a home in Kent. For up to 90 days in each of the relevant years, he was in the UK and, from 2008 onwards, had a UK address for service by HMRC (which was the address provided to HMRC on his tax returns each year).  He also had UK agents, Tenon, dealing with his tax affairs with HMRC on his behalf.
56.	Mr Sykes submits that the links which Mr Sakellarios has with the UK are entirely coincidental to the assumed obligation to deduct PAYE. A UK property is irrelevant to the PAYE obligations since it was unoccupied and there was no-one there to undertake PAYE compliance should HMRC need it.  This is coincidental. So too is the fact that he held shares in Pisani (Holdings) Limited. Mr Sakellarios was rarely in the UK – fewer than three months a year. The fact that Mr Sakellarios performed some UK duties and tax was deducted by Pisani Plc under PAYE in paying his salary is also entirely irrelevant and coincidental. The returns he prepared were self-assessment income tax returns (as employee amongst other things) and have nothing to do with the returns required under PAYE by the employer.  No return for 2006/2007 when £1.5m was paid has been produced suggesting none was filed. He did not have an address for service. His usual residence would be in Greece as is reflected in the Companies House filings and all personal correspondence. He has no trading presence.
57.	The legal test is clear from the majority in Oceanic and I do not read the first instance Goldman Sachs case as seeking to place a gloss upon it. Similarly the observation of Lord Lowry, who dissented, relied on by Mr Sykes does not narrow the test. Essentially, as Lord Scarman explained, the question is no more and no less than whether the foreigner in question has by coming into the country made himself subject to UK jurisdiction. It has to be more than a presence sufficient to bring proceedings and there must be continuity. As I see it Mr Salellarios has made himself subject to the UK jurisdiction in a way that means PAYE collection can be made effective. The fact that he was a director of UK companies and owns shares does not carry weight. However he has a substantial home in Kent, he had UK earnings on which he paid tax which could be attached as well as  the other connections he relies on. 
At what rate was the Defendant required to deduct income tax under the PAYE system?
58.	Once it has been established that the payments under the Deed were employment income and that the Defendant was an “other payer” (in respect of whom, the Claimant was an “other payee”) from whom income tax was required to be deducted under the PAYE system, then reg.21(1) of the PAYE Regs applies as follows, in Mr Gourgey’s adaptation:
“(1) On making a [payment of employment income] to an [other payee] during a tax year, an [other payer] must deduct or repay tax in accordance with these Regulations by reference to the [other payee’s] code, if the [other payer] has one for the relevant [other payee].”
59.	He says that the requirement to deduct by reference to the recipient’s tax code wherever possible fulfils the underlying purpose of the PAYE system, namely that so far as is possible, the correct amount of tax should be deducted at source (with the individual being responsible at the end of the tax year for accounting to HMRC for the balance of income tax due from him from his employment which does not, for whatever reason, fall to be collected under the PAYE system).  That this is the purpose of the PAYE system is clear from s.685(1) ITEPA 2003 which requires HMRC to construct tax tables “with a view to securing so far as is possible- (a) the total income tax payable in respect of PAYE income for any tax year is deducted from the PAYE income paid during the year”.
60.	The Defendant has the Claimant’s tax code and it has been admitted by the Claimant that he was a higher rate taxpayer during all the tax years in which payments were made. Mr Gourgey says that it follows that the deduction should be at the higher rate.
61.	Mr Sykes submits that the rate at which PAYE is applied to past payments is the basic rate. This can be seen from Regulation 49 for 2010/2011 which also shows the basic rate applied for earlier years. The employment is an entirely notional one. Mr Sakellarios is employer solely in relation to that ‘employment’. No code within Regulation 8 of the 2003 Regulations was received by Mr Sakellarios.  The point made here is, he says, entirely in accordance with HMRC practice and with Booth v Mirror Group [1992] STC (SCD) 615.
62.	Mr Gourgey argues that Booth v Mirror Group is not authority for the proposition that the Claimant seeks to advance. Hobhouse J. made it clear that the question he had to address was whether there was a regulation which covered “the position of a third party one-off payer of a taxable emolument” (at 618h). At 619e, Hobhouse J. described the basic rate provided for in reg.20(3)(c) and (5)(a) as the “fall-back position”. But it is important to recognise that this was in the context of the former regulation headed “Employee for whom an appropriate code not known”. Mr Gourgey says that the Defendant is not a “one-off” payer and secondly, he does know the Claimant’s tax code. Mr Gourgey is correct. In Booth the Court was concerned in a vacuum of authority when considering a one off (the judge’s phrase) payment by one company to the employee of another. The issue for decision was whether there should be a deduction at all. The answer was that there should be a deduction under a regulation, with which I am not concerned, with the consequence that deduction was at the basic rate since the regulation explicitly applied this when the tax code was not known. No wider question of principle about the rate for deduction was raised.
63.	Mr Sykes also submits on behalf of the Claimant that the condition that the other payer “has one [i.e. a tax code] for the relevant [other payee]” imposes a requirement that the other payer must have been issued with a tax code by HMRC for use in respect of the other payee before the tax code in the other payer’s possession can be used. The Claimant submits that a code cannot be shared and is specific to an employer for use in respect of his or her employee. 
