Interleasing (UK) Ltd v Morris

1. LORD JUSTICE PETER GIBSON: The defendant and Part 20 claimant, Nicholas Morris, appeals with the permission of this court (Sir Martin Nourse) from the order of Lightman J on 30th ^_ May 2002 deciding adversely to Mr Morris various points arising on interlocutory applications made by Mr Morris and the claimant, Interleasing (UK) Ltd, respectively.

The facts

2. By an Agreement dated 8th July 2000 Mr Morris and his wife ("the Sellers") agreed to sell to the claimant all the issued shares in Concept Automotive Services Ltd ("the Company"). The consideration for the sale was (1) £39,773,505 payable immediately, and (2) as much of a retention sum of £4,500,000 as should be released to the Sellers pursuant to Schedule 9 to the Agreement. Completion was to take place that day. Mr Morris gave the claimant a number of warranties. They included, in paragraph 6.2 of Schedule 5 to the Agreement, a warranty that the net asset value ("the NAV") of the Company at 31st May 2000 was not less than £8,815,000. There were some qualifications but they are not material. By paragraph 1 of Schedule 6 to the Agreement the claimant had to give written notice containing reasonable details of the specific circumstances giving rise to a warranty claim. That had to be done by 8th January 2002. Paragraph 3.1 of that Schedule provided that a warranty claim should not be enforceable against Mr Morris and should be deemed to have been withdrawn unless any legal proceedings in connection with it were commenced within six months after written notice of it was first served on Mr Morris. By Schedule 8, paragraph 10, provision was made for a reference to an independent firm of experts in relation to matters specified in that paragraph.

3. Schedule 9 contained details of the arrangements relating to the retention sum. That sum was to be retained in an interest bearing deposit account in the names of the solicitors for the Sellers and the claimants respectively. It was to meet claims by the claimant for breach of warranty and could only be released in accordance with the terms of the Schedule. In the Schedule the claimant is called "the Buyer". In paragraph 1 of that Schedule the terms "Credit Balance", being the credit balance on the deposit account, and "Payment Date", being in the event 30th June 2001, were defined. Other relevant paragraphs of the Schedule were the following:

"3 Subject as set out below, any Credit Balance on the Payment Date will be paid to the Nominated Account and the Sellers' Solicitors receipt for this money will be a good discharge for it.

4 Once a Claim has been settled or resolved whether before or after the Payment Date and the amount due to the Buyer has been determined, an amount equal to that agreed amount (plus any interest earned on that amount (insofar as there is sufficient money in the Deposit Account to do so)) will be paid to the Buyer and/or the Company (as appropriate) out of the Deposit Account.

5 If on the Payment Date there is one or more outstanding Good Claim, the amount due to be released to the Sellers' Solicitors on the Payment Date shall be reduced by a sum equal to the aggregate of all outstanding Good Claims, but for the avoidance of doubt the amount shall not be reduced by the amount of any other claims.

6 In the event that the Buyer receives unconditional payment of all or part of its entitlement in respect of a Claim directly from the Warrantor then the equivalent of any amount so retained or withheld in respect of that Claim shall be immediately released to the Sellers' Solicitors.

7 If any money is retained in the Deposit Account after the Payment Date as a result of the operation of paragraph 5, it will be held in the Deposit Account until the Claim in question has been settled or resolved.

8 Any Credit Balance after all Good Claims which were outstanding on the Payment Date have been settled or resolved, is payable to the Warrantor whose receipt is a good discharge for this payment.

9 The payment of any sum to the Buyer and/or the Company (as appropriate) under this Schedule in no way prejudices or affects any other rights or remedies of the Buyer or the Company to recover any amount due to them which is not satisfied in full by a payment out of the Deposit Account.

10 For the purposes of this Schedule:

10.1 any Claim notified under paragraph 4 is deemed to have been withdrawn if legal proceedings have not been issued and served within 6 months of the Claim being so notified;

10.2 a Claim is deemed settled when the Parties agree a final settlement and a Claim is deemed resolved when an order or a decree of a competent Court has been given in proceedings relating to that Claim and that order or decree is final and non-appealable (or the Buyer has indicated that it does not intend to appeal);

10.3 the amount determined to be payable on settlement or resolution of the Claim is either agreed by the Parties or else imposed by a competent court;

10.4 a 'Good Claim' means a Claim in respect of which Counsel of at least ten years call has given a recent opinion to the Buyer in writing stating that the Claim in question is bona fide and has a reasonable chance of success and estimating its quantum. The amount so estimated plus a reasonable estimate of costs shall be the amount retained in the Retention Account in respect of any relevant Claim.

10.5 The Buyer and the Warrantor shall promptly give all such instructions to the Buyer's Solicitors and the Sellers' Solicitors as are necessary to give effect hereto and neither the Buyer's Solicitors nor the Sellers' Solicitors shall be obliged to take action other than as instructed in writing by the Buyer or the Warrantor jointly, or under an order of a court of competent jurisdiction."

Paragraph 10.4 is the provision most material to the present dispute.

4. On 28th June 2001 the solicitors to the claimant by letter notified Mr Morris of a NAV warranty claim. They referred to paragraph 6.2 of Schedule 5 and to itemised summaries of total fixed assets of the Company at 31st May and 30th ^_ June 2000 as showing that those assets included goodwill figures of £3,022,578 and £3,162,261 respectively for the business ("the N&M Business") which had previously been carried on by Mr Morris as sole trader but had been transferred to the Company on 28th April 2000. They also referred to goodwill for the N&M Business of £3,162,261 as being written off by the company's auditors because the N&M Business was not profitable and had no prospect of becoming profitable. They referred to paragraph 10.4 of Schedule 9 and said that, in compliance with that provision, they enclosed a written Opinion of counsel, Sandra Bristoll, as expressing the opinion that the first two criteria of paragraph 10.4 had been fulfilled and as estimating the quantum of the claim as £3,269,000. They said that their estimate of costs in regard to the claim was £100,000 and they expressed the view that the amount to be released on the Payment Date should be reduced by £3,369,000.

