Macquarie Internationale Investments Ltd v Glencore UK Ltd

This judgment is in six parts namely:

This is an appeal by the purchaser of a group of companies against the rejection of its claim for damages for breach of warranty. The appeal turns upon the correct construction of warranties given to the purchaser.

The purchaser is Macquarie Internationale Investments Ltd, which I shall refer to as “Macquarie”.

The sellers were Baring European Fund Managers Limited, Flenwood Limited and Glencore UK Limited. I shall refer to those three companies as “Baring”, “Flenwood” and “Glencore”.

The holding company which was the subject of the sale and purchase agreement was Corona Energy Holdings Ltd. That company has subsequently changed its name to Macquarie Corona Energy Holdings Ltd. I shall refer to it simply as “Corona”.

Another company which will feature in the narrative is Xoserve Ltd, to which I shall refer to as “Xoserve”. Xoserve is owned by the five major gas distribution companies in the UK. It acts as an interface between (a) companies which ship gas to terminals at various ports and (b) the gas distribution network companies. The gas distribution network companies are sometimes described as gas transporters, because they transport gas through their network of pipes to the numerous users throughout the UK.

The only statute which is relevant to this case is the Companies Act 1985, to which I shall refer as “the 1985 Act”.

Section 226A of the 1985 Act provides:

“226A Companies Act Individual Accounts

(1)

Companies Act individual accounts must comprise:-

(a)

a balance sheet as at the last day of the financial year, and

(b)

a profit and loss account.

(2)

The balance sheet must give a true and fair view of the state of affairs of the company as at the end of the financial year.

(3)

Companies Act individual accounts must comply with the provisions of Schedule 4 as to the form and content of the balance sheet and profit and loss account and additional information to be provided by way of notes to the accounts.

(4)

Where compliance with the provisions of that Schedule, and the other provisions of this Act as to the matters to be included in a company’s individual accounts or in notes to those accounts, would not be sufficient to give a true and fair view, the necessary additional information must be given in the accounts or in a note to them.

(5)

If in special circumstances compliance with any of those provisions is inconsistent with the requirement to give a true and fair view, the directors must depart from that provision to the extent necessary to give a true and fair view.”

Section 227A of the 1985 Act provides:

“227A Companies Act group accounts

(1)

Companies Act group accounts must comprise:-

(a)

a consolidated balance sheet dealing with the state of affairs of the parent company and its subsidiary undertakings, and

(b)

a consolidated profit and loss account dealing with the profit or loss of the parent company and its subsidiary undertakings.

(2)

The accounts must give a true and fair view of the state of affairs as at the end of the financial year, and the profit or loss for the financial year, of the undertakings included in the consolidation as a whole, so far as concerns members of the company.

(3)

Companies Act group accounts must comply with the provisions of Schedule 4A as to the form and content of the consolidated balance sheet and consolidated profit and loss account and additional information to be provided by way of notes to the accounts.

(4)

Where compliance with the provisions of that Schedule, and the other provisions of this Act as to the matters to be included in a company’s group accounts or in notes to those accounts, would not be sufficient to give a true and fair view, the necessary additional information must be given in the accounts or in a note to them.

(5)

If in special circumstances compliance with any of those provisions is inconsistent with the requirement to give a true and fair view, the directors must depart from that provision to the extent necessary to give a true and fair view.”

Subsections (4) and (5) in each of these sections are sometimes referred to as the “true and fair view override”: see Palmers Company Law, volume 2, paragraph 9.182.

The Accounting Standards Board is a body which publishes standards for the guidance of those who prepare accounts. One of its publications, FRS 3, gives the following guidance in respect of prior period adjustments:

“60 The majority of items relating to prior periods arise mainly from the corrections and adjustments which are the natural result of estimates inherent in accounting and more particularly in the periodic preparation of financial statements. They are dealt with in the profit and loss account of the period in which they are identified and their effect is stated where material. They are not exceptional or extraordinary merely because they relate to a prior period; their nature will determine their classification. Prior period adjustments, that is prior period items which should be adjusted against the opening balance of retained profits or reserves, are rare and limited to items arising from changes in accounting policies or from the correction of fundamental errors.

…..

63.

In exceptional circumstances it may be found that financial statements of prior periods have been issued containing errors which are of such significance as to destroy the true and fair view and hence the validity of those financial statements. The corrections of such fundamental errors and the cumulative adjustments applicable to prior periods have no bearing on the results of the current period and they are therefore not included in arriving at the profit or loss for the current period. They are accounted for by restating prior periods, with the result that the opening balance of retained profits will be adjusted accordingly, and highlighted in the reconciliation of movements in shareholders’ funds. As the cumulative adjustments are recognised in the current period, they should also be noted at the foot of the statement of total recognised gains and losses of the current period. ”

After these introductory remarks, I must now turn to the facts.

