commonwealth oil & gas company ltd v baxter & …...as clear as mr baxter's. mr mcbain...
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Commonwealth Oil & Gas Company Ltd v Baxter & Anor [2007] ScotCS CSOH_198 (14 December 2007) Source: http://www.bailii.org Cite as: [2007] ScotCS CSOH_198
OUTER HOUSE, COURT OF SESSION
[2007] CSOH 198
CA5/07
OPINION OF LORD REED
in the cause
COMMONWEALTH OIL & GAS COMPANY LIMITED
Pursuers;
against
(FIRST) NICHOLAS WILSON
BAXTER and (SECOND) EURASIA ENERGY LIMITED
Defenders:
________________
Pursuers: Keen, Q.C., Munro; Brodies Defenders: Currie, Q.C., Lindsay; McGrigors
14 December 2007 Introduction
[1] This case concerns an agreement, described as a Memorandum of Understanding, entered
into between the second defenders (whom I shall refer to as Eurasia) and the State Oil Company of
the Azerbaijan Republic ("SOCAR"), under which Eurasia were granted an exclusive right, for a
period of twelve months, to negotiate with SOCAR on the terms of a possible further agreement
relating to the exploration and development of an oil exploration block in Azerbaijan ("the Eurasia
block"). In the event, the Memorandum of Understanding expired without any further agreement
being concluded. In their pleadings in these proceedings, the pursuers (whom I shall refer to as
COGCL) maintain that the conclusion of the Memorandum of Understanding was the result of the
diversion by the first defender (whom I shall refer to as Mr Baxter) to Eurasia of a valuable
commercial opportunity. They contend that, in identifying and procuring that opportunity, and in
failing to bring it to COGCL, Mr Baxter acted in breach of a fiduciary duty owed by him as a
director of COGCL. They further contend that, since Mr Baxter was a substantial shareholder in
Eurasia, one of their directors, their president and their chief executive officer, Eurasia knew that
Mr Baxter had secured the Memorandum of Understanding on their behalf in breach of his fiduciary
duties to COGCL.
[2] In the summons, COGCL seek in the first place an account of the profits accruing to Mr
Baxter personally by reason of his breach of fiduciary duty. They further seek a declarator that
Eurasia held the Memorandum of Understanding and any profits flowing from it on constructive
trust for COCGL, together with an account of those profits. At the conclusion of the proof,
however, as explained below, counsel for COGCL stated that those conclusions were no longer
insisted in, since it was accepted that no profits had in fact been derived from the Memorandum of
Understanding. COGCL continued however to insist in their alternative conclusion for damages
against Mr Baxter and Eurasia jointly and severally, on the basis that, if Mr Baxter had brought the
opportunity to enter into the Memorandum of Understanding to the attention of COGCL, they
would have pursued that opportunity and entered into the Memorandum of Understanding, either on
their own account or through the medium of a corporate vehicle incorporated for that purpose. Had
COGCL entered into the Memorandum of Understanding, it was maintained, there was a substantial
chance that they would have successfully negotiated and entered into a further agreement for the
exploration and development of the Eurasia block. In those circumstances, it was argued, a liability
in damages existed by reason of Mr Baxter's breach of fiduciary duty and Eurasia's knowing receipt
of a commercial opportunity brought to them in breach of Mr Baxter's fiduciary duty.
[3] In response, Mr Baxter denies having acted in breach of fiduciary duty, and Eurasia deny
being under any liability in damages to COGCL. The grounds on which they maintain those
positions are considered in detail below. Matters on which the evidence focused included the
circumstances in which Mr Baxter became a director of COGCL, and the responsibilities - if any -
which he was expected to discharge; the nature of COGCL's activities; whether the conclusion of
the Memorandum of Understanding arose out of Mr Baxter's performance of any duties he might
have had as a director of COGCL; and whether the opportunity in question was one which he knew,
or ought reasonably to have known, might have been exploited by COGCL (as distinct, possibly,
from another company in the same group of companies).
The history of the case
[4] It is convenient at this point to say something about the history of the case. The action
originally proceeded at the instance not only of COGCL but also of their parent company, Arawak
Energy Corporation ("Arawak"). The defenders included not only Mr Baxter and Eurasia but also a
company named Interact Ltd ("Interact"). Mr Baxter was alleged to have acted in breach of a
fiduciary duty owed to Arawak (of which he was at one time a director, as explained below), as well
as a fiduciary duty owed to COGCL. The breach of fiduciary duty was said in each case to consist
not only of the diversion of the opportunity to enter into the Memorandum of Understanding, but
also the misuse of information confidential to Arawak and its subsidiaries, including COGCL.
Mr Baxter was in addition alleged to have acted in breach of obligations of confidentiality imposed
upon him by two contracts with Arawak, referred to below as the first and second consultancy
agreements. The confidential information in question was said to include information which
Mr Baxter received as a director of two other companies in which COGCL had at the time a
minority shareholding, namely Commonwealth Gobustan Ltd ("CGL") and Gobustan Operating
Company Ltd ("GOC"). It was also alleged that Interact was a corporate vehicle through which
Mr Baxter had undertaken to provide consultancy services to Arawak under a contract between
Arawak and Interact, and that his diversion of the Memorandum of Understanding opportunity to
Eurasia constituted a breach of that contract.
[5] In February 2007 the summons underwent considerable adjustment. The averments relating
to the misuse of confidential information as an aspect of breach of fiduciary duty were deleted,
together with the averments of breach of confidence and the averments of breach of contract by
Interact. Averments were introduced alleging, for the first time, that Mr Baxter had been given the
task, as a director of COGCL, of finding new business opportunities in Azerbaijan. The proceedings
were then abandoned insofar as they proceeded at the instance of Arawak. They were also
abandoned insofar as they were directed against Interact.
[6] In June 2007 a proof before answer was allowed. It was understood that the issue to be
resolved at that stage was whether Mr Baxter was under a duty to account to COGCL by reason of a
breach of fiduciary duty, and whether Eurasia held the Memorandum of Understanding and any
profits flowing from it as constructive trustees for COGCL, and as such were equally under a duty
to account. As I have explained, after evidence had been led (indeed, during the course of the
closing submissions on behalf of Mr Baxter and Eurasia), counsel for COGCL departed from the
conclusions for an accounting and for a declarator of constructive trust, since it was accepted that
the Memorandum of Understanding had expired without any profits being derived from it. The
court was invited instead to make findings that there had been a breach of fiduciary duty by
Mr Baxter, and also a breach of duty by Eurasia, giving rise to a liability in reparation. In the event
that the court made such findings, it was submitted that the case should then be put out for a hearing
with a view to deciding which pleas should be sustained or repelled and determining future
procedure. Counsel for COGCL envisaged that, if the court found that there had been a breach of
fiduciary duty, a proof on damages would then be appropriate, possibly after some amendment of
the pleadings bearing on that issue. If the court found that there had been no breach of fiduciary
duty, then decree of absolvitor would be appropriate.
[7] Counsel for Mr Baxter and Eurasia was content that the court should proceed on that basis,
subject to two points. First, counsel wished to reserve his position as to whether any breach of duty
by Mr Baxter gave rise to a liability in reparation until the court had made findings as to the nature
of any such breach of duty. Secondly, counsel maintained that Eurasia were in any event under no
liability in reparation. I understood counsel for COGCL to be content that the relevancy of any
claim for damages against Mr Baxter should be reserved at this stage, but that the relevancy of the
claim against Eurasia should be determined. It was also agreed that the plea of no title to sue should
also be reserved, that plea being directed to the question whether the losses claimed had been
suffered by COGCL as distinct from other companies.
[8] As this summary of the history of the case indicates, the case is concerned with a complex
network of relationships between different companies and individuals. It is necessary to keep in
mind the different types of relationship - some arising by virtue of directorships, others under
contract - and also the different companies involved. In relation to the latter point, a feature of the
evidence was the lack of attention paid to the distinct identities of different companies, although
separate corporate personality was freely used to create "vehicles" which could be used for
commercial purposes.
The witnesses
[9] It is appropriate next to say something about the witnesses led at the proof. They were:
1. Mr Baxter, who was led by counsel for COGCL as his first witness.
2. Mr Alastair McBain, the president and chief executive officer of Arawak and a
director of COGCL, CGL and GOC.
3. Miss Magdalena Bujnowska, the corporate secretary of Arawak.
4. Mr James Coleman, Q.C., a corporate lawyer practising in Canada, and the chairman
of Arawak.
5. Mr Jay Scott, a former director of COGCL, CGL and GOC.
6. Mrs Susan Baxter, who is married to Mr Baxter.
[10] Mr Baxter was an impressive witness, who took care to be accurate in his evidence, and was
precise as to the clarity or otherwise of his recollection. It is unfortunate that he was led in advance
of COGCL's own witnesses, with the consequence, first, that he gave evidence before the evidence
against him had been heard, and secondly, that his evidence in support of his own position had to be
taken in the form of cross-examination. As a consequence, he did not have an opportunity to
respond to evidence given by subsequent witnesses, and some of his own evidence in re-
examination was not explored as fully as it might otherwise have been. His evidence was generally
consistent with the contemporaneous documents. Bearing in mind that the onus of proof lies on
COGCL, and that the evidence given by their witnesses was generally somewhat less impressive
(for the reasons explained below), I have in general accepted Mr Baxter's account of events.
[11] Mr McBain was another careful and measured witness. He was precise in his use of
language, and was candid as to the clarity (or otherwise) of his memory. He appeared to me to be
doing his best to give his honest recollection of events. That recollection was however not generally
as clear as Mr Baxter's. Mr McBain also became visibly tired on a number of occasions during his
evidence and had difficulty concentrating on questions, necessitating adjournments. Mr McBain's
evidence is in some respects difficult to reconcile with the contemporaneous documents, and with
the inferences which could reasonably be drawn from undisputed events and the inherent
commercial probabilities, as explained below. Where his evidence conflicts with Mr Baxter's I have
usually (but not invariably) preferred that of Mr Baxter.
[12] One point which emerged clearly was that both Mr Baxter and Mr McBain are intelligent
and astute businessmen, who know each other well. I have no doubt that, in their dealings with each
other, a great deal would go without saying, as Mr Baxter observed in his evidence.
[13] The remaining witnesses were less important. Ms Bujnowska's evidence added little to
Mr McBain's. It appeared to me to be coloured by her loyalty to Arawak (her demeanour towards
counsel for Mr Baxter and Eurasia, for example, being hostile from the outset). I have treated her
evidence with caution. Mr Coleman was less closely involved in events than Mr McBain and added
relatively little of significance. Insofar as his evidence was contradictory of that of Mr and
Mrs Baxter (particularly in relation to conversations said to have taken place at casual encounters or
on social occasions), I found the evidence of Mr and Mrs Baxter to be more credible. Mr Scott
appeared to me to be a straightforward witness with no obvious axe to grind. His evidence was
however taken at a rather superficial level, by comparison with the evidence of Mr McBain and
Mr Baxter, and added relatively little. Mrs Baxter was another straightforward witness, whose
evidence supported the credibility of certain evidence given by her husband, and undermined the
credibility of contrary evidence given by other witnesses.
[14] In addition to the evidence given by the witnesses, an agreed chronology of events was also
produced.
The factual circumstances
[15] Although the issues in this case arise primarily out of events which occurred between
13 April 2004, when Mr Baxter became a non-executive director of COGCL, and 7 December
2005, when the Memorandum of Understanding was signed, the evidence at the proof covered a
much longer period. Events prior to April 2004 were examined in detail, as forming the background
to the critical period and establishing the context in which Mr Baxter became a director. Events
subsequent to 7 December 2005 were also examined, primarily for their bearing on the credibility of
evidence concerning the critical period. I shall accordingly consider in turn the events during each
of those three periods. Even in summary they unfortunately form a long and complex narrative.
Events prior to Mr Baxter's becoming a non-executive director of COGCL
[16] After training as a geophysicist, Mr Baxter worked on mineral exploration projects around
the world, and became a director of a company involved in the sale of geophysical equipment and
services. In 1985 he went into business with Mr Jeremy Little, and formed Addison & Baxter Ltd
("ABL"), a private company incorporated in England and Wales. ABL acquired the sales operation
of a former employer of Mr Baxter. The business was successful and a number of other companies
were formed to develop it further. In 1995 ABL, and the other companies owned by Mr Baxter and
Mr Little, were sold into a dormant Canadian company. That company was then reincorporated in
Anguilla in April 1995, under the name A & B Geoscience Corporation ("ABG"). Mr Baxter and
Mr Little became directors of ABG, and Mr Baxter was employed by ABG as its chief operating
officer. ABG initially sold geophysical equipment, but soon became involved in oil and gas
exploration. It subsequently changed its name to Arawak Energy Corporation ("Arawak"), as
explained below. It was (and remains) a public company listed on the Toronto Venture Exchange.
[17] In about 1993, following the break-up of the former Soviet Union, Mr Baxter was among the
first western entrepreneurs to become involved in exploration activities in the Azerbaijan Republic.
In 1994 he negotiated and managed the first marine seismic survey by a western contractor in the
Caspian Sea. The survey was conducted over a block in the Turkmenistan sector of the Caspian
using an Azerbaijani vessel provided under an agreement with SOCAR.
[18] Mr Baxter explained in evidence that many oil companies were attracted to the former
Soviet Union at that time, and that Azerbaijan was a busy location. It had been a producer of oil
since the nineteenth century. There were oilfields in production, and other geological structures
which had been explored by the Soviet Union as potential sources of oil and gas. A considerable
quantity of information was publicly available. Oil exploration and production were regulated by
SOCAR, which was a state agency headed at that time by the son of the President of the Republic:
he subsequently succeeded his father as President. The President exerted firm control over the
Government, including SOCAR. SOCAR was a large organisation with about 90,000 employees at
that time (on paper, at least), a figure which was subsequently reduced to about 30,000.
[19] Following the successful completion of the offshore seismic survey, and the development of
a good working relationship with SOCAR, Mr Baxter spoke to SOCAR's technical staff and
expressed an interest in undertaking a project in Azerbaijan, if SOCAR could point him in the right
direction. SOCAR directed his attention to South-West Gobustan. Mr Baxter spent more than a year
identifying a suitable area there, then negotiated an exploration, development and production
sharing agreement ("EDPSA") on behalf of ABG. Mr Baxter explained in evidence that an EDPSA
is not simply a contract: each EDPSA (there being about 30 in existence altogether) requires to be
ratified by a law passed by the Azeri Parliament. Between 1994 and 1998 (when, as explained
below, the South-West Gobustan EDPSA was finally concluded), Mr Baxter and his colleagues
made a wide range of contacts in SOCAR, from the technical staff to the vice-president of SOCAR
(now, as explained above, the President of the Republic).
[20] In October 1995 Mr Baxter and Mr Little formed COGCL as a wholly-owned subsidiary of
ABG, incorporated in Anguilla. The company was intended to be a holding company which would
have subsidiaries operating in the Commonwealth of Independent States: that is to say, the states
formerly belonging to the Soviet Union. It would thus be the company through which ABG held its
interests in oil and gas operations in the former Soviet Union. The company's original directors
included Mr Baxter, Mr Little, Mr. Graham Crabtree, an Anguillan lawyer who was also a non-
executive director of ABG, and Mr Mikhail Khait, a Russian geophysicist involved with Mr Baxter
in exploration activities in Azerbaijan. Mr Baxter was employed by COGCL as their chief operating
officer, and Mr Little was employed as their president and chief executive officer.
[21] Reference was made during the course of the evidence to COGCL's Articles of
Incorporation and By-Law, but they were not examined in any detail. Both documents bear to be
made under Anguilla's Companies Ordinance, 1994. The Articles appear to be analogous to the
memorandum of a UK company, specifying such matters as the company's name, registered office,
authorised share capital and purposes. The By-Law appears to be analogous to the articles of
association of a UK company. It provides inter alia that the business and affairs of the company
shall be managed by the directors (paragraph 7.1), that any director can convene a meeting of the
directors at any time (paragraph 8.2) and that the directors shall appoint a managing director and
other officers of the company (paragraphs 14.1, 14.4 and 14.6). It also provides for the directors to
designate by resolution the persons authorised to sign cheques (paragraph 11.1). No evidence was
led concerning the law of Anguilla.
[22] In July 1997 Mr Baxter and Mr Little formed CGL as a wholly-owned subsidiary of
COGCL, incorporated in Anguilla. CGL was formed as a special vehicle to act as a "contractor
party" to the proposed South-West Gobustan EDPSA. Mr Baxter and Mr Little became directors of
CGL, and were also employed in the management of the company.
[23] In June 1998 Mr Baxter's efforts resulted in the conclusion of the first onshore EDPSA in
Azerbaijan. The parties to the EDPSA were CGL, Union Texas Gobustan Ltd, SOCAR Oil Affiliate
(a commercial entity associated with SOCAR) and SOCAR, the parties other than SOCAR being
described as "contractor parties". The EDPSA related to three blocks in South-West Gobustan. One
of the blocks, known as the coastal block, was adjacent to the coast of the Caspian Sea. The other
two blocks were further inland. The commercial interest in the EDPSA was divided in the
proportions 40 per cent for CGL, 40 per cent for Union Texas and 20 per cent for SOCAR Oil
Affiliate. CGL subsequently purchased Union Texas's interest, so that it then had an 80 per cent
interest in the EDPSA.
[24] In May 2000 GOC was incorporated in Anguilla to carry out operations on behalf of the
contractor parties to the EDPSA. It was a wholly-owned subsidiary of CGL. Mr Baxter became a
director.
[25] The EDPSA included a minimum obligatory work programme, to be completed by
November 2001. ABG was unable to provide its subsidiaries (COGCL, CGL and GOC) with the
funds required to carry out the work. By 2001 little of the programme had been completed. ABG
then became involved in discussions with Mr McBain, a consultant with Vitol Services Limited, a
member of the Vitol group. Vitol was a privately owned group of companies, primarily concerned
in oil trading. It was a far larger enterprise than ABG: its gross revenues in 2001 totalled
US$32 billion. In the course of the discussions Mr McBain travelled to Azerbaijan for meetings
with SOCAR. He formed the impression that SOCAR was likely to grant an extension of the period
for completion of the minimum work programme if funding was secured. The discussions resulted
in an agreement being reached, which involved ABG, COGCL and CGL.
[26] In relation to ABG, Rosco SA, a Swiss-based wholly-owned subsidiary of Vitol, was to
acquire 22.63 per cent of the share capital, with an option to increase its holding. Rosco was also to
have the right to nominate two directors. In relation to COGCL, Rosco was to "retire" the long-term
debts. In relation to CGL, a loan was to be provided by Rosco in order to provide CGL with the
working capital required to complete the minimum work programme. Rosco was also to subscribe
for 62.83 per cent of the share capital of CGL, the remaining 37.17 per cent of CGL's share capital
being retained by COGCL.
[27] In May 2002 the arrangements between Rosco, ABG, COGCL and CGL were implemented,
SOCAR having been persuaded to extend the deadline for the minimum programme until
November 2003. Mr McBain and Mr Roland Favre (a director of Rosco) became directors of ABG
and of GOC. Soon afterwards, at Mr McBain's suggestion, Mr Scott went to Azerbaijan as a
consultant to ABG, to carry out a review of GOC's work programme. Mr McBain explained in
evidence that Vitol's intention was to find another company which could buy a share in the project
and move it forward, but as time went on they realised that it was inevitable that they would have to
get on with the minimum work programme themselves. Mr Scott was a Canadian with substantial
experience of drilling and production operations, and of project and corporate management,
particularly in Russia. Following his review, Mr Scott was appointed in June 2002 as general
manager of GOC.
[28] Soon afterwards, Mr McBain made it clear that he wished to replace Mr Baxter and
Mr Little in the management and control of CGL and GOC. Since Rosco owned 62.83 per cent of
the shares in CGL, and GOC was wholly owned by CGL, Mr Baxter and Mr Little had no option
but to accede. In July 2002 they resigned from their positions as, respectively, the president and
chairman of both companies. They were replaced by Mr Scott, as president, and Mr McBain, as
chairman. In relation to the replacement of Mr Baxter, Mr McBain said in evidence that Mr Baxter
was "a deal maker with a coterie of contacts", but that what was needed was someone with hands-
on experience of running an oil rig and commissioning contracts. Mr McBain also replaced
Mr Baxter as CGL's representative on the committees established under the EDPSA to manage
relations between the contractor parties and SOCAR. CGL and GOC were then managed on a day-
to-day basis by Mr Scott and Mr McBain.
[29] From that point onwards Mr Scott reported to Mr McBain on operations in Azerbaijan. He
considered, as he said in evidence, that the operation was "totally dysfunctional". Technical talent
on the ground was "almost non-existent". He had particular concerns about Mr Khait and another
local employee, Mr Felix Mendeleyev. In Mr Scott's view they had no business in the oil industry
and knew nothing about it. He also had suspicions that they might have been involved in the
misappropriation of funds, although he had "no real physical proof of improprieties". He reported
his suspicions to Mr McBain, and, as Mr Scott said in evidence, "we terminated Khait and
Mendeleyev".
[30] Mr McBain invited Mr Baxter and Mr Little to a meeting on 2 August 2002 at Vitol's offices
in London. The meeting was also attended by Mr Ian Taylor, the president and chief executive of
Vitol. Mr Scott invited Mr Khait and Mr Mendeleyev to a meeting held at the same time in Baku,
the capital of Azerbaijan. At the Baku meeting, Mr Scott dismissed Mr Khait and Mr Mendeleyev
from their employment with CGL and GOC, ostensibly on the ground of redundancy, in
anticipation of a downturn in CGL's and GOC's activities. In fact, no such downturn was expected.
At the London meeting, Mr Baxter and Mr Little were told that Rosco was exercising all its
remaining share options (increasing its holding in ABG to about 42 per cent), and required board
and executive control of ABG (of which Mr Little was then the president) and COGCL (of which
Mr Baxter was then the president). The offices of the ABG group were to be transferred to Vitol's
offices. Mr McBain also informed Mr Baxter and Mr Little that Mr Khait and Mr Mendeleyev were
being dismissed at a meeting which was being held at the same time in Baku, and that the
dismissals resulted from the discovery of evidence implicating Mr Khait and Mr Mendeleyev in
corruption and misappropriation of funds. Mr Baxter and Mr Little were surprised and concerned,
and asked to see the evidence supporting the allegations. Their concern arose partly from the fact
that Mr Khait and Mr Mendeleyev were employees of long standing. Mr Khait, in particular, had
been instrumental in assisting Mr Baxter to negotiate and conclude the EDPSA, and in persuading
SOCAR to extend the deadline for the minimum work programme. Under Azeri law, it was also
necessary for foreign companies operating in Azerbaijan to have a designated local representative
and a local representative office; and Mr Khait was the local representative of COGCL and CGL.
He was regarded as having excellent relations with SOCAR. Mr Mendeleyev was an Azeri national,
whose local knowledge had been found valuable.
