Rust Consulting Ltd v PB Ltd

This appeal and cross-appeal from a decision of Akenhead J in the Technology and Construction Court raises a series of short points as to the meaning of certain provisions in an Asset Purchase Agreement concluded between two companies within a group of companies owned by Kennedy & Donkin Holdings Limited. The meaning of those provisions will be of no interest or importance to anyone other than the immediate parties to this litigation. The background to the dispute is fully set out in Akenhead J’s judgment, which is to be found at [2010] EWHC 3243 (TCC) and I do not propose to repeat them further than is necessary to make this judgment intelligible.

Pursuant to an exchange of letters between 5 September 1995 and 27 November 1995 the Respondent Rust Consulting Limited (“Rust”) was engaged to provide geotechnical engineering services by Rockeagle Limited in respect of the development of a shopping village on a site in Ebbw Vale. The site had been that of the National Garden Festival, reclaimed from an area formerly used for the deposition of steel waste products from Ebbw Vale steelworks. An interpretative geotechnical and environmental report was to be prepared. I shall call this agreement for professional services, as did the judge, the November 1995 Agreement. In the correspondence exchanged it was envisaged that the cost of preparation of the report would be of the order of £8,000. It was said that a “Warranty” would also be required, in a form to be agreed, apparently for the benefit of the local authority. It was envisaged that there would be a further fee of £1,000 in respect of the provision of this document.

In February 1996 Rust provided its report. Amongst other matters contained therein, Rust reviewed recommendations made in an earlier geotechnical report provided by Ove Arup in October 1994. No further relevant professional services were provided by Rust to Rockeagle thereafter, save possibly in a supplementary letter of advice dated 26 March 1996.

For what the judge described as reasons best known to them, on 8 November 1996 Rust and Rockeagle entered into a further agreement (“the November 1996 Agreement”) which was supplemental to the November 1995 Agreement, varied it and incorporated its terms as varied. This November 1996 Agreement provided that Rust adopted the Ove Arup report “as if it was its own”. Further, Rust undertook on request to execute, complete and deliver to Rockeagle collateral warranties in a form attached in favour of various entities including Rockeagle Festival Shopping Limited and the local authority. The November 1996 Agreement was sealed at least by Rust.

On the same day, 8 November 1996, Rust entered into a Deed of Warranty with Rockeagle Limited and Rockeagle Shopping Limited, the latter described as “the beneficiary”. Again, it was executed under seal at least by Rust. The Preamble refers to the November 1995 and November 1996 Agreements and to the production of the February 1996 report, together with advice said to have been given in the letter dated 26 March 1996. Relevant provisions of the Warranty are:-

“1.

[Rust] warrants to [Rockeagle Shopping Limited] that it has exercised and will continue to exercise reasonable skill, care and diligence in the performance of its duties to [Rockeagle Limited]

. . .

3.

[Rust] shall maintain professional indemnity insurance in an amount of not less than . . . £2,000,000 for any one occurrence or series of occurrences arising out of any one event for a period of twelve years from the date of issue of the final report provided always that such insurance is available at commercially reasonable rates . . .”

The effect of this curious document is for present purposes threefold. Firstly it conferred upon Rockeagle Festival Shopping Limited the benefit of the contracts made with Rockeagle Limited in November 1995 and on the same day, 8 November 1996. Secondly it potentially conferred upon Rockeagle Festival Shopping Limited the benefit of a twelve year limitation period. Thirdly it imposed upon Rust an obligation to maintain professional indemnity insurance cover as therein described.

Building work in relation to the shopping village began in late August 1996. The shopping village commenced trading on 25 July 1997. No doubt it was opened incrementally, as practical completion under the building contract was not certified until 9 September 1997.

It is alleged by the Rockeagle companies who developed the site that cracking in the buildings was first noticed in 1999. Nine years later, in March 2008, proceedings were brought against Rust, and against a firm of structural and civil engineers, alleging breach of contract and negligence. By now the Rockeagle companies had become, respectively, Eagle One Limited and Eagle One Festival Shopping Limited, and the judge referred to these proceedings, as will I, as the Eagle One proceedings. It was alleged that in purchasing the site and in proceeding with the development the Eagle One Companies relied upon the advice of the two defendants as to the appropriate foundations to be used. It was alleged that following construction the buildings began to suffer structural damage due to the presence of unstable steel slag waste. The Eagle One Companies claimed to have suffered loss and damage, selling the development at a reduced value and to have incurred additional costs in maintaining the operation of the buildings.