Prior to September 2006 Baring, Flenwood and Glencore held the entire share capital of Corona. Corona is and was the parent company of Corona Energy Limited. That company directly or indirectly owns four further subsidiaries known as “Corona 1”, “Corona 2”, “Corona 3” and “Corona 4”. I shall refer collectively to Corona and its various subsidiaries as “the Corona Energy Group” or “the Group”. I shall refer to Corona 1, Corona 2, Corona 3 and Corona 4 as “the Corona companies”.

The Corona Energy Group carries on the business of supplying gas to commercial customers in the UK. The manner in which it operates is as follows. Each day the Corona companies deliver gas at sea ports to the national transmission system. Each day Corona’s customers draw off gas at their premises and the amount of gas drawn off at each address is recorded on the customers’ meters. Other shippers of gas operate in a similar manner.

As explained in Part 1, gas is transported through the national transmission system not by the shippers but by gas transporters. Gas transporters own and operate the transmission and distribution system.

The relationship between the various shippers and gas transporters is regulated by the Uniform Network Code, which constitutes a contract between them. Xoserve acts as agent for the gas transporters and, amongst other things, it calculates on a daily basis the volumes of gas supplied to and taken off from the system by each shipper. Any imbalance between the volumes gives rise to a balancing charge, payable by Xoserve or the shipper. Where there is an oversupply, a charge is paid by Xoserve to the shipper and, where there is an undersupply, by the shipper to Xoserve. This process is known in the industry as energy balancing and the charges are known as balancing charges.

In about October 2005 Xoserve began to use a computer system called “Gemini” to determine balancing charges in respect of each shipper. Unfortunately, Xoserve made an error in October 2005 in loading information into the Gemini system. Xoserve failed to include in the Gemini system the changes that had occurred in each shipper’s portfolio of customers on 2^nd and 3^rd October 2005. That error was not corrected until September 2006.

Unknown to Macquarie, Glencore or Corona, by 31^st July 2006 Corona 2 had incurred a liability of some £2.4 million to Xoserve as a result of the error that Xoserve had made in October 2005. That error resulted in an undercharge by Xoserve in respect of balancing charges due from Corona 2. Xoserve did not inform Corona of this error until November 2006. The additional balancing charge which Xoserve then required Corona to pay is referred to by the parties as “the missed meters charge”.

In early 2006 accounts were prepared for the Corona companies and draft consolidated accounts were prepared for the Corona Energy Group for the financial year ending on 31^st December 2005. The liability of Corona 2 for the missed meters charge was not known at that time. Accordingly it was omitted from the draft accounts for Corona 2 and from the draft consolidated accounts for the Group.

In the summer of 2006 Baring, Flenwood and Glencore, in ignorance of the missed meters charge, embarked on the sale of Corona. On 31^st July 2006 they entered into a sale and purchase agreement (“the SPA”) under which they sold all of the issued share capital of Corona to Macquarie.

The SPA contained the following terms:

It should be noted that the phrase “the Warrantor” in clause 6 referred to Glencore alone. The other two sellers did not give any warranties.

The warranties which Glencore gave are set out in schedule 3 to the SPA. The warranties contained in paragraph 4 of schedule 3 (defined as Core Warranties) read as follows:

“4.

ACCOUNTS AND MANAGEMENT ACCOUNTS

4.1

Accounts

The Accounts:

(a)

have been prepared in accordance with Relevant Accounting Standards and in a manner consistent with that adopted in the preparation of the annual accounts of the Group and/or the Company or Subsidiary to which they relate (as the case may be) for the Financial Years ended 31 December 2003 and 31 December 2004;

(b)

give a true and fair view of the assets and liabilities of the Group and/or the Company or the Subsidiary to which they relate as at the Accounts Date and the profits and losses of the Group and/or the Company or the Subsidiary to which they relate (as the case may be) for the Financial Year ended on the Accounts Date (including all related party transactions);

(c)

comply with the requirements of the Companies Act;

(d)

make appropriate provision for or note or otherwise disclose all material actual liabilities and all material contingent, deferred and disputed liabilities (including, in each case, Taxation liabilities) (whether liquidated or unliquidated) and all outstanding capital commitments of which the Group and/or Company or Subsidiary to which they relate was aware as at the Accounts Date and in respect of which disclosure or provision is required under Relevant Accounting Standards; and

(e)

make adequate provision for debts then known or believed to be bad or doubtful.