[31] Mr McBain said in evidence that he was disappointed at the meeting by Mr Baxter's reaction
to the dismissal of Mr Khait and Mr Mendeleyev. His perspective was that Vitol had rescued ABG
and had increased greatly the value of Mr Baxter's shareholding in the company, and that Mr Baxter
was nevertheless failing to give Vitol his support. He regarded Mr Baxter's reluctance to accept the
allegations about Mr Khait and Mr Mendeleyev, and his request for evidence, as unreasonable. He
said in evidence that the culture of backhanders and illegal payments was endemic in that part of the
world. In a country which suffered from endemic corruption, it was difficult to provide proof: it was
not a question of calling in the police. Vitol's way of dealing with this was to stamp it out
immediately. It was futile for them to fund a company and find that the funds were not being used
properly. They therefore decided to take control of ABG and COGCL. Mr McBain said in evidence
that, at the meeting, "we informed Mr Baxter forcefully that that would be our intention". Mr Baxter
and Mr Little were invited to make a proposal within seven days under which Rosco would obtain
board and executive control of ABG and COGCL. They were told that they would have a role in
ABG in the future.
[32] On 16 August 2002, no proposal having been submitted, a further meeting took place
between Mr Baxter, Mr Little and Mr McBain. Mr John Martin, a financial officer of Vitol, was
also present. There was further discussion of the position of Mr Khait and Mr Mendeleyev.
Mr Little observed that they had been actively involved in securing the EDPSA. Mr McBain
responded that the business development role was past: ABG and COGCL were now in what he
described as a "holding pattern" - in other words, they were focusing on the implementation of the
EDPSA rather than seeking further business development. Mr Baxter and Mr Little appear to have
been reluctant to accept that. Mr McBain also expressed concern about his discovery that Mr Khait,
although dismissed by CGL, continued to hold other positions in the ABG group. He informed
Mr Baxter and Mr Little that Vitol intended to restructure the boards of ABG and COGCL. His
proposal was that Mr Baxter, Mr Little and Mr Crabtree should resign and that Mr Martin should be
appointed, giving Vitol a majority on the boards. Mr Little responded that that would be contrary to
the earlier agreement whereby Vitol were to nominate two out of seven directors, rather than three
out of five. As Mr McBain said in evidence, it became clear that Vitol was on a collision course
with the existing management of ABG. They had "completely lost confidence in them".
[33] Since ABG was a public company listed on a Canadian stock exchange, Mr McBain then
sought advice from Mr Coleman, a Canadian lawyer, about how Vitol might acquire control of
ABG. Mr Coleman advised that it would be best to seek the support of the non-executive directors.
He would go to Anguilla and explain to them why Vitol would be better rescuing the company.
Mr McBain could then call a board meeting and tell Mr Baxter and Mr Little that they were no
longer required.
[34] In his evidence in relation to this chapter of events, Mr McBain's position in summary was
that he was disappointed by Mr Baxter's behaviour, and in particular by his failure to take seriously
the allegations concerning Mr Khait and Mr Mendeleyev. Although Mr McBain initially appeared
to accept that Vitol's decision to take control of ABG and COGCL had been taken before the
meeting on 2 August, and at another point in his evidence said that he could not remember, his final
position was that it was as a result of Mr Baxter's reaction to the dismissal of Mr Khait and
Mr Mendeleyev that he decided that Mr Baxter had to be relieved of his management
responsibilities. Mr McBain described Vitol's taking control of ABG from Mr Baxter and Mr Little
as "the last thing we wanted at that time". Vitol had been compelled to take this "drastic" step as a
result of the "unwillingness or inability of the previous board [of ABG and COGCL] to deal with
the contagion of corruption". Mr McBain also maintained that he thought at the time that Mr Baxter
would in the future be an important asset to the ABG group, because of his relationships in
Azerbaijan and his knowledge of the South-West Gobustan project.
[35] It appears however from the contemporary documents that Mr Baxter and Mr Little did in
fact take the allegations seriously and wished to have a full investigation carried out, and that it was
Mr Little rather than Mr Baxter who was particularly vocal in expressing his desire to see
supporting evidence. The documents do not convey to me the impression that Mr Baxter's being
relieved of his responsibilities was primarily the result of his reaction to the dismissal of Mr Khait
and Mr Mendeleyev. It appears to me that Mr Baxter was probably correct in his impression that the
decision that Vitol (or Rosco, the two being effectively indistinguishable) should take control of
ABG and COGCL had been taken in advance of the meeting on 2 August. The decision of
Mr Taylor, the president and chief executive of Vitol, to attend that meeting appears to me to be
consistent with that conclusion. Mr McBain's written summary of the meeting, expressly "for the
record", also supports that conclusion, as it links the decision to take control of ABG and COGCL
to the exercise of the share options ("Rosco is exercising all its remaining warrants, and requires
board and executive control of ABG and COGCL"), and deals with the dismissal of Mr Khait and
Mr Mendeleyev as a separate item.
[36] Later in August 2002 Mr McBain wrote to Mr Baxter and Mr Little, recording his surprise at
their reluctance to accept Rosco's position in relation to Mr Khait and Mr Mendeleyev, and his
dismay that Mr Khait and Mr Mendeleyev remained on the payroll of companies in the ABG group.
In his letter, Mr McBain set out the grounds for suspicion about Mr Mendeleyev in particular: the
case against Mr Khait was that Mr Mendeleyev could not have acted as he was alleged to have done
without at least tacit support from Mr Khait.
[37] In early September 2002 Mr Coleman and Mr McBain had a number of meetings in
Anguilla with the non-executive directors of ABG, at which they sought support for the removal of
Mr Baxter and Mr Little from their executive positions and for Vitol's assumption of control. They
sought to have a board meeting held at once. Mr Baxter and Mr Little were informed by the non-
executive directors, and persuaded them that the meeting should not be held until the following
week, on 10 September. Mr McBain then telephoned Mr Little saying that if he and Mr Baxter were
prepared to resign quickly, quietly and amicably, an agreement could be reached which would be
satisfactory to all sides. Mr Baxter and Mr Little tried to secure the support of other ABG
shareholders and of the independent directors, but it became apparent that Vitol was likely to
prevail.
[38] At the meeting of the board of directors of ABG on 10 September 2002, Mr Baxter and
Mr Little resigned from their executive positions with ABG, as respectively the chief operating
officer and the president and chief executive officer. Mr McBain was then appointed as president
and chief executive officer of ABG, and Mr Martin as chief financial officer. Mr Scott was
subsequently appointed as chief operating officer. Mr McBain was also appointed as the
representative director of ABG with authority to vote the shares of COGCL (which, as explained
above, was ABG's wholly-owned subsidiary) on all matters requiring the approval of COGCL's
shareholders. At the meeting, Mr McBain also undertook to have the board of directors of ABG
provided with regular reports on operations in Baku, the reports to be provided by Mr Scott. It was
also agreed at the meeting that Mr Baxter and Mr Little should each receive what was described as
an "executive termination package", consisting of a termination agreement and a consultancy
agreement. Mr McBain said in evidence that both agreements were designed as instruments to
compensate Mr Baxter and Mr Little for their loss of office. As non-executive directors of ABG,
they would continue to receive the standard director's fee of US$15,000 per annum.
[39] This is a convenient point to explain how directors' fees were paid. Mr McBain explained in
evidence that all directors of all companies in the ABG (now Arawak) group received a total of
US$15,000 per annum for their directorships, regardless of how many directorships they held. If a
directorship was held in a company which was only part-owned by Arawak (directly or indirectly),
that would be the company which was billed for the fees: in his own case, CGL (in which Arawak
hold a minority shareholding via COGCL) was billed US$15,000 for his fees.
[40] According to the minutes, there took place simultaneously with the ABG board meeting a
meeting of the shareholders of COGCL. So far as appears from the evidence, this was the only
shareholders' meeting of COGCL to take place. The minute records that Mr McBain was present,
representing the sole shareholder, ABG. Mr McBain was appointed chairman of the meeting. He
received the resignations of Mr Baxter, Mr Little and Mr Crabtree from COGCL's board of
directors. He proposed that the board be reduced to four directors. That motion was seconded by
Mr McBain, and passed unanimously. His motion that the directors should be himself, Mr Favre
and two of ABG's non-executive directors was likewise seconded by himself and passed.
[41] In summary, therefore, on 10 September 2002 Mr Baxter lost his executive positions with
ABG and COGCL, with the consequence that he had no contract of employment with anyone. He
also lost his directorship of COGCL. He remained a non-executive director of CGL and GOC
(having lost his executive positions with those companies on 8 July 2002, as explained above). He
and Mr Little also remained directors of ABL, which continued in existence as a wholly-owned
subsidiary of ABG. They also remained directors of ABG for the time being, but without any
executive responsibilities. Mr Coleman explained in evidence that Mr Baxter and Mr Little could
not be removed from the board of ABG without a shareholders' meeting. It was made clear to
Mr Baxter that he would be removed from his position as a non-executive director of ABG at the
next annual general meeting.
[42] Following the meeting on 10 September, Mr Scott was appointed as COGCL's
representative for the purposes of the representative office in Baku, in place of Mr Khait. The terms
of the termination and consultancy agreements were then negotiated. One matter raised by
Mr Baxter and Mr Little concerned business asset taper relief in respect of the capital gains tax
liability which they would incur on a disposal of their shareholdings in ABG. In that regard Mr
Little wrote to Mr McBain on 19 November 2002, on behalf of himself and Mr Baxter:
"We have received professional advice that our shareholdings in ABG will continue to be eligible for full business asset taper relief for CGT purposes while we are officers or employees (full time or otherwise) of the Company or of a company having a relevant connection. Apparently our directorships (even though non-executive) qualify us as 'officers' under the UK's Taxes Act, so all is currently well. However, if we were to cease to be directors, there may then be a problem. We propose that if this happens before we sell our shares, the first move should be to seek Revenue clearance for a continuation of full business asset taper relief, and if this fails then the Company should let us retain such 'officer/employee' status as is necessary to retain full business asset taper relief. This should be reflected in the TAs [termination agreements] and CAs [consultancy agreements] as appropriate".
This matter was reflected in both the termination agreement and the consultancy agreement (which I
shall refer to as "the first consultancy agreement"), as explained below.
[43] The matter with which the negotiations were principally concerned, however, was the "non-
compete" clause (as it was described in evidence) which Mr McBain wished to have included in the
consultancy agreement. It appears from Mr Coleman's evidence that one of the purposes of the
consultancy agreements was to prevent Mr Baxter and Mr Little from assisting or establishing a
competing operation. A "non-compete" clause was considered necessary, or at least desirable,
notwithstanding that Mr Baxter remained a non-executive director of ABG, CGL and GOC. In that
regard, it has to be borne in mind not only that Mr McBain intended to remove Mr Baxter from the
board of ABG at the next annual general meeting, but also that Mr McBain had been involved for
several months in negotiations with the China National Petroleum Corporation ("CNPC") with a
view to selling to it the whole or a part of ABG's or Rosco's interest in the EDPSA. Mr Baxter and
Mr Little reluctantly accepted the restrictions proposed by Mr McBain.
[44] The termination agreement was entered into between ABG, ABL, COGCL, Mr Baxter and
his then wife. It was not subject to any limitation of time. As had been envisaged, it provided for the
payment to Mr Baxter of a lump sum equivalent to six months' salary, without admission of
liability. In relation to taper relief, it provided (at clause 13):
"The Employer [defined as meaning each of ABG, ABL and COGCL] acknowledges that notwithstanding the termination of the Employee's employment, the Employee intends to benefit from full business asset taper relief for Capital Gains Tax purposes in respect of his shareholding in ABG. The Employer agrees to use reasonable endeavours to co-operate with the Employee in respect of the Employee obtaining the benefit of such relief".
[45] The first consultancy agreement was also entered into between ABG and Mr Baxter.
Although executed on 13 December 2002, it was effective for the period from 11 September 2002
to 10 September 2003. It provided that ABG entered into the agreement:
"for itself and as agent and trustee for and on behalf of each Group Company".
the latter expression being defined as meaning:
"The Company [ABG], any company which is a subsidiary of the Company, and Rosco SA only to the extent that Rosco SA is carrying on the Business in place of the Company and/or any subsidiary of the Company".
The expression "the Business" was defined as meaning:
"The business now being carried on by the Company and any company which is a subsidiary of the Company, being the exploration, production and development of (and related activities in respect of) any hydrocarbon products (including gas and crude oil) carried out within the Azerbaijan Republic".
At the time, the only active subsidiaries of ABG were ABL and COGCL. Under the agreement,
Mr Baxter was to supply "such consultancy services as the Company (acting through the Company
representative [Mr McBain] or otherwise) shall from time to time require in relation to the
management of its business". The services were to be provided for up to six working days per
month. Mr Baxter was to be paid US$125,000, and his expenses were to be reimbursed.
[46] Under the non-compete provisions (clause 3.2), Mr Baxter undertook that during the
currency of the agreement he would not
"3.2.1 be in any way directly or indirectly employed, engaged, interested or concerned (whether as director, officer, employee, shareholder, partner, agent, consultant or otherwise) in any business or undertaking of any kind which is wholly or partly in competition with the Business carried on by the Company or any Group Company in Azerbaijan or where this is or is likely to be otherwise in conflict with the interests of the Company or any Group Company in Azerbaijan ....
3.2.2 whether by himself or by his servants or agents or otherwise howsoever and whether
as a consultant, principal, partner, director, employee or otherwise directly or indirectly provide or procure the provision of any consultancy services or carry out
or procure the carrying out of any other business activity, work or services to or for the benefit of any competitor of the Company or of any Group Company if the services, activity or work relate to or are concerned with the Business".
As Mr Baxter observed in evidence, although the agreement was framed as a contract under which
he could be required to work for up to six days per month for ABG, the practical effect of clause 3.2
was to prevent him from working for himself or anyone else in the oil and gas industry in
Azerbaijan during the currency of the agreement. In addition, clause 3.4 required Mr Baxter, during
the currency of the agreement, to
"use his best endeavours to promote and protect the interests of the Company and each Group Company and [not to] do anything which is harmful to those interests".
Clause 7.4 dealt with taper relief and was in similar terms to clause 13 of the termination
agreement.
[47] In evidence, Mr McBain initially maintained that he was unaware at this time that taper
relief was a matter of importance to Mr Baxter. Under questioning, however, he accepted that it
would have been reasonable for him to infer that taper relief was important to Mr Baxter and Mr
Little, and that it had been made clear to him that they qualified for taper relief as long as they held
directorships in the ABG group. In the light of the documentation, I accept that the importance
which Mr Baxter and Mr Little attached to taper relief was clear to Mr McBain.
[48] In January 2003 ABG announced that Rosco had entered into agreements for the sale of its
62.83 per cent interest in CGL to two Chinese-controlled companies, CNPC International Ltd
("CIL") and Smart Achieve Developments Ltd ("SADL"), which were trading affiliates of CNPC.
COGCL was to retain its 37.17 per cent interest in CGL. The transaction was completed in
March 2003. At that point a shareholders' agreement was entered into between CIL, SADL,
COGCL and CGL. It provided that the board of directors of CGL and of GOC should comprise
seven directors. The Chinese companies had the right to appoint and remove four directors from
time to time, and COGCL had the right to appoint and remove the remaining three directors. The
Chinese companies also had the right to appoint and remove the president of CGL and of GOC.
[49] In April 2003 Mr Scott resigned as president of CGL and GOC, and was replaced by a
nominee of the Chinese companies. Mr Scott became a director of CGL, along with four nominees
of the Chinese companies. Mr Little, Mr Crabtree and others resigned as directors of CGL.
Mr McBain and Mr Baxter continued to be directors of CGL. Although Mr Baxter was never
appointed by COGCL as a director of CGL, he effectively held office as a director of CGL at the
pleasure of COGCL.
[50] Although Mr Scott had been relieved of his executive responsibilities with CGL and GOC,
he remained in Azerbaijan as president of COGCL. He was also the chief operations officer of
ABG. It appears from the accounts for the year to 31 December 2002 (the only COGCL accounts to
which reference was made in evidence ) that COGCL did not carry on any trading activity. Its only
fixed asset was its minority shareholding in CGL. Following the Chinese takeover of CGL, COGCL
opened an office in Baku, where Mr Scott was based. He had an assistant who worked there, with
the title of office manager. Part-time staff also assisted Mr Scott from time to time. Mr Scott
prepared weekly reports, headed "COGCL Weekly Data", in which he summarised GOC's
operations and reported on other relevant matters. The reports were sent to Mr McBain. One of
Mr Scott's functions was to look for new business opportunities. In performing that function, he
never consulted Mr Baxter. The capacity in which Mr Scott prepared his reports and investigated
new opportunities did not appear clearly from the evidence. As explained below, in the only
detailed report which he submitted on a new opportunity (the Siyazan monocline), he described
himself as the chief operating officer of Arawak, as ABG had by then been re-named. The reality
appears to be that little attention was paid to separate corporate identities. Mr Baxter said in
evidence that as far as he could make out, there were projects being pursued in Azerbaijan by either
COGCL or Arawak, and also by Vitol and other companies: it was not always clear which hats were
being worn. He accepted, however, that he understood that the ABG/Arawak group (which included
COGCL) was interested in taking forward opportunities in Azerbaijan. I note that it is a matter of
admission in the pleadings (and therefore binding upon me) that Arawak and COGCL were
involved in pursuing efforts to identify new business opportunities in Azerbaijan in relation to the
Siyazan monocline and the Neftchala oilfield (discussed below).
[51] On 5 May 2003 ABG held its annual general meeting. Mr Baxter and Mr Crabtree were not
re-appointed as directors. Mr Coleman became a director in their place. At a board meeting of ABG
held the same day, Mr Coleman was appointed as chairman of the company, and Mr McBain was
re-appointed as president and chief executive officer. The minute of the meeting records:
"The Chairman called upon Mr McBain to review other opportunities that the Company [i.e. ABG] is considering. Mr McBain outlined briefly what the company was looking at and indicated that Jay Scott had been hired to seek out other opportunities".
This meeting took place during the currency of Mr Baxter's first consultancy agreement.
Mr McBain accepted in evidence that Mr Scott had been tasked to seek other opportunities in
Azerbaijan besides the South-West Gobustan EDPSA, and that he had not suggested at the meeting
that Mr Baxter was involved in seeking such opportunities. The minute supports Mr Baxter's
evidence that he had not been asked at that time to look for new business opportunities in
Azerbaijan, and I accept that evidence.
[52] As at this point, Mr Baxter had lost all his directorships in the ABG group, (i.e. ABG and its
subsidiaries), apart from his directorship of ABL, which was not a trading company. All his
contracts of employment had been terminated, bringing to an end the substantial remuneration
which he had earned (his annual salary as chief operating officer of ABG having been £118,500).
He had the first consultancy agreement, which was due to expire in September 2003. From
July 2003, as explained below, he received US$15,000 per annum from CGL in respect of his non-
executive directorships of CGL and GOC, those companies now being under Chinese control. CGL
paid the same amount to its Chinese directors.
[53] Later in May 2003 Mr McBain found himself in disagreement with the Chinese directors of
CGL as to whether CGL's annual budget was a subject which should be discussed by the board of
directors (of which he and Mr Baxter were both members). He asked Mr Baxter to review the
shareholders' agreement. Mr Baxter then reported to Mr McBain on matters relevant to meetings of
the CGL board, and on matters relevant to meetings of CGL's shareholders. One matter which he
mentioned was that the EDPSA required the "contractor parties" (i.e. CGL and SOCAR Oil
Affiliate) to enter into a joint operating agreement to regulate the conduct of the operations, and that
SOCAR was likely to remind CGL shortly of the need for such an agreement. When asked about
the capacity in which he provided this report, Mr Baxter said that the lines between companies got
blurred at times, and he was not necessarily conscious of the capacity in which he was doing
anything. Since this review was concerned with the activities of CGL, he (now) thought he was
doing it in a CGL capacity.
[54] In June 2003 ABG changed its name to Arawak Energy Corporation ("Arawak"). In
July 2003 Mr Baxter attended a board meeting of CGL in Baku. It was agreed that the board would
request the shareholders to agree a form of joint operating agreement which would then be
submitted to SOCAR. It was also agreed that CGL would pay the directors a fee of US$15,000 per
annum in addition to their expenses. From that point onwards, Mr Baxter (like Mr McBain, as
explained earlier) was not remunerated by the Arawak group (i.e. Arawak and its subsidiaries) in
respect of any directorships of companies in the group. Initially, Mr Baxter was paid his fees and
expenses by Arawak, who were then reimbursed by CGL. Subsequently, Mr Baxter invoiced CGL
in Baku directly.
[55] By September 2003, relations between Mr Baxter and Mr McBain were reasonably cordial.
The first consultancy agreement was about to expire. Mr Baxter had not been asked to do anything
under it. On 1 September he e-mailed Mr McBain, noting that CGL was making progress on its gas
wells in the coastal block and that production might soon begin. He suggested that he might ask the
Chinese president of CGL, Mr Xin, what his plans were for gas production and sales. He had
spoken to Mr Xin about this at the July board meeting of CGL, and Mr Xin had appeared to be
interested in anything Mr Baxter could contribute. Mr McBain replied by e-mail, agreeing with this
suggestion. In evidence, Mr Baxter said that, having never been asked to do anything under the
consultancy agreement, he was trying to get something to do. Distribution and sales were controlled
by Azeri Gas, which was closely associated with SOCAR. In order to develop its gas reserves, CGL
therefore needed a contract with SOCAR. At the time, the Azeris were developing an offshore gas
field which was far larger than the field controlled by CGL. It would be difficult to persuade
SOCAR to take an interest in a contract for small and unquantified reserves. Mr Baxter did however
have previous experience of negotiating the sale of gas from another project in Azerbaijan. In his
subsequent correspondence with Mr Xin, Mr Baxter stated that he was acting in his capacity as a
director of CGL and GOC. His work in connection with the gas marketing agreement was not the
subject of any formal contract. He agreed what he would do, in advance, with the president of CGL.
[56] By September 2003 it had become apparent to Mr Baxter and Mr Little that ABL, which had
ceased to be active, was likely at some point to be wound up unless, as Mr Little was suggesting, he
and Mr Baxter were to take the company over. If, however, ABL was either wound up or ceased to
form part of the Arawak group, the consequence would be that Mr Baxter would lose his sole
remaining directorship of a company in the Arawak group. As a result he would cease to qualify for
taper relief on the sale of his Arawak shares, which had risen in value by millions of dollars. His
potential tax liability amounted to hundreds of thousands of pounds. He wrote to Mr Little on
9 September:
"For as long as I own & sell Arawak shares I need Addison & Baxter Limited to be an Arawak subsidiary (>51% owned, I presume), and I need to be a director of it to qualify for accelerated taper relief on business assets. This is singularly the most important issue for me. So I don't want Addison & Baxter wound up in a hurry. If it were, and possibly in any case, I would have to persuade adm [Mr McBain} to make me an employee of another group >51% subsidiary, say COGCL".
