Forrest & Ors v Glasser & Anor

In issue in this appeal is the construction of contractual time-bar clauses in commercial agreements.

By an agreement dated 24th November 2000 the six appellants, an investment syndicate led by Mr Henrik Kjellin, subscribed for ninety-six shares representing 48.95% of the issued shared capital in a company called Glasser Whitley Ltd at a price of £700,000. By a second agreement dated 2nd January 2001 they acquired further shares in the company from the respondents for £900,000. It is common ground that the two agreements are to all intents and purposes in similar terms and I shall confine myself to reciting the terms of the subscription agreement.

Unfortunately for the subscribers, their hopes and expectations of good fortune were dashed as the company failed to perform satisfactorily with the result that it entered into a creditors’ voluntary liquidation on 1st August 2003 and has since been wound up.

The appellants were aggrieved and in the autumn of 2003 they began to question whether there had been full compliance by the respondents with their contractual obligations. Legal advice was taken on both sides and there was an exchange of correspondence and emails between Mr Kjellin and Mr Glasser about a “potential warranty claim”.

The respondents had entered into a number of warranties – 29 in one agreement and 32 in the other, so we were told – particularly as set out in clause 5 and schedules 2 and 4 of the subscription and acquisition agreements respectively. They included warranties that the audited accounts gave a true and fair picture of the assets, liabilities, commitments and profits of the company as at the end of the last accounting year, 31st December 1999, and also that the accounts had been prepared in accordance with generally accepted accounting principles. The relevant warranty contained in paragraph 5.3 of schedule 2 was this:

On 24th November 2003 the appellants’ solicitors wrote to each of the respondents’ saying:

On 17th November 2004 the appellants issued a claim for the recovery of their investment based on breach of warranty. An amended Particulars of Claim allege that the warranted management accounts dated 31st October 2000 had not been prepared in accordance with generally accepted accounting principles, did not reflect the state of affairs of the company in respect of the profits/losses of the company during the period to which they were related, did not accurately or adequately disclose all assets and liabilities of the company and did not apply bases and policies of accounting which had been consistently applied in the accounts. The particulars were these:

The respondents denied being in breach as alleged and by an amendment to the Defence made on 14th September 2005 for the first time took the further point that the claim was time-barred under clause 6.3.1 of the agreement. The material clauses are these:

On an application to strike out, Stanley Burnton J. decided without objection to resolve the matter by a trial of preliminary issues which were formulated as follows:

On 7th December 2005 he ordered that the answer to preliminary issue A was negative and the answer to preliminary issue B was positive. However, he gave permission to appeal.

Stanley Burnton J. held that the first question to consider was:

He thought the commercial purpose of the provisions was obvious, namely that:

He considered clause 6.4 and held:

His conclusion was that the claim was too vague and unspecific. In his judgment:

Of that conclusion he said:

There are, it seems to me, five questions which need our consideration:

Although Mr Houseman, counsel for the appellants, did not seem to demur either in the court below or in his skeleton argument from the proposition, to quote from his written argument, that “the content of the notification required under clause 6.3.1 should be equated to or aligned with that set out in clause 6.4 for practical purposes”, we did not understand that the point was conceded and Mr Reeve, counsel now appearing for the respondents, did not argue otherwise. Under gentle prodding from Longmore L.J. Mr Houseman was very happy to leave the answer to us.

Although couched in slightly different language, clause 5 of each of the agreements records the warranty given by the respondent and clause 6 of the subscribers’ agreement is headed “Limitation to Warranties” and clause 6 of the acquisition agreement is headed “Vendors’ Limitations”. Clause 6.1 provides in each case that:

The first point to notice, therefore, is that clause 6.3 and clause 6.4 are quite separate from each other. Their legal effect is quite different. The provisions of clauses 6.3.1 and 6.3.2, being deemed waivers of the claim, operate as contractual time-bars in the event that the claim is not notified before the third anniversary of the completion date and in the event that court proceedings are not issued and served within 12 months of the date of the notification of such claim. Clause 6.4, on the other hand, is not a time-bar provision: it imposes a contractual obligation to notify the warrantors as soon as reasonably practicable after the date upon which the appellants become aware of a claim against them. Failure to give that notice may be a breach of contract, though I confess it may be difficult to establish the damage that flows from the breach, but that does not matter for present purposes. It is, however, no defence to a claim which is brought in time in accordance with clause 6.3. The introductory words of clause 6.4, “without prejudice to the provisions of clause 6.3” serve only to emphasise the fact that clause 6.3 and clause 6.4 are separate and apart and independent of each other. The phrase “without prejudice to” means literally that clause 6.4 is without damage or detriment to clause 6.3, in other words, clause 6.4 does not in any way affect clause 6.3. Whatever is required for clause 6.4 purposes will not bear upon what is required for 6.3 purposes. Each is freestanding and independent and, with respect to the learned judge, I cannot accept “that it would be illogical for [the requirements of clause 6.4] to be greater than the requirement of notification of a claim under 6.3.” On the contrary, the phrase “without prejudice to” makes it explicit that the specific requirements of clause 6.4 are not imported into the different and general provisions of clause 6.3.1. In my judgment clause 6.3.1 stands alone and must be construed accordingly.