64.	To this Mr Gourgey responds that the condition for applying the payee’s tax code under Regulation 21 is simply that the payer “has one” for the payee. On a plain reading of those words applied to the facts of the present case. The Defendant clearly “has” (in the sense of “has in his possession”) the Claimant’s tax code. On the Defendant’s case, that is the end of the matter.  He says that the Claimant is unable to point to a single regulation that provides, in terms, that one employer is not permitted to make deductions by reference to a code issued to another employer.
65.	The court has the choice in applying Regulation 21 to these facts between accepting the words as they stand so that the Defendant uses the code which he has or of adopting a more complex approach as suggested by Mr Sykes. The numerous regulations he cites do not as I understand them erect any relevant principle. In what is, I imagine, an unusual situation, as it seems to have been at the time of Booth, I see no reason of principle for not applying the words as they stand.  Indeed there are good reasons of principle, those behind the PAYE system, for doing just that. 
Tax- conclusion
66.	I therefore conclude that the payments are employment income, the Defendant is an other payer, he has tax presence and that deduction should be on the basis of the Claimant’s code. This conclusion may not be of practical relevance, at least for a time, for reasons I will come to.
The Counterclaim
67.	The Defendant admits that there is no statutory right to recover from the employee tax that should have been deducted at source and which was instead paid over. He says that without a basis for recovery of the overpayment the Claimant would be left with a potential windfall. The amount of the overpayment and the basis for its calculation is contained in the Schedule to the Amended Counterclaim. The Defendant calculates the total overpayment to be £818,073.40.
68.	The Defendant’s case is that he is entitled to recover the overpayment from by reliance on an implied term or by recovery for payment made under a mistake. 
69.	The implied term claimed is one that if the Defendant paid to the Claimant a sum which included an amount which he was required by law to deduct from the payments, the Claimant would repay it. Mr Sykes opposes the introduction of an implied term on detailed grounds that I do not set out because as I see it this aspect of the Defendant’s claim fails for a fundamental reason.
70.	It is common ground that the relevant law affecting implied terms was set out by Lord Hoffmann in Attorney General of Belize and others v Belize Telecom Ltd and another [2009] 2 All ER 1127.  He said at paragraphs 17 and 18:
"[17] The question of implication arises when the instrument does not expressly provide for what is to happen when some event occurs. The most usual inference in such a case is that nothing is to happen. If the parties had intended something to happen, the instrument would have said so. Otherwise, the express provisions of the instrument are to continue to operate undisturbed. If the event has caused loss to one or other of the parties, the loss lies where it falls.

[18] In some cases, however, the reasonable addressee would understand the instrument to mean something else. He would consider that the only meaning consistent with the other provisions of the instrument, read against the relevant background, is that something is to happen. The event in question is to affect the rights of the parties. The instrument may not have expressly said so, but this is what it must mean. In such a case, it is said that the court implies a term as to what will happen if the event in question occurs. But the implication of the term is not an addition to the instrument. It only spells out what the instrument means."
71.	If, bearing in mind the limitations of the traditional test, the officious bystander had been present in this case the answer to the question would have been “well it all depends”. The claim for money back may have been made immediately following an erroneous bank transfer or years later when the funds may have gone. The money may have been donated to a foreign charity or left on deposit. The term is of course implied or not at the time the parties contract not in the light of the particular circumstances which arise later. It seems to me that if any term were to be implied it would have to be on much the same basis as the alternative claim in mistake. In short the term pleaded will not be implied.
72.	The existence and extent of the right to recover sums paid under a mistake of fact or law, and the obligation on the party alleging lack of equity to prove it, are not in dispute. The Claimant rejects the application of this restitutionary remedy to the facts. He says that due care was not taken by Mr Sakellarios as payer since he should have verified his obligations and found out that there was a tax liability to deduct. This is arguably correct but it has little weight as a factor in permitting what is otherwise unjust enrichment. The Claimant says that it is also relevant that it was believed by both parties that there would be no tax on receipt. This meant that the proceeds meant more to Mr Telfer than they would otherwise have done. Further Mr Telfer was giving up a shareholding to which a substantial discount (40%) had been applied. As I have found that these claims fail on their facts I do not address them further.
73.	In principle therefore the Defendant has established a right to claim reimbursement based on mistake but I decline to reach further conclusions at this point.
Conclusion
74.	The claim fails in that the Defendant was obliged to deduct tax at the higher rate on the payments he made to the Claimant. The Defendant also has, in principle and subject to the facts as they later emerge, a right to claim reimbursement for past sums which should have been deducted but were not.
75.	The parties have given late and partial disclosure about their dealings with and investigations by HMRC. Notionally this whole case is about ensuring that any appropriate deductions were made in respect of money due to HMRC. I am not at present prepared to accept the submissions made by each side that there is no risk of windfall or of HMRC not receiving what is due. I am minded, subject from hearing from Counsel, to decline to make any orders for payment to the Claimant or for reimbursement to the Defendant until it is clear when and in what way, following full disclosure to HMRC, the tax obligations revealed in this case will be met. Apart from paying regard to the public interest it will not be just for me to make a final decision on what if any thing should be paid as between the parties until the picture is clear.
76.	I am grateful to Counsel and solicitors for the admirable way in which, despite its difficulties, this case was presented and prepared.
77.	I shall be grateful if Counsel will, not less than 72 hours before hand down of this judgment let me have a list of corrections of the usual kind and a draft order, both preferably agreed, and a note of matters which they wish to raise at the hearing.