Provided, however, Mr Baxter could secure a directorship or employment with another company in
the Arawak group, it could be in his interests to cease to be a director of ABL. That was because
ABL was the principal company of his (and Mr Little's) pension scheme. Under the terms of the
scheme, it was possible for them to take early retirement at the age of 50 (i.e. in Mr Baxter's case in
February 2004), to receive a tax free lump sum from the scheme, and for the scheme then to be
wound up. This was only possible if they ceased to be directors of ABL.
[57] At the end of September 2003, the first consultancy agreement having expired, Mr McBain
raised with Mr Baxter the possibility of renewing the agreement on the basis that the annual
payment would be reduced to US$25,000. Mr Baxter replied that he would rather do without the
money than accept the non-compete restrictions. Mr McBain agreed to drop the restrictions and
asked Mr Baxter to prepare a revised agreement. In evidence, Mr Baxter said that, by this time, his
expertise and experience were effectively confined to the oil and gas business in Azerbaijan. He
could not manage on US$25,000 per annum. He had told Mr McBain that he would rather do
without a consultancy agreement than accept restrictions on his activities. His intention was to find
new areas of activity in the oil and gas sector in Azerbaijan. He could not say whether he had said
that in terms to Mr McBain, but it must have been obvious to him. Mr McBain knew the level of
salary Mr Baxter was used to, and his age and experience. He knew that Mr Baxter wanted to be
free of the "non-compete" restrictions. Mr McBain had agreed to have a consultancy agreement
without a restriction on competition.
[58] In his evidence in relation to this matter, Mr McBain said that he had no clear recollection of
his discussions with Mr Baxter. In relation to the US$25,000 figure, Mr McBain said that Mr Baxter
and Mr Little had become very wealthy because of the rise in the Arawak share price: the
implication appeared to be that, since Mr Baxter could make a large capital gain, he should not
expect much by way of remuneration for his services, but should instead endeavour to increase the
value of his shares. Mr McBain said that the figure of US$25,000 was not intended to place a value
on Mr Baxter's services: "we reward people for doing things". The second consultancy agreement
was "just something to keep people there, on side". Mr McBain accepted that Mr Baxter was then
about 50 years of age and had lost all his executive remuneration. He accepted that Mr Baxter had
said that he would rather do without the money than accept restrictions on competition, but denied
that he (Mr McBain) had accepted that Mr Baxter would be free to use his skills and contacts in
Azerbaijan for his own benefit or on behalf of a third party. Mr McBain said that if he had thought
for one second that Mr Baxter wanted to be free of restraints and to capitalise on his contacts and
experience in the oil and gas industry in Azerbaijan, he would never have agreed to have the
restrictions removed. Mr McBain maintained that he had thought Mr Baxter wanted the restrictions
removed because they would prevent him from going into an unrelated industry, such as catering, or
because the restrictions were insulting.
[59] I found Mr McBain's evidence on this last point difficult to accept. He is an astute
businessman, and I think it unlikely that he imagined that Mr Baxter had it in mind to enter the
catering industry, or was anxious to have the non-compete restriction removed because he found it
insulting. I accept Mr Baxter's evidence that it must have been clear to Mr McBain at this time,
whether or not he was told in terms, that Mr Baxter wished to pursue oil and gas projects in
Azerbaijan on his own behalf. That was the obvious explanation of Mr Baxter's insistence on
having the non-compete restriction removed from his consultancy agreement. Mr McBain must also
have realised that a retainer of US$25,000 was insufficient to enable Mr Baxter to support himself
and his dependants. Since Mr Baxter's experience and contacts lay in the oil and gas sector in
Azerbaijan, his most obvious course of action, if released from a non-compete restriction, was to
pursue oil and gas projects there on his own behalf.
[60] During October 2003, Mr Baxter prepared a draft consultancy agreement, which was a
revised version of the first consultancy agreement. The old clause 3.2 (the non-compete clause) was
deleted.
[61] On 20 October 2003 a company named Pacific Alliance Ventures Ltd ("PAVL") was
incorporated in Nevada. One of its directors was Mr Gerald Tuskey, who had acted as a legal
adviser to ABG until Vitol took control of their management in September 2002. He was a friend of
Mr Baxter. The other director was Ms Velda King. It appears that the company was formed by
Mr Tuskey with contacts in Vancouver, and that he invited his friends, including Mr Baxter, to
invest in it. It appears to have had 58 shareholders at that time. Mr Baxter was the largest
shareholder, with about 15 per cent of the share capital. The company carried on business in
marketing and advertising.
[62] On 21 October Mr Baxter forwarded the draft consultancy agreement to Mr McBain. Later
in October Mr Baxter visited Baku for meetings in connection with the proposed gas marketing
agreement. Mr McBain and Mr Coleman also visited Baku, and Mr McBain had a meeting with
SOCAR. In his weekly management report for the week ending 2 November, Mr Scott reported that
the review of new project possibilities was ongoing. I accept Mr Baxter's evidence that he was not
involved in the review.
[63] On 15 and 16 November 2003 Mr Baxter attended board meetings of CGL and GOC in
Beijing. At the CGL board meeting, Mr Baxter provided a detailed review of gas marketing
opportunities, and requested further information which he required in order to pursue a gas
marketing agreement with SOCAR. His recommendations were supported by the board. A proposed
joint operating agreement was also mentioned. That was the last occasion on which Mr Baxter
attended a board meeting of CGL or GOC, prior to the execution of the Memorandum of
Understanding.
[64] On 19 November 2003 the second consultancy agreement was executed. It was entered into
between Arawak and Mr Baxter, and was effective for the period from 11 September 2003 to
10 September 2004. It contained no definition of the expression "the Business" and no "non-
compete" provisions. It provided for Mr Baxter to be retained on a "when needed" basis for up to
two days per month, and for a retainer of US$25,000 to be paid, with an additional US$1000 per
day for any additional days worked. The agreement was otherwise in similar terms to the first
consultancy agreement. In particular, clause 3.3 required Mr Baxter to:
"use his best endeavours to promote and protect the interests of the Company and each Group Company and [not to] do anything which is harmful to those interests".
Clause 7.4 provided:
"The Company acknowledges that the Consultant intends to benefit from full business asset taper relief for Capital Gains Tax purposes in respect of his shareholding in the Company. The Company agrees that during the continuance of this Agreement it shall use reasonable endeavours to co-operate with the Consultant in respect of the Consultant obtaining the benefit of such relief".
In the event, Mr Baxter was never required to work more than two days per month.
[65] Mr Baxter said in evidence that, once the second consultancy agreement had been signed, he
saw no obstacle to his seeking out new oil and gas opportunities in Azerbaijan on behalf of a third
party or on his own account. I accept that that was Mr Baxter's understanding. Mr McBain, on the
other hand, acceded in evidence to counsel's suggestion that the removal of the non-compete clause
was of no significance, given the terms of clause 3.3. At another point in his evidence, however, he
appeared to be willing to accept that, under the second consultancy agreement, Mr Baxter was free
to pursue business opportunities in Azerbaijan on his own account or for the benefit of third parties.
My inference, consistently with my conclusion that Mr McBain understood that Mr Baxter wished
the non-compete clause removed so as to be able to act on his own account, is that Mr McBain
probably thought at the time that Mr Baxter was now free to act on his own account.
[66] In December 2003 Mr Scott visited London and made a presentation to Mr McBain and
Mr Coleman on new business opportunities in Azerbaijan. In the meantime, Mr Baxter continued to
work with Mr Zheng, who had replaced Mr Xin as the president of CGL and GOC, on the
preparation of a draft gas marketing agreement. The draft agreement was ready in January 2004,
and Mr Baxter then went to Baku to undertake negotiations with SOCAR. He dealt in particular
with Mr Ali Jafarli, the deputy director of their foreign investment division, whom he had known
since 1996. Mr Baxter kept Mr McBain informed of progress.
[67] While in Baku, Mr Baxter spoke to Mr McBain about a business venture being undertaken
by Rick MacDougall and Ray Lagarde, who had worked in Azerbaijan for Union Texas Gobustan.
By this time, Arawak and Vitol had interests in oil and gas projects outside Azerbaijan, through
other companies besides COGCL. Mr Baxter hoped that Arawak or Vitol might be interested in
becoming involved in a project along with the proposed venture, which required finance. He
mentioned the possibility of projects in Russia and Kazakhstan. Mr McBain appeared to be
interested.
[68] Until about this time the weekly reports which Mr Scott sent to Mr McBain had been e-
mailed by Mr McBain to the directors of Arawak, and copied by e-mail to a number of other people,
including Mr Baxter. Mr Baxter was not sent Mr Scott's report for the week ending 1 February
2004, but was provided with a copy by Mr Little. In the report, Mr Scott mentioned a potential
project at Siyazan, in the north of Azerbaijan. The Siyazan monocline was a geological structure
running from the coast of the Caspian Sea in a north-westerly direction along the edge of the
Greater Caucasus mountain range for a distance of about 90km. There was an existing oilfield there,
although part of the area remained undeveloped. Mr Scott had been approached in relation to
Siyazan by a retired SOCAR geologist. Mr Scott and Mr McBain had travelled to Siyazan to look at
the area, and the geological and geophysical data were being reviewed. Information had been sent
to Vitol and to Samson, a US company which was involved in a joint venture with Vitol in the
Komi Republic in Russia. The potential opportunity at Siyazan had been (and continued to be)
investigated without Mr Baxter's involvement.
[69] After receiving the report, Mr Baxter wrote to Mr Little on 6 February 2004:
"Regarding 'Sent Siyazan monocline data to Samson and Vitol for review and comment' and 'Travelled out to Siyazan with Alastair to look at area' I had heard about this from Alastair [McBain] & Ali [Jafarli]. Not surprisingly (and encouragingly) adm [Mr McBain] continues to be interested in new projects in Azerbaijan & I suppose this is part of the reason he keeps J [Mr Scott] on in Baku. As I have said decent onshore projects are few & far between, and they appear to have a short list of Siazan and Neftchala. They also seem to want Samson involved as operator/risk sharer (also good news). I'm reasonably certain that Samson have visited Baku & help short list these projects. I presume they want a project with exploration upside, because that's where the opportunity (if any) exists with Siazan. As to which company Alastair uses depends on him, I hope Arawak would get a piece for the sizzle. Since you received this report & have no prior knowledge of this item, why not question adm on it - I'd be interested to hear his spin on it. Of course it may serve to have you removed from the distribution list as well!"
[70] Mr Baxter's response confirms that he did not understand himself at that time to have any
role in Azerbaijan in relation to finding new projects for the Arawak group. His reference to the
scarcity of decent onshore projects is consistent with his evidence that Mr McBain's focus was on
onshore projects. His comment that "which company Alastair uses depends on him" is consistent
with his evidence that any project which might be undertaken would not necessarily be allocated to
the Arawak group. Neftchala was an area in southern Azerbaijan where there was an existing
oilfield.
[71] By March 2004 Mr Baxter and Mr Little had decided to resign as directors of ABL and wind
up the pension scheme, provided they could secure their position in relation to taper relief. On
2 March Mr Little wrote to Mr Baxter, and to his (Mr Little's) accountant:
"I am also trying to get resolution of the timing of our resignations as directors of Addison & Baxter Limited. We have not resigned yet, because this will affect our eligibility for business asset taper relief. We need to be appointed as directors of another qualifying subsidiary to preserve this relief. I shall be discussing this at a board meeting this afternoon, and will advise further".
In evidence, Mr Baxter said that he understood that the board meeting referred to was a meeting of
the Arawak board. Mr McBain said that he did not recollect the matter being raised. He initially
said that he would be surprised if Mr Little had raised it at an Arawak board meeting, as it was not
an appropriate matter to raise: "We weren't handing out directorships to suit people's tax positions".
He acknowledged that the only company of whose board Mr Little was a member, and which had
the power to appoint him and Mr Baxter as directors of a subsidiary of Arawak, was Arawak. Given
what Mr Little had written, and given also Mr McBain's admittedly limited recollection, it appears
to me to be likely that the matter was raised at the Arawak board meeting that day.
[72] In connection with this matter, Mr McBain was reminded in evidence of the obligation
under clause 13 of the termination agreement to use reasonable endeavours to co-operate with
Mr Baxter (and Mr Little) in respect of his obtaining taper relief. Asked if he took the obligation
seriously, Mr McBain answered "Not really". Asked if did not take a contractual obligation
seriously, Mr McBain answered that he did not know if an obligation to use reasonable endeavours
was a contractual obligation.
[73] In the meantime, Mr Baxter was continuing to liaise with Mr Zheng of CGL and Mr Jafarli
of SOCAR in connection with the gas marketing agreement. He kept Mr McBain informed of
progress. Mr Baxter also made efforts to arrange a meeting between Mr McBain, Mr MacDougall,
Mr Lagarde and himself. In that regard, he had written to Mr McBain in relation to the joint venture
between Vitol and Samson in the Komi Republic, and also in relation to a project in California
which he thought might be of interest to Vitol. He also sought to interest Mr McBain in a project
involving Mr Mark Lang, another of Mr Baxter's acquaintances from Azerbaijan, concerned with
the development of oil terminal infrastructure in the Caspian Sea. Mr Baxter hoped that this project
might be of interest to Vitol.
[74] On 5 March 2004 Mr Little e-mailed Ms Bujnowska, the corporate secretary of Arawak, and
Ms Gina Metcalfe, an accountant working for Arawak's chief financial officer, John Martin, on the
subject of business asset taper relief:
"While I remain a director of Arawak Energy Corporation, my BATR position is secure. The current issue is with Nick [Baxter]. He must have a qualifying BATR position before he and I cease to be directors of Addison & Baxter Limited, which is the necessary precursor to winding up the A & B Pension Scheme and then Addison & Baxter Limited itself".
Mr Little attached to the e-mail earlier e-mails between himself and the tax adviser acting for
himself and Mr Baxter, in which their thinking in relation to directorships and taper relief was set
out. Hard copies of the e-mails were sent to Mr Martin and Mr Coleman.
[75] On 9 March 2004 Mr Baxter had a meeting with Mr McBain. Following the meeting,
Mr Baxter sent Mr McBain, on 11 March 2004, what he described as a "brief minute of a few of the
points we agreed on Tuesday, with some of my comments". The first point was:
"1. N.B. [Mr Baxter] to be appointed as a director of COGCL. Best done asap, but could wait until the next AGM (presumably May/June 2004)."
The second point was an agreement that Mr McBain would meet Mr Baxter, Mr MacDougall,
Mr Lagarde and Mr Alex Warmath (who had joined the proposed joint venture) in Houston, Texas
later that month. On the same date, Mr Baxter also sent an e-mail to Mr Little, informing him of
what had been achieved at the meeting with Mr McBain:
"2. His agreement in principle to put me on the COGCL BOD [Board of Directors]. He must have been flitting in & out of your meetings last week because he was far from up to speed on this matter. Anyway it didn't take me more than 5 minutes to get there with him. We were very short of time, which helped. His suggestion is to do this at the next AGM, presumably in June (along with the Arawak AGM). Thinking out load (sic), he thought a) it was ok, b) it was appropriate, c) he might put J Scott on the Board at the same time (because J. likes that sort of thing!). and d) sling off at least one Anguillan, s/t m & m [subject to
media and marketing] considerations. I made him aware that this fix is only needed for you if your ABG directorship stops & I detected no sign that this is on the cards. I will suggest to him that we make this appointment prior to the June AGM, but realistically I probably won't succeed. I guess we can wait until then".
[76] In evidence, Mr Baxter was asked by counsel for COGCL why Mr McBain thought it was
appropriate for him to become a director of COGCL. Mr Baxter responded that he thought it was
because of the obligation of Arawak to use reasonable endeavours to assist him and Mr Little in
obtaining taper relief. He did not think it was because of his directorship of CGL. He would have
explained to Mr McBain that it was for reasons related to taper relief that he wanted to be a director
of COGCL. It was Arawak's only active subsidiary apart from ABL. It would have been out of the
question for Mr McBain to agree to his becoming a director of Arawak itself, and preposterous for
Mr Baxter to have suggested it. COGCL never had board meetings, and nothing was happening in
it, so it was a "tidy" directorship for him to have. The only reason for his becoming a director of
COGCL was to fulfil the requirements of taper relief. Asked whether he had told Mr McBain at that
meeting that he would be pursuing his own independent interests in Azerbaijan, Mr Baxter said that
he had probably not done so. He did not think that Mr McBain would have regarded that as
unacceptable, if it had been mentioned.
[77] Mr McBain said in evidence that he had no recollection of the meeting. He remembered
wanting to have Mr Baxter as a director of COGCL: he had "fantastic" contacts, including
SOCAR's vice-president, their chief geologist, and the head and deputy head of their foreign
investment division. He was "way the best person" they could have to represent the company in
Azerbaijan. He recollected that Mr Baxter might have tax issues relating to taper relief, but it was
not a major consideration to Arawak. The decision to put Mr Baxter on the board of COGCL had
nothing to do with tax: "I wouldn't hand out board seats for individuals' tax purposes". Arawak
might have found a way of compensating Mr Baxter for the loss of taper relief outside a
directorship. For him, putting Mr Baxter on the board was the right thing to do; the fact that it suited
Mr Baxter from a tax point of view was fortuitous. He was thinking of trying to make the COGCL
board more meaningful for the purpose for which it was intended. He wanted to transform the
position from one where there was little or no trust between the current and former management of
ABG/Arawak to one where they were working as a team. The appointment of Mr Baxter was a
gesture of trust in himself and Mr Little. Initially they had been kept away - they had to go, because
of the issue of Mr Khait - but by this stage they were working together. When it was suggested in
cross-examination that to compensate Mr Baxter for the loss of taper relief would have involved a
payment of about £200,000, and that it was inconceivable that Arawak would have compensated
Mr Baxter to that extent, given the sort of payments it had previously made to him, Mr McBain
responded that he had no idea: compensation was a hypothetical alternative to a directorship, and
had never been discussed. His position was that Mr Baxter had not made him aware that the reason
he (Mr Baxter) had approached him (Mr McBain) to become a director of COGCL was because he
needed "this fix", as it was described in the e-mail.
[78] In relation to this matter, there are aspects of Mr McBain's evidence which I do not find
convincing. First, I find it difficult to accept that Mr McBain at that time regarded Mr Baxter as
someone with "fantastic" contacts who was "way the best person" to represent the company in
Azerbaijan. As I have explained, Mr McBain had been responsible for the removal of Mr Baxter
from all his directorships and executive positions in ABG/Arawak and COGCL. Although he had
given Mr Baxter a consultancy contract as part of a termination package, he had not in reality
engaged him as a consultant. Although he had given Mr Baxter a further consultancy contract at a
reduced level of service and remuneration, that had been to keep him "on side". He had given
responsibility for the Arawak group's affairs in Azerbaijan to Mr Scott. He had given Mr Scott the
task of finding new business opportunities in Azerbaijan, and had chosen not to involve Mr Baxter
to any extent. Although Mr McBain maintained in evidence that Mr Baxter had been "tasked" for
some time with finding new business opportunities in Azerbaijan, that proposition is not supported
by the documentary evidence, and Mr Baxter's evidence to the contrary appears to me to be more
likely to be true. The only task which Mr Baxter had undertaken in Azerbaijan - the continuing
negotiation of the gas marketing agreement - had been undertaken on his own initiative, after
raising the matter with Mr Xin, and had been undertaken by Mr Baxter (as Mr McBain accepted in
evidence) in his capacity as a director of CGL and GOC. Secondly, I find it difficult to accept that
Mr Baxter's appointment arose out of an intention that he should, as a director of COGCL, have a
responsibility for finding new projects for COGCL (or Arawak) in Azerbaijan or elsewhere. That
responsibility lay with Mr Scott, who was employed by Arawak as its chief operating officer and by
COGCL as its president, and received substantial remuneration in respect of that employment.
Thirdly, it seems to me to be likely that Mr McBain understood that Mr Baxter's proposal that he
should become a director of COGCL was motivated by tax considerations. As explained above, I
consider it likely that the matter had been raised by Mr Little at the Arawak board meeting on
2 March. Mr Baxter's statement in the e-mail of 11 March, that he had made Mr McBain aware that
"this fix" was only needed for Mr Little if he ceased to be a director of Arawak, suggests that
Mr Baxter had indeed explained to Mr McBain the link between his wish to become a director of
COGCL and taper relief. At the same time, I accept Mr McBain's evidence that his reason for
agreeing to have Mr Baxter appointed as a director of COGCL was not motivated, primarily at least,
by a desire to accommodate Mr Baxter's desire to avoid capital gains tax. To appoint him as a
director of a holding company whose board never met may have been, as Mr McBain said, a gesture
of trust. The fact that Mr Scott and Mr Baxter were directors of CGL, a shareholding in which was
COGCL's only substantial asset, may also have been relevant.
[79] Later in March Mr Baxter sought to interest Mr McBain in a proposal by Richard Sobel, a
British banker who worked for the Moscow office of a US investment bank, to discuss the possible
financing of Vitol or Arawak projects.
[80] In advance of the Houston meeting between Mr McBain and the members of the proposed
joint venture, Mr Baxter provided them with a briefing in an e-mail dated 22 March:
"- Vitol owns various assets in Russia, Azerbaijan & Kazakhstan directly and indirectly via its private and publicly (sic) subsidiaries;
- Alastair is responsible for upstream projects in Vitol and is responsible for identifying, acquiring & managing them; - Alastair seems very motivated to rapidly expand this asset base & grow the reserves and production; - He favours projects and regions that he considers undervalued or for the time being ignored, and that offer good upside potential. This was what attracted him to Russia in the 90's and to Azerbaijan; - He is willing to look at such projects in nearly any location; - They seem not to be adverse to disposing of interests if the circumstances or deal looks right; - I guesstimate that Vitol's appetite is for projects in the 25-100 million barrels recoverable range, although he can clarify & confirm this; - Vitol has large financial resources, but Alastair is careful in the selection of projects; - Historically they have not wished to be operators, probably because they recognise they are a fledgling upstream company, and lack the human resources, experience & expertise; however now they have a few more projects, they have access to more people & their confidence is increasing."
In evidence, Mr McBain confirmed the accuracy of that summary, subject to the qualification that
his role was changing from being responsible for upstream projects (i.e. exploration, development
and production) in Vitol to being responsible solely for Arawak, to which Vitol's assets in Russia
and Kazakhstan were being transferred.
[81] In April 2004 a project review of the Siyazan monocline was completed by Mr Scott and the
consultants whom he had engaged. Their report identified the north-western end of the monocline
(the end furthest from the coast) as the area of greatest interest. It was noted, however, that the
south-east end of the monocline might extend beyond the coastline. In that regard, the report stated:
"This is a shallow offshore area (water depth less than 10m), should reserves be located in this area development would be reasonably simple".
In evidence, Mr Scott said that "simple" was probably the wrong word: he would prefer to say that
it would not be incredibly difficult. The report recommended that negotiations should be undertaken
to purchase additional data from SOCAR with a view to negotiating a memorandum of agreement
with SOCAR. It was recommended that the deal with SOCAR should, if possible, relate to the
north-western section of the monocline: it was not suggested that it should include offshore areas. It
was noted that "our ability to work with SOCAR should help us". Mr Scott had already been having
discussions with SOCAR in relation to Siyazan.