The principles by which contractual documents are nowadays construed were elucidated by Lord Hoffmann in his by now well-known speech in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 W.L.R. 896, 912/913. The essential points for this case are these:

The natural and ordinary meaning of the words in clause 6.3 seem to me to be plain enough. “Claim” is defined in clause 6.1. Reading it into clause 6.3, the clause provides that “any Claim under the Warranties which shall not have been notified in writing to the company on or before the third anniversary of the completion date … shall be deemed to have been waived.” Thus what has to be notified is a claim under the warranty. “Claim” is an ordinary word which does not need further definition. The requirement is that the warrantors must be informed that a demand is being made for damages for breach of warranty. That is all. On the ordinary meaning of the words, no particulars have to be given of that claim.

That no particulars have to be given is consistent both with the structure of clause 6 and with the authorities on these contractual time-bar clauses. As for the structure of clause 6, the notification required under 6.4 is specific. That notice must be in sufficient detail to enable the company and the warrantors to identify the claim and to respond to it. Thus the draftsman was well aware of the need to be specific where specificity is demanded. Consequently imposing specific requirements in clause 6.4 in contrast to being silent of any specificity in clause 6.3.1 argues strongly in favour of a bald notice of claim being sufficient for the latter’s purposes.

Moreover, in each of the authorities to which we have been referred, some greater or lesser specificity was stipulated in the relevant clause. Thus in Senate Electrical Wholesalers Ltd v Alcatel Submarine Networks Ltd [1999] 2 Lloyd’s L.R. 423 the relevant clause required notice to be given “setting out such particulars of the grounds on which such claim is based”. In Laminates Acquisition Co. v BTR Australia Ltd [2003] EWHC 2540 the clause required “written notice of such claim specifying (in reasonable detail the extent that such information is available at the time of the claim) the matter which gives rise to the claim, the nature of the claim and the amount claimed in respect thereof (detailing the purchaser’s calculation of the loss thereby alleged to have been suffered by it or the relevant member of the purchaser’s group.” In Bottin (International) Investments Ltd v Venson Group Plc & ors [2004] EWCA Civ. 1368 notice of the claim had to be made in writing “specifying such details of the event or circumstances giving rise to such claim as are available to the investor and an estimate (if capable of preparation by the investor) of the total amount of the warrantor’s liabilities therefor claimed.” Finally, in RWE Nukem Ltd v AEA Technology Plc [2005] EWHC 78 the requirement was for “written particulars of such claim (giving detail of the specific matter as are available to the purchaser in respect of which such claim is made).” The reasonable man will know, therefore, that clauses requiring a degree of specificity can easily be drafted but he will also know that no such detail was provided for in clause 6.3.1.

If the natural and ordinary meaning of the words is that a bald notice of claim is sufficient to satisfy clause 6.3.1, is that a conclusion that flouts business commonsense? Is there something in the background which drives one to a different interpretation? It is strongly submitted on the respondents’ behalf that the purpose of a clause like this is to promote certainty and that certainty requires the giving of as much information about the claim as would be required for a properly pleaded particulars of claim supplemented if need be by the particulars given under a request for further information. I cannot accept that submission. It seems to me to be impossible to identify that purpose from the background of this case and the business commonsense of these transactions. Mr Reeve relies on dicta in the cases I have set out above. I am quite prepared to accept (but then I would because I was a member of the Court) the observation in Senate Electrical that “certainty is a crucial foundation for commercial activity”. That observation was, however, made in the context of that case and the clause there in issue. As Peter Gibson L.J. said in Bottin: “Those remarks were made in the context of a different wording of the agreement under consideration in that case and against the background of the wholly uninformative notice.” The only true principle to be derived from these authorities is the first proposition which Gloster J. distilled from them in RWE Nukem Ltd namely that –

The most that can be said for this clause is that it was intended to meet the sensible commercial purpose of providing a cut-off point for liability for breach of warranty after the expiration of three years from completion. The subscribers/purchasers then have a further twelve months, ample time for negotiation and settlement of the claim, before the second time barrier falls if proceedings have not been issued by then. The very fact that proceedings are contemplated with all the formality of pleading and particularity at that second stage itself militates against the argument that the same degree of particularity should have been given at the first stage twelve months earlier when the claim was notified.