5. Counsel was of more than 10 years call. She expressed herself in the Opinion in this form:

" INTRODUCTION

1. I am asked by my Instructing Solicitors, who act for GMAC International Corporation/Interleasing (UK) Limited ("GMAC") to advise on whether or not GMAC are entitled to make any deduction from the retention sum based on a breach of warranty claim. Before any such deduction can be made, GMAC need to obtain an opinion in writing that they have a 'Good Claim'. In reaching such an opinion, cl.10.4 in Schedule 9 to the Sale Agreement provides that I must deal with the following issues in my Opinion:

a. whether or not the claim is bona fide;

b. whether the claim has a reasonable chance of success;

c. what estimate can be placed on the quantum of any such claim.

2. The basic thrust of this claim relates to the fact that in the accounts of Concept Automotive Services Limited ('the Company') for the year ended 31 December 2000, goodwill of £3,269m has been written off, thereby reducing the Company's assets. This goodwill relates to the purchase by the Company of the N&M Business.

3. The stance adopted by GMAC is that:

a. the writing off of this goodwill has thereby reduced the Company's assets and Net Asset Value (`NAV').

b. this goodwill element was in the Company's balance sheet as at Completion of the Sale Agreement and was therefore not a true asset to this extent, and.

c. the NAV should have been reduced accordingly.

4. I am instructed that the vendors' position appears to be that GMAC had notice of the goodwill element in the Company's balance sheet at closing and therefore had notice of it.

5. My Instructions are that GMAC apparently take the view that they were aware of the goodwill figure, but did not believe that it would be written off by the auditors. GMAC also seek to rely on clause 6.6 of the Sale Agreement and upon the Disclosure Letter in relation to the Company's Management Accounts, which included the assets and liabilities of the transferred N&M Business.

6. For the reasons set out in detail below, I am of the view that:

a. there is no reason on the information before me to question the bona fides of GMAC's potential claim.

b. in assessing whether or not the claim has a 'reasonable chance of success', I must give those words their ordinary meaning. Its prospects of success must therefore in my view be more than fanciful and capable of reasoned assessment.

c. I have been instructed that the NAV in the Sale Agreement included over £3m goodwill in respect of the N&M Business, which ought not to have been included; this goodwill element can be seen in the itemised summary of the Company's total fixed assets as at 31 May 2000. I am instructed that had this goodwill element been excluded, the NAV and the purchase price would have been reduced.

d. on the information presently available, I am of the view that the claim appears to have a reasonable chance of success.

e. on the information presently available, the only estimate which I could put upon the quantum of any such claim would be £3.269m, i.e. the amount written off in the accounts. This figure may well alter once valuation and accountancy evidence has been obtained by the parties.

f. moreover, it may well be that the quantum of the claim exceeds the goodwill figure, depending upon the impact the true position would have had on the purchase price paid by GMAC. I am instructed that the NAV was an important element in determining the opening level of equity and the future dividends for the Company and therefore any inaccuracy in the NAV would have had an effect on the dividend levels."

6. In paragraphs 7 and 8 she dealt with the construction of the contract. In paragraph 9 she said:

"9. The key issue for present purposes, upon which I am asked to advise, is whether or not there has been a breach of the NAV Warranty given in para 6.2 of Schedule 5 to the Sale Agreement.

NET ASSET VALUE

10. The starting point for any review of the NAV Warranty is the definition in the Agreement of 'Net Asset Value' in cl.1.1 of this Sale Agreement.

11. I am advised by the Company's auditors that the goodwill has been written down because the N&M Business was not profitable and had no prospect of becoming profitable. In fact, no premium should have been paid in the view of the auditors over the book value of N&M's tangible assets.

12. It appears from the itemised summary of total fixed assets of the Company as at 31 May 2000 that a goodwill figure for the N&M Business of £3,162,261 was included in respect of that investment. In the absence of this goodwill, it would appear that the NAV would have been reduced.

13. Accordingly, on the assumption that the goodwill attributable to the Company's investment in the N&M business was taken into account in calculating the Company's NAV and that the goodwill was in fact over-valued by over £3m, my view is that there is a reasonable chance that GMAC will be able to demonstrate that there has been a breach of the NAV Warranty.

OTHER WARRANTIES

14. I have not yet seen the Company's complete Management Accounts for 31 May 2000 but I have been provided with the Company's balance sheet at that time, with an itemised summary of the total fixed assets. This clearly includes a sum in respect of goodwill arising on the investment in the N&M Business of £3,162,261.

15. Furthermore, it should be noted that the Disclosure Letter deals expressly with para 5.9 in Schedule 5. It states that the Management Accounts of the Company for the period ended 31 May 2000 materially reflect the assets and liabilities of the Company (including such assets and liabilities as transferred to the Company by N&M). If there is an issue about the true assets transferred i.e. the goodwill element, then this may be a possible route to investigate. The most recent management accounts, which I have seen from N&M, date from March 2000 and show total net assets on the balance sheet of approx. £1m. Given that the purchase price was £4m, there must have been a significant goodwill element involved. It is this goodwill element which is now under scrutiny.