[82] With effect from 1 April 2004 GOC entered into a contract with Interact, a company based
in Anguilla whose director and general manager was Mr Crabtree, for the supply of consulting
services during the period until the end of 2004 in connection with the preparation, drafting and
negotiation of the gas marketing agreement, for a consideration of US$92,395. The contract was
executed by Mr Zheng and Mr Crabtree late in 2004. The consideration was paid by GOC to
Interact at the end of 2004. In evidence Mr Baxter said that he received no payment under this
contract: the fees paid by GOC were used by Interact to make payments to local consultants whom
it had engaged. He was not a director or shareholder of Interact. That evidence was not
contradicted, and I accept it.
[83] In about April 2004 Vitol Services Ltd also entered into a contract with Interact for the
provision of consultancy services, including a survey of gas marketing opportunities in Azerbaijan,
for a consideration of US$69,000. The contract was executed by Mr Martin and Mr Crabtree. The
consideration was paid to Interact by Vitol during April 2004. In evidence, Mr Baxter said that he
received no payment under this contract, which had been arranged by Vitol for reasons of their own.
That evidence was not contradicted, and I accept it.
[84] In the meantime, Mr Scott undertook negotiations with SOCAR in relation to the Siyazan
project. In his weekly report to 4 April, he also mentioned that he had "reviewed several other
possible SOCAR projects". In relation to this report, Mr McBain said in evidence that Mr Scott was
"looking for other business opportunities for Arawak". Mr Baxter was not involved in Mr Scott's
review. According to Mr McBain's evidence, Mr Baxter had by this time been given responsibility
for finding new business opportunities in Azerbaijan. Mr McBain said that he had personally given
Mr Baxter that task, although he could not remember when. Although there was no indication in
Mr Scott's reports that Mr Baxter had been involved, that was because he and Mr Baxter did not
communicate. Although there were no e-mails or other documents suggesting that Mr Baxter had
been given such a responsibility, that was because matters were not always recorded in writing. I
find myself unable to accept this evidence. Mr McBain's dealings with Mr Baxter appear to be fairly
well documented, and there is nothing in the documentation to support Mr McBain's evidence. The
documentary evidence is consistent with Mr Baxter's evidence that he had not been given such a
responsibility, and I accept that evidence.
[85] On 8 April 2004 Mr Little again e-mailed Ms Metcalfe explaining the connection between
Mr Baxter's directorship of COGCL and business asset taper relief:
"As soon as Nick is firmly installed as a director of CO&GCL, hopefully on Tuesday [13 April], and assuming that I remain a director of Arawak, we can proceed with the winding up or liquidation of A&BL. Once we cease to be directors of A&BL, we can wind up the A&BPS [the Addison and Baxter Pension Scheme]. If I am to step down as a director of Arawak, then I too will need to become a director of CO&GCL. The need to remain directors of a qualifying group company comes from the business asset taper relief rules".
Events between Mr Baxter's becoming a non-executive director of COGCL and the signing of the
Memorandum of Understanding
[86] On 13 April 2004 a meeting of the Arawak board of directors took place. One of the items
on the agenda was:
"4. Discuss and if appropriate appoint Nicholas W Baxter as director of Commonwealth Oil & Gas Company Limited".
The appointment of directors to COGCL was a matter to be decided by the shareholders of COGCL
- in other words, Arawak, whose delegate was Mr McBain - at a shareholders' meeting. It is
however a matter of agreement between the parties that, on that date,
"Arawak directors' meeting appoints Mr Baxter and Mr Little to the COGCL Board".
[87] I accept Mr Baxter's evidence that, at the time he became a director of COGCL, he was not
given any specific management or executive functions, and that it was not suggested to him then, or
at any subsequent time prior to the signing of the Memorandum of Understanding, that he had any
responsibility for finding new business opportunities in Azerbaijan. As Mr Baxter observed, if he
had been given such responsibilities, it would have been customary in the Arawak group for him to
have a formal contract. Mr Baxter did not receive any remuneration attributable to his directorship
of COGCL, but continued to receive directors' fees from CGL. He attended no board meetings of
COGCL, since no board meetings were held.
[88] Early in May 2004 Mr Baxter was in Baku working on the negotiation of the gas marketing
agreement. I accept his evidence that this did not arise out of his directorship of COGCL: it was
related, as explained above, to his directorship of CGL and GOC. On 28 May Mr Baxter met
Mr McBain in London to discuss the conclusion of the gas marketing agreement, and the interest of
Mr Sobel (the banker mentioned above) in providing finance to Arawak.
[89] By early June Mr Baxter had been authorised by Mr McBain to discuss with Mr Sobel the
possibility of his financing Arawak's acquisition of Vitol's 50 per cent shareholding in a Cypriot
company which held an interest in the ZAO Pechora-neftegas project in the Komi Republic in
Russia. There is no suggestion that Mr Baxter was acting in this regard as a director of COGCL.
[90] Since about 2000 Mr Baxter had been a member of the Eastern Europe and FSU [Former
Soviet Union] Scout Group. This was a loose association of people with an interest in oil and gas in
the areas in question. Meetings were held from time to time in London at which information was
exchanged. Mr Baxter was on the circulation list, and was informed of meetings. Mr McBain and
Ms Bujnowska were also on the circulation list. They were all informed of a meeting to be held on
8 June. Neither Mr McBain nor Ms Bujnowska wished to attend. Ms Bujnowska e-mailed
Mr Baxter, asking him if he would be able to attend "on our behalf". It is unclear from the evidence
whether he was being asked to attend on behalf of Arawak or in some other capacity. Although
Mr McBain maintained in evidence that Mr Baxter attended meetings of the Scout Group on behalf
of COGCL, there does not appear to me to be a convincing basis for finding that Mr Baxter did so
specifically in that capacity. On the only occasion mentioned in evidence when the capacity in
which Mr Baxter attended a meeting was specified, he was described by Ms Bujnowska (in an e-
mail to the organiser, in relation to a Scout Group meeting in 2005) as attending the meeting "on
behalf of Arawak". Mr Baxter had been a member of the Scout Group long before he became a non-
executive director of COGCL, and appears to have remained a member during the period when he
held no directorship or executive position with either COGCL or Arawak. Although a Scout Group
contact list was produced, which listed Mr Baxter, Mr McBain and Ms Bujnowska against the
words "Commonwealth Oil & Gas Company (Arawak)", the list is not an accurate document (it
describes Mr Baxter, for example, as "Vice President").
[91] Mr Baxter submitted an expenses claim to Arawak in respect of the travelling costs he had
incurred in attending the meeting with Mr McBain on 28 May and the Scout Group meeting on
8 June. The expenses were paid during August by a cheque drawn on an account in the name of
COGCL. That payment arrangement was made by Arawak's accounts department. Mr Baxter's
expenses claim in respect of the next Scout Group meeting, on 10 August, was paid by Arawak.
[92] At about the same time as the Scout Group meeting, the appointment of Mr Baxter and
Mr Little as directors of COGCL was registered with the Registrar of Companies in Anguilla. On
9 June they resigned as directors of ABL.
[93] On 15 June 2004 the gas marketing agreement was executed by GOC and SOCAR. On
12 July 2004 Arawak announced that it had signed an agreement to acquire from Vitol its 50 per
cent interest in the Cypriot holding company of ZAO Pechoraneftegas, the Russian company with
operations in the Komi Republic, and had also signed a letter of intent to acquire the share capital of
Altius Energy Corporation, a Canadian company with operations in Kazakhstan. The operations in
Russia and Kazahkstan were all onshore.
[94] On 27 July 2004 Mr Little forwarded to Mr Baxter the latest of Mr Scott's weekly reports on
operations in Azerbaijan, having noticed that Mr Baxter was not on the distribution list. The report
stated:
"Prepared letters to SOCAR on purchasing Siyazan and then discovered that A letter had been signed giving exclusive rights to Siyazan to Trans Meridian [another oil company] for 3 months. Alastair [McBain] in Baku for 3 days and visited Aleskerov [the head of SOCAR's foreign investment division] to clarify situation on Siyazan. We have decided to drop the project for now but watch in the next months as we do not believe that Trans Meridian has the funds or expertise to tackle this project. Following Alastair's visit and other discussions we have decided to reinitiate the review of Neftchala area as a potential new project. Jay [Scott] met
with Ali Jafarli about Neftchala and we have agreed to review what we have late next week a meeting at which we will supply a data purchase letter and first draft of a proposed workplan to be incorporated into a PSA".
Mr Little commented to Mr Baxter:
"I cannot help thinking that it's a bit late to be finding out that Trans Meridian has a 3 month exclusive on Siyazan. Wouldn't have happened with you and Misha [Khait] at the helm, or alternatively you would have spotted it before now".
[95] In his evidence, Mr Baxter commented that it would appear that Trans Meridian had
approached an influential person in Azerbaijan, who had instructed the officials to enter into an
agreement providing that company with an exclusive right, for a period of three months, to study
the Siyazan data and to consider whether to proceed to negotiate a PSA. According to the evidence
of Mr Scott and Mr McBain, the President of the Republic had personally intervened. Mr McBain
accepted in evidence that it was probably true that the Siyazan opportunity would not have been lost
if Mr Baxter had been involved. The problem had been that Arawak lacked political influence: what
Mr McBain described as a "silver bullet". Azerbaijan was a small country. In practice, the President
of the Republic was the most important person in SOCAR. What Arawak needed was political
support. Mr Baxter understood far better than Mr Scott the use of high level contacts. He was able
to provide a silver bullet.
[96] Mr Baxter had not been involved in Siyazan; and, even after the lack of success in respect of
the Siyazan project, he was not involved in the Neftchala project either. Nor was he involved in any
further consideration of the Siyazan project. This episode tends to support Mr Baxter's evidence that
he had not been instructed to explore new opportunities on behalf of COGCL, and that the pursuit
of new opportunities continued to be dealt with by Mr Scott and Mr McBain.
[97] On 4 August Mr Baxter e-mailed Ms Bujnowska, drawing her attention to the fact that he
had not been sent Mr Scott's weekly reports for some time. Ms Bujnowska responded that it had
been an oversight, and sent Mr Baxter the reports which he had missed.
[98] A board meeting of CGL was held in Beijing on 17 August. Mr Baxter was keen to attend.
At a late stage, Mr McBain decided that the meeting should be attended only by himself and
Mr Scott (apart from the Chinese directors). Mr Baxter did not attend. One of the matters discussed
was the proposed joint operating agreement between the contractor parties (i.e. CGL and Socar Oil
Affiliate) and SOCAR.
[99] On 25 August Mr McBain provided Mr Baxter and Mr Scott with his comments on a draft
joint operating agreement which had, seemingly, been prepared by SOCAR, and had been sent by
GOC to Mr McBain with some suggestions by the Chinese. Mr Baxter in turn provided Mr McBain
with some additional comments. Mr McBain then submitted what he described as "COGCL
comments" on the draft agreement. The comments were drafted with a view to the interests of
COGCL.
[100] On 6 September 2004 Mr Baxter had a meeting with Mr McBain in London. In advance of
the meeting, Mr Baxter made some rough notes of the matters he wished to raise. His notes
included, under the heading "Azerbaijan business development", the subheadings "objectives",
"budget" and "reasonable autonomy". In evidence, Mr Baxter said that, since his days as an
executive director of ABG, he had been interested in that company's expanding its business. When
Vitol had come in as shareholders, the expectation had been that they would accelerate the
development of the business. In reality, there had been no development of the company's business
in Azerbaijan: all it had was a minority interest in an operation run by the Chinese. That operation
had resulted in only pilot production of oil and gas, principally from the coastal block. Mr Baxter
was no longer an executive of any company and had effectively nothing to do. He had not been
asked to carry out any investigations for any of the Arawak companies. At the meeting, he told
Mr McBain that he was prepared to help develop the business if Mr McBain was agreeable.
Mr Baxter wanted to establish a basic framework for how that might work. Mr Scott was
responsible for finding new opportunities in Azerbaijan. If Mr Baxter was to do anything, it would
have to be with the co-operation of Mr Scott, with whom he had had a difficult relationship in the
past. Mr Baxter needed to know his terms of reference, the scope of his authority and his budget,
and the basis on which he would be remunerated. Mr McBain's reaction was neutral. The matter
was left on the basis that Mr Baxter would travel to Baku to be briefed by Mr Scott, and Mr McBain
would get back to Mr Baxter with a proposal if he was interested. Mr McBain said in evidence that
he had no recollection of the meeting, but that it was likely that there were such discussions.
[101] On 13 September Mr Baxter e-mailed Mr McBain:
"Just to recap on our meeting last week: 1. I owe you a draft invoice for the Gas Agreement .... 2. You are going to email Jay [Scott] (BCC [i.e. blind copy] to me) re: my increased involvement in capturing a new project in Azerbaijan preparatory for my next visit, at which time Jay will brief me. 3. I am available to go to Baku between 27 September and 8 October."
Mr Baxter did not receive any response to this e-mail. Nor did he receive a copy of any e-mail sent
by Mr McBain to Mr Scott. By this time the second consultancy agreement had expired. Any
involvement by Mr Baxter in capturing a new project was therefore not to be covered by that
agreement. There is no indication that any such involvement was to be undertaken as a director of
COGCL. Nor is there any indication that Mr Baxter had been asked to undertake either the initial
journey to Baku for a discussion with Mr Scott, or any further work which might follow on from
that, in the capacity of a director of COGCL.
[102] On 23 September Mr Baxter e-mailed Mr McBain again:
"I am proposing to go to Baku next Thursday (30th September) for a few days to commence the initiative we discussed several weeks ago. Prior to this you would need to brief Jay on the purpose of my visit & give him an outline of my activities, and then you & I would need to review those discussions & your objectives. Please let me know if this plan works as far as you are concerned".
Mr Baxter received no response from Mr McBain. He went to Baku in any event. He met Mr Scott
over dinner, and also had discussions with SOCAR officials. He submitted an expenses claim to
Arawak. It was paid by a cheque drawn on an account held by COGCL. When asked about this in
evidence, Mr Baxter remarked that he might have received a cheque from any of the Arawak
companies: he did not study the origin of every cheque he received.
[103] At about this time Mr Baxter was involved again in the consideration of the "COGCL
comments" on the draft joint operating agreement to be entered into by CGL. He said in evidence
that, if he had thought about the capacity in which he was doing so, it would have been as a director
of CGL. It appears to me, however, that in reality he and Mr McBain were also acting in the
interests of COGCL, whose interests they represented on the board of CGL.
[104] During September 2004 Mr Scott tendered his resignation from his executive positions with
Arawak and COGCL. His resignation took effect on 15 October. He then ceased to work in Baku.
He was retained by Arawak as a consultant and remained a director of CGL. It is a matter of
admission that, after Mr Scott's departure, Mr Marcel Lensvelt was employed by Arawak as their
country manager in Azerbaijan, and was permanently based there.
[105] On 4 October 2004 Mr Baxter was asked by e-mail to sign and return a resolution of the
directors of COGCL altering the authorised signatories in respect of COGCL's account with the
National Westminster Bank. The resolution removed him from the list of authorised signatories.
Such a resolution required to be signed by all the directors.
[106] After the beginning of November 2004, Mr Baxter ceased to receive reports on operations
by the Arawak group in Azerbaijan. One report was prepared, following Mr Scott's departure, by a
local employee. There is no evidence that further reports were prepared.
[107] On 1 and 26 November 2004 Mr Baxter had meetings with Mr McBain. He subsequently
submitted an expenses claim to Arawak in respect of those meetings. The expenses were paid,
apparently by Arawak. Arawak also reimbursed Mr Baxter for the cost of certain telephone calls
which he had made to Azerbaijan. Mr McBain said in evidence that these expenses were paid
because they related to Arawak's business: possibly to business development, or to problems CGL
might have had at the time, or to matters concerning the gas marketing agreement.
[108] Late in November, arrangements were made for a CGL board meeting to be held in Beijing
in December, on a date which was proposed by Mr McBain after Mr Baxter had said he would be
unavailable then. Instead, Mr McBain took Mr Charles Carter, who had recently replaced Mr
Martin as Arawak's chief financial officer. In evidence, Mr Baxter said that he had been told by
Mr McBain on a number of occasions that he would rather take other people, such as Mr Carter or
Mr Brian Hepp, a production engineer who had been one of the authors of the report on the Siyazan
monocline, and that it was not worth paying for Mr Baxter to go.
[109] On 23 December 2004 Mr Baxter received an e-mail from Mr Khait on the subject of
"proposed offshore fields". Mr Khait wrote that what he described as "the proposed area" included
an oil field at Alat-Deniz ("deniz" being the Azeri word for "sea"), a former oilfield at Garasu-
Deniz, and four prospective exploration structures, at Sangi-Muzan, Voenmor, Aran-Deniz and
Dashly.
[110] Although the blocks in which CGL had an interest under the South-West Gobustan EDPSA
were onshore, and the oilfields and structures investigated by Mr Scott at Siyazan and Neftchala
were also onshore, there were other oilfields and structures situated offshore in the Caspian Sea.
The Alat-Deniz field had been discovered in 1983 and had been in production since 1986. The
Garasu-Deniz field had been discovered in 1974 and had been in production at one time, but had
been abandoned following violent accidents and was not currently in operation. The other structures
had not been developed, due to poor geophysical study of the area: the waters were too shallow for
ships, and investigation was further impeded by the presence of a series of piers, which had been
built across the water by SOCAR in order to carry out drilling. Any areas which were not assigned
to a specific company were potentially available to any company with an interest. The areas
mentioned in Mr Khait's e-mail were amongst hundreds of areas which were potentially available.
They had been drawn to Mr Khait's attention by contacts in SOCAR. Mr Baxter said in evidence
that Mr McBain (or anyone else) could at any time have expressed an interest in the areas in
question to SOCAR and got on with it, just as Arawak had expressed an interest in Siyazan,
Neftchala and (later) Shirvanoil. Mr McBain and his people in Baku knew the same SOCAR
officials as he did.
[111] In evidence, Mr Baxter said that the e-mail did not come out of the blue: he had received an
earlier telephone call from Mr Khait, during a train journey to London, in which this matter had
been discussed. He had not pursued the project referred to in the e-mail during his earlier visits to
Baku. Nor had he been aware of this potential project at the time of his previous meetings with
Mr McBain. It had emerged as a result of Mr Khait's discussions with SOCAR officials.
[112] The area covered by the Memorandum of Understanding ("the Eurasia block") was
subsequently delineated by Mr Baxter, and differed in some respects from the area mentioned in
Mr Khait's e-mail. Its north-western edge was contiguous with the coastal block of the South-West
Gobustan EDPSA, the boundary between them being the coastline. At that point, the nearest oilfield
to the coastal block, namely the Alat-Deniz oil field, lay more than a mile offshore, according to the
charts produced in evidence. The Alat-Deniz oilfield was a separate structure from the oilfields in
the coastal block. Until the Eurasia block was delineated by Mr Baxter, it was not recognised as an
oil and gas block.
[113] Early in January 2005 Arawak's acquisitions of Altius, and of a 50 per cent share in the
holding company of ZAO Pechoraneftegas, were completed. Mr Little (whose role in these
transactions was not explained in evidence) then e-mailed Mr Baxter on the subject of "getting
paid":
"Now that the deals have closed, I think it's time to present the bill. At the moment I believe I am receiving director's fees of US$15,000 p.a. and that's it .... Are you in the same boat, i.e. US$15,000 p.a. only at the moment? If so, you have a bill to present for work in Azerbaijan. Any suggestions as to how to raise this matter? Left to myself, I would request an audience and broach the matter gently ....."
Mr Baxter replied:
"I continue to be paid $15k per annum from CGL in Baku and that's the lot since the consultation agreement expired in September. I am expecting something in respect of the gas agreement, but this is subject to further discussion with adm [Mr McBain] and CGL Baku. The way I deal with this type of issue is typically over a lunch with Alastair..... By his own admission and comments from others, he can (deliberately) be mean, so if I were you I'd ask for more than you reasonably expect. He also told me he (and probably Ian [Taylor, of Vitol]) prefers to pay on results rather than for instance via an ongoing consultancy. My approach these days is to forget about the consultancy and agree to be rewarded on success".
In evidence, Mr Baxter explained that at this stage discussions were under way between Arawak
and Interact in relation to payment for the negotiation of the gas marketing agreement. The
discussions were lengthy and required a considerable effort on the part of Interact. He had
discussions with Mr McBain about arrangements in respect of other projects, but no agreement was
ever reached.
[114] During January 2005 Mr Michael Volcko, the president of Altius, became an employee of
Arawak. He was encouraged by Mr McBain to interest himself in business development in
Azerbaijan, and visited Baku.
[115] On 13 January 2005 a further board meeting of CGL was held in Beijing. Mr McBain
attended with Mr Hepp. Mr Baxter was not informed that the meeting was to be held, and was not
present. He had expected to be notified of the meeting by Mr McBain, as had happened on previous
occasions.
[116] On 1 February 2005 Mr Baxter e-mailed Mr McBain to suggest that they hold a meeting "to
catch up on a number of issues". Mr Baxter observed in evidence that it was always he who took the
initiative: matters had been left on several occasions on the basis that Mr McBain would come back
to him, but he never did. His attitude was one of unresponsiveness.
[117] Mr Baxter met Mr McBain on 17 February. In advance of the meeting, Mr Baxter made a
note of matters which he intended to raise. These were matters which had been raised with
Mr Baxter by Mr Ali Jafarli when Mr Baxter had been in Baku: Mr Baxter was, as he said in
evidence, acting as a messenger in relaying Mr Jafarli's news to Mr McBain. Two of the matters
related to CGL and the proposed joint operating agreement. Another matter related to a company
named Shirvanoil, which had an interest in an onshore oilfield in the south of Azerbaijan. Vitol had
made a loan to Shirvanoil, secured over its oil production, with an agreement in relation to the
marketing of the oil. Mr McBain was interested in the possibility of Arawak's acquiring Vitol's
interest. Mr Jafarli's news was that the PSA had been signed and awaited ratification by the Azeri
Parliament. He also wanted more information about the arrangements between Vitol and Shirvanoil.
The final matter related to Neftchala, which was one of the locations in which Mr Scott had been
interested: the current operation at Neftchala, by a Turkish company, had encountered some
financial difficulty, which SOCAR would expect to be resolved before another company could
become involved.
[118] Mr Baxter said in evidence that, at the meeting on 17 February, he again raised with
Mr McBain the possibility of his pursuing development opportunities for the Arawak group. He
asked what types of project Mr McBain was interested in. Mr McBain responded that he was
interested in onshore projects. Mr Baxter discussed with Mr McBain how he might be rewarded if
he found further opportunities. The sticking point in the discussion was that Mr McBain wanted
exclusivity on anything Mr Baxter found: in other words, he wanted any project found by
Mr Baxter to be placed at the disposal of the Arawak group. Mr Baxter said in evidence that he had
made it clear to Mr McBain, if not at that meeting then previously, that he wanted to develop a
project in which he would have a proprietary interest. Mr McBain did not respond positively.
[119] At the meeting Mr Baxter did not inform Mr McBain about the potential offshore project.