On 24 April 2008 Rust went into creditors’ voluntary liquidation. At a hearing before the Court on 28 November 2008 the liquidators of Rust consented to judgment against Rust for a total sum of £8,069,822.32, representing 100% of the maximum damages claimed.

Meanwhile on 5 September 1997 Rust had entered into an “Intra Group Assets Purchase Agreement” with another company in the same group, Kennedy & Donkin Limited. Both Rust and Kennedy & Donkin Limited were at the time wholly owned subsidiaries of Kennedy & Donkin Holdings Limited. By this agreement “the Vendor [Rust] agreed with the Purchaser [Kennedy & Donkin Limited] to sell to the Purchaser the whole of its property, undertaking, business and assets (except its subsidiaries) and the Purchaser agreed to assume all of its liabilities and obligations, all with effect from 31 December 1996, upon the terms of this agreement”.

Material provisions of the agreement are:-

“1.

Definitions

1.1

In this agreement, unless the context otherwise requires, the following expressions have the meanings set opposite them:-

“Assets”: the whole of the property, undertaking, rights and assets of the Vendor whatsoever and wheresoever situate;

“Business”: the business of the Vendor carried on by it as a going concern at the Effective Date and (if applicable) thereafter;

“Completion”: the performance by the parties of their respective obligations under clause [5];

“Contracts”: all contracts, orders and commitments of the Vendor or any of its Subsidiaries under which the obligations of all the parties thereto had not at the Effective Date been fully performed;

“Effective Date”: close of business on 31st December 1996;

“Liabilities”: the book debts and other liabilities (including VAT thereon) owing by the Vendor at Completion insofar as they are attributable to the Business, the Assets, the Subsidiaries or the Contracts and insofar as they are reflected in the accounts of the Vendor or any of its Subsidiaries as at the Effective Date;

“Market Value”: the aggregate price reasonably obtainable at the close of business on the date of Completion on the open market on an arm’s length basis for the purchase of the Assets and the assumption of the Liabilities;

. . .

2.

Agreement to sell

2.1

Subject to the conditions set out in this Agreement the Vendor sold and transferred as legal and beneficial owner and the Purchaser purchased and took over as a going concern with effect from the Effective Date the whole of the Business and Assets of the Vendor except the Subsidiaries.

. . .

3.

Consideration

3.1

The consideration for the sale and transfer by the Vendor referred to in clause 2 is (i) the sum of £1,000 and (ii) the Purchaser assuming responsibility for the satisfaction, fulfilment and discharge of all of the Liabilities and the Contracts of the Business outstanding at the Effective Date and the Purchaser hereby indemnifies and covenants to keep indemnified the Vendor against all proceedings, claims and demands in respect thereof (the “Consideration”);

3.2

Each of the parties acknowledges that it believes that the Consideration equals the Market Value but if following the date hereof it can be reasonably shown that:-

3.2.1

The Consideration was worth less than the Market Value then the Consideration shall be increased by the sum of the shortfall; or

3.2.2

The Consideration was worth more than the Market Value then the Consideration shall be decreased by the sum of the excess.

. . .

5.

Completion

Completion of the sale and transfer of the Business and the Assets shall take place on and with effect from the close of business on the date hereof when the following shall take place:-

5.1

The Vendor shall deliver to the Purchaser all of the assets capable of passing by delivery and shall allow the Purchaser to take possession of all other Assets hereby agreed to be sold;

5.2

The Vendor shall execute and deliver to the Purchaser all instruments of transfer necessary or desirable for the transfer of all of the Vendor’s rights, title and interest in the Business and the Assets hereby agreed to be sold.

6.

Agency

The Vendor and the Purchaser hereby acknowledge and agree that the Vendor has since the Effective Date been operating the Business as agent for the Purchaser and shall continue to do so until Completion so that all profits and losses relating to the Business arising between the Effective Date and Completion shall be for the account of the Purchaser and that any assets acquired or created by the Vendor relating to the Business between the Effective Date and completion shall have been acquired or created by the Vendor as agent for the Purchaser. The Purchaser shall indemnify and keep indemnified the Vendor in respect of any liabilities incurred since the Effective Date.

. . .

8.