4.2

Management Accounts

The Management Accounts have been diligently prepared in accordance with Relevant Accounting Standards and in a manner consistent with that adopted in the preparation of the management accounts of the Group for each month during the twelve months prior to the Accounts Date. On the basis of the accounting bases, practices and policies used in their preparation and having regard to the purpose for which they were prepared, the Management Accounts:

(a)

fairly reflect the financial position of the Group as at 30 June 2006;

(b)

fairly reflect the cash and working capital position of the Group as at 30 June 2006; and

(c)

are not misleading in any material respect.”

I shall refer to the warranty contained in paragraph 4.1 as “the accounts warranty”. I shall refer to the warranty contained in paragraph 4.2 as “the management accounts warranty”. It should be noted that by reason of the definitions in clause 1.1 of the SPA the accounts referred to in paragraph 4.1 of schedule 3 are the draft audited accounts for the year ended 31^st December 2005.

The warranty contained in paragraph 5 of schedule 3, which is defined as a Non-core Warranty, reads as follows:

“Since 30^th June 2006:

…

(c)

there has been no material adverse change in the financial position of the Group taken as a whole; ”

Paragraphs 6 and 7 of schedule 3 contain a number of warranties about the assets and liabilities of Corona.

Let me now turn to the purchase price under the SPA. It will be recalled that this was defined in clause 3.1 by reference to the Exchange Net Worth and the Target Net Worth.

The Exchange Net Worth was the net asset value of Corona as at 31^st July 2006 as shown in the exchange accounts. The Target Net Worth was £5,751,000. That was the net asset value as at 30^th June 2006 as shown in the management accounts.

The exchange accounts were agreed shortly before completion. They comprised Corona’s management accounts as at 31^st July 2006 with two adjustments. There was, however, a crucial difference between the management accounts and the exchange accounts. The management accounts were warranted by Glencore. The exchange accounts were not warranted. They were subject to agreement between the parties.

The exchange accounts calculated Corona’s net asset value as at 31^st July 2006 in the sum of £5,741,000, which was £10,000 less than the net asset value shown in the management accounts as at 30^th June 2006. Macquarie paid £5,541,000 to the vendors as consideration under the SPA.

Both the management accounts and the exchange accounts were prepared without reference to, and in ignorance of, the missed meters charge.

Macquarie completed its purchase of Corona on 15^th September 2006 and paid the purchase price on the due date.

In November 2006 Xoserve informed Corona of the missed meters charge. In January 2007 Xoserve sent an invoice to Corona 2 for some £3.1 million in respect of that matter. The Group duly paid that invoice.

Macquarie was aggrieved by the fact that the missed meters charge had not been disclosed to it at the time of purchase. Macquarie took the view that the non-disclosure of this liability constituted a breach of warranty. Accordingly Macquarie commenced the present proceedings.

By a claim form issued in the Commercial Court on 20^th July 2007 Macquarie claimed damages against Glencore for breach of the warranties contained in the SPA. As the pleadings evolved, the principal breaches which Macquarie alleged related to the warranties in paragraphs 4.1 and 4.2 of schedule 3 to the SPA. Macquarie alleged that both the accounts and the management accounts were deficient, because they omitted any reference to the missed meters charge. Accordingly Glencore was in breach of the warranties contained in paragraphs 4.1 and 4.2 in a number of respects. Macquarie contended that as a result of these breaches the true net asset value of Corona on 30^th June 2006 was £3,406,000, some 40% lower than it was supposed to be. As a consequence the price paid by Macquarie was some £2.4 million greater than it would have been if the price had been calculated on the true net asset value of Corona.

Glencore, by its re-amended defence, denied that there was any breach of the warranties contained in paragraphs 4.1 and 4.2 of schedule 3. Glencore contended that at all material times the missed meters charge was an unknown liability. Accordingly, it was properly omitted both from the accounts and the management accounts.

In relation to the figures, it became common ground between the parties that the net asset value set out in the management accounts and the exchange accounts would have been reduced by £2,440,187 if the parties had been aware of the missed meters charge.

The action came on for trial before Mr Justice Andrew Smith in July 2009. The trial lasted for 6 days. The judge handed down his reserved judgment on 17^th September 2009 in which he dismissed Macquarie’s claim: see [2009] EWHC 2267 (Comm).

The judge dealt with the accounts warranty in paragraphs 158 to 170 of his judgment. He held that there was not sufficient evidence available to Corona before 15^th September 2006 of the existence of the missed meters charge for the purpose of making provision in the accounts. He held that the accounts had been prepared in accordance with the relevant accounting standards, despite the absence of any provision for the missed meters charge.