16. It therefore appears that there may be scope for making a warranty claim related to the value of the N&M Business.

STATE OF GMAC's KNOWLEDGE AS AT COMPLETION

17. Clause 6.6.2 provides that GMAC's rights and remedies for breach of warranty are not affected by the fact that GMAC or its advisers has undertaken any investigation into the affairs of the Company save where the findings of such investigation make GMAC actually aware of a fact or matter which could give rise to a warranty claim.

18. It is unclear to me that the work done by Deloitte & Touche for GMAC in fact revealed the facts upon any NAV Warranty claim is now sought to be based. Their report did not deal in any detail with the acquisition of the N&M Business and did not analyse the price paid for that business.

19. I have not seen all of the Disclosed Documents or the further information obtained by GMAc as a result of their inquiries. However, at this stage, on the information presently available, it appears that GMAC were not aware of the true value of the goodwill connected with the acquisition of the N&M Business.

20. The vendors' position that GMAC had notice of the goodwill element in the Company's accounts does not provide a sufficient answer in my opinion. The mere fact that a goodwill element was included in the balance sheet position cannot detract from the fact that the vendors had warranted the NAV and the value of the assets included in the Company's Management Accounts, including those of the N&M Business, which appear to have been overstated.

DAMAGES.

21. It is for GMAC to prove both the fact of the loss and the quantum of the damage. SENATE ELECTRICAL -v- STC [1999] 2 LLR 423, 430 paras 30-32.

22. Clause 7.6 of the Sale Agreement provides that any NAV Warranty Claim shall be satisfied by the payment by the Warrantor to the Buyer of an amount equal to the amount (in pounds) of the shortfall between the amount warranted in the NAV warranty and the actual Net Asset Value.

23. As set out above, at this stage the only figure which I am able to put on this shortfall is the amount of goodwill now being written off by the Company's auditors. The direct correlation of the written off goodwill to the reduction in the NAV will have to be justified and it may well be that the purchase price paid for the Company will need to be revisited as a whole. The only sensible estimate, which can be made at this stage, is that the full amount written off in the draft year end accounts is the amount of GMAC's loss.

CONCLUSION .

24. For the reasons set out above:

a. there is no reason on the information before me to question the bona fides of GMAC's potential claim.

b. in assessing whether or not the claim has a `reasonable chance of success', I must give those words their ordinary meaning. Its prospects of success must therefore in my view be more than fanciful and capable of reasoned assessment.

c. I have been instructed that the NAV in the Sale Agreement included over £3m goodwill in respect of the N&M Business, which ought not to have been included; this goodwill element can be seen in the itemised summary of the Company's total fixed assets as at 31 May 2000. I am instructed that had this goodwill element been excluded, the NAV and the purchase price would have been reduced.

d. on the information presently available, I am of the view that the claim appears to have a reasonable chance of success.

e. on the information presently available, the only proper estimate which I could put upon the quantum of any such claim would be £3.269m, i.e. the amount written off in the accounts. However, it should be borne in mind that unless and until expert accountancy and valuation evidence has been obtained to perform the exercise of calculating the NAV, I am not able to advise in any detail on the issue of quantum.

f. moreover, it may well be that the quantum of the claim exceeds the goodwill figure, depending upon the impact the true position would have had on the purchase price paid by GMAC. I am instructed that the NAV was an important element in determining the opening level of equity and the future dividends for the Company and therefore any inaccuracy in the NAV would have had an effect on the dividend levels.

25. Accordingly, for the reasons set out above, I am of the Opinion that GMAC's NAV Warranty Claim has a reasonable chance of success and that therefore GMAC ought to be entitled to make a deduction from the Retention Sum in accordance with para 5 of Schedule 9 to the Sale Agreement."

Accordingly, £3,369,000 was retained and not paid over to Mr Morris.

7. On 20th ^_ December 2001 the claimant commenced proceedings against Mr Morris. The claimant claimed damages for breach of warranty. In paragraph 8 of the particulars of claim it was pleaded that neither a warranty called "the assets warranty" nor the NAV warranty was true, and then particulars are given of that averment:

"iii) the Management Accounts which were provided pursuant to the Agreement attached to the Disclosure Letter showed Total Net Assets of £8,815,489;

iv) the figure for Total Net Assets included in the Management Accounts took into account a valuation of the goodwill of the N&M Business as at 31 May 2000 of £3,022,578;

v) similarly, the calculation of the Net Asset Value of Concept took into account a valuation of the goodwill of the N&M Business as at 31 May 2000 of £3,022,578;

vi) the preliminary statutory accounts for the N&M Business for the 11 months to 30 April 2000 (which were not disclosed to Interleasing at the time of the Agreement) show that N&M Business made profit before tax of just £18,000 in that period;

vii) in the premises, the goodwill of the N&M Business was not worth £3,022,578 on 31 May 2000;

viii) instead, the goodwill of the N&M Business had no value on 31 May 2000;

ix) accordingly, the Net Asset Value of Concept was overstated by £3,022,578;

x) in the premises:

a) the Total Net Assets of Concept in the Management Accounts were materially mis-stated and the figure for those assets in those accounts was materially inaccurate;

b) the Net Asset Value of Concept was £3,022,578 less than £8,815,000."

8. It will be noted that the figure given for goodwill for the N&M Business at 31st May 2000, and not the higher figure at 30th ^_ June 2000 which had been relied on by counsel, was the figure used by the claimant in its pleaded case.

9. Mr Morris in his particulars of defence denied the claim and he counterclaimed for the balance of the retention sum. It was averred in paragraph 27 as amended (the amendment being underlined):

"It was an implied term of Schedule 9 of the Agreement (as a matter of necessary implication by reason of the use of the words in clause 10.4 of Schedule 9 of the Agreement, alternatively business efficacy) that any Opinion of Counsel should be given on the basis of true facts and proper instructions allowing Counsel to explore the full merits of the claims made, alternatively on a true construction of the words used in clause 10.4 of Schedule 9 of the Agreement any opinion was to be given on the said basis ."

10. It was further averred that the Opinion did not establish a good claim, as it was based on apparently erroneous and incomplete instructions and did not fulfil the requirements of paragraph 10.4. Nine paragraphs of particulars are then given, most of which were repeated in the arguments presented to the judge and also repeated in this court. Although there is reference to the instructions provided to counsel, the claimant has not disclosed those instructions, for which it claimed privilege. Mr Morris averred that accordingly the claimant had no good claim, alternatively the Opinion was obtained in breach of the pleaded implied term. He therefore sought to be paid the £3,369,000 which had been retained, plus interest.

11. Four applications were heard by the judge in April 2002: (1) Mr Morris applied on 22nd March 2002 under CPR 31.12 for specific disclosure of the instructions to counsel and/or under CPR 31.19 for an order that the claimants' claim that it was entitled to withhold inspection of those instructions on the ground of privilege be rejected because privilege had been waived by the provision of the Opinion.

(2) The claimant applied on 28th March 2002 for the striking out of paragraph 27 or for summary judgment in its favour in respect of Mr Morris's pleaded assertion in paragraph 27 that there was an implied term to be read into the Agreement.

(3) The claimant applied on 16th ^_ April 2002 for the striking out of other specified pleaded assertions by Mr Morris in his counterclaim relating to the implied term.

(4) Mr Morris applied on 3rd May 2002 for summary judgment on his claim for the release from the deposit account of £3,369,000, or such other sum as the court might decide, and or damages. I note that the fourth application was made by Mr Morris in the course of the hearing before the judge, even though he had not seen the instructions which he had argued he needed in order to decide whether to apply for summary judgment.

12. The judge in his judgment dealt first with the status of the Opinion. He referred in paragraphs 13 and 14 of the judgment to the rival arguments of the parties. For the claimant it had been argued that the role of the Opinion was as a certificate certifying the existence of a good claim and that, so long as the conditions specified in paragraph 10.4 were complied with, the consequence was that the amount estimated by counsel as the quantum of the warranty claim, plus a reasonable estimate of costs, would be retained until trial. It was further argued that it was not open to Mr Morris or the court to investigate the cogency of the reasoning or the factual or legal basis for the view expressed by counsel in her opinion. For Mr Morris it was contended that by reason of the alleged implied term, or on the true construction of Schedule 9, any opinion of counsel had to be given on the basis of the true facts and proper instructions. It was also contended that Mr Morris was entitled to disclosure of the instructions.

13. The judge then said this in paragraphs 15 and 16 of judgment:

"15 In my view the role of the Opinion is to act as a filter on warranty claims by the Claimant which operate to withhold payment to the Defendant of the Retention: a warranty claim can only bar payment of the Retention to the Defendant if and so far as the Warranty Claim surmounts the hurdle of obtaining the (limited) endorsement required by paragraph 10.4 of Schedule 9 of an Opinion of Counsel of ten years call to the effect stipulated. The protection afforded to the Defendant is that he may expect (reasonably) experienced Counsel only to express an opinion in the terms required when it is professionally proper to do so. I do not think that by way of implied term or as a matter of construction the Opinion only has effect if given on the basis of true facts or proper instructions or that the existence of true facts or proper instructions is a matter which is open to investigation. I do not think that it is necessary to read into the paragraph any such limitation or condition or that to do so fulfils what can be assumed to have been the common expectations of the parties. The parties expected that Counsel and instructing solicitors would have the necessary expertise and experience and comply with the professional standards necessary to ensure that only proper and substantial claims obtained the protection of security in the form of the Retention and precluded prompt payment of the full purchase price by the Defendant. The implication and construction suggested by the Defendant has two inseparable difficulties. First at no stage prior to judgment at the trial of the action will it be known with any certainty what are the true facts and whether the instructions to Counsel are proper in the sense of according with the facts and (in all probability) the parties' legal rights. The whole premise on which the provision is made for the Opinion is that at the stage at which it is required the facts are uncertain and in all likelihood in issue: its role is to play a part in the regulation of the parties' affairs in these uncertain times pending the clarification and certainty to be afforded by final judgment in the action. Second the parties cannot conceivably have intended the existence of parasitic litigation directed at ascertaining (most particularly at the interlocutory stage when the issue of payment of the Retention most acutely arises) the truth of the facts stated and the propriety of the Instructions. Indeed the purpose of the provisions of Schedule 9 and the focus on Counsel's Opinion is surely to put in place a scheme obviating the need or occasion for interim judicial determination of the question whether a claim by the Claimant is such as to justify the Claimant in withholding part of the purchase price.

16 In my view it is not open to the Defendant to go behind the Opinion and challenge it on the ground that it was not given on the basis of true facts or proper instructions. The Opinion stands as a form of certificate and the only issue can be whether on its face it fulfils the requirements laid down in paragraph 10.4 of Schedule 9."

14. The judge accordingly struck out the pleaded implied term and the other averments in the counterclaim which related to that implied term. He also refused to order disclosure of the instructions. He indicated that, if he had accepted the implication of the term, as argued by Mr Morris, he would have held that there had been a waiver of privilege in respect of the Opinion and that it would not be fair to allow such waiver without the waiver of privilege in respect of the instructions. The judge then dealt with four challenges by Mr Morris to the sufficiency of the Opinion, all of which the judge rejected.