Contracts

With effect from the Effective Date the Purchaser has, to the extent that they were not fully performed, assumed the obligations of and become entitled to the benefits of the Vendor under the Contracts. If consent to the assignment or novation of any of the Contracts is required from any person, until such consent is obtained:-

8.1

the Vendor shall continue to hold the benefit of the Contract on trust for the Purchaser and shall immediately upon receipt pay to the Purchaser any sums received by it under the Contract;

8.2

the Purchaser shall at its own cost and for its own benefit continue to perform the Vendor’s obligations under the contract and shall indemnify the Vendor fully at all times from and against all costs, proceedings, claims, demands and expenses which may be incurred by the Vendor as a result of any act or omission by the Purchaser in relation to the Contract or any failure to obtain the relevant consent; and

8.3

the Vendor shall take such action as the Purchaser may reasonably require to obtain the necessary consents.”

Kennedy & Donkin Limited has changed its name and is now known as PB Limited, the Defendant below and now the Appellant in this court.

It will be noted that the contract contains two indemnity provisions, clauses 3.1 and 8.2. The Eagle One Companies pressed the liquidators of Rust to claim from PB Limited pursuant to those provisions an indemnity in respect of the consent judgment. The liquidators declined, stating that their legal advice was to the effect that the judgment was not in respect of either a Liability or a Contract as defined in the Assets Purchase Agreement, to which I shall refer hereafter as “the APA”. As the principal creditor of Rust the Eagle One Companies have replaced the liquidators who now bring this action against PB Limited for the benefit of the Eagle One Companies.

Akenhead J was asked to determine a series of preliminary issues. Those issues can be summarised as raising the following four topics:-

By his judgment of 21 December 2010 Akenhead J ruled in favour of Rust on topic (1) and in favour of PB Limited on topics (2), (3) and (4). PB appeals on topic (1) and Rust cross-appeals on topics (2) and (3).

It would have been very easy for Rust and Kennedy & Donkin Limited to have made an agreement which simply and expressly provided for the latter to assume all the liabilities of the former. However they did not do that. They drew a distinction between contracts for which Kennedy & Donkin would assume responsibility and liabilities which they would assume. After the effective date the Purchaser was responsible for the performance of defined Contracts and was to indemnify the Vendor in respect of that performance. Clause 8 deals with the situation where the Purchaser cannot perform the outstanding obligations without the consent of the counterparty to whom the obligation is owed. For liabilities both the Effective Date and the Completion Date are relevant to the identification of those which are assumed by the Purchaser. The Completion Date was, I assume, 5 September 1997 as envisaged in Clause 5. Broadly speaking, liabilities undischarged as at completion are assumed insofar as reflected in the accounts of the Vendor (or any of its subsidiaries) as at the Effective Date. Like Contracts, Liabilities is a defined term.

It is common ground that in the definition of Liabilities the parties must have been referring to the Company Accounts (by which I think is meant the statutory audited accounts) for the year ending 31 December 1996, albeit those accounts had been neither signed nor published by 5 September 1997. Both the Directors’ Report and the Auditors’ Report accompanying the accounts are dated 27 October 1997, which the judge found was the date on which they were “finally prepared, signed and filed”.

The Profit and Loss account shows an accumulated deficit at the end of the year of £9.697M, albeit the bulk of that is accounted for by the loss on the sale of the trade assets and liabilities of Rust to PB. Both this document and the Balance Sheet made it clear expressly that the accompanying notes are an integral part of the two documents. The Balance Sheet showed a net asset value of £1,000 (representing the sale price from Rust to PB of the business) and against the entry “Provisions for liabilities and charges” no sum is entered but beside it there is a reference to Note 13. It is common ground that Note 13 adds nothing of relevance to the present dispute and that no financial provision or allowance was made in the accounts against contingent liabilities, either generally in relation to all or some contracts historically entered into by Rust or specifically in relation to the work done for the Eagle One Companies. Note 17 to the accounts is headed “Guarantees and other financial commitments”. Note 17(d) provides:-

“Guarantees and Bonds

The company has contingent liabilities in the ordinary course of business including guarantees and bonds. Any losses foreseen under these arrangements are provided in the accounts. With effect from 31 December 1996, the obligation to make good any contingent liability that crystallises has been assumed by Kennedy & Donkin Limited (formerly Rust, Kennedy & Donkin Limited).”

Note 18 to the accounts is headed “Subsequent Events”. This provides:-

“With effect from 31 December 1996 the company’s trade assets and liabilities were sold at net book value to Kennedy & Donkin Limited (formerly Rust, Kennedy & Donkin Limited), a sister subsidiary undertaking. The company ceased to trade from that date.”