As regards the warranty that the accounts gave “a true and fair view” of Corona’s assets and liabilities and profits and losses, the judge held that the expression “true and fair view” had the same meaning under the SPA as it had under the Companies Acts.

The judge considered the meaning of “true and fair view” under the Companies Acts. He referred to the true and fair view override at sections 226A and 227A of the 1985 Act and the commentary on that provision in paragraph 19 of the Foreword to Accounting Standards issued or adopted by the Accounting Standards Board. This paragraph is set out in paragraph 169 of the judge’s judgment.

At paragraph 170 of his judgment the judge held as follows:

“170.

However, I cannot accept that there are such exceptional circumstances in this case. I find it difficult to envisage circumstances in which, because an entity has no or no sufficient evidence of a liability and therefore does not provide for it in its financial statements, they would on that account fail to give a true and fair view of the entity’s financial position. I have already concluded that the Accounts were prepared in accordance with Relevant Accounting Standards, and I cannot accept that, this being so, the Accounts did not give a true and fair view of the assets and liabilities of the Group and of Corona 2 because they did not provide for the Missed Meters charge.”

The judge then turned to the management accounts warranty. On the basis of his findings regarding the lack of evidence available to Corona of the missed meters charge, the judge held that the management accounts had been prepared in accordance with the relevant accounting standards. Accordingly the judge held that there was no breach of the warranty contained in the first sentence of paragraph 4.2. The judge then turned to the second sentence. He held as follows:

“180.

I have explained why, in my judgment, the Accounts gave a true and fair view of the assets and liabilities of the Group given that they complied with Relevant Accounting Standards. For similar reasons I conclude that, being prepared in accordance with Relevant Accounting Standards, the Management Accounts gave a true and fair view of the Group’s financial position. This is, however, a more stringent test than is required by the warranty about the Management Accounts. Apart from the qualification to the warranty in the opening words of the second sentence of paragraph 4.2 of schedule 3, the requirement is that the Management Accounts should “fairly reflect” the financial position of the Group. As I interpret this, the parties intended that there should be a less demanding stipulation with regard to the Management Accounts than that they should give a true and fair view; they did not require that more time or more industry be spent in preparing them or that they be prepared to more demanding standards because they were the subject of the warranty than would normally be spent upon accounts prepared for internal management purpose in accordance with properly diligent standards.

181.

The Management Accounts were also warranted not to be misleading in any material respect. I interpret this as requiring them not to be so misleading to a reader who is reasonably well informed about business, about ordinary accounting practices and about the usual purpose and precision of management accounts. Macquarie’s allegation is that they were misleading because, by reason of the Missed Meters charge, the Group “made a loss before tax of approximately £2m in the six months ended 30^th June 2006 and the omission from the Management Accounts of [the Missed Meters charge] rendered them misleading…”; and also that they were misleading with regard to the Mod 640 charges. Thus, no separate argument is advanced in respect of this requirement and, in my judgment, the Management Accounts, being in accordance with proper accounting principles and fairly reflecting the Group’s financial position, were not misleading.”

Accordingly the judge held that there was no breach of the warranties contained in the second sentence of paragraph 4.2 of schedule 3 to the SPA.

In case the judge was wrong in his conclusions thus far, he went on to consider whether the missed meters charge was “material” for the purposes of paragraph 4.2(c). He concluded that this item was not material. The judge’s reasoning in relation to materiality was as follows. The missed meters charge represented only a small proportion of the turnover of the Group as a whole and of Corona 2 in particular. On the basis of the Materiality Statement published by the Accounting Standards Board and the expert evidence in this case, a discrepancy of less than £2.5 million would not be regarded as material.

Macquarie was aggrieved by the judge’s rejection of its claim. Accordingly it appeals to the Court of Appeal.

By a notice of appeal issued on 21^st October 2009 Macquarie appealed against the judge’s decision that there was no breach of warranty. Macquarie contended that the judge ought to have found a breach of the management accounts warranty. Macquarie no longer pursued its contention that there had been a breach of the accounts warranty. Furthermore, Macquarie did not challenge any of the judge’s findings of fact.

Macquarie’s case on appeal involves two separate arguments. These are:

I shall address these two issues separately.

Mr Ian Glick QC for Macquarie points out that paragraphs 4.1(a) and 4.1(b) are separate warranties. Paragraph 4.1(a) relates to the process by which the accounts are prepared. Paragraph 4.1(b) relates to the outcome of that process. He submits that even though the process was in accordance with the relevant accounting standards, the outcome of that process, namely the draft audited accounts, did not present a true and fair view of the assets and liabilities of the Group or of Corona 2. There was an undisclosed liability of £2.4 million.