15. On this appeal Mr Richard Morgan for Mr Morris submits that the judge erred on six grounds. Those grounds of appeal are in an order different from that in which the points are dealt with by the judge in his judgment. Miss Catherine Otton-Goulden QC, appearing with Ms Lester for the claimant, supports the judge's judgment on all those six points. She has also sought by way of a Respondent's Notice to support the judge's conclusion in relation to the application for disclosure of the instructions on the further ground that there was no waiver of privilege in the instructions.

16. I find it convenient to deal with the grounds in the same order as the judge deals with the points which are thereby raised. I will start with the sixth ground, relating to the alleged implied term, and deal with that before the fifth ground, relating to the disclosure of the instructions. As the judge said, if Mr Morris is right on the implied term, then that will bear on whether the instructions should be disclosed. I will then deal with grounds one to four, relating to whether the Opinion complied with the requirements of paragraph 10.4.

The sixth ground: Implied term

17. Mr Morgan submits that the judge was wrong to strike out the implied term. He describes the judge's decision as startling. He says that it could not have been the intention of the parties to the Agreement that the claimant could properly rely on an Opinion which is based on an allegation which was not in fact true or on instructions which sought to limit counsel's consideration to confirming a line of reasoning set out in their assertions in the instructions. If Mr Morgan is right, Mr Morris is given by the Agreement full scope to challenge the Opinion by reference to those of the contents of the instructions with which he disagrees. As the judge recognised, the correctness of such submissions turns on what can be seen to be the function of the Opinion.

18. I agree with the judge that the Opinion was intended to be a form of certificate so as to give Mr Morris some protection in relation to claims which the claimant chose to assert. Counsel had to be reasonably experienced, hence the requirement that counsel be of more than ten years call. Counsel had to express a view as to the prospects of success for the claim and as to the quantum of that claim. I, of course, accept that such counsel might give wrong advice on incorrect instructions, but I find it impossible to believe that the parties intended at the stage when the Opinion was given, that is to say almost certainly before proceedings were commenced and before trial and before Mr Morris's response to the claim was known, that Mr Morris should be able to challenge the facts presented to counsel or the propriety of the instructions. The validity of the claim vouched for by counsel is a matter which will be determined at the trial and the provision of the Agreement requiring that proceedings be commenced within six months of the notification of the claim is an indication that the parties expected that resolution of the dispute would not be long delayed. If Mr Morris succeeded in resisting the claim and was able to call for the retention, then he would have the benefit of the interest payable on the amount retained in the deposit account. We are told by Mr Morgan that Mr Morris would like to invest the money at a higher rate, but he is stuck with the contractual terms as to the deposit account.

19. It is well established that no term is to be implied into an agreement unless it is necessary to do so. It is suggested that it is so necessary by reason of the use of language in paragraph 10.4, alternatively in order to give business efficacy to the Agreement. In my judgment, the test of necessity is not satisfied. Indeed, it seems to me plain that, so far from being necessary, the implied term would run counter to the efficacy of the provisions of Schedule 9, providing, as they do, for the Opinion to be given at a time when facts which may be disputed and contentions which may be resisted have not been determined but which it was contemplated would be determined by timely proceedings on the claim. I can see no basis for implying the suggested term into the Agreement. I do not accept that on the true construction of the words used in paragraph 10.4 any opinion had to be given on the suggested basis. Such a basis would have been likely to be productive of extensive argument which would not serve any useful purpose.

20. It follows that I accept the judge's view on the implied term and I would reject the first ground of appeal.

Ground five: Disclosure of instructions

21. Mr Morgan repeated before us the argument that the instructions should be disclosed. He said that the Opinion and the instructions were, in effect, a single document or transaction and that the instructions were necessary for a fair reading and understanding of the Opinion. He pointed to the fact that, as the judge said, the Opinion made constant reference to the contents of the instructions. We have had our attention drawn to the remarks of Auld LJ, with whom Popplewell J agreed, in the Divisional Court in The Queen v Secretary of State for Transport ex parte Factortame [1997] 9 ALR 591 at pages 598 to 599. There Auld LJ cited what Mustill J had said in Nea Karteria Maritime Co. Ltd v Atlantic & Great Lakes Steamship Corporation (No.2) [1981] Comm.LR 138 and 139. Auld LJ said at page 599:

"Much depends on whether the party making partial disclosure seeks to represent by so doing that the disclosed documents go to part or the whole of an 'issue in question', ... The issue may be confined to what was said or done in a single transaction though it may be more complex than that and extend over a series of events or transactions. In each case the question for the court is whether the matters in issue and the document or documents in respect of which partial disclosure has been made are respectively severable so that the partially disclosed material clearly does not bear on matters in issue in respect of which material is withheld. The more confined the issue, for example as to the content of a single document or conversation, the more difficult it is likely to be to withhold, by severance, part of the document or other documents relevant to the document or conversation."

22. In Phipson on Evidence, 15th ^_ Edition, at paragraph 22, the editors refer to that passage and comment:

"What constitutes 'the issue in question' will always be a question of fact. It is necessary to identify the purpose of the waiver, and to see what fairness demands in the circumstances. In general, the courts have not extended the ambit of the waiver beyond what is necessary and if in doubt have taken a relatively restricted view of 'the issue in question'."