The judge heard expert accounting evidence, from which there emerged the common ground to which I have just referred. The evidence also established that the relevant accounting guidance at the time of the APA and when Rust’s accounts were prepared distinguished between three different categories of contingent losses:

It was accepted before us by Mr David Thomas QC, for Rust, that any accounts of Rust for the year ending 31 December 1996 finalized after the conclusion of the Assets Purchase Agreement would have to make reference to that agreement. Reference was indeed made thereto at Notes 17(d) and 18 to the accounts.

The short point which arises on the appeal and on topic (1) is whether the accounts reflect the type of remote contingent liability which Rust might have had to the Eagle One Companies arising out of the November 1995 and/or November 1996 Agreements. The judge decided that the reference to contingent liabilities in the ordinary course of business reflected that liability. He noted that there was no qualification on the nature of the liabilities assumed so that there was no reason why they should not include liabilities which were not known about on 5 September 1997. Liability for breach of contract arises on breach so that, if Rust was in material breach of the November 1995 or November 1996 Agreement, that had accrued by 31 December 1996. The liability was clearly attributable to the business of Rust. Such a remote contingent liability was reflected in the accounts because such liabilities are referred to expressly in Note 17(d). In my view the judge was right.

Mr David Streatfeild-James QC for PB contended that for a liability to be reflected in the accounts there had to be a provision made in the financial statements as required in the first category of contingent loss mentioned in paragraph 19 above, a probable material contingent loss or, at the very least, a disclosure such as was at that time required by the relevant accounting guidance in relation to the second category of material contingent loss described above, a material contingent loss which is not probable but where the possibility of loss is more than remote or which is probable but where the loss cannot be estimated with reasonable accuracy. It is common ground that no such provision or disclosure was made and indeed none would have been anticipated or was realistically possible. The argument of Mr Streatfeild-James comes effectively to this. The parties must have intended by their use of the expression “reflected in the accounts” something other than a mere recital of the obvious, that any company of this sort which had been trading for some time would or might inevitably have contingent liabilities in the ordinary course of business about which it knew nothing.

In my judgment Mr Streatfeild-James’ argument involves reading into the contract words which are not there. Furthermore it seems to me to go against the grain of the APA. Notwithstanding the somewhat convoluted drafting, the Preamble provides clearly that the Purchaser has agreed to assume all of the liabilities of the Vendor, Rust, not simply those of which there is sufficient knowledge to require either a provision or disclosure in the financial statements.

Mr Streatfeild-James also submitted that the potential purchaser of liabilities would wish to have some mechanism to enable it to identify and assess the extent of that which it was taking on, and noted that although this was an intra-group transaction the consideration for the sale and transfer by the Vendor was stated to be equal to Market Value, being defined as the aggregate price reasonably obtainable at the close of business on the date of Completion on the open market on an arm’s length basis for the purchase of the Assets and the assumption of the Liabilities. This is of course true so far as it goes, but a purchaser in this position could never have a mechanism to enable it to identify and assess the extent of liabilities of which nothing is known. It should also not be overlooked that the purchaser was acquiring an ongoing business and all its assets including goodwill.

Mr Thomas for his part contended that the requirement that liabilities be reflected in the accounts provided a protection to the purchaser in that a general reference to liabilities might not be enough to satisfy the definition of those Liabilities which were to be assumed. He suggested that a general reference to contingent liabilities would not be a sufficient “reflection” of a contingent liability which as at the date of the accounts was quantifiable in the sense that the loss could have been estimated with reasonable accuracy, likewise a loss about which sufficient was known to require disclosure. We do not need to decide whether this argument is right and, as it stands, it too involves reading into the definition a requirement which is not there, that the relevant liability be properly reflected in the accounts. However it seems to me likely that the parties must have had available to them when the APA was made the accounts for the year ending 31 December 1996 in at any rate draft, albeit unsigned, form. The accounts were finalized and signed only a few weeks later. It seems to me that the parties can be regarded as having entered into the APA in the expectation that the accounts would be properly drawn up, which would involve of course that the Directors of Rust make, or more likely had already made, appropriate disclosures to the auditors. I think it likely that as at the date of the agreement the parties knew what would be in the accounts, particularly so far as concerns outstanding liabilities since it is inherently implausible that the parties would have agreed to a definition of Liabilities which left it in the power of the person drawing up the accounts to apportion responsibility.