Mr Baxter said in evidence that he wished to keep the matter confidential, not only from Arawak
but more generally. Anyone might have been interested if it came to their attention, including
Arawak. Information leaked out very quickly in Baku. He wanted to ensure that he did not have a
problem with predators. He was no more concerned about Arawak than about anyone else. He saw
no need to inform Mr McBain. He saw no conflict between this potential project and anything
which Arawak were pursuing or were interested in. He had asked Mr McBain what types of project
he was interested in, and Mr McBain had said that his interest was in onshore projects.
[120] Although Mr Baxter acknowledged in evidence that he could not speak for Mr McBain, he
said that he would not have thought that the Eurasia block would have been of interest to Arawak. It
did not fit Arawak's stated corporate strategy to "target oil and gas assets with low technical risk in
high return environments". The risk was high, and the possible return was highly uncertain.
Although offshore development could be cheaper in shallow water than in deep water (as
Mr McBain said in evidence), the exploration phase could be more difficult and expensive,
especially in congested areas such as the area in question (congested, that is to say, with existing
structures). It was very different from the Siyazan monocline, where there was an existing
producing oilfield with over a thousand producing wells, and where the difficulties arose from the
hilly or mountainous nature of the terrain. Neftchala was another existing producing oilfield, as also
was the Shirvanoil operation. In an existing oilfield, the technical and commercial risks were known
to be low. The Alat-Deniz was a producing oilfield. The rest of the Eurasia block contained a series
of exploration structures. When drilling new structures, it was not known whether hydrocarbons
would be found. The commercial risk was therefore higher than when drilling in an oilfield, and the
technical risks (such as the risk of blowouts due to high pressure) were unknown. The Eurasia block
involved a high technical risk and also required a great deal of capital investment. The Arawak
group could have investigated the same field and structures themselves if they had been interested.
Mogul and Total had explored the same block in the 1990s with a Russian company. The existence
of the Alat-Deniz oilfield was common knowledge to all Western oil companies operating in
Azerbaijan, as was the existence of the other structures. It was not a secret. The drilling structures
were visible from the shore. Anyone who showed the slightest interest would find out about it. Even
as at the date of the proof, in September 2007, the Arawak group had not taken part in an offshore
project in shallow water anywhere in the world: all its projects were onshore and low risk. It was
irrelevant that the Alat-Deniz oilfield was offshore from the South-West Gobustan coastal block: it
was a separate geological structure. Mr Baxter candidly acknowledged, however, that he would not
have told Mr McBain about the project even if he had said that he was interested in offshore
projects.
[121] Mr Baxter also observed in evidence that, even if a given project might be of interest to
Mr McBain, it did not follow that it would involve COGCL. COGCL was a holding company,
which held a minority interest in CGL. It could not be assumed that everything that Arawak decided
to do in Azerbaijan would be done through COGCL. Even if he had told Mr McBain about the
project in question, and Mr McBain had said that COGCL was interested, he (Mr Baxter) would not
have pursued it on behalf of COGCL. Mr Baxter accepted, however, that the Arawak group,
including COGCL, was interested in taking forward opportunities in Azerbaijan. He accepted that
Arawak and its subsidiaries had made clear their interest in securing additional projects in
Azerbaijan, and that COGCL had attempted to pursue development opportunities at Siyazan and
Neftchala. He accepted that he had been aware of that. He accepted that COGCL was one of the
companies which Arawak might use to take forward any opportunity. He accepted that he had made
a conscious decision not to bring the Alat-Deniz project to the attention of COGCL. He nevertheless
maintained that he had not regarded himself as free to ignore the best interests of COGCL, and that
he had always acted in the company's best interests.
[122] Mr McBain said in evidence that he recollected that, at about the time of this meeting,
Mr Baxter asked him how much he (Mr Baxter) would be paid to bring a project to Arawak.
Mr Baxter indicated that he wanted a carried interest (i.e. a share of the profits, after the costs had
been deducted) of the order of 20 per cent. Mr McBain was surprised by what Mr Baxter wanted,
and said he would think about it. The matter was never raised again. Mr McBain had assumed,
when Mr Baxter asked what would happen if he found a new business, that he had not in fact found
anything: it never crossed his mind that Mr Baxter had actually uncovered a project. Equally, it
never crossed his mind that Mr Baxter might go elsewhere with any opportunity which he might
find: it was "inconceivable" to him that Mr Baxter would not act in the best interests of a company
(Arawak) which he had founded and which had made him wealthy. Mr McBain accepted in
evidence that Mr Baxter had been wanting him to make proposals for a working arrangement, and
that he had not replied.
[123] Mr McBain also accepted that, at the meeting on 17 February, he might have said that he
was interested in onshore projects. Arawak was desperate for projects in Azerbaijan, but his
preference would have been for onshore projects. In that regard, Mr McBain said that there was no
realistic way for Arawak to participate in deep offshore projects, which involved high costs and
high risks and could be undertaken only by the larger oil companies. The only significant fields to
have been developed in the Caspian Sea were in deep water: both fields had been developed by BP.
He had not been aware of the existence of the Alat-Deniz oilfield. Although the shallow water of
the Caspian was obstructed by piers and other structures, making it difficult to use ships for
exploration, it might be possible to drill from the shore using deviated wells. Mr McBain also
accepted that, to the extent that oil was already being produced from a block, SOCAR would
require that amount of oil to continue to be provided to them: the foreign operator was under an
obligation to increase production above the existing level. Referred to Arawak's corporate strategy,
as stated on its internet site, to "target oil and gas resources with low technical risk in high return
environments", Mr McBain maintained that the Alat-Deniz oilfield was a resource of low technical
risk, since it was a producing oilfield: the expression "technical risk" referred to the risk that drilling
might not encounter hydrocarbons; and Azerbaijan was a high return environment. Mr McBain said
that, if Mr Baxter had told him of the offshore opportunity, he would have "been on it in a
heartbeat". It would be ludicrous to suggest that because the opportunity was offshore, it would
have been of no interest. Asked why, if Arawak was desperate for projects, he had not made an
arrangement with Mr Baxter as to the basis on which he might find projects for Arawak,
Mr McBain answered that Mr Baxter was a large shareholder in the company. Mr McBain's
assumption appears to have been that, since Mr Baxter owned about 3 per cent of Arawak's share
capital, it would be in his interests to find projects and bring them to Arawak, whether or not any
agreement had been reached as to his remuneration or participation in the project.
[124] In relation to the question whether the possibility of an agreement with SOCAR in respect of
the potential exploration of the offshore structures in the Eurasia block would have been of interest
to Mr McBain, it appears to me that the answer to the question depends on the context in which it is
considered. I am not convinced, on a balance of probabilities, that Mr McBain would have been
interested in pursuing the possibility of a project in relation to the Eurasia block, if he had merely
been informed of the existence of the structures there in December 2004 or February 2005. The
existence of the Alat-Deniz oilfield had been public knowledge for many years. If the Arawak
group had had an interest in offshore exploration, they would have found out about it. I accept that
Mr McBain's focus was on onshore exploration, as he told Mr Baxter at the meeting on 17 February
2005. That is consistent with the history of attempting to secure the Siyazan, Neftchala and
Shirvanoil projects, and with the decision to focus on the onshore part of the Siyazan monocline
rather than its offshore continuation.
[125] If, on the other hand, the question is whether Mr McBain would have been interested if
Mr Baxter had told him that contacts at SOCAR had directed his attention to a proposed area for
exploration, that the proposed area was in shallow water offshore and included an established
oilfield, and that he (Mr Baxter) thought that there were reasonable prospects of securing an
agreement with SOCAR in relation to the proposed area, then it seems to me that Mr McBain would
probably have been interested. The principal problem in Azerbaijan, as Mr McBain's evidence made
clear, was not finding oilfields or structures which might be suitable for exploration, but securing
agreements with SOCAR; and Mr Baxter's track record, and his continuing relationship with
SOCAR, demonstrated that he might be in a position to deliver such an agreement. The closer
Mr Baxter got to such an agreement, the more likely it is that Mr McBain would have been
interested.
[126] If the question is considered as at a point in time shortly before the Memorandum of
Understanding was executed, and therefore after Mr Baxter had successfully carried out his
negotiations with SOCAR - if, in other words, the question is whether Mr McBain would have been
interested if Mr Baxter had offered him the Memorandum of Understanding on a plate - then the
question should certainly be answered in the affirmative. Although Mr McBain's evidence that he
was "desperate" to find another project in Azerbaijan appears to me to be somewhat overstated - if
he had been desperate, I doubt whether he would have shown so little interest in Mr Baxter's
overtures - I have no doubt that he would at least have wanted to investigate a potential offshore
project which had reached the stage of an exclusive agreement with SOCAR for access to data and
for an opportunity to negotiate an EDPSA. The possibility of such an agreement was not in
Mr McBain's mind when he told Mr Baxter that his interest was in onshore projects.
[127] I also accept that it is more likely than not that the company on whose behalf Mr McBain
would have acted in relation to the Memorandum of Understanding, if the opportunity had arisen,
was COGCL. As Ms Bujnowska explained, COGCL was the company which held Arawak's assets
in Azerbaijan; and, if another asset had been acquired, it would probably have been held by
COGCL via a corporate vehicle formed for the purpose, analogous to CGL.
[128] I also conclude that a reasonable person in Mr Baxter's position would have known that such
an agreement with SOCAR would have been of interest to Mr McBain. Such a person would in my
opinion have realised that there was at least a real possibility that the company on whose behalf
Mr McBain would have acted, in that regard, was COGCL. Nevertheless, having given the matter
careful consideration, I am prepared to accept that Mr Baxter saw no conflict between the potential
project and anything which Arawak were pursuing or might realistically be interested in, given
Mr McBain's statement that his interest lay in onshore projects, the Arawak group's history of
looking only at onshore opportunities, and the risks involved in the project in question. I do not
overlook Mr Baxter's evidence that he kept the opportunity secret because "anyone" might have
been interested in it, "including Arawak"; but the import of his evidence as a whole was that,
although it was commercially prudent to keep the information about the opportunity to himself, so
as to ensure that it did not leak out, he believed that the opportunity was not one which the Arawak
group would have wished to pursue. My conclusion, based principally on the impression I formed
of Mr Baxter over the four days during which he gave evidence, is that that was a genuine belief. I
also doubt whether Mr Baxter would have written to Mr McBain as he did on 9 December 2005 (as
explained below) if he had been conscious of having breached his duties to COGCL: if, in other
words, he had been acting in bad faith. I have reached that conclusion despite finding it somewhat
surprising that a person of Mr Baxter's intelligence and acumen in business should not have been
conscious of a danger, to put it no higher at this stage, of being in breach of his duty as a director of
COGCL. Given that the affairs of the Arawak group were conducted without close attention being
paid to the separate identities of the different companies in the group, and given the minimal extent
to which Mr Baxter was in practice involved in matters as a director of COGCL, it would not
however be altogether surprising if that role was not at the forefront of his mind.
[129] On 31 March 2005 Mr Baxter became a director of PAVL. Mr McBain and Mr Baxter met
again on 3 May, and at social events on 8 and 19 June. They had a further meeting on 8 July. They
also corresponded by e-mail. The matters which had been discussed at the meeting on 17 February
were not raised.
[130] Later in July 2005 Mr Baxter wrote to Mr McBain in connection with a proposed payment
to Interact for services provided in respect of the negotiation of the gas marketing agreement (which
had been signed in June 2004). Mr McBain responded that the payment should be made by Arawak,
which (unlike Vitol) did not have a consultancy agreement with Interact. In August Mr Baxter sent
Mr McBain a draft agreement between Interact and Arawak. On 3 October Mr McBain responded
to Mr Baxter:
"One thing we wondered whether you could accept would be some kind of exclusivity clause with respect to the upstream oil and gas business in Azerbaijan. I know this is something we have discussed in the past but we wondered whether we could now include that as it would be the sort of thing which would be normal in this type of contract".
Mr McBain was under the mistaken impression that Interact was merely a vehicle under which
Mr Baxter provided his own services: his alter ego, in effect. He assumed that the agreement and
the payment related to Mr Baxter's services in respect of the gas marketing agreement. In those
circumstances, his e-mail of 3 October supports Mr Baxter's evidence that the question of the
Arawak group having an exclusive right to exploration, development and production projects found
by Mr Baxter in Azerbaijan, if he pursued opportunities there on Arawak's behalf, had been
discussed and had not been agreed.
[131] Mr Baxter responded on 5 October 2005:
"I have discussed this with Interact. The agreement is between Interact & Arawak, not Arawak & me personally. As you know Interact works with a number of consultants. Also, the agreement is in respect of specific services connected to gas marketing which have been completed for some time now, and the execution of the agreement is unfortunately now long overdue. In this context it hardly seems appropriate or relevant to include additional clauses including, exclusivity. I am advised that if you wish, it may be appropriate to amend the
draft to limit the definitions of 'Consultancy Services' and 'the Fee' and to shorten the Term (say to 30 October 2005) to reflect the fact that the agreement is in respect of these already completed services, but I am advised that Interact would not insist on such changes, since any additional services or fees must be by the mutual written agreement of the parties. Interact would prefer that this agreement is finalised as soon as possible, so that it can square up with the various consultants who participated in the project. From a personal perspective, I made proposals to you earlier in the year and I remain ready with an open mind to discuss any further proposals you have for a working arrangement for activities in Azerbaijan, or for that matter, anywhere else".
Mr McBain agreed to omit the exclusivity clause. He did not respond to the second paragraph of
Mr Baxter's e-mail. In evidence, Mr McBain said that he was puzzled by the second paragraph, but
concluded that it referred to the occasion when Mr Baxter had talked about a specific reward
structure for bringing a project to Arawak. Although Mr McBain repeatedly claimed in his evidence
that he had regarded Mr Baxter as the person best placed and most likely to identify new business
opportunities in Azerbaijan, and that he had "tasked" Mr Baxter with the identification of such
opportunities, the contrary is indicated by what Mr Baxter wrote in the second paragraph of his e-
mail of 5 October, and by the absence of any response on the part of Mr McBain.
[132] The agreement was executed by Arawak and Interact in October 2005. It bore to come into
effect on 1 January 2005, and to be for "the provision of services including advice and
recommendations in connection with the identification and potential development of business
opportunities in the oil and gas sector in Azerbaijan, commencing with but not limited to the
development of natural gas marketing opportunities in Azerbaijan and the Caspian area, as agreed
by the parties". The consideration was US$75,000. That sum was paid to Interact. The agreement
was executed by Mr McBain and Mr Crabtree. In evidence, Mr McBain said that GOC was
controlled by CNPC, who were notorious for their reluctance to pay bills or to provide an adequate
reward to contractors, especially non-Chinese contractors. Mr McBain felt that it had been in the
overriding interest of the Arawak group that the gas marketing agreement should be concluded:
otherwise, the gas reserves could not be categorised as proven according to Canadian stock
exchange rules. He was happy that Arawak should pay the consultancy costs which could not be
"pushed through" GOC. Mr Baxter confirmed in evidence that, notwithstanding the terms of the
consultancy agreement, the services had already been provided before the agreement's
commencement date. The money paid to Interact was used to pay Azeri oil consultants whom
Mr Baxter had engaged. It made up the balance left outstanding after the payment made by GOC at
the end of 2004. He received nothing himself as a result of the conclusion of the gas marketing
agreement, other than any consequential increase in the value of his Arawak shares.
[133] In about October 2005 Mr Baxter signed a resolution of the COGCL board of directors
altering the authorised signatories in respect of COGCL's account with Scotia Bank Anguilla Ltd.
As previously, he was e-mailed the resolution for signature and return.
[134] On 28 November 2005 Mr Baxter was appointed president and chief executive officer of
PAVL. On the same date, the directors approved a change of the company's name to Eurasia Energy
Ltd ("Eurasia"): the change took effect on 12 January 2006. Mr Baxter subsequently wrote to
Mr Little that he had been appointed president and chief executive officer "on the understanding
that [he] would attempt to find an interesting project to contribute to the company". Mr Baxter said
in evidence that the project which he contributed was the one which became the Memorandum of
Understanding. During re-examination (by counsel for COGCL), Mr Baxter said that he had
initially developed the project in question without knowing in what entity it would end up: it was a
project he was developing for his own proprietary interest. Asked whether it could have gone to
Arawak or to PAVL, Mr Baxter replied that it could have: it could have gone to any company. The
point in time of the decision would have been about the time when he needed to execute the
Memorandum of Understanding in December 2005. In the light of his appointment as president and
chief executive officer of PAVL on 28 November and the decision taken then to change the
company's name, and bearing in mind also what Mr Baxter wrote to Mr Little, it would appear
likely that the decision had in fact been taken by that date.
[135] On 7 December 2005 the Memorandum of Understanding between SOCAR and PAVL
(whose name was stated as "Eurasia") was executed. Its principal provisions stated:
"1. From the date of execution of this Memo and until the period of its expiry Eurasia is granted the exclusive rights to negotiate on the terms of the Exploration, Rehabilitation, Development and Production Sharing Agreement ('the ERDPSA') for the Block.
2. The Parties have intent within a period of twelve (12) months from the date of
execution of this Memo to agree upon and sign the Agreement on the Basic Commercial Principles and Provisions of the ERDPSA (the 'Agreement'). The period of negotiations may be extended by the period mutually agreed by the Parties.
3. If the Parties have not agreed on the Agreement within the said period and have
failed to agree on its extension, this Memo shall terminate and the Parties shall be free of the obligations assumed hereunder.
4. If the Parties have agreed on the Agreement, pursuant to Clause 2 above, SOCAR
shall address in writing to the President of the Azerbaijan Republic to vest SOCAR with the authority in the form of Decree of the President of the Azerbaijan Republic necessary to carry out negotiations and conclude the ERDPSA.
5. Based upon the authorizations set forth in Clause 4 above, the Parties intend within
the time period defined in the Agreement to finalize the ERDPSA draft in the framework of the commercial principles and provisions agreed and sign the ERDPSA.
....... 8. SOCAR shall use all reasonable efforts to provide Eurasia, free of charge, with all of
SOCAR's existing data relevant to the Block, within sixty (60) days from the effective date of this Memo."
[136] The "Block" referred to ("the Eurasia block") included the producing Alat-Deniz oilfield and
seven prospective exploration structures at Garasu, Hamamdaz-Deniz, Sangi-Mugan, Ulfat, Aran-
Deniz, Dashly and Sabayü. The block trended in a south-easterly direction from the coast to 70
kilometres offshore. The north-western edge of the block was contiguous with CGL's coastal block.
Water depths were predominantly up to 20 metres, and reached a maximum of 50 metres. The data
referred to in clause 8 had not been provided to Eurasia at the time of entering into the
Memorandum of Understanding, and were not provided until several months later.
[137] In evidence, Mr Baxter accepted that the conclusion of the Memorandum of Understanding
was secured as a result of his efforts, and that he had actively pursued the opportunity to enter into
that agreement. He and Mr Khait had used the know-how and contacts which they had built up
when working on the South-West Gobustan EDPSA in order to secure the Memorandum of
Understanding. There is no evidence that Mr Baxter used any contacts, knowledge, expertise or
information which he acquired as a director of COGCL from April 2004 onwards in order to secure
the Memorandum of Understanding. It is clear that he did not learn of the oilfield and structures in
what became the Eurasia block, or of the possibility of entering into an agreement with SOCAR in
relation to that oilfield or those structures, by virtue of his directorship of COGCL. Nor can the
opportunity to enter into such an agreement be attributed to that directorship.
[138] During the period between Mr Baxter's becoming a director of COGCL and the execution of
the Memorandum of Understanding no meetings were held of the board of directors. Mr Baxter was
not requested to do anything specifically as a director, other than to sign two resolutions altering the
authorised signatories of the company's cheques (he himself being removed as an authorised
signatory). He took no part in the management or control of any operations of COGCL. Counsel for
COGCL however invited me to find that Mr Baxter had performed three functions in particular as a
director of COGCL. First, it was argued that Mr Baxter had attended the Scout Group meetings as a
representative of COGCL. I do not find that to be proved, for the reasons explained above.
Secondly, it was argued that Mr Baxter had negotiated the gas marketing agreement on behalf of
COGCL. It appears to me, however, that Mr Baxter was acting in relation to that matter on behalf of
CGL: indeed, it was only towards the end of the negotiations that Mr Baxter became a director of
COGCL. Thirdly, it was argued that Mr Baxter had acted on behalf of COGCL in considering the
terms of the joint operating agreement to be entered into between CGL and SOCAR Oil Affiliate.
That appears to me to be correct, but it does not necessarily follow that Mr Baxter was acting in that
respect as a director of COGCL, rather than as COGCL's nominee (in effect) on the board of CGL.
Mr Baxter acknowledged in evidence that little thought had been given at the time to the particular
capacity in which he (or others) might be acting. I note, in relation to this issue, that it is a matter of
admission in COGCL's pleadings that "at the meetings [between Mr Baxter and Mr McBain] on
6 September and 1 November 2004, CGL and GOC business was discussed, including a joint
operating agreement which was under discussion with CNPC and SOCAR". It was also argued that
Mr Baxter had received directors' fees in respect of his directorship of COGCL, amongst other
companies; but it is clear from the evidence that the only fees he received during the material period
were paid by CGL in respect of his directorship of CGL, and were not affected by his also being a
director of COGCL. It was argued that Mr Baxter's directorship was reflected in his attending
meetings with Mr McBain, but it does not appear to me to be possible to attribute the meetings
specifically to the directorship: they were concerned with such matters as possible deals between
Vitol and Arawak, the proposed joint venture involving Mr MacDougall and others, Arawak's
acquisition of ZAO Pechoraneftegas, the gas marketing agreement (in relation to which, as I have
explained, I consider that Mr Baxter was acting as a director of CGL), and the basis upon which
Mr Baxter might be instructed to pursue development opportunities for the Arawak group. It was
argued that Mr Baxter had been paid expenses by COGCL; but, as I have explained, the accounting
arrangements were determined by Arawak after Mr Baxter had submitted claims to the latter
company; there does not appear to have been a consistent practice; and the fact that COGCL
reimbursed certain expenses does not in any event imply that the expenses were incurred by
Mr Baxter in the capacity of a director of COGCL. In short, so far as appears from the evidence,
Mr Baxter's directorship had no unambiguous manifestation, other than his signature of
two resolutions altering the authorised signatories of the company's cheques. On the other hand, he
was in frequent contact with Mr McBain and other Arawak staff in relation to the affairs of the
Arawak group (including COGCL) in Azerbaijan, in a context where he was in fact a director of
COGCL and of CGL, and where little attention appears to have been paid to the distinct identities of
the various companies or to the different capacities in which persons might be acting.
[139] It is apparent from the evidence that, between 13 April 2004 and the end of 2005, Mr Baxter
was a director of COGCL, and that he was looking for new projects. Counsel for COGCL invited
me to find, on the evidence, that Mr Baxter had been given that function as a director of COGCL.