23. As Miss Otton-Goulden submitted in her skeleton argument, the important question is to ask in respect of what issue the Opinion was supplied to Mr Morris. I agree with her that the issue was simply whether there had been compliance with the requirements of paragraph 10.4. The instructions do not seem to me to be relevant to that issue. The mere fact that counsel refers to the instructions does not make them disclosable, because counsel had made plain in the Opinion what were her instructions. I can, of course, conceive of cases where the instructions may be relevant: if the Opinion, for example, simply incorporates the facts stated in the instructions without stating what they were. But this Opinion is not like that. I agree with the judge that the instructions in the present case are not a relevant document. It is not, therefore, necessary to decide the question raised by the Respondent's Notice and we heard no argument on it.

Ground 1: Bona fides

24. Paragraph 10.4 requires counsel to state in the Opinion that the claim is bona fide. Two questions are raised by Mr Morgan's challenge to the satisfaction of that requirement: (1) Is an express statement to that effect required? (2) If not, was there an implicit statement in the Opinion that the claim was bona fide?

25. The judge in paragraph 23 of his judgment said that he had been greatly troubled by the absence of an explicit statement. In paragraph 24 the judge said that there was nothing in the language of the Agreement which required an express statement. What was required was that the satisfaction of counsel on that score was to be found in the terms of the Opinion. He added that whilst it was obviously desirable that the satisfaction was stated expressly, that was not essential if the implication was clear and unequivocal.

26. The judge continued:

"25 The second question is whether the Opinion contains such an implicit statement that the claim is bona fide. What the Opinion does state is: (i) that a question to be addressed is whether or not the claim is bona fide; (ii) (twice) that on the information before her Counsel had no reason to question the bona fides of the claim; and (iii) (in the conclusion) that for the reasons set out above the claim had a reasonable prospect of success and that therefore the Claimant was entitled to make a deduction from the Retention in accordance with paragraph 5 of Schedule 9. In deciding whether these elements of the Opinion constitute the necessary implicit statement it is necessary to have in mind the relationship between the two required constituents of a Good Claim, namely bona fides and a reasonable prospect of success. Bona fides can only go to the question whether the claim is honestly brought and in particular whether it is brought for some dishonest or improper purpose. It would be an improper purpose if the purpose was to afford a pretext for holding on to the Retention when there is (to the knowledge of the Claimant) no proper or sufficient cause. There is however limited (in any) scope for any such improper purpose if the claim has any reasonable prospect of success. If the Claimant's claim has a reasonable prospect of success, as the Opinion held, that of itself is a substantial (if not sufficient) basis for holding that the claim was bona fides. Indeed it is not easy (even if it is possible) to see how in this case a claim with the necessary prospect of success could be otherwise than bona fide. None is suggested. None occurred to me and none evidently occurred to Counsel when giving the Opinion. In those circumstances in my judgment it was sufficient for the Opinion to state that there was a reasonable prospect of success and no reason (or basis) to question the existence of bona fides. The implication was clear and unequivocal, namely that the claim was bona fide. Such a statement therefore constituted for the purpose of Schedule 9 the necessary verification that the claim was bona fide."

27. Mr Morgan says that an express statement is indeed necessary under the terms of paragraph 10.4. He further argues that the judge wrongly imposed on that paragraph a construction contrary to the express wording of the paragraph which requires such statement if counsel is so satisfied. He contends that the judge's claim was tantamount to a finding that counsel was entitled to depart from the Agreement and that the judge failed to have any proper regard to two decisions.

28. One was Jones v Sherwood Services Ltd [1992] 1 WLR 277 at page 287 A, where Dillon LJ said this:

"The next step must be to see what the nature of the mistake was, if there is evidence to show that. If the mistake made was that the expert departed from his instructions in a material respect -- e.g., if he valued the wrong number of shares, or valued shares in the wrong company, or if, as in Jones (M.) v Jones (R.R.) [1971] 1 W.L.R. 840, the expert had valued machinery himself whereas his instructions were to employ an expert valuer of his choice to do that -- either party would be able to say that certificate was not binding because the expert had not done what he was appointed to do."

29. The other decision was Lightman J's own decision in British Shipbuilders v VSEL Consortium Plc [1997] 1 Lloyd's Law Reports 106 at page 109, where the judge said:

"(3) If the expert in making his determination goes outside his remit e.g. by determining a different question from that remitted to him or in his determination fails to comply with any conditions which the agreement requires him to comply with in making his determination, the court may intervene and set his decision aside. Such a determination by the expert as a matter of construction of the agreement is not a determination which the parties agreed should affect the rights and duties of the parties, and the Court will say so."

30. Further, Mr Morgan said that the analysis applied by the judge ran directly contrary to the ratio of the decision of this court in Veba Oil v Petrotrade [2002] 1 All ER 703.

31. I am unable to accept these submissions. A statement may be express or implicit. I see nothing in the Agreement which indicates that an express statement is required, though, of course, it avoids all questions if in fact there is such a statement. It is to my mind a question of construction of the Opinion whether counsel has given a statement to the required effect. It is evident that counsel considered that she was dealing with the question whether or not the claim was bona fide. She says in paragraph 1 of her Opinion that she had to deal with it. She considers the relevant warranty and the matters which led to the conclusion that there had been a breach in that the goodwill for the N&M Business was worth nothing at the date of the Agreement. She refers in paragraph 22 of her Opinion to the provisions of clause 7.6 of the Agreement as to how any warranty claim should be satisfied. She refers to clause 6.6, which provides an express illustration of how a claim may not be bona fide, that is to say where the claimant makes investigation into the affairs of the Company before the Agreement is concluded and by its findings then is actually aware of a fact or matter which could give rise to a warranty claim. But counsel records her instructions that the claimant, whilst aware of the goodwill figure, did not believe that it would be written off by the auditors, as it was only a few months after the date of the Agreement.