Since the relevant accounting practice at the time did not require any disclosure in respect of a remote contingent liability such as that of Rust to the Eagle One Companies, and since the liability was not known about, it is difficult to see how that liability could have been reflected in the accounts other than by a general reference to contingent liabilities in the ordinary course of business. There can therefore be no doubt that Note 17(d) is a proper reflection of the liability as it stood as at the date of the accounts. Nothing more could have been said. It is unnecessary to decide what would have been the position in the unlikely event, as these parties would have seen it, that the accounts did not properly reflect a liability. It is sufficient as I see it to conclude that this liability was both reflected and, if it matters, properly reflected in the accounts.

The judge pointed out that if in the accounts the Eagle One Companies had been identified as past contractual counterparties to whom an as yet unknown liability might be owed, and as little as fifty pence allowed in the accounts for the possible liability, there could be no doubt that the liability to those companies would be reflected in those accounts, as required in the definition. As the judge observed the wording is “insofar as they are reflected in the accounts” and not “only to the extent that they are reflected in the accounts”. It would be odd if the adoption of so curious an accounting device could make the difference as to whether a liability of this sort is, in the language of the definition, reflected or not.

Notwithstanding the somewhat cumbersome way in which the APA deals, perhaps of necessity, with the assumption of responsibility for outstanding contractual obligations, I can see nothing surprising in the conclusion that the purchaser in this intra-group transaction to all intents and purposes assumed all of the liabilities of the vendor insofar as attributable to the business. However that may be, I see no escape from the conclusion that the relevant liability was here reflected in the accounts as at the Effective Date. I would therefore dismiss PB’s appeal.

This renders it unnecessary to consider the cross-appeal. I will however briefly set out my conclusions.

It is common ground that as at the Effective Date Rust was under a continuing obligation to maintain in place professional indemnity insurance. It has not been suggested by the Eagle One Companies that Rust failed in that regard. I agree with the judge that the indemnity available under Clause 3.1 is in respect of proceedings, claims and demands in respect of outstanding obligations, and there is no claim in respect of the outstanding obligation to maintain professional indemnity insurance. I do not agree with the argument advanced by Mr Thomas to the effect that a single outstanding contractual obligation opens the door under Clause 3.1 to an indemnity in respect of all other obligations which arose under the same contract, notwithstanding those obligations were fully performed as at the Effective Date. This involves an unnatural reading of Clause 3.1. It is also unnecessary. Other things being equal, inadequate performance of those other contractual obligations will have given rise to a Liability in respect of which there is a separate indemnity.

Mr Thomas has sought to identify three further outstanding contractual obligations in respect of which an obligation to indemnify in turn arises under Clause 3.1:

I reject this approach. Not all lawyers are conscious of the contractual analysis adopted by Diplock LJ in Ward v Bignall [1967] 1 QB 534, 548 and repeated by him as Lord Diplock in Lep Air Services v Rolloswin Investments Ltd [1973] AC 331, 350 which distinguishes between primary contractual obligations of performance and the secondary obligation to pay damages which arises on discharge by breach. It would be unrealistic to think that the parties had in mind such an analysis when they referred to contractual obligations which were not fully performed or which were outstanding. Next, the relevant allegations against Rust were of a failure adequately to perform. It was not suggested that there were obligations which had not been fully performed as at the Effective Date, rather that those obligations had not been performed with reasonable skill and care. Lastly, as there were not outstanding obligations under the 1995 and 1996 Agreements, so therefore there were no duties to the client in respect of which Rust could or was required to continue to exercise reasonable skill, care and diligence under the Warranty.

Rust’s argument under Clause 8 is as follows:-

I do not accept this analysis. The only obligation under the Warranty which was not fully performed as at 31 December 1996 was the obligation to maintain in place professional indemnity insurance for the benefit of Rust. PB had no need of either an assignment or a novation in order to assume and perform that obligation. No question therefore arises as to any failure by PB to obtain a relevant consent to an assignment or a novation. Indeed, I am bound to say that the notion of PB seeking consent to an assignment or novation of contracts long since performed is completely unreal.

The arguments developed on the cross-appeal seem to have gone beyond those deployed before the judge. The judge was in my view right to conclude that Rust could not advance a claim for an indemnity under either Clause 3.1 or Clause 8.2, both for the reasons which he gave and those which I have summarised above.

It follows that I would dismiss both the appeal and the cross-appeal.

I agree.

I also agree.