Nobahar-Cookson & Ors v The Hut Group Ltd

This appeal raises a short point of construction relating to a contractual time limit for the making of warranty claims pursuant to a Share Purchase Agreement dated 30 May 2011 (“the SPA”). The answer to the question of construction does not turn upon any detailed appreciation of the factual or commercial background to the making of the SPA, which may be found in the judgment of Blair J [2014] EWHC 3842 (QB), at paragraphs 14-34.

It is sufficient by way of summary for me to say that the SPA provided for the sale of a company called Cend, which carried on an online sport nutrition business, by its shareholders (described as the “Sellers”) who are the defendants and appellants in these proceedings, a Mr Nobahar-Cookson and Barclays Private Bank & Trust Limited (now called Zedra Trust Company (Jersey) Limited) to The Hut Group Limited (described as “Buyer”) in exchange for consideration consisting partly of cash and partly of shares in the Buyer. The Hut Group Limited is the claimant and respondent in these proceedings.

Both the Buyer and Sellers gave each other detailed warranties which, in the case of the Sellers, included comprehensive warranties about the accounts, business, assets and affairs of Cend.

In due course, both the Buyer and the Sellers made warranty claims against each other, which led to proceedings in the Commercial Court which culminated in a judgment in the sum of £4.3m odd in favour of the Buyer on its claim, and a judgment in the sum of £10.8m odd in favour of the Sellers on their counterclaim.

In finding in the Buyer’s favour on its claim, the judge rejected a submission by the Sellers that the claim fell foul of the time limit imposed by clause 5.1 of Schedule 5 to the SPA in the following terms:

“The Sellers will not be liable for any Claim unless the Buyer serves notice of the Claim on the Sellers (specifying in reasonable detail the nature of the Claim and, so far is practicable, the amount claimed in respect it) as soon as reasonably practicable and in any event within 20 Business Days after becoming aware of the matter.”

The Buyer’s claim was that the Sellers were in breach of warranties that Cend’s Management Accounts gave a true and fair view of Cend’s financial position, and had been prepared on a basis consistent with that used for its statutory accounts.

The Buyer served notice of its warranty claim pursuant to clause 5.1 on 6 February 2012. It was common ground therefore that, if the Sellers could show that the Buyer had become “aware of the matter” within the meaning of clause 5.1 by 9 January 2012, then its warranty claim would be contractually time-barred.

The judge found that the Buyer had become aware of the facts about Cend’s financial position sufficient to prove its breach of warranty claim, when compared with what was stated in the Management Accounts, before 9 January 2012, and that it was by that time aware that it might have a claim under the warranties in the SPA. Nonetheless he found that the Buyer was not aware of the claim identified in the clause 5.1 notice until after that date, because it became so aware only upon receipt thereafter of advice to that effect from its forensic accountants PWC. He concluded that the phrase “aware of the matter” at the end of clause 5.1 meant, in effect, “aware of the Claim”. He distinguished between awareness of the facts giving rise to the Claim and awareness that there might be a claim, on the one hand, and awareness of “a proper basis” for the Claim, on the other: see paragraph 79 of the judgment.

There is no appeal against the judge’s findings of fact summarised above, about the state of the Buyer’s awareness. Rather, the appeal has been presented (and very well argued) upon the basis of an invitation to this court to choose between three alternative constructions of the phrase “aware of the matter”, namely:

Counsel helpfully grouped their submissions under three common headings: (i) language, (ii) commercial common sense, and (iii) a label which they chose to use: contra proferentem. It is convenient to address the submissions about the extent, weight and applicability of what they called the contra proferentem principle first.

The judge rejected the submission made to him that the contra proferentem principle supported a narrow interpretation of clause 5.1 in the following terms, at paragraph 79(1) of the judgment.

“(1)

THG submitted that since the clause was capable of operating harshly, the time-bar provision should be construed contra proferentem. However, in this contract both parties were subject to time-bars in similar terms, so that each was subject to the same limitation (see e.g. Lewison, The Interpretation of Contracts (5^thed, 2011) p.619-620). There is no reason to apply such a canon of construction to mutual rights and limitations.”

In this court Mr John Odgers QC supported the judge’s conclusion on the broader ground that the contra proferentem principle is not now regarded as of any significant weight for the purpose of construing commercial contracts, and that it is a principle of interpretation of last resort. For that purpose he relied upon dicta to that effect in Sinochem International Oil (London) Co Ltd v Mobil Sales & Supply Corporation [2000] 1 Lloyd’s Rep. 339, at paragraph 27, per Mance LJ; K/S Victoria Street v House of Fraser (Stores Management) Ltd [2012] Ch 497 at paragraph 68 per Lord Neuberger MR (giving the judgment of this court), and Lewison on The Interpretation of Contracts (6^th ed) at paragraph 7.08(g), on page 395, with its citation of CDV Software Entertainment AG v Gamecock Media Europe Limited [2009] EWHC 2965, and Landlord Protect Ltd v St Anselm Development Co Ltd. [2008] EWHC 1582 (Ch).

It is certainly true that there are dicta in those cases which appear at first sight to be broadly supportive of Mr Odgers’ submission. The best example is perhaps the following passage from Lord Neuberger MR in the K/S Victoria Street case at paragraph 68.