32. Against that background the statement that there is no reason on the information before counsel to question the bona fides of the claimant's claim is, in my opinion, a statement that the claim was bona fide, particularly when one bears in mind that counsel found that the claim had a reasonable prospect of success. It is hard to imagine how a conclusion that there was a reasonable prospect of success could be consistent with a conclusion that the claim was not made bona fide. It may be, as was suggested by Jacob J in the course of the argument, that the required statement that the claim was bona fide and had a reasonable chance of success should be looked at as a composite phrase, each of the two elements in a sense overlapping the other.

33. As for the three cases to which Mr Morgan referred, none, with respect to him, seems to me to assist on this point. The judge expressly had regard to what he himself said in his own judgment in the British Shipbuilders case. That case dealt with a slightly different question, that is to say whether the expert had answered the question agreed by the parties as the question to be decided by the expert. The present case relates to the question whether the contents of the Opinion fulfilled the requirements laid down in the Agreement. There is no condition in those requirements that there should be an express statement that the claim was bona fide. Nothing in the present case is akin to the substantive mistakes to which Dillon LJ in Jones v Sherwood referred. The Veba Oil case is also, in my view, clearly distinguishable. In that case the contract provided for the quantity and quality of a cargo to be determined by an independent inspector who was required to use a particular test method, D1298. The inspector used a different test method, D4052. This court held that the specified test method, and no other, must be used. In the present case, in my judgment, no test different from that applied by counsel in the Opinion was specified.

34. I would therefore reject this ground of appeal.

The second ground: Reasonable chance of success

35. It will be recalled that counsel said in paragraph 6(b) and (d) and paragraph 24(b) and (d) of her Opinion that giving the words "reasonable chance of success" their ordinary meaning as "more than fanciful and capable of reasonable assessment", the claim appeared to her to have a reasonable chance of success.

36. The judge said on this point at paragraph 19:

"The first question is whether the Opinion expresses the required view of the prospects of success of the claim. It may be considered surprising on the limited information available to her that Counsel in the Opinion stated that the claim had a reasonable prospect of success. It may be considered surprising that she felt able to state this when taking so much on trust from her informants and instructing solicitors. The Agreement may have expected more of her. But unequivocally the Opinion states that there was such a prospect that that, as it seems to me, is an end of the matter. No doubt Counsel as certifier owed a duty of care to the Defendant and is subject to a claim in negligence if that duty was breached, but that is not to the point. The Defendant submits that Counsel has misconstrued the term 'reasonable prospect of success'. Counsel in the Opinion adopted the test of a claim whose prospects of success were more than fanciful and were capable of reasoned assessment. The Defendant argues that it means a claim with a more than even prospect of success or a claim with prospects which a reasonable person would consider sufficient to justify. In my view this challenge is misconceived. Schedule 9 does not define the term 'reasonable prospect of success'. What is required to constitute such a prospect may vary with the circumstances and the nature of the claim. The Agreement leaves it to Counsel in the Opinion to use her own judgment whether the claim has a reasonable prospect of success. The approach of Counsel, namely that the claim must have a real prospect of success, is one which in my view was open to her and fairly answers the description in paragraph 10.4. Indeed, if it is necessary to define the term, that is in my view the correct definition and certainly a definition preferable to that advanced by the Defendant. The Defendant's criterion of a claim with a greater than even prospect of success is far from being the obviously intended meaning and places an artificial limitation on claims which carry with them the benefit of security for satisfaction out of the Retention. Their alternative proffered criterion of one with prospects sufficient for a reasonable man to pursue is unhelpful: whether a reasonable man will pursue a claim depends part only on the prospects of success: it depends also on a multitude of variables including the sum at issue, the likely costs, the likely timescale and the likely recovery of any award of damages or costs."

37. Mr Morgan submits that (1) the judge did not consider whether counsel's test was the test required; (2) alternatively, the judge in accepting counsel's test reached a conclusion not open to him; (3) the judge in ascribing to counsel the test of a real prospect of success was not using counsel's language and compounded the error.

38. I have no hesitation in rejecting these submissions. In my judgment the judge did consider whether counsel's test came within the contractual requirement. He held that the Agreement left it to counsel to use her judgment whether the claim had a reasonable chance of success, and that a real prospect of success (which is what the judge considered a more than fanciful chance of success amounted to) fairly answered the description in paragraph 10.4. I agree with the judge that counsel's test was one open to her. I further agree that the meaning pleaded by Mr Morris, that it is a chance more likely than not to succeed, cannot be right. Indeed, Mr Morgan very fairly acknowledged that that might put it too high. He suggested that the test would be whether a reasonable person would proceed with the claim. I do not see that as substantively differing from the test which counsel applied. In my judgment this ground of appeal also fails.

The third ground: Core elements of claim

39. The judge dealt with an argument similar to that now advanced to us in paragraph 20 of his judgment, saying this:

"The Defendant maintains as his second ground of challenge that Counsel in the Opinion must express an opinion on the existence of the core elements of a good claim, and not merely accept their existence on trust from instructing solicitors or informants. In my view, whilst one might expect Counsel

before venturing an Opinion to wish to investigate the core elements, the clause in the Agreement requires no such exercise. The expression of the required conclusion is sufficient. I fully understand the gripe of the Defendant that the Opinion is plainly prepared in a hurry with minimal material made available for a balanced evaluation of the claim and Counsel appears without more to have swallowed whole the instructing solicitor's and adviser's summaries of fact, rendering her Opinion, as an opinion on the merits of the claim, of negligible value. This devalues the requirement for vouching of the claim by Counsel. But in my judgment the Opinion remains a certificate binding on the Defendant for the purposes of Schedule 9. It does at least once explicitly, and more than once implicitly, express the view that the warranty allegedly breached was untrue at the date of the Agreement. Dissatisfaction on the part of the Defendant with the use of the certification provision cannot deprive the Opinion of full contractual effect. Recourse (if any) is limited to a suit against the certifier i.e. Counsel. I accordingly hold that the Opinion does sufficiently certify the merits of the Claimant's claim."