Mr Richard Southern QC for Glencore submitted that if accounts are prepared in accordance with the relevant accounting standards, then save in exceptional circumstances (of which, when pressed in argument, he could not suggest an example) they are bound to present a true and fair view of assets and liabilities.

On this issue a joint opinion written by Mr Leonard Hoffmann QC and Ms Mary Arden in September 1983 has been highly influential and was relied upon by the judge in the present case. I recall that that joint opinion was in general circulation in the 1980s. It appears to have left an imprint on judicial thinking and on legal writing in subsequent decades. The essential thesis of Mr Hoffmann and Ms Arden was that the concept of “true and fair view” as used in the Companies Acts is an abstraction. It is for the courts to decide in any given case whether the accounts do give a true and fair view. However, in deciding this question the courts look for guidance to the ordinary practices of accountants and in particular to the standards published by the relevant professional body. These published standards not only guide accountants in the preparation of accounts but also mould the expectations of those who read or use the accounts. Therefore compliance with professional standards is prima facie evidence that the accounts present a true and fair view of the assets and liabilities of the company or the group. Deviation from accepted accounting principles is prima facie evidence that the accounts do not present a true and fair view of the assets and liabilities of the company or the group.

In subsequent decisions courts have treated compliance with published professional standards as strong evidence that the accounts in question did present a true and fair view: see Lloyd Cheyman & Co Ltd v Littlejohn & Co [1987] BCLC 303 at 313; Senate Electrical Wholesalers Ltd v STC Submarine Systems Ltd (20^th December 1996, unreported) at page 20 of the transcript; Bairstow v Queen's Moat Houses plc (23^rd July 1999, unreported) at pages 31-32 of the transcript and Revenue and Customs Commissioners v William Grant & Sons Distillers Ltd [2007] UKHL 15; [2007] 1 WLR 1448 at paragraphs 2 and 38.

In the present case at no time before the draft audited accounts were signed off on 15^th September 2006 did the Group have evidence of the missed meters charge, which would have enabled this charge to be included in the accounts. Indeed the inclusion of such a charge would have meant that the accounts were not prepared in accordance with the relevant accounting standards, which would have put Glencore in breach of paragraph 4.1(a) of schedule 3.

Mr Glick drew our attention to the decision of the House of Lords in Smith New Court Securities Ltd v Citibank N.A [1997] AC 254, in particular the speech of Lord Steyn at page 271, in support of the proposition that accounts properly prepared may subsequently turn out not to have presented a true and fair view. However, I do not think that this authority supports that proposition. It was not an issue in that case, and neither the lower courts nor the House of Lords had to decide whether the accounts of Ferranti had been prepared in accordance with the published accounting standards.

There are no exceptional circumstances in the present case which would have led to the conclusion that the draft audited accounts, despite being prepared in accordance with the relevant accounting standards, did not give a true and fair view of the assets and liabilities. The Group did not know about and could not reasonably have discovered the missed meters charge at the relevant time. Furthermore, it cannot be said that the Group or its accountants made an “error” within the meaning of paragraph 63 of FRS 3, which required or permitted the accounts for the year ended 31^st December 2005 to be reopened or restated.

I therefore conclude, for essentially the same reasons as the judge, that the draft audited accounts presented a true and fair view of the assets and liabilities of the Group and of Corona 2 for the year ended 31^st December 2005.

I now turn to the management accounts for the period January to June 2006. Over that six month period the amount of the missed meters charge increased from some lesser sum to approximately £2.4 million. However, the existence of that liability remained unknown and not reasonably discoverable. Therefore the same process of reasoning applies to the management accounts. There is now no dispute that the management accounts were prepared in accordance with the relevant accounting standards. Although the SPA does not contain a warranty that the management accounts gave a true and fair view of the assets and liabilities of the Group, I agree with the judge’s view that the management accounts did present a true and fair view of the Group’s financial position.

The issues in relation to paragraph 4.2 have unfolded in this court in a somewhat different manner from that in which they were presented to the court below.

Mr Glick accepts that there is no breach of the first sentence of paragraph 4.2. The management accounts were diligently prepared in accordance with the relevant accounting standards.

In relation to the second sentence of paragraph 4.2, Mr Glick’s position would clearly be stronger if we had held that the management accounts did not present a true and fair view of the Group’s financial position as at 30^th June 2006. However, Mr Glick submits that even if we are against him on that proposition (as we are), nevertheless there is still a breach of the warranties in the second sentence of paragraph 4.2.

For ease of reference I shall break the second sentence of paragraph 4.2 down into sections. I shall refer to the first section (“On the basis of the accounting bases, practices and policies used in their preparation and having regard to the purpose to which they were prepared, the Management Accounts:”) as “the introductory words”. I shall refer to sub-paragraph (a) as “warranty (a)”. I shall refer to sub-paragraph (b) as “warranty (b)”. I shall refer to sub-paragraph (c) as “warranty (c)”.

Mr Glick submits that the second sentence must be construed in its proper context. It is a warranty given to a purchaser and contained in a sale and purchase agreement. It must not be interpreted from the viewpoint of an accountant. Thus warranty (a) is not a variant, or a watered down version, of the assertion that the management accounts present a true and fair view of the Group’s financial position. On the contrary, warranty (a) is telling the purchaser that the management accounts represent, with a reasonable degree of accuracy, the actual assets and liabilities of the Group. In other words, the management accounts include any existing liabilities, whether known or unknown and whether reasonably discoverable or not.

Likewise, submits Mr Glick, warranty (c) must be construed from the point of view of the purchaser, not from the point of view of an accountant. Mr Glick accepts the judge’s finding that, from an accountant’s point of view, a discrepancy of £2.4 million would not be material in this case. But from the point of view of the purchaser, such a discrepancy would be highly material. It has the immediate effect that the purchase price, which is based upon net asset value, increases by 79%.

In support of this argument Mr Glick submits that if the second sentence is construed from an accountancy point of view, it becomes a watered down version of the “true and fair view” warranty. Such a warranty would add nothing to the first sentence of paragraph 4.2. The words would then be mere surplusage. The court should strive to avoid an interpretation of the second sentence of paragraph 4.2 which deprives that sentence of any effect.

Although Mr Glick presented his arguments most attractively, I cannot accept them.

The whole of paragraphs 4.1 and 4.2 of schedule 3 are warranties about accounts. They spell out what the various accounts represent, how they were prepared and with what degree of precision. The second sentence of paragraph 4.2 is all of a piece with the first sentence. It gives the reader more information about the management accounts. The first part of the introductory words (“on the basis of the accounting bases, practices and policies used in their preparation”) governs warranties (a), (b) and (c). In other words warranty (a) does not purport to tell the reader anything about unknown or undiscoverable liabilities, whether large or small. It tells the reader that the management accounts fairly reflect those assets and liabilities of the Group which the accounting bases, practices and policies permit or require to be included.

Warranty (c) must be interpreted on the same basis. The phrase “not misleading” does not mean that the management accounts represent the actual position on the ground. Nor does it mean that the management accounts include financial liabilities which are unknown or undiscoverable. The phrase means that the management accounts contain the information which the reader would expect management accounts prepared on the stated basis to contain. The fact that these are management accounts and the reference to their purpose (which the judge found to be internal management) warns the reader that there will be a lesser degree of accuracy than one would expect from audited, statutory accounts.

The word “material” in warranty (c) makes express that which would otherwise be implicit. In my view the concept of materiality in warranty (c) must be interpreted by reference to published accounting standards, not by reference to some different or more rigorous test.

I do not accept that the second sentence of paragraph 4.2 is surplusage or that it adds nothing to the first sentence. The first sentence asserts that, subject to the qualification that these are management accounts, they have been prepared in accordance with the relevant accounting standards. The second sentence comes quite close to saying that the management accounts present a true and fair view of the Group’s financial position. However the sentence does not go quite that far, because management accounts are prepared with less precision than statutory accounts and they are not subject to audit. Any cautious draftsman will bear in mind the advice given by Mr Hoffmann and Ms Arden in their widely circulated joint opinion and the statutory true and fair view override to which I have referred. He will know that in exceptional circumstances a provision of this nature adds further protection to the requirement that accounts be prepared in accordance with relevant accounting standards.

In any event, the argument from surplusage is not a powerful one. The draftsman of a contract will strive to ensure that he has hit his target. That striving will sometimes result in the inclusion of unnecessary words or a degree of repetition: see Arbuthnot v Fagan [1995] CLC 1396 at page 1404 (per Hoffmann LJ); Beaufort Developments (N.I.) Ltd v Gilbert Ash N.I. Ltd [1999] AC 266 at page 274 (per Lord Hoffmann).

The above interpretation of paragraph 4 of schedule 3 fits with the overall structure of that schedule. The whole of paragraph 4 is devoted to warranties about the accounts. The warranties given about the assets and liabilities of Corona are set out elsewhere in that schedule, namely in paragraphs 6 and 7. No breach of those two paragraphs is alleged. Furthermore, paragraph 4.1(d) contains a specific warranty as to liabilities shown in the accounts, which is expressly limited by reference to those of which the relevant company was aware as at the Accounts Date and for which disclosure or provision is required. It would be surprising if the existence of an unknown liability, not covered by that warranty, was a breach of the more general warranty in paragraph 4.1(b). Moreover, there is no warranty as to Net Asset Value as such.

Let me now draw the threads together. For the reasons set out above I reject the construction of paragraph 4.2 which Mr Glick has urged upon this court.

In my view, the whole of paragraph 4.2 must be read as a warranty about the manner of preparation and the degree of accuracy of the management accounts. On the judge’s findings of fact, which are not challenged, the management accounts were prepared in the manner required by clause 4.2 and they attained the requisite degree of accuracy. I would therefore dismiss this appeal.

I agree that this appeal should be dismissed, and I shall briefly give my reasons in the light of the admirably presented arguments of Mr Glick QC on behalf of Macquarie.

Lord Justice Jackson has set out the issues, and the relevant facts, contractual provisions and other material very clearly in his judgment, and I gratefully adopt what he says, together with his definitions.

The primary way in which Macquarie’s case is put is that the failure of the Management Accounts, prepared as at 30 June 2006, to take into account the missed meters charge constituted a breach of warranty (c) in that the failure to allow for a liability for well over £2m, which it now turns out actually existed at that date, must mean that those accounts were “misleading in [a] material respect”. Given that warranty (c) was contained in the SPA, an agreement for the sale and purchase of a company, Corona, whose net asset value was under £6m, and the Management Accounts were prepared in relation to the affairs of that company, the argument has considerable initial attraction.

The argument proceeds on the basis that what is “misleading” and what is “material” is to be judged from the viewpoint of the purchaser under the SPA, and that the issue of whether warranty (c) is breached is to be judged by reference to any information whether available as at 30 June 2006 or coming to light thereafter, which can be seen, albeit retrospectively, to affect materially the perceived actual commercial net asset value of Corona as at that date.

Putting on one side the point that this approach to warranty (c) may be neither as conceptually simple nor as commercially fair as it may initially appear, it seems to me that the argument suffers from the fundamental defect of not reading warranty (c) in its contractual context. One cannot satisfactorily, or even properly, decide what warranty (c), or any other provision of the SPA, means by simply taking the essential nature of the bargain contained in the agreement and then reading the provision on its own. One must, of course, construe the provision by reference to its context, and, in this case, in particular its contractual context.

When one sets, and then interprets, warranty (c) in its contractual context, it can be seen that it is not concerned with the management accounts showing a misleading picture by reference to information which comes to light after 30 June 2006 and which materially affects the retrospectively assessed commercial net asset value of Corona as at that date. What the warranty is directed to is any materially misleading aspects of the Management Accounts, assessed on a conventional accounting basis, as at 30 June 2006.

First, warranty (c), like warranties (a) and (b), is part of the second sentence of paragraph 4.2, the management accounts warranty. Accordingly, it is governed by the opening words of that sentence, the introductory words, “On the basis of the accounting bases, practices and policies used in [the] preparation [of the Management Accounts]”. In other words, bearing in mind that the management accounts were prepared in accordance with those “bases, practices and policies”, the warranty assures Macquarie that those accounts are not materially misleading. As a matter of ordinary English, it seems to me that this indicates that, if, according to the accounting practices and policies used to prepare the Management Accounts, there was no reason to take into account, or even to refer to, the missed meter charges, then the failure to do so cannot render those accounts “misleading”, let alone “misleading in any material respect”. The Judge concluded, and this has, realistically, not been challenged, that the Management Accounts, if prepared in accordance with the Standards, not merely could, but positively should, have disregarded the missed meter charges, as there was no evidence of those charges as at the date that the accounts were prepared.

Mr Glick argued that the function of the introductory words was merely to protect Macquarie if one acceptable basis, practice or policy, rather than another, had been used. But that does not meet this point. That is because that argument accepts that, if a proper basis, practice or policy has been used, warranty (c) means that the accounts will not be materially misleading if the basis, practice or policy is complied with.

It is true that this means that warranties (a), (b) and (c), indeed the whole of the second sentence, would add very little, indeed would rarely add anything, to the first sentence, of paragraph 4.2. However, when it comes to drafting warranties in contracts for sales of businesses and of companies, it is scarcely surprising that cautious lawyers, with their clients’ (and their own) interests to protect in an ever faster changing and more litigious environment, should adopt a belt and braces approach. Further, now that documents are routinely drafted by electronic means, with provisions in previous contracts being used and adapted for new contracts, the likelihood of superfluity of expression and duplication of protective provisions is all the greater.

At different stages of his judicial career Lord Hoffmann, whose contributions to the law of interpretation of contracts, as in so many other areas, has been as remarkable for their perception of analysis as for their elegance of expression, has made illuminating observations on the topic of redundancy. At first instance, in Norwich Union Life Insurance Society v British Railways Board [1987] 2 EGLR 137, 138D he referred to the “torrential drafting” of leasehold repairing covenants,. In the Court of Appeal in Arbuthnott v Fagan [1995] CLC 1396, 1404D-E, discussing Lloyds’ agency agreements, he stated that “little weight should be given to an argument based on redundancy”, which he said was “a common consequence of a determination to make sure that one has obliterated the conceptual target”. And, as Lord Hoffmann in Beaufort Developments (NI) Ltd v Gilbert-Ash (NI) Ltd [1999] AC 266, 274B-D, when discussing a JCT Standard Form, he described “the argument from redundancy” as “seldom ... entirely secure”, because of “a lawyer’s desire to make sure that every conceivable point has been covered”. These remarks apply, in my view, with as much force to contractual warranties in sales of companies and businesses, perhaps particularly when it comes to the reliability of accounts.

If one widens the contractual context a little further, it seems to me that this reading of the warranty, indeed of the whole of the second sentence of paragraph 4.2, is consistent with the first sentence of the paragraph. It is clear that this first sentence positively requires the Management Accounts to comply with “the Relevant Accounting Standards” (“the Standards”). Unless one reads the second sentence in the way in which it seems to me that it should be read, there would be a risk of something close to an irresolvable tension between the two sentences; the first would be a warranty that the accounts comply with the Standards, whereas the second would provide for compensation, even though they did so. I accept that there is no logical inconsistency between the two sentences in these circumstances, but it would be an oddity, particularly given that the whole paragraph, as its title indicates, and as Sir Richard Buxton trenchantly pointed out when refusing permission to appeal on Macquarie’s initial written application, is concerned with accounts, not with retrospectively perceived commercial value.

The point is reinforced, if one widens one’s reading of the SPA a little further still, and looks at paragraph 4.1. It seems to me clear that this warranty, despite the fact that it appears to contain a number of different assurances, is very much directed to the accuracy of Corona’s most recent statutory annual accounts (“the Statutory Accounts”) as at 31 December 2005. Paragraph 4.1 first states that (a) the Statutory Accounts have been prepared in accordance with the Standards, and it then goes on to state that those accounts (b) “give a true and fair view”, and (d) “disclose all material actual liabilities”. In my view, it is plain that (b) and (d) are rarely, if ever, likely to add anything to (a). The substantial and consistent authorities and understanding on this point are set out in paragraphs 51 and 52 of Lord Justice Jackson’s judgment. They not only provide the well-established backcloth against which paragraph 4.1 falls to be interpreted, but they demonstrate the reason why paragraph 4.1(b) and (d) take matters very little, if any, further than paragraph 4.1(a).

As Mr Southern QC argued on behalf of Glencore, one must read paragraph 4.2 in the light of paragraph 4.1 (and, to be fair, vice versa). Given that paragraph 4.2 is concerned with management accounts, rather than the more rigorously prepared Statutory Accounts (hence no doubt the words “having regard for the purpose for which they were prepared”), it would be surprising if greater reliance was to be placed on their accuracy than on that of the Statutory Accounts. But, even more to the point, the notion that the second sentence of paragraph 4.2 adds very little to the first sentence, which provides that the Management Accounts comply with the Standards, chimes very well with the notion that subparagraphs (b) to (e) add very little to subparagraph (a) of paragraph 4.1, which provides that the Statutory Accounts comply with the Standards.

Finally, there are the warranties in paragraphs 6 and 7, which contain a number of separate provisions relating, respectively, to the “Assets of [Corona]” and “Liabilities”. As Lord Justice Thomas said when granting permission to appeal on Macquarie’s renewed application (albeit expressing some scepticism as to the prospects of success), it is in these paragraphs, rather than in paragraphs 4.1 and 4.2, which are concerned with accounts, rather than actual assets and liabilities, that one would expect to find a warranty of the type on which Macquarie’s argument relies, and it is not there. In a sense, this is a further aspect of the point made by Sir Richard Buxton: paragraphs 4.1 and 4.2 are concerned with Corona’s accounts, whereas paragraphs 6 and 7 are concerned with its actual assets and liabilities.

Macquarie also relied on warranty (a), but, essentially on the same grounds as those that I have discussed it seems to me that its case on that warranty must fail as well.

For these reasons, which are little more than a summary of the reasons more fully given in the judgment of Lord Justice Jackson, I would uphold the judgment of Mr Justice Andrew Smith and dismiss this appeal.

I agree.