In my judgment, upon a proper construction of clause 6.3.1, a bald notification of the claim is sufficient and no particulars of it need be given.

The first paragraph of the notification letter gave notice of the intention to make a claim. The letter went further by informing the respondents that the claim arose out of the fact that the management accounts were not in accordance with the warranties given in clause 5. In other words, notice was given that the breach of warranty was confined to errors in the management accounts and that no other warranty claim was being made. The respondents submit that notice of an intention to make a claim was merely notice that a claim would be made at some time in the future and that that was not good enough to satisfy the requirement that a present claim should be asserted. I reject that submission. Any reasonable recipient of the letter would understand the letters to be notification of an existing claim for breach of warranty through inaccuracies in the management accounts. The concluding paragraph of the letter makes that abundantly clear:

In the light of the conclusion I have reached above, it is strictly unnecessary to consider this question. Nonetheless, in view of the importance it played at the hearing, I shall express my views very shortly.

Mannai Investment Co. Ltd v Eagle Star Life Assurance Co. Ltd [1997] A.C. 749 sets out the principles for the construction of notices, in essence, that the question is how a reasonable recipient would have understood the notice bearing in mind its context. The contextual scene is always relevant. To cite but one passage, Lord Hoffmann said at p. 775:

In my respectful judgment the fact that the letters did not incorporate the preceding correspondence and emails and did not refer to them is neither here nor there. The recipient will have read the notification letters against the background of what had gone before them. That is the context. That context has to be considered in order to decide what a reasonable recipient would understand when he read the letter. In my judgment the judge was wrong to exclude consideration of the antecedent correspondence.

Assuming I am wrong in my conclusion that no particulars of the claim need be specified in the notice, then the antecedent correspondence makes it plain what claim is being asserted. In the light of my earlier judgment it is unnecessary to recite this correspondence at length. This is but a summary of it. It begins on 23rd September 2003 when Mr Kjellin wrote to Mr Glasser “Re: potential warranty claim”. That heading is frequently adopted thereafter. That letter encloses a letter from the subscribers’/purchasers’ solicitors, referring to substantial and unexplained discrepancies in the management accounts of 31st October 2000 and the subsequently audited accounts of 31st December 2000. The preliminary view was expressed that the management accounts could not have reflected the true financial position of the company and that there was prima facie good evidence to support a claim for breach of warranty. The solicitors pointed out that notice of the claim should be given as soon as possible and in any event within the three year period from the completion date. Three discrepancies seem to be identified namely the increase in creditors, in salaries and pension and in the cost of sales. In the correspondence which follows the respondents make clear that they too had taken legal advice and they refer to the relevant warranty at paragraph 5.3 of schedule 2 of the agreement. They do their best to refute the argument. They seem to have done so successfully in respect of the salaries and pensions issue. The other inaccuracies about work in progress and creditors are debated as the correspondence continues. On 31st October 2003 Mr Kjellin emailed Mr Glasser thanking him for “the salary responses which I received on the fax, and will circulate. Apart from the WIP [work in progress], the only other seriously large discrepancy is the Creditors.” Mr Glasser’s response was to say that his solicitors would be dealing with the matter on 18th or 19th November and that as soon as he has a response he would be in touch. On 19th November Mr Kjellin emailed Mr Glasser saying this:

Against that background any reasonable recipient of the solicitor’s letters would have understood that the appellants were notifying a claim under the warranty clause. The recipients would have had, moreover, sufficient information to identify the warranty concerned and the particular inaccuracies to which the complaint related. When the proceedings were launched, the particulars of claim identified the same inaccuracies, namely work in progress and over-stated creditors. Thus the respondents had all the information they needed by November 2003 to know the nature of the claim made against them and to prepare to meet a claim in respect of work in progress and overstated creditors. They could safely close their books on any other claim. If I were in any previous doubt about it, there is an ample sufficiency of information in the antecedent exchanges for the letters of 24th November to constitute valid notification pursuant to clause 6.3.1.

Though it may not be a valid tool for construction of the notices, the glaring fact is that no point was taken to question the validity of the notices until the amended defence was served nearly two years later.

In my judgment the judge’s sense of discomfort was properly felt. I would allow the appeal, set the order aside and answer preliminary issue A in the affirmative. Accordingly no answer to preliminary issue B is required.

I agree.

I also agree.