40. Mr Morgan submits that the contractual requirement that counsel should provide an Opinion carries with it the implication that counsel has personally investigated, and reviewed and considered the facts and expressed a view on those facts. He says that it is not enough for counsel to provide an Opinion reciting core assertions taken from the instructions. He argues that it is significant that the Agreement does not mention a certificate. He submits that the judge was wrong to substitute the test which he did in paragraph 20 for what is contained in paragraph 10.4.

41. I am not persuaded by these submissions. I see no great significance in a requirement that there should be an Opinion rather than a certificate. When counsel are asked to give their views in writing they do so in the form of Opinions or Advices. It seems to me unrealistic to suggest that counsel in supplying an Opinion cannot accept what his solicitors have stated in the instructions to counsel to be the facts, provided that there is no glaring error. It will be appreciated that the subject matter of the Opinion related to matters which are peculiarly within the province of accountants, and the expert advice which was received by the solicitors instructing counsel for the claimant could properly be accepted by counsel. Indeed, it seems to me quite unrealistic to expect counsel to delve into such matters.

42. But, in any event, it is obvious from the Opinion that counsel personally considered the facts contained in the instructions and in the documents, and she expressed her view on them. True it is that she said from time to time that this was the information presently before her, and it is obvious that she expected that there may be further information revealed at a subsequent time; but I do not see that her expression of opinion in the Opinion fell short of what was required of her in order to produce an Opinion complying with the requirements of paragraph 10.4.

Fourth ground: Identity of claims

43. Mr Morgan contended before us, as he did before the judge, that the claim the subject of counsel's Opinion was fundamentally different from that contained in the claimant's particulars of claim. In the Opinion counsel had considered that the claimant had a good claim in respect of the NAV warranty for £3,269,000, being the goodwill written off as the N&M Business was not profitable. The pleaded claim was for £3,022,578, and it was pleaded that the preliminary accounts for the N&M Business showed that it made a profit of only £18,000 in the eleven months to 30th April 2000. Mr Morgan submits that counsel did not vouch the claim now made.

44. The judge pointed out in paragraph 26 of his judgment that, in view of the fact that up to six months could elapse between the notification by the claimant of the claim and the issue of proceedings, the claimant's knowledge of the facts could change. He said that some allowance for changes must have been intended by the parties without forfeiting the security of the retention. He continued in paragraph 27:

"This analysis as it seems to me provides the necessary guidance as to the degree of identity required. For Schedule 9, identity is required only of the claims made, i.e. the essential element of the cause of action. Variations and refinements in the facts alleged do not make a claim maintained in an action a different claim from that vouched as a Good Claim by Counsel if the claim maintained in the action fairly and properly falls within the embrace of the Opinion. The question is whether upon a full and fair reading of the Opinion the claim in the maintained action (i.e. the cause of action) can properly be said to be vouched by the Opinion."

45. He expressed the view in paragraph 28 that the changes in the particulars of claim were very limited refinements on the facts set out in the Opinion and that the cause of action remained the same. I agree with the judge.

46. The basis of the claim vouched in the Opinion and of that in the particulars of claim is that the goodwill of the N&M Business should not have been included in the NAV warranted by Mr Morris. In the Opinion it was sought to show that the goodwill of the N&M Business at the date of the sale was valueless by reference to the writing down of the goodwill in December 2000. That does not, of course, preclude the claimant seeking to establish that by any other means. Indeed, on the issue whether the goodwill was valueless at the relevant date the profitability of the Company over a period will inevitably be considered. I do not see that the pleaded claim is substantially different from the claim vouched by counsel. True it is that there is no mention in the pleaded claim that the goodwill had been written off in December and that the only matter relied on as showing that the goodwill had no value is the modest amount of profits that were made in the eleven months up to April 2000. But in substance the claim vouched in the Opinion and the claim asserted in the pleadings are identical, that is to say that it is an NAV warranty claim arising out of the fact, as is alleged, that the goodwill of the N&M Business has no value and should not have been included in the warranted NAV.

47. For these reasons therefore, despite Mr Morgan's brave attempt to get this appeal on its feet, I would dismiss this appeal.

48. LORD JUSTICE KEENE: I agree.

49. MR JUSTICE JACOB: I also agree. I would only add this. The judge to some extent criticised the Opinion of counsel. He said this:

"I fully understand the gripe of the Defendant that the Opinion is plainly prepared in a hurry with minimal material made available for a balanced evaluation of the claim and Counsel appears without more to have swallowed whole the instructing solicitor's and adviser's summaries of fact, rendering her Opinion, as an opinion on the merits of the claim, of negligible value."

50. I, for my part, do not see any real material on which the judge based that. Counsel, so far as I can see, based her Opinion on the act of the accountants in writing off the goodwill, which had been paid for only five months earlier. That lies at the core of this case, and I cannot see why her Opinion is subject to any gripe.

Order: Appeal dismissed with costs summarily assessed at £20,000. Application for permission to appeal to the House of Lords refused.

(Order does not form part of Approved Judgment)