As mentioned above, Mr McBain maintained in evidence that, by October 2004 at latest, he had
instructed Mr Baxter to pursue projects in Azerbaijan on behalf of COGCL. That claim is
contradicted by the evidence of Mr Baxter; and, as I have explained, the documentary evidence
supports Mr Baxter's position. Mr McBain generally failed to respond to Mr Baxter's attempts to
secure a role in finding projects for the Arawak group. When the matter was discussed (on
17 February 2005), he and Mr Baxter were unable to agree terms. When the matter was raised again
by Mr Baxter (in his e-mail of 5 October 2005), Mr McBain did not respond. It also appears
that, in so far as there had been any discussion of the possibility that Mr Baxter might pursue
opportunities in Azerbaijan for the Arawak group (in particular, at the meetings on 6 September
2004 and 17 September 2005), it was not envisaged that Mr Baxter would perform such a role in his
capacity as a director of COGCL: what was discussed, but was never agreed, was a separate
arrangement. I also note that Mr McBain accepted in evidence that, if he had ever instructed
Mr Baxter to find new business opportunities for the Arawak group, that would probably have been
recorded in the e-mails which passed between them. There is no such record in any of the numerous
e-mails referred to in evidence. Mr McBain said in that regard that his own e-mails had been
deleted, and that the e-mails before the court were those which Mr Baxter had produced. There was
however no suggestion made either to Mr Baxter or in closing submissions that relevant e-mails had
not been produced.
[140] Ms Bujnowska's evidence supported Mr McBain's: she claimed that Mr Baxter had been
paid close to US$500,000 to look at new business opportunities for COGCL. That figure was, on
any view, a gross exaggeration: it included all the payments received from the ABG/Arawak group
and from GOC by Interact, which were not received by Mr Baxter, together with the fees paid to
Mr Baxter as a director of CGL, which Ms Bujnowska accepted were paid in respect of services to
CGL, together with the payments made to Mr Baxter as part of his "termination package" when he
ceased to be employed by ABG. Equally, Ms Bujnowska's evidence that Mr Scott was not involved
in looking for new business opportunities in Azerbaijan, and that it did not form part of his job,
cannot be reconciled with Mr Scott's weekly reports and his report on the Siyazan monocline.
[141] Mr Coleman maintained that, each time he met Mr Baxter, he encouraged him to try to find
something for Arawak. In cross-examination, however, it became apparent that, after the meetings
of 10 September 2002 and 5 May 2003, when Mr Coleman was involved in the removal of
Mr Baxter from his positions with ABG and COGCL, their subsequent meetings were few in
number and either casual (when they happened to bump into each other in Vitol's offices) or social
(as when they spent an evening at the opera with their respective partners). Mrs Baxter did not
recollect any discussion of business matters on the latter occasion; and I accept her evidence, which
is consistent with that of her husband. I also accept Mr Baxter's evidence that, if he had had any
such discussions with Mr Coleman, they would have been very general in character. Mr Coleman
did not appear to be closely involved in the management of Arawak on a day to day basis: that may
also explain his evidence, which was clearly incorrect, that Mr Scott did not have a role in
connection with finding further business opportunities.
[142] Mr Scott himself said in evidence that his understanding, between April and October 2004,
was that Mr Baxter was monitoring relations with SOCAR, keeping his contacts and looking at new
business "for COGCL, for Arawak". He said, in evidence in chief, that he had sent Mr Baxter e-
mails to do with relations with the Government of Azerbaijan: that matter was not however raised
with Mr Baxter himself when he gave evidence, and no such e-mails were produced. In cross-
examination Mr Scott accepted that he had had no significant amount of written or oral
communication with Mr Baxter during the period in question, and that Mr Baxter had been working
in Azerbaijan during that period on the gas marketing agreement. Since there is no suggestion in the
evidence that any steps were taken to involve Mr Baxter in the various projects pursued by Mr Scott
or in the related discussions with SOCAR, and in the light of my conclusion that Mr Baxter had not
been instructed by Mr McBain to look for new business, I do not consider Mr Scott's evidence as to
his understanding to be significant.
[143] Mrs Baxter gave evidence that she and her husband had been surprised that he was not asked
to look for new opportunities for the Arawak group in Azerbaijan: he was someone who could
obviously get a project there, since he had done it before. When it became obvious that Arawak
needed a new project, they had discussed the terms on which he would have been willing to find
one. He would not have gone looking for a project for Arawak without having an equity position
within the project. He wanted to have his financial position sorted out with Mr McBain in advance:
he felt Mr McBain had taken too long to sort matters out in relation to the gas marketing agreement.
Events subsequent to the signing of the Memorandum of Understanding
[144] On 9 December 2005 Mr Baxter e-mailed Mr McBain. After mentioning that he had been in
Baku and had met Mr Zheng of CGL, he continued:
"As a courtesy I would like to advise you that whilst I was in Baku I signed an MOU [Memorandum of Understanding] with SOCAR for the exclusive rights to negotiate the terms of an (ERD)PSA for the first shallow water block in Azerbaijani waters, south-east of SWG [South-West Gobustan] and north of the Ateshgah Block. The agreement is subject to certain confidentiality conditions and is unlikely to be announced officially until early in the new year. I would therefore be grateful if you would respect this confidentiality".
Mr McBain replied:
"I am intrigued by your news. Can we discuss?"
Neither in that response, nor in any subsequent communication either from Mr McBain or from
Arawak's solicitors, was it suggested to Mr Baxter that it had been his task to seek out new
opportunities for COGCL (or for Arawak). Mr Baxter observed in evidence that he knew
Mr McBain well: if that had been his task, he would have expected Mr McBain to draw that to his
attention and to request him to deliver the project to Arawak. In evidence, Mr McBain said that he
was intrigued: he assumed that the link between the Memorandum of Understanding and Arawak
would become evident in discussion with Mr Baxter. I find that evidence difficult to accept, given
that Mr Baxter had expressly informed Mr McBain of the Memorandum of Understanding as a
courtesy, and had asked him to treat the information as confidential until the agreement he had
signed was made public. I also find it difficult to believe that Mr McBain imagined that Mr Baxter
would have signed an agreement directly or indirectly on behalf of Arawak without his
authorisation.
[145] On 13 December Mr Baxter met Mr McBain in London. Mr McBain congratulated
Mr Baxter on his success, and expressed interest in the project. He said that it put him in a difficult
position, because Mr Baxter had succeeded where Arawak had failed. He suggested ways in which
Arawak might participate in the project. It became apparent to him that Mr Baxter was not willing
to allow Arawak to participate at that stage, although he said that he did not discount the possibility
of Arawak being involved at a later stage. Mr McBain said in evidence that he was "stunned" by
Mr Baxter's unwillingness to allow Arawak to participate, since Mr Baxter was a major shareholder
in Arawak. He did not complain that Mr Baxter had purloined something which should have been
given to the Arawak group. He did not suggest to Mr Baxter that he had been "tasked" to obtain
projects of that kind for Arawak. Mr McBain said in evidence that he was conscious of the duties of
directors, but he looked at the matter from a more pragmatic point of view. He could not
contemplate that the project was not going to become part of Arawak's operation in some form or
other. The best plan was to keep a dialogue going with Mr Baxter. He was willing to discuss terms
and rewards.
[146] On 14 December a board meeting of CGL was held in London. Mr McBain, Mr Baxter and
Mr Carter (who had replaced Mr Scott as a director) all attended. It was the first board meeting
Mr Baxter had attended since 2003. I note that Mr Baxter had not been removed by COGCL from
his directorship of CGL.
[147] On 21 December PAVL filed an information statement with the United States Securities and
Exchange Commission. The statement bore to be furnished by the board of directors and was signed
by Mr Tuskey, who was a director of PAVL and its chief financial officer, secretary and treasurer. It
stated that PAVL had issued more than 20 million shares, of which 3 million (14.95 per cent) were
held by Mr Baxter. It is apparent from the statement that PAVL was a public company. Its directors
were Mr Baxter, Mr Tuskey and Ms King. According to the statement, the company had been
carrying on business since October 2003 as a provider of marketing and advertising services. It
conducted its business through offices in Phoenix, Arizona and Vancouver. The statement said:
"Even though our company has experienced revenue and marginal profitability on almost a quarterly basis, management is of the view that the Company's current business may not present the best opportunity for our company to maximise long term returns for our shareholders. Through the second half of 2005, management has considered other potential opportunities for our company including opportunities in businesses which have no connection to marketing and advertising. In particular, our director, Mr Nicholas W Baxter, has been proactive in pursuing an opportunity in the oil and gas industry based on his previous experience and contacts in that industry."
The statement contained information about the Memorandum of Understanding, and described how
that "potentially lucrative opportunity" had been obtained through Mr Baxter's efforts. It described
Mr Baxter's previous involvement in the oil and gas industry, and stated that he had been a director
of Arawak until 2003. No mention was made of COGCL. A report in similar terms, also signed by
Mr Tuskey, was filed with the SEC on behalf of PAVL at about the same time. In evidence,
Mr Baxter said that, as far as he could remember, Mr Tuskey had never discussed with him details
of his involvement in the Arawak group. He had no discussions with Mr Tuskey about his
relationship with Arawak in the context of this project. Mr Tuskey had not been involved with
ABG/Arawak since 2002.
[148] On 3 January 2006 Mr Baxter informed Mr Little about the Memorandum of Understanding.
Mr Little then expressed concern to Mr McBain, arising out of the fact that Mr Baxter had secured
the project for Eurasia at a time when he was a director of COGCL. In reply, Mr McBain stated that
"we are not comfortable with this development".
[149] On 5 January Mr Baxter contacted Mr McBain in relation to GOC. Mr McBain replied:
"I am really hoping that we are going to be able to continue working together in some form. However, your latest news continues to worry me. Do you think there is anything we can do which can work for both parties? Is it worth meeting?".
In evidence, Mr McBain explained that he had been "rather stunned" to discover that the
Memorandum of Understanding had been entered into by a public company. He was grasping at
ways of avoiding a confrontation. One possibility was an arrangement under which Arawak and
Eurasia would both have an interest in the project. He had several conversations with Mr Baxter in
early January in which he attempted to negotiate such an arrangement.
[150] On 11 January Mr Baxter learned from Mr McBain that certain directors were unhappy
about his involvement with Eurasia. On 25 January Mr Baxter offered to resign his directorships of
COGCL, CGL and GOC. He received an acknowledgement on 2 February. On 6 February
Mr Baxter tendered his resignation. In his letter of resignation, he stated that he had "enjoyed ...
serving as a director of COGCL". Counsel for COGCL attempted to attach significance to these
conventional remarks as demonstrating that Mr Baxter had been actively involved in the business of
COGCL as one of its directors, but I accept Mr Baxter's evidence that he meant merely that he had
acted as a non-executive director of the company.
[151] On 7 February solicitors acting on behalf of Arawak and COGCL sent Mr Baxter a letter
before action. It made numerous allegations, but did not suggest that Mr Baxter had been given any
specific function of finding new projects for the Arawak group. Nor was such a suggestion made in
later correspondence between solicitors.
[152] On 8 November 2006 Mr Baxter wrote to SOCAR, on behalf of Eurasia, formerly
requesting the commencement of negotiation of the Agreement on the Basic Commercial Principles
and Provisions of the ERDPSA, as envisaged by clause 2 of the Memorandum of Understanding.
On 24 November Mr Baxter wrote again to SOCAR, on behalf of Eurasia, requesting an extension
of the period for negotiating that agreement.
[153] On 18 January 2007 the president of SOCAR wrote to Mr Baxter, in response to his letter of
24 November, refusing to extend the period for negotiations, and stating that the Memorandum of
Understanding had terminated.
The parties' submissions
[154] Many of the parties' submissions were concerned with questions of fact. It is necessary at
this point to summarise their submissions as to the law.
The submissions on behalf of COGCL
[155] It was well established that the relationship between a company and its directors was
fiduciary. No distinction was drawn in that regard between executive and non-executive directors.
The relevant general principles were to be found in Aberdeen Railway Co v Blaikie Bros (1854)
1 Macq. 461 at page 471 per Lord Cranworth LC, Regal (Hastings) Ltd v Gulliver [1967] 2 A.C.
134n at pages 147-148 per Lord Russell of Killowen, Boardman v Phipps [1967] 2 A.C. 46 at
pages 123-125 per Lord Upjohn, Item Software (UK) Ltd v Fassihi [2005] 2 B.C.L.C. 91 at
paras 38-43 per Arden LJ and Shepherds Investments Ltd v Walters [2007] 2 B.C.L.C. 202 at paras
85-108 per Etherton J.
[156] A distinction was drawn in the authorities between the rule that a person in a fiduciary
position must not make a project out of his trust, and the rule that such a person must not place
himself in a position where his duty and his interest might conflict: reference was made to
Ultraframe (UK) Ltd v Fielding [2005] E.W.H.C. 1638 (Ch) at paras 1305-1311 per Lewison J. It
was not suggested in the present case that there had been any breach of the "no profit" rule: it was
not suggested that the opportunity to enter into the Memorandum of Understanding had been
available to Mr Baxter by virtue of his directorship, or as a result of contacts which he had made as
a director of COGCL. Nor was the present case a "corporate opportunity" case of the kind discussed
at Ultraframe at paras 1332-1355: it was not suggested that Mr Baxter possessed knowledge of the
opportunity in question as the agent of COGCL. It was the "no conflict" rule which was relevant to
the present case.
[157] For the purposes of that rule, it was sufficient that (1) an opportunity came the way of a
person who was a director of a company, (2) he knew or ought to have known that the opportunity
was in the company's line of business, and (3) he failed to seek the company's informed consent.
Reference was made to Bhullar v Bhullar [2003] 2 B.C.L.C. 241, to Foster Bryant Surveying Ltd v
Bryant [2007] 2 B.C.L.C. 239 and to Prentice and Payne, "Director's Fiduciary Duties" (2006)
122 L.Q.R. 558.
[158] In order for Mr Baxter to owe a fiduciary duty to COGCL, it was not necessary that he
should have a role in the company's management. The fact that his motivation for being a director
was tax avoidance was nothing to the point. Even if he had not been "tasked" to seek out
opportunities for COGCL, neither had the directors in the Bhullar case been tasked. It was
sufficient that Mr Baxter was a director of COGCL, that the Eurasia block was a project in which
COGCL would have had an interest, and that a reasonable man would have known that. Whether
COGCL would have taken the opportunity, had it been made aware of it, was not to the point:
Bhullar at para 41 per Jonathan Parker LJ. Mr Baxter's fiduciary duty was a duty of loyalty, which
existed by virtue of his status as a director. Reference was made to Bristol and West Building
Society v Mothew [1998] Ch 1 at page 18 per Millett LJ, to Meyer v Scottish Co-operative
Wholesale Society Ltd 1958 S.C.(H.L.) 40 and to Prentice and Payne, "The Corporate Opportunity
Doctrine" (2004) 120 L.Q.R. 198. It was therefore immaterial that Mr Baxter had no executive
responsibilities. Reference was made in that connection to In Plus Group Ltd v Pyke [2002]
2 B.C.L.C. 201 at para 80 per Sedley LJ and to Palmer's Company Law at para 8-208. In practice, a
company might give its informed consent to a non-executive director's being involved in a
competing business; and, in that event, the director's conduct in pursuing an opportunity on behalf
of the competing business would not be a breach of fiduciary duty. In the present case, however, it
was not suggested that COGCL had given its informed consent to Mr Baxter's involvement with
Eurasia. Since COGCL had not given its consent, Mr Baxter could not pursue the Eurasia block
opportunity without a conflict arising between his duty to COGCL and his personal interests. The
possible intervention of a vehicle company was of no importance: the benefit of the opportunity
would inure to COGCL.
[159] Turning to the position of Eurasia, counsel submitted that Mr Baxter had at all material
times acted as the directing mind and will of Eurasia: it was effectively the instrument by which he
had diverted this opportunity away from COGCL. Reference was made to El Ajou v Dollar Land
Holdings plc [1994] 2 All E.R. 685 and Crown Dilmun v Sutton [2004] 1 B.C.L.C. 468. It did not
matter that Mr Baxter had not been asked in evidence about his position vis-à-vis Eurasia: his being
its directing mind was a legal inference to be drawn from the evidence. Mr Baxter had been
appointed president of the company in return for bringing it the opportunity. It was clear from his
evidence that he had decided to take the opportunity to Eurasia, which was therefore simply the
vehicle which he had employed. He had the power to bind the company, and had done so by
entering into the Memorandum of Understanding. Since Mr Baxter was the directing mind and will
of Eurasia, it followed that, if he knew that he was acting in breach of his fiduciary duty to COGCL,
that knowledge was also attributable to Eurasia, which was therefore an accessory to his breach of
his fiduciary duty. Mr Baxter and Eurasia were therefore jointly and severally liable to COGCL in
damages. In that regard, counsel initially submitted that the liability of Eurasia was based on its
knowing assistance of a breach of duty, and sought leave to amend the relevant plea accordingly, so
as to base Eurasia's liability in damages on its "knowing assistance for (sic) the breach of
Mr Baxter's fiduciary duties" rather than, as pleaded, on its "knowing receipt of a commercial
opportunity brought to it in breach of Mr Baxter's fiduciary duties". That motion was however
withdrawn in the face of opposition, and the court was invited to deal with the case on the existing
pleadings. It was submitted that whether the pleadings referred to knowing receipt or knowing
assistance was not of critical importance. It was submitted that Eurasia could be described as
constructive fiduciaries. In such circumstances, English law provided for equitable compensation
rather than damages: Bristol and West at page 17 per Millett LJ. In Scots law, however, damages
were an available remedy: Clydebank Football Club Ltd v Steedman 2002 S.L.T. 109. Reference
was also made to Re Duckwari plc (No 2) [1998] 2 B.C.L.C. 315 and Satnam Investments Ltd v
Dunlop Heywood & Co Ltd [1999] 3 All E.R. 652.
The submissions on behalf of Mr Baxter and Eurasia
[160] The approach adopted by counsel for COGCL to the fiduciary duty of company directors
was too broad, and was based on taking judicial dicta out of context. The restrictions on a director
making profits on his own account, and on conflicts of interest, were closely related. At the root of
the "no conflict" rule in particular was the unacceptability of a director's making use for his own
benefit of an opportunity or knowledge which he had acquired in his capacity as a director. The
correct approach was explained in Bell v Lever Brothers Ltd [1932] A.C. 161 at pages 193-195 per
Lord Blanesburgh, where the true scope of Lord Cranworth's dictum in the Aberdeen Railway Co
case was made clear, and where the principle found in London and Mashonaland Exploration Co
Ltd v New Mashonaland Exploration Co Ltd [1891] W.N. 165 was endorsed. Reference was also
made to Bray v Ford [1898] A.C. 44 at page 51 per Lord Herschell, Burland v Earle at pages 98-99
per Lord Davey and Cook v Deeks [1916] A.C. 554 at pages 561-563 per Lord Buckmaster LC.
There was therefore no rule against a non-executive director becoming engaged, either personally or
as a director of another company, in the same line of business as the company.
[161] That principle was not confined to the case of a dummy director. The same approach could
be seen in the Regal case per Lord Sankey at page 139, Lord Russell of Killowen at pages 143-149,
Lord MacMillan at page 153, Lord Wright at pages 154-156 and Lord Porter at pages 157-158, and
in Boardman v Phipps per Viscount Dilhorne at page 88, Lord Cohen at pages 102-103, Lord
Hudson at page 105 and Lord Guest at page 118. These authorities did not support the proposition
that a conflict arose merely because a director took for himself, without the informed consent of the
company, an opportunity which in the view of a reasonable person the company would have
wanted, or which was in the company's line of business.
[162] Following the correct approach, it was necessary to identify the powers which the director
had to exercise in a fiduciary capacity in order to determine whether there was a conflict: Chan v
Zacharia (1984) 154 C.L.R. 178; Ultraframe. A fiduciary might be in a fiduciary position for some
of his activities but not for others. Each transaction or group of transactions must be looked at
separately: New Zealand Netherlands Society "Oranje" Inc v Kuys [1973] 1 W.L.R. 1126 at
pages 1129-1130 per Lord Wilberforce. Whether there was a conflict therefore depended on the
extent, if any, to which the director had management and control of the company's operations, and
on whether he was working exclusively for the company: Canadian Aero Service Ltd v O'Malley
(1973) 40 D.L.R.(3d) 371 at page 391 per Laskin J; CMS Dolphin Ltd v Simonet [2001] 2 B.C.L.C.
704. Nor would it be sufficient to establish a relevant fiduciary duty merely to show that the director
was, by virtue of a commercial arrangement independent of his directorship, undertaking the
function of finding new business opportunities for the company: that function would require to be
referable to his fiduciary position, i.e. his directorship.
[163] The more recent English authorities were generally consistent with this approach. The
judgment of Roskill J in Industrial Development Consultants Ltd v Cooley [1972] 1 W.L.R. 433
adhered to the earlier line of authority: the critical passage (at page 451F-G) had to be read in its
context, as Elias J explained in University of Nottingham v Fishel [2000] I.C.R. 1462 at page 1495.
The In Plus Group decision followed the earlier authorities. The judgment of Jonathan Parker LJ in
Bhullar proceeded on the same basis as Roskill J in the Cooley case: namely, that it had been part of
the director's duties, on the facts of the case, to find new business opportunities for the company.
Insofar as Bhullar implied that a managing director could not act in any other capacity within the
scope of the company's activities, that approach might be criticised, but it did not in any event bear
on the present case. In Item Software, the law was too widely stated by Arden LJ at para 41.
Reference was made to the criticism of that judgment in P & V Industries Pty Ltd v Porto [2006]
V.S.C. 131.
[164] Even if Mr Baxter had acted in breach of fiduciary duty, it did not follow that he was liable
in damages (the claim for an accounting having been abandoned). He might, consistently with his
duties, have elected to resign his directorship and pursued the same opportunity, or he might have
elected to remain a director and not to pursue it. The relevancy of the claim for damages could not
be determined at this stage.
[165] Turning to the position of Eurasia, the case made against them in the pleadings was one of
"knowing receipt", which was different from a case of "knowing assistance": Royal Brunei Airlines
Sdn Bhd v Tan [1995] 2 A.C. 378 at page 382 per Lord Nicholls of Birkenhead. A case of knowing
receipt was based on the receipt of trust property: it appeared to be accepted that Eurasia were not,
on any view, in that position. Knowing receipt would give rise to an obligation to account, not to a
liability in damages. There was no basis in Scottish authority for the proposition that knowing
receipt gave rise to a liability in reparation. The appropriate remedy in Scots law was more likely to
be of a restitutionary nature, cf. JS Cruickshank (Farmers)Ltd v Gordon & Innes Ltd [2007] CSOH
113 at paras 16 and 19. There was no evidence that Mr Baxter was the directing mind and will of
Eurasia. That suggestion had not been put to Mr Baxter. In response to counsel for COGCL's
reference to "knowing assistance", it was submitted that COGCL had no case in their pleadings that
Eurasia had assisted Mr Baxter in diverting this opportunity, knowingly or otherwise. If COGCL
had based their case on knowing assistance, consideration would have been given to the question
whether it was necessary to lead evidence bearing on that matter. In the event, no evidence had been
led in that regard on behalf of Eurasia, since it was not an issue in the case. Those acting for
COGCL were trying to change horses, having failed to consider the question of the appropriate
remedy until closing submissions. In English law, the test was in any event one of conscious
dishonesty: Barlow Clowes International Ltd v Eurotrust International Ltd [2006] 1 W.L.R. 1476.
That issue had not been touched on in the present case. Mere knowledge that an opportunity had
been afforded in breach of someone else's fiduciary duty was not enough: Satnam at page 671 per
Nourse LJ. Reference was also made to the decision of the Court of Appeal in Criterion Properties
plc v Stratford UK Properties LLC [2003] 1 W.L.R. 2108 (which I note was subsequently affirmed
by the House of Lords on different grounds: [2004] 1 W.L.R. 1846). There was no support for the
idea that Eurasia was a constructive fiduciary. It had not received an asset which could be returned
or realised for value. COGCL's loss (if any) did not flow from Eurasia's receipt of the Memorandum
of Understanding, but from the fact that Mr Baxter did not give it to COGCL.
Discussion
The case against Mr Baxter
[166] The parties' submissions in relation to the case against Mr Baxter were based on widely
differing approaches to the fiduciary duties of directors. In essence, counsel for COGCL adopted an
approach according to which the status of director imposed a duty of loyalty which required the
director not to pursue for his own benefit an opportunity lying within the scope of the company's
activities which came to his attention, without having first offered it to the company, whereas
counsel for Mr Baxter adopted an approach according to which the director was under such a duty
only if the opportunity in question came to his attention when he was acting in his capacity as a
director. Each approach was said to be supported by the authorities. In that regard, it is necessary to
bear in mind an observation made by Fletcher Moulton LJ in In re Coomber; Coomber v Coomber
[1911] 1 Ch. 723 at page 729:
"There is no class of case in which one ought more carefully to bear in mind the facts of the case, when one reads the judgment of the Court on those facts, than cases which relate to fiduciary and confidential relations and the action of the Court with regard to them."
[167] The basic principle on which this branch of the law is founded was stated by
Lord Cranworth LC in the Scottish case of Aberdeen Railway Co v Blaikie Bros at pages 471-472:
"The Directors are a body to whom is delegated the duty of managing the general affairs of the Company. A corporate body can only act by agents, and it is of course the duty of those agents so to act as best to promote the interests of the corporation whose affairs they are conducting. Such agents have duties to discharge of a fiduciary nature towards their principal. And it is a rule of universal application, that no one, having such duties to discharge, shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound to protect. So strictly is this principle adhered to, that no question is allowed to be raised as to the fairness or unfairness of a contract so entered into. It obviously is, or may be, impossible to demonstrate how far in any particular case the terms of such a contract have been the best for the interest of the cestui que trust, which it was possible to obtain.
It may sometimes happen that the terms on which a trustee has dealt or attempted to deal with the estate or interests of those for whom he is a trustee, have been as good as could have been obtained from any other person, - they may even at the time have been better. But still so inflexible is the rule that no inquiry on that subject is permitted."
In support of the "rule of universal application", Lord Cranworth referred to a number of English
authorities, including in particular Keech v Sandford (1726) Cas. temp King 61, 25 E.R. 223, to the
earlier decision of the House of Lords in the Scottish case of York Buildings Company v Mackenzie
(1795) 3 Pat.App. 378, and to the Digest 18.1.34.7. I note that the principle is also consistent with
earlier Scottish authorities (e.g. Hamilton v Wright (1842) 1 Bell's App.Cas. 574, and the authorities
cited there by Lord Brougham).
[168] Although, as counsel for Mr Baxter pointed out, the Aberdeen Railway case was concerned
with a transaction entered into by a company director on behalf of the company, in which he had a
personal interest, the principle stated by Lord Cranworth was not confined to situations of that
nature: indeed Keech v Sandford, cited by Lord Cranworth as an illustration of the principle,
concerned a transaction entered into by a trustee in his personal capacity.
[169] Lord Cranworth's statement of the law has been repeated in innumerable cases of the highest
authority. A more recent statement of high authority can be found in the speech of Lord Upjohn in
Boardman v Phipps at pages 123-125:
"Rules of equity have to be applied to such a great diversity of circumstances that they can be stated only in the most general terms and applied with particular attention to the exact circumstances of each case. The relevant rule for the decision of this case is the fundamental rule of equity that a person in a fiduciary capacity must not make a profit out of his trust which is part of the wider rule that a trustee must not place himself in a position where his duty and his interest may conflict ... It is perhaps stated most highly against trustees or directors in the celebrated speech of Lord Cranworth L.C. in Aberdeen Railway v Blaikie, where he said:
'And it is a rule of universal application, that no one, having such duties to discharge, shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound to protect.'
The phrase 'possibly may conflict' requires consideration. In my view it means that the reasonable man looking at the relevant facts and circumstances of the particular case would
think that there was a real sensible possibility of conflict; not that you could imagine some situation arising which might, in some conceivable possibility in events not contemplated as real sensible possibilities by any reasonable person, result in conflict. ... The whole of the law is laid down in the fundamental principle exemplified in Lord Cranworth's statement I have already quoted. But it is applicable, like so many equitable principles which may affect a conscience, however innocent, to such a diversity of different cases that the observations of judges and even in your Lordships' House in cases where this great principle is being applied must be regarded as applicable only to the particular facts of the particular case in question and not regarded as a new and slightly different formulation of the legal principle so well settled."
In relation to the last point, Lord Upjohn referred specifically to the case of Regal (Hastings) Ltd v
Gulliver, on which counsel for Mr Baxter placed particular reliance in the present case.
Lord Upjohn's was a dissenting speech; but there does not appear to have been any difference in
principle between the speeches of their Lordships, as distinct from a difference in the application of
the relevant principles to the facts of the case.
[170] I note that Lord Upjohn, following earlier authorities, referred to two "rules": the rule that a
person acting in a fiduciary capacity must not make a profit out of his trust, and the wider rule that a
trustee must not place himself in a position where his duty and his interest may conflict. The Regal
case was concerned with the former rule; and the speeches therefore referred to the need for proof
that the directors had acquired a profit by reason of, and in the course of, their office as directors.
Their Lordships were not however narrowing the scope of the wider rule enunciated by
Lord Cranworth and re-stated in that case by Lord Sankey at page 137:
"The general rule of equity is that no one who has duties of a fiduciary nature to perform is allowed to enter into engagements in which he has or can have a personal interest conflicting with the interests of those whom he is bound to protect."
It was also made clear by Lord Russell of Killowen at pages 144-145 that it was no answer to
maintain that the actions of the director were bona fide or were beneficial to the company:
"My Lords, with all respect I think there is a misapprehension here. The rule of equity which insists on those, who by use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud, or absence of bona fides; or upon such questions or considerations as whether the profit would or should otherwise have gone to the plaintiff, or whether the profiteer was under a duty to obtain the source of the profit for the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his action.
The liability arises from the mere fact of a profit having, in the stated circumstances, been made. The profiteer, however honest and well-intentioned, cannot escape the risk of being called upon to account."
[171] More recent authorities have indicated that the obligation not to have a conflicting interest
and not to make an unauthorised profit are not the only obligations which are consequential upon a
director's duty to act in what he in good faith considers to be the best interests of the company. In
Bristol and West Building Society v Mothew, for example, Millett LJ said at page 18:
"A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal. This is not intended to be an exhaustive list, but it is sufficient to indicate the nature of fiduciary obligations. They are the defining characteristics of the fiduciary. As Dr. Finn pointed out in his classic work Fiduciary Obligations (1977), p. 2, he is not subject to fiduciary obligations because is a fiduciary; it is because he is subject to them that he is a fiduciary. ... The nature of the obligation determines the nature of the breach. The various obligations of a fiduciary merely reflect different aspects of his core duties of loyalty and fidelity. Breach of fiduciary obligation, therefore, connotes disloyalty or infidelity. Mere incompetence is not enough. A servant who loyally does his incompetent best for his master is not unfaithful and is not guilty of a breach of fiduciary duty."
It is also relevant, in the context of the present case, to note what was said by Millett LJ at pages 18-
19:
"A fiduciary who acts for two principals with potentially conflicting interests without the informed consent of both is in breach of the obligation of undivided loyalty; he puts himself in a position where his duty to one principal may conflict with his duty to the other: see Clark Boyce v Mouat [1994] 1 A.C. 428 and the cases there cited. This is sometimes described as 'the double employment rule'. Breach of the rule automatically constitutes a breach of fiduciary duty."
[172] Millett LJ's identification of a core obligation of loyalty, one aspect of which is the duty to
act in good faith, is reflected in the more recent judgment of Arden LJ in Item Software (UK) Ltd v
Fassihi, with which the other members of the Court of Appeal expressed agreement. Her Ladyship
referred at para 41 to "the fundamental duty to which a director is subject, that is the duty to act in
what he in good faith considers to be the best interests of the company": a duty which her Ladyship
also described as "the duty of loyalty".
[173] One final point of a general nature requires to be noted. Where a personal benefit or gain has
been obtained or received in breach of the principles which I have explained, it is immaterial to the
fiduciary's liability to account that he acted in good faith and that no damage was suffered by the
person to whom the fiduciary obligation was owed. That point was explained by Lord Cranworth in
the Aberdeen Railway case at pages 471-472 and has been re-stated in many of the subsequent cases
(e.g. in the Regal case at page 144 per Lord Russell of Killowen).
[174] Considering in particular the position of company directors, the reason why they are in a
fiduciary relationship with the company is because, as Lord Cranworth explained in the passage
quoted earlier, they have been entrusted with the management of the company's affairs. They are
therefore under a fiduciary obligation of loyalty, which entails (amongst other duties) an obligation
not to allow their personal interests to conflict with the interests of the company and not to make
secret profits.
[175] I am unable to accept the submission by counsel for Mr Baxter, based on the decision in
London and Mashonaland Exploration Co Ltd v New Mashonaland Exploration Co Ltd and on a
passage in the speech of Lord Blanesburgh in Bell v Lever Brothers Ltd, that the director's fiduciary
obligation, so far as relevant to his dealings with third parties, is merely to forbear from using for
his own benefit the property of the company or information which is confidential to the company.
The brief report of the decision in the Mashonaland case (seemingly an ex tempore judgment on an
interlocutory application for injunctive relief) contains no discussion of fiduciary obligations (other
than in relation to confidential information). The passage referred to in Lord Blanesburgh's speech
in Bell v Lever Brothers Ltd (at pages 193-195) is not an exhaustive statement of the principles
established by the earlier authorities (as Roskill J noted in Industrial Development Consultants v
Cooley at page 448), and cannot have been intended to depart from those authorities.
[176] A relationship of trust normally exists between a company and all its directors, whether
executive or non-executive, notwithstanding the difference in the extent to which they are involved
in day-to-day management. Under the company's articles (or its By-Law, in the present case), and
under companies legislation, all directors are ordinarily entrusted with powers and responsibilities
on behalf of the company, and they are all therefore subject to fiduciary duties. In particular, the
nature of their role, whether they are executive or non-executive, calls for disinterestedness and
good faith. As was said by Sedley LJ in In Plus Group Ltd v Pyke at para 80:
"The fiduciary duty of a director to his company is uniform and universal. What vary infinitely are the elements of fact and degree which determine whether the duty has been breached."
[177] The importance of directors' fiduciary duties is reflected in the fact that they are mandatory
rules of law which the company and the director cannot contract out of. Section 310 of the
Companies Act 1985 makes void:
"(1) ... any provision, whether contained in a company's articles or in any contract with the company or otherwise, for exempting any officer of the company or any person (whether an officer or not) employed by the company as auditor from, or indemnifying him against, any liability which by virtue of any rule of law would otherwise attach to him in respect of any negligence, default, breach of duty or breach of trust of which he may be guilty in relation to the company ..."
[178] The significance of the fiduciary duties of non-executive directors is illustrated by the case
of Meyer v Scottish Co-operative Wholesale Society Ltd, which concerned a textile company which
was a subsidiary of the co-operative society. Certain of the company's directors were nominees of
the society, and were also directors of the society. The company was however managed by two
other directors. The resultant position was described by Lord Denning at pages 67-68:
"So long as the interests of all concerned were in harmony, there was no difficulty. The nominee directors could do their duty by both companies without embarrassment. But, so soon as the interests of the two companies were in conflict, the nominee directors were placed in an impossible position. Thus, when the realignment of shareholding was under discussion, the duty of the three directors to the textile company was to get the best possible price for any new issue of its shares (see per Lord Wright in Lowry v Consolidated African Selection Trust Ltd [1940] A.C. 648, 679), whereas their duty to the co-operative society was to obtain the new shares at the lowest possible price - at par, if they could. Again, when the co-operative society determined to set up its own rayon department competing with the business of the textile company, the duty of the three directors to the textile company was to
do their best to promote its business and to act with complete good faith towards it; and in consequence not to disclose their knowledge of its affairs to a competitor, and not even to work for a competitor, when to do so might operate to the disadvantage of the textile company (see Hivac Ltd v Park Royal Scientific Instruments Ltd [1946] Ch. 169), whereas they were under the self-same duties to the co-operative society. It is plain that, in the circumstances, these three gentlemen could not do their duty by both companies, and they did not do so."
[179] The Aberdeen Railway case and the Meyer case are examples of situations where directors
had a personal interest, or a duty to a third party, which conflicted with the disinterested
performance of their duty to act in what they in good faith considered to be the best interests of the
company. In the Aberdeen Railway case, the director's duty to secure the best bargain he could for
the company was compromised by his personal interest that the company should pay as high a price
as possible. In the Meyer case, the directors' duty to do their best to promote the business of the
company, and consequently not to assist a competitor, was compromised by their owing the same
duties to a competing company. Many other examples can be found amongst the authorities which
were cited in argument in the present case. Some are concerned with transactions entered into by
persons after they had resigned as directors or had tendered their resignation: such cases give rise to
issues which need not be considered in the present case. Some of the authorities are however closer
on their facts to the present case, and illustrate how the relevant principles apply in practice: in
particular, how attractive opportunities may be open to all bar the director, who is bound by a duty
of self-denial, unless the company grants its informed consent.
[180] The decision of Roskill J in Industrial Development Consultants Ltd v Cooley is an
application of the general "no conflict" principle stated by Lord Cranworth. The director in that case
was, as Roskill J stated at page 447, subject to "the plainest conflict of interest". After the company
of which he was managing director had unsuccessfully sought a contract for the design and
construction of gas board depots, he was separately approached by the gas board with a view to his
tendering for a contract on his own account. He learned that the gas board were back in the market
for the construction of depots, and the timescale and capital sums involved. In order to obtain his
release from the company, so that he could tender for the contract, he lied to the company about his
state of health. The possibility that the gas board might have been willing to contract with the
company was assessed as being no higher than 10 per cent. It was argued, under reference to the
speech of Lord Blanesburgh in Bell v Lever Brothers Ltd, that there was no breach of duty because
the relevant information had been received by the director in a personal capacity rather than in the
course of his duties as director: a similar argument to that of counsel for Mr Baxter in the present
case. The argument was rejected, Roskill J stating at pages 451-453:
"Information which came to him while he was managing director and which was of concern to the plaintiffs and was relevant for the plaintiffs to know, was information which it was his duty to pass on to the plaintiffs because between himself and the plaintiffs a fiduciary relationship existed as defined in the passage I have quoted from Buckley on the Companies Acts and, indeed, in the speech of Lord Cranworth LC. It seems to me plain that throughout [the relevant period] the defendant was in a fiduciary relationship with the plaintiffs. From the time he embarked upon his course of dealing with the Eastern Gas Board ... he embarked upon a deliberate policy and course of conduct which put his personal interest as a potential contracting party with the Eastern Gas Board in direct conflict with his pre-existing and continuing duty as managing director of the plaintiffs. That is something which for over 200 years the courts have forbidden ... Therefore, I feel impelled to the conclusion that when the defendant embarked on this course of conduct ... he was guilty of putting himself into the position in which his duty to his employers, the plaintiffs, and his own private interests conflicted and conflicted grievously. There being the fiduciary relationship I have described, it seems to me plain that it was his duty once he got this information to pass it on to his employers and not to guard it for his own personal purposes and profit."
An argument that there was no duty to account, since the gas board would not in any event have
contracted with the company, was rejected by Roskill J at page 453:
"When one looks at the way the cases have gone over the centuries it is plain that the question whether or not the benefit would have been obtained but for the breach of trust has always been treated as irrelevant."
In that regard, Roskill J referred to Keech v Sandford and to the Regal case. There was therefore a
duty to account for the profit received, notwithstanding that the case fell outside the scope of the
"no profit" principle as it had been formulated in the Regal case. In that regard, Roskill J said (at
page 453):
"[O]ne must, as Lord Upjohn pointed out in Phipps v Boardman [1967] 2 A.C. 46, 125, look at the passages in Regal having regard to the facts of that case to which those passages and those statements were directed. I think Mr Brown was right when he said that it is the basic
principle which matters. It is an over-riding principle of equity that a man must not be allowed to put himself in a position in which his fiduciary duty and his interests conflict."
Roskill J therefore ordered the defendant to account for the profit which he had made, adding (at
page 454) that he would otherwise have awarded damages for the plaintiff's loss of the opportunity
to obtain the contract.
[181] Counsel for Mr Baxter sought to distinguish the Cooley case from the present case on the
basis that the defendant in that case, unlike Mr Baxter, was employed as a managing director, with a
specific responsibility to secure contracts of the type in question. As Roskill J made clear at
page 451 in the passage quoted earlier, however, the decision in the Cooley case was based on the
fiduciary relationship between a company director and the company, as defined in the speech of
Lord Cranworth in the Aberdeen Railway case. Since the fiduciary obligation to avoid a conflict
between interest and duty cannot be severed from the principal duties arising under the fiduciary
relationship (cf. Tito v Waddell (No 2) [1977] Ch. 10 at 230 per Sir Robert Megarry V-C; Birks,
"The Content of Fiduciary Obligations" (2002) 16 Trust Law International, pp 47-48, 50), the
defendant's responsibilities as managing director were relevant. It is difficult however to imagine
that the result of the case would have been different if the gas board had approached another
director and he had acted in the same way, since any director would have been under a duty "so to
act as best to promote the interests of the corporation", as Lord Cranworth stated in the Aberdeen
Railway case: "to do their best to promote its business and to act with complete good faith towards
it", as Lord Denning said in the Meyer case.
[182] The decision in Bhullar v Bhullar is another example of the application of the same
principles. The case concerned a company, run by two families, which carried on a supermarket
business, but which had also acquired an investment property: its objects included the acquisition of
property for investment. The families fell out. The directors from one family informed those from
the other family that they wished to go their separate ways, and did not wish any further properties
to be acquired by the company. That decision was accepted in principle. While negotiations took
place over the division of the assets, the appellant directors discovered by chance that the property
next to the company's existing investment property, currently being used for car parking by the
tenants of the latter property, was on the market. They did not inform the company, but purchased
the property for their personal benefit in the name of a company which they controlled. As in the
present case, it was argued on the basis of the Regal case that, since the appellants had not been
acting as directors at the time when they learned of the investment opportunity, it followed that their
fiduciary duty was not engaged. It was also argued that any interest of the company in acquiring the
property could only have been extremely limited. Jonathan Parker LJ, in whose judgment the other
members of the Court of Appeal concurred, referred to Lord Cranworth's decision in the Aberdeen
Railway case and to its application by Roskill J in the Cooley case. His Lordship observed (at
para 30) that "the rule is essentially a simple one, albeit that it may in some cases be difficult to
apply". He concluded, at para 41:
"It seems obvious that the opportunity to acquire the property would have been commercially attractive to the company, given its proximity to Springbank Works. Whether the company could or would have taken that opportunity, had it been made aware of it, is not to the point: the existence of the opportunity was information which it was relevant for the company to know, and it follows that the appellants were under a duty to communicate it to the company. The anxiety which the appellants plainly felt as to the propriety of purchasing the property through Silvercrest without first disclosing their intentions to their co-directors - anxiety which led Inderjit to seek legal advice from the company's solicitor - is, in my view, eloquent of the existence of a possible conflict of duty and interest."
The directors were therefore ordered to procure that the property was transferred to the company at
cost price, and to account for profits.
[183] The cases of Cooley and Bhullar were discussed by Arden LJ in Item Software, in a
judgment with which the other members of the Court of Appeal expressed their agreement.
Arden LJ noted that both Cooley (at pages 451 and 453 per Roskill J) and Bhullar (at para 41 per
Jonathan Parker LJ) spoke of the director having a duty to disclose. In that regard, her Ladyship
said, at paras 40-41:
"[40] However, the Bhullar and Cooley cases do not suggest that the duty to disclose there referred to is some new and separate duty imposed on a fiduciary, breach of which would give rise to a potential liability to pay compensation. It may be that in those cases the courts
spoke of a duty to disclose simply to explain why in those cases the information obtained in a private capacity gave rise to a liability to account for secret profits. In addition, it is often said that a fiduciary must disclose a conflict of interest and duty because that is a shorthand way of stating the mechanism by which he can avoid any liability to account for secret profits. ... [41] For my part, I do not consider that it is correct to infer from the cases to which I have referred that a fiduciary owes a separate and independent duty to disclose his own misconduct to his principal or more generally information of relevance and concern to it. So to hold would lead to a proliferation of duties and arguments about their breadth. I prefer to base my conclusion in this case on the fundamental duty to which a director is subject, that is the duty to act in what he in good faith considers to be the best interests of his company."
[184] The same approach was followed by Etherton J in Shepherds Investments Ltd v Walters,
which concerned directors of a company who, while remaining in office, were involved in
establishing a competing company. His Lordship said (at para 132):
"As Arden LJ so clearly stated in Item Software, in relation to a fiduciary's duty to disclose his own misconduct to his principal, or, more generally, information of relevance and concern to his principal, the single and overriding touchstone is the fundamental duty of a director to act in what he considers in good faith to be in the best interests of the company. There is no separate and independent duty of disclosure. In the context of the director's own acts to promote a competing business, the breach of fiduciary duty is to carry out the impermissible acts of promotion without first disclosing the intention to do them and obtaining permission to so. There is a breach because the director's conflict between his personal interest and his duty to the company has not been authorised after full disclosure to, and informed consent by, the company. In the case of the acts of his fellow directors in promoting a rival business, the breach of fiduciary duty of the director is failing to disclose matters which are of relevance and concern to the company and which, if acting in good faith in the best interests of the company, the director would disclose."
[185] While bearing in mind the warning by Fletcher Moulton LJ in In re Coomber with which I
began this discussion, and accordingly bearing in mind the need for the relevant principles to be
applied with sensitivity to the facts of particular cases, it appears to me that the cases which I have
discussed illustrate a number of principles relevant to a situation where a director exploits for his
own advantage a commercial opportunity which might have been commercially attractive to his
company:
1. A director is under a duty to act in what he in good faith considers to be the best
interests of the company for whose affairs he and the other directors are responsible. He is
therefore under an accessory obligation not to place himself in a position where his duty and
his interest may conflict. In consequence, he is obliged not to act for his own benefit or for
the benefit of a third party, in a situation where there is a potential conflict of interests,
without the company's informed consent, and not to make an unauthorised profit (Aberdeen
Railway at page 471 per Lord Cranworth; Meyer at pages 67-68 per Lord Denning; Bristol
and West Building Society v Mothew at page 18 per Millett LJ).
2. A director who wishes to exploit for his own benefit (or that of a third party) a
business opportunity which is in the company's line of business must therefore first disclose
the opportunity to his company and obtain its consent (Cooley; Bhullar). As Arden LJ
explained in Item Software at para 41, the duty breached in Cooley and Bhullar was not a
fiduciary "duty to disclose ... information of relevance and concern" to the company, but
rather the fiduciary duty to avoid a conflict between the director's duty and his personal
interests. The underlying duty which may be in conflict with the director's personal interests
is, as Arden LJ also explained in Item Software (ibid), the director's duty to act in what he in
good faith considers to be the best interests of the company.
3. The relevant consideration is not whether the director has come across the
opportunity in the course of performing his functions as a director, but whether by taking up
the opportunity the director would be putting himself "in a position where his duty and his
interest may conflict" (Boardman v Phipps at page 123 per Lord Upjohn). This includes
circumstances where "the reasonable man looking at the relevant facts and circumstances of
the particular case would think that there was a real sensible possibility of conflict" (ibid, at
page 124).
4. The opportunity need not concern something in which the company is at the time
pursuing an active interest: it is sufficient that "the existence of the opportunity was
information which it was relevant for the company to know" (Bhullar at para 41 per
Jonathan Parker LJ). This is consistent with paragraph 3 above: there will be a potential
conflict if a reasonable person would think that there was "a real sensible possibility" that
the opportunity would have been commercially attractive to the company.
5. It is no answer for the director to say that the information or opportunity did not
come to him in the course of performing his functions as a director (Bhullar; Cooley). This
follows from paragraph 3 above.
6. It is no answer for the director to say that he was acting in good faith (Regal;
Boardman v Phipps).
7. It is no answer that the company could not or would not in fact have taken the
opportunity, if the reasonable man would think that there was a real sensible possibility of
conflict: "whether the company could or would have taken the opportunity, had it been made
aware of it, is not to the point" (Bhullar at para 41, per Jonathan Parker LJ).
8. Equally, where the opportunity involves a third party, it is no answer that the third
party would have been unwilling to deal with the company, if the reasonable man would
think that a conflict existed (Cooley). As Roskill J observed in Cooley at page 454, it would
be curious if "he whose duty it would have been to seek to persuade them to change their
mind should now say that the plaintiffs suffered no loss because he would never have
succeeded in persuading them to change their mind". This is consistent with the law's
unwillingness to enquire, where a conflict existed, as to whether the fiduciary nevertheless
performed his duties as well as he would otherwise have done (Aberdeen Railway at pages
471-472 per Lord Cranworth).
[186] Applying these principles to the facts of the present case, it is clear in the first place that
Mr Baxter was at all material times a director of COGCL. As such, he owed fiduciary duties to the
company. The fact that he was a non-executive director does not mean that he did not owe the
company the same fiduciary duties as its executive directors. As explained earlier, the common law
(or, in English law, equity) imposes the same fiduciary duties on all directors, because they are all
in a relationship of trust and confidence with the company, having been entrusted with the
management of its affairs (similarly, although the provisions of Part 10 of the Companies Act 2006
are not applicable to the present case, it is consistent with principle that those provisions,
identifying the principal duties of directors, apply to executive and non-executive directors alike).
Although Mr Baxter was not involved in the day-to-day running of COGCL's business, his role as a
non-executive director of a wholly-owned subsidiary of a listed company was not merely nominal;
and he possessed, under the By-Law and under company legislation (which I have to assume to be
the same in Anguilla as in the United Kingdom) a variety of powers, including the power to
convene meetings of the board.
[187] As a director of COGCL, Mr Baxter was under the same duty as any other director to act in
what he in good faith considered to be the best interests of the company. He was under an
obligation not to place himself in a position where his own interests conflicted with his performance
of that duty, and not to act for his own benefit or for the benefit of a third party, in a situation of
potential conflict, without the company's informed consent. The existence of these duties was
unaffected by the fact that Mr Baxter's only reason for becoming a director was to secure tax relief:
his directorship brought with it not only eligibility for taper relief, but also responsibilities of
loyalty and good faith. If he could not discharge those responsibilities, he should not have remained
a director.
[188] Although COGCL was not pursuing offshore opportunities, it is a matter of admission that it
had been involved in pursuing efforts to identify new business opportunities in Azerbaijan. As I
have explained, I accept that the possibility of an agreement with SOCAR relating to the
exploration and development of the Eurasia block would have been of interest to COGCL: the
stronger the possibility of an agreement, the greater the level of interest would have been. At the
very least, a reasonable person would have thought there was a real sensible possibility that the
opportunity to enter into the Memorandum of Understanding would have been commercially
attractive to COGCL. The existence of the opportunity to enter into such an agreement was
therefore information which it was relevant for COGCL to know.
[189] Mr Baxter's duty to act in good faith in the best interests of COGCL encompassed informing
it of matters known to him which it would be in the company's best interests to know about. That
duty conflicted with his personal interest in keeping the information to himself.
[190] When Mr Baxter decided not to disclose to COGCL that there was a possibility of his being
able to secure an agreement with SOCAR relating to the exploration and development of the
Eurasia block, and instead decided to pursue that possibility on his own account, he gave his
personal interests priority over his duty towards the company. He then embarked upon, and
persisted in, a course of conduct which placed his personal interests in conflict with his duty to act
in good faith in the best interests of COGCL. The further his discussions with SOCAR progressed
towards an agreement, the plainer the conflict of interest became, and the more clearly Mr Baxter
subjected the performance of his duty to the company to the pursuit of his personal interest or,
latterly, the interests of Eurasia. His assumption of responsibilities as a director and employee of
Eurasia merely made the conflict more acute. He was under an obligation to serve each company as
faithfully and loyally as if it were his only principal, and plainly he could not do so: he could not
promote COGCL's interests in good faith while concealing from it the existence of the opportunity
which he was attempting to negotiate on behalf of Eurasia.
[191] In these circumstances, I conclude that Mr Baxter acted in breach of the fiduciary duty
which he owed to COGCL.
The case against Eurasia
[192] The claim against Eurasia is concerned with a situation where a third party is said to have
received "a valuable commercial opportunity" from a director, knowing that the director has given it
to them in breach of his fiduciary duties to his company, thereby depriving the company of that
opportunity. The proposition of law on which the claim is based, as encapsulated in the plea in law,
is:
"... [COGCL] having suffered loss, injury and damage by reason of [Mr Baxter's] breaches of fiduciary duties and by reason of [Eurasia's] knowing receipt of a commercial opportunity brought to it in breach of [Mr Baxter's] fiduciary duties ... is entitled to reparation from them."
Counsel for COGCL confirmed in his submissions that the argument was that Eurasia were liable in
damages as accessories to Mr Baxter's breach of fiduciary duty, as a result of their knowing
involvement in that breach as recipients of the Memorandum of Understanding.
[193] The expression "knowing receipt", which appears in COGCL's pleadings, and the expression
"knowing assistance", which also featured in submissions, are commonly used to refer to the two
types of liability described by Lord Selborne LC in Barnes v Addy (1874) 9 L.R.Ch.App. 244 at
pages 251-252:
"[The responsibility of a trustee] may no doubt be extended in equity to others who are not properly trustees, if they are found ... actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust. But ... strangers are not to be made constructive trustees merely because they act as the agents of trustees in transactions within their legal powers, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees."
I note that that dictum is quoted, as a statement of Scots law, in Menzies on Trustees, 2nd ed., at
para 1286. In the first situation described by Lord Selborne, the third party is made liable as a
recipient of trust property or its traceable proceeds. In the second situation, the third party is made
liable to pay compensation as an accessory to the trustee's breach of trust. In the present case,
notwithstanding the reference in the pleadings to "knowing receipt" rather than "knowing
assistance", the claim is of the second kind: COGCL maintain that Eurasia are liable to compensate
them for their loss, as an accessory to the fiduciary's breach of duty, rather than being liable to
restore property held in trust, or liable by reason of unjust enrichment.
[194] The necessary ingredients of such a claim under the law of Brunei were reviewed by
Lord Nicholls of Birkenhead in Royal Brunei Airlines Sdn Bhd v Tan. Money held by a company in
trust for a third party had been misused. The company had not itself been dishonest or fraudulent,
but its managing director had authorised the misuse of the money, knowing that such use was not
permitted by the trust. The issue was whether, as the second part of Lord Selborne's dictum
suggested, the breach of trust which was a prerequisite to accessory liability must itself be a
dishonest and fraudulent breach of trust by the trustee. It was held that it need not.
[195] In the course of his judgment, Lord Nicholls considered the nature of the accessory liability,
and its proper limits. The relevant passages merit extensive quotation. His Lordship began (at pages
386-387) by explaining the rationale of the liability:
"Stated in the simplest terms, a trust is a relationship which exists when one person holds property on behalf of another. If, for his own purposes, a third party deliberately interferes in that relationship by assisting the trustee in depriving the beneficiary of the property held for him by the trustee, the beneficiary should be able to look for recompense to the third party as well as the trustee. Affording the beneficiary a remedy against the third party serves the dual purpose of making good the beneficiary's loss should the trustee lack financial means and imposing a liability which will discourage others from behaving in a similar fashion. The rationale is not far to seek. Beneficiaries are entitled to expect that those who become trustees will fulfil their obligations. They are also entitled to
expect, and this is only a short step further, that those who become trustees will be permitted to fulfil their obligations without deliberate intervention from third parties. They are entitled to expect that third parties will refrain from intentionally intruding in the trustee-beneficiary relationship and thereby hindering a beneficiary from receiving his entitlement in accordance with the terms of the trust instrument. There is here a close analogy with breach of contract. A person who knowingly procures a breach of contract, or knowingly interferes with the due performance of a contract, is liable to the innocent party. The underlying rationale is the same."
His Lordship then discussed the question whether liability should be strict or fault-based. Having
rejected strict liability, for reasons which appear to me to be equally persuasive from the perspective
of Scots law, his Lordship described the nature of the fault required. It was generally accepted that
dishonesty fulfilled that role. In that regard, his Lordship began by explaining (at page 389) what
dishonesty meant in this context:
"Whatever may be the position in some criminal or other contexts (see, for instance, Reg. v Ghosh [1982] Q.B. 1053), in the context of the accessory liability principle acting dishonestly, or with a lack of probity, which is synonymous, means simply not acting as an honest person would in the circumstances. This is an objective standard. At first sight this may seem surprising. Honesty has a connotation of subjectivity, as distinct from the objectivity of negligence. Honesty, indeed, does have a strong subjective element in that it is a description of a type of conduct assessed in the light of what a person actually knew at the time, as distinct from what a reasonable person would have known or appreciated. Further, honesty and its counterpart dishonesty are mostly concerned with advertent conduct, not inadvertent conduct. Carelessness is not dishonesty. Thus for the most part dishonesty is to be equated with conscious impropriety. However, these subjective characteristics of honesty do not mean that individuals are free to set their own standards of honesty in particular circumstances. The standard of what constitutes honest conduct is not subjective. Honesty is not an optional scale, with higher or lower values according to the moral standards of each individual. If a person knowingly appropriates another's property, he will not escape a finding of dishonesty simply because he sees nothing wrong in such behaviour. In most situations there is little difficulty in identifying how an honest person would behave. Honest people do not intentionally deceive others to their detriment. Honest people do not knowingly take others' property. Unless there is a very good and compelling reason, an honest person does not participate in a transaction if he knows it involves a misapplication of trust assets to the detriment of the beneficiaries. Nor does an honest person in such a case deliberately close his eyes and ears, or deliberately not ask questions, lest he learn something he would rather not know, and then proceed regardless."
His Lordship acknowledged that there were some situations where the question was less
straightforward. In that regard, his Lordship said (at pages 390-391):
"The individual is expected to attain the standard which would be observed by an honest person placed in those circumstances. It is impossible to be more specific. Knox J captured the flavour of this, in a case with a commercial setting, when he referred to a person who is
'guilty of commercially unacceptable conduct in the particular context involved:' see Cowan de Groot Properties Ltd v Eagle Trust Plc [1992] 4 All E.R. 700, 761. Acting in reckless disregard of others' rights or possible rights can be a tell-tale sign of dishonesty. An honest person would have regard to the circumstances known to him, including the nature and importance of the proposed transaction, the nature and importance of his role, the ordinary course of business, the degree of doubt, the practicability of the trustee or the third party proceeding otherwise and the seriousness of the adverse consequences to the beneficiaries. The circumstances will dictate which one or more of the possible courses should be taken by an honest person. He might, for instance, flatly decline to become involved. He might ask further questions. He might seek advice, or insist on further advice being obtained. He might advise the trustee of the risks but then proceed with his role in the transaction. He might do many things. Ultimately, in most cases, an honest person should have little difficulty in knowing whether a proposed transaction, or his participation in it, would offend the normally accepted standards of honest conduct. Likewise, when called upon to decide whether a person was acting honestly, a court will look at all the circumstances known to the third party at the time. The court will also have regard to personal attributes of the third party, such as his experience and intelligence, and the reason why he acted as he did. Before leaving cases where there is a real doubt, one further point should be noted. To inquire, in such cases, whether a person dishonestly assisted in what is later held to be a breach of trust is to ask a meaningful question, which is capable of being given a meaningful answer. This is not always so if the question is posed in terms of 'knowingly' assisted. Framing the question in the latter form all too often leads one into tortuous convolutions about the 'sort' of knowledge required, when the truth is that 'knowingly' is inapt as a criterion when applied to the gradually darkening spectrum where the differences are of degree and not kind."
Lord Nicholls then discussed the question whether negligence would suffice for liability. His
conclusion (at page 392) was that it would not ordinarily be appropriate to impose upon persons
dealing with trustees a duty of care towards the beneficiaries of the trust, in the absence of particular
facts which would warrant the imposition of such a duty. It appears to me to be likely that a similar
conclusion would be reached in Scots law. It was not in any event suggested in the present case that
negligence would suffice. Lord Nicholls concluded (at page 392):
"Drawing the threads together, their Lordships' overall conclusion is that dishonesty is a necessary ingredient of accessory liability. It is also a sufficient ingredient. A liability in equity to make good resulting loss attaches to a person who dishonestly procures or assists in a breach of trust or fiduciary obligation. It is not necessary that, in addition, the trustee or fiduciary was acting dishonestly, although this will usually be so where the third party who is assisting him is acting dishonestly. 'Knowingly' is better avoided as a defining ingredient of the principle."
[196] As that passage makes clear, the liability is not confined to breaches of trust, but also applies
in respect of breaches of fiduciary obligations. In Brown v Bennett [1999] 1 B.C.L.C. 649 it was
considered by the Court of Appeal to be arguable that the liability applied not only in relation to
property but in relation to all breaches of directors' fiduciary duties in relation to the management of
a company.
[197] I do not doubt that Scots law also imposes a liability upon a third party who participates in a
breach of trust or fiduciary duty. Whether the test of liability is precisely the same as in English law
was disputed in argument: counsel for COGCL implicitly maintained that liability attached to a
person who knowingly participated in a breach of trust, whereas counsel for Eurasia maintained, on
the authority of Royal Brunei, that dishonesty was required. Neither counsel developed any analysis
of Scots law which might bear on this point. Such an analysis might involve considering whether
the liability of a trustee who commits a breach of trust to make good to the trust estate the loss
which he has caused is aptly characterised as delictual, or as a liability in damages (cf. Menzies on
Trustees, para 1071; Hobday v Kirkpatrick's Trustees 1985 S.L.T. 197; Tibbert v McColl 1994 S.C.
178; cf. Chambers, "Liability", and Mitchell, "Assistance", in Birks and Pretto eds., Breach of
Trust); whether the liability of a company director who acts in breach of his fiduciary duty to
compensate the company for the resulting loss is of the same character; and whether the accessory
liability of a third party who assists in a breach of trust or fiduciary duty is a liability in damages.
Consideration could then be given to whether the delictual liability for assisting a party in breaching
his contract, knowing of the contract and intending to cause its breach, as explained in OBG Ltd v
Allen [2007] 2 W.L.R. 920, is an illustration of a wider principle of accessory liability in delict for
knowingly assisting in wrongdoing, as suggested in Lumley v Gye (1853) 2 E&B 216 at page 232
per Erle J, in Allen v Flood [1898] A.C. 1 at pages 96 and 106-107 per Lord Watson, and in OBG
Ltd v Allen at paras 8 and 36 per Lord Hoffmann. If so, consideration could then be given to
whether the accessory liability of the person who assists in a breach of trust or fiduciary duty falls
within the scope of that principle. If so, then the mental element involved in liability would appear
to be whether the person who assisted in the breach of trust or fiduciary duty did so knowingly and
intentionally, as those concepts were explained in OBG Ltd v Allen at paras 39-43 and 69 per
Lord Hoffmann and at paras 191-192 and 202 per Lord Nicholls of Birkenhead. If, on the other
hand, the accessory liability of such a person is not properly characterised as delictual, but derives
from the law of trust, then the mental element may not necessarily be the same: as in relation to
some other questions relating to breaches of trust or fiduciary duty and the position of third parties,
the concepts of good faith and bad faith might be relevant (cf. the line of authority from Thomson v
Clydesdale Bank Ltd (1893) 20 R (H.L.) 59 to Style Financial Services Ltd v Bank of Scotland 1996
S.L.T. 421 and Bank of Scotland v MacLeod Paxton Woolard & Co 1998 S.L.T. 258). In that
regard, consideration might be given not only to Royal Brunei and the subsequent decisions of the
Privy Council and the House of Lords, but also to the approach adopted by the High Court of
Australia (most recently in Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] H.C.A.22), as
well as to the relevant Scottish authorities.
[198] Although the concepts of "knowingly" and "dishonestly" (or "in bad faith") participating in a
breach of fiduciary duty are not precisely the same, the distinction between them is not of critical
importance in the present case. They issues appear to me to be of central importance to the claim
made against Eurasia: first, whether (as COGCL maintain) Mr Baxter's state of mind can be
attributed to Eurasia; and, secondly, whether Mr Baxter's state of mind was such that, were it
attributable to Eurasia, their conduct would amount to knowing or dishonest participation in his
breach of fiduciary duty.
[199] It is convenient to begin by dealing with the second of those issues. As I have explained, I
have come to the conclusion, albeit with some hesitation, that Mr Baxter did not realise that he was
acting in breach of his obligations to COGCL. Given that conclusion, if follows that COGCL have
failed to establish their claim that Eurasia knew, via Mr Baxter, that they had secured the
Memorandum of Understanding in breach of his fiduciary duty, even if Mr Baxter's knowledge can
be attributed to Eurasia. As Lord Hoffmann said in OBG Ltd v Allen at para 39, in relation to
inducement of a breach of contract:
"To be liable for inducing breach of contract, you must know that you are inducing a breach of contract. It is not enough that you know that you are procuring an act which, as a matter of law or construction of the contract, is a breach. You must actually realize that it will have this effect. Nor does it matter that you ought reasonably to have done so."
[200] In view of my conclusion that Mr Baxter did not knowingly act in breach of his fiduciary
duties, there is no question of my finding that he acted dishonestly or in bad faith. As Lord Nicholls
said in Royal Brunei at page 389, honesty is "assessed in the light of what a person actually knew at
the time, as distinct from what a reasonable person would have known or appreciated". There is no
suggestion in the present case that Mr Baxter wilfully or recklessly closed his eyes to the possibility
that his conduct might be in breach of his fiduciary duty.
[201] In the circumstances, it is unnecessary for me to reach any conclusion on the question
whether Mr Baxter's state of mind can be treated as that of Eurasia. I should however make some
observations in relation to that question.
[202] COGCL's claim proceeds on the basis that, because Mr Baxter was a substantial shareholder
in Eurasia, one of its directors (from 31 March 2005), its president and its chief executive officer
(from 28 November 2005), it follows that his knowledge can be attributed to Eurasia.
[203] Counsel for COGCL relied on the "directing mind and will" theory, as explained by
Hoffmann LJ in El Ajou v Dollar Land Holdings plc. I note that Lord Hoffmann discussed the issue
more fully in Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 A.C.
500, drawing a distinction (at pages 506-507) between primary, general and special rules of
attribution. The company's primary rules of attribution are generally found in its constitution, and in
company law. The general rules of attribution are the principles of agency and vicarious liability.
Special rules of attribution apply "when a rule of law, either expressly or by implication, excludes
attribution on the basis of the general principles of agency or vicarious liability" (page 507). In such
circumstances, "the rule of attribution is a matter of interpretation or construction of the relevant
substantive rule" (ibid).
[204] In the present case, there was no argument directed to the question whether the relevant rule
of law - namely, the rule imposing accessory liability on a person who knowingly and intentionally
participates in a breach of fiduciary duty (or on a person who does so dishonestly, depending on
how the rule is correctly stated) - is consistent with the company's primary rules of attribution
together with the general principles of agency, or (as I am inclined to think) requires a special rule
of attribution. If the primary rules are applicable, there is no evidence as to the articles of
association or other constitutional documents of Eurasia. If the general principles of agency are
applicable, there is no evidence as to the nature and extent of Mr Baxter's authority in relation to the
pursuit of the Memorandum of Understanding on Eurasia's behalf, or as to when or by whom the
relevant decisions were taken. In that regard, the present case might be contrasted with El Ajou,
where the director in question "was clearly regarded as being in a different position from the other
directors" and committed the company to the transaction in question "as an autonomous act"
without any board resolution authorising him to do so (per Hoffmann LJ at pages 706-707). No
information of that kind has been placed before the court in the present case. The basis on which the
claim was presented - that a person who was a substantial shareholder, a director, the president and
the chief executive officer could ipso facto be described in a general sense as the "directing mind
and will" of the company - does not in my opinion reflect the correct approach.
[205] Nor do I accept that Eurasia can simply be treated as a "vehicle" or instrument employed by
Mr Baxter: it appears to be a public company with numerous shareholders and with other officers
besides Mr Baxter, which had an existence for more than a year before it became involved in
Mr Baxter's dealings with SOCAR. I note that it was not in any event suggested that the corporate
veil should be lifted, so that Eurasia could on that basis be treated as the same person as Mr Baxter.
Conclusions
[206] I accordingly conclude that Mr Baxter acted in breach of his fiduciary duty to COGCL when
he pursued the Eurasia block opportunity for his own benefit, or latterly for the benefit of Eurasia,
without having first disclosed the existence of that opportunity to COGCL and obtained their
permission. I also conclude that Eurasia did not knowingly or dishonestly participate in that breach
of duty, and are therefore not under any liability to compensate COGCL for any loss which they
may have suffered in consequence.
[207] The case will be put out for a hearing to discuss the appropriate form of order, and future
procedure, in the light of these conclusions.
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