“… such rules are rarely if ever of any assistance when it comes to construing commercial contracts. Quite apart from raising abstruse issues as to who is proferens (and, in particular, whether the issue turns on the precise facts of the case or hypothetical analysis), “rules” of interpretation such as contra proferentem are rarely decisive as to the meaning of any provisions of a commercial contract. The words used in a commercial sense, and the documentary and actual context, are, and should be, normally enough to determine the meaning of a factual provision.”

But none of those cases was about exclusion clauses, and the contra proferentem rule in its classic form was by no means limited to, or even mainly about, exclusion clauses. It was a rule designed to resolve ambiguities against the party who prepared the document in which the clause appeared, or prepared the particular clause, or against the person for whose benefit the clause operates: see Lewison, (op. cit.) at paragraph 7.08(b) at page 391, and the admirable historical introduction which precedes it.

Taking them in turn, the Sinochem case was about a provision against set-off, which Mance LJ said (at paragraph 27) was not to be regarded as an exclusion clause. The K/S Victoria Street case was about a provision in a lease defining the circumstances in which consent to an assignment had to be obtained: see paragraph 9. The CDV Software Entertainment case was about a termination clause. The Landlord Protect case was, again, about a clause in a lease about consent to assignment.

In contrast, recent decisions about exclusion clauses have continued to affirm the utility of the principle that, if necessary to resolve ambiguity, they should be narrowly construed, including in relation to commercial contracts. Association of British Travel Agents Limited v British Airways Plc [2000] 2 Lloyd’s Rep. 209 was about an exclusion clause in a commercial contract. At paragraph 43 Clarke LJ said:

“In my opinion, in all these circumstances, where there is doubt as to the true meaning of the expression “other charges”, it should be construed against the airlines contra proferentes both for the reasons already given and because it appears in an exclusion clause.” (my underlining)

In Laminates Acquisition Co v BTR Australia Ltd [2003] EWHC 2540 (Comm) the Commercial Court had to construe a contractual time limit for giving notice of a claim in broadly similar terms to that in issue in this appeal, and again in a commercial contract. At paragraph 30 Cooke J treated it as axiomatic that he should apply what he called “the usual principles which apply to construction of exclusion clauses” to a time limit of that kind. The application of principles for the construction of exclusion clauses to contractual time-bars has been settled for nearly a century: see Atlantic Shipping and Trading Co Ltd v Louis Dreyfus & Co [1922] 2 AC 250.

In my judgment the underlying rationale for the principle that, if necessary to resolve ambiguity, exclusion clauses should be narrowly construed has nothing to do with the identification of the proferens, either of the document as a whole or of the clause in question. Nor is it a principle derived from an identification of the person seeking to rely upon it. Ambiguity in an exclusion clause may have to be resolved by a narrow construction because an exclusion clause cuts down or detracts from the ambit of some important obligation in a contract, or a remedy conferred by the general law such as (in the present case) an obligation to give effect to a contractual warranty by paying compensation for breach of it. The parties are not lightly to be taken to have intended to cut down the remedies which the law provides for breach of important contractual obligations without using clear words having that effect: see Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689 per Lord Diplock at 717H, applied in Seadrill Management Services Ltd v OAO Gazprom [2010] EWCA Civ 691, by Moore-Bick LJ at para 29.

This approach to exclusion clauses is not now regarded as a presumption, still less as a special rule justifying the giving of a strained meaning to a provision merely because it is an exclusion clause. Commercial parties are entitled to allocate between them the risks of something going wrong in their contractual relationship in any way they choose. Nor is it simply to be mechanistically applied wherever an ambiguity is identified in an exclusion clause. The court must still use all its tools of linguistic, contextual, purposive and common-sense analysis to discern what the clause really means. In the Seadrill Management case Moore-Bick described the principle as:

“essentially one of common sense; parties do not normally give up valuable rights without making it clear that they intend to do so.”

In the present case the Buyer challenged by respondent’s notice the judge’s conclusion that clause 5.1 should not be construed contra proferentem because both sides gave warranties to each other, subject in each case to exclusion clauses. In my judgment that challenge to the judge’s analysis is well made. I can see no reason to disapply the principle that resolves ambiguities in a particular exclusion clause by a narrow construction, merely because the same contract contains an exclusion clause limiting the extent of contractual warranties given by the other party. The same principle may be used where necessary to resolve ambiguities (if there are any) in either of them.

For those legal reasons I approach the issue as to the construction of clause 5.1 upon the basis that there remains a principle that an ambiguity in its meaning may have to be resolved by a preference for the narrower construction, if linguistic, contextual and purposive analysis do not disclose an answer to the question with sufficient clarity.

Turning therefore to the language, it is necessary first to set clause 5.1 in its context. The word “Claim” used three times in clause 5.1 is defined in clause 1(a) as meaning, for present purposes, “any Warranty Claim”. That phrase is defined in clause 1.1 of the main Agreement as meaning “a claim by the Buyer for breach of a Warranty … ”.

Clause 5.1 is part of a group of provisions regulating the bringing of claims. Clause 5.2(c) provides a twelve month period from the date of the SPA for the bringing of “any other Claim”. This means all Claims other than Tax Warranty Claims, Tax Covenant Claims or Locked Box Claims which have separate time limits provided for them. Clause 5.2(c) operates as a one year limitation period regardless of the state of awareness of the Buyer.

Clause 5.3 provides that a Claim notified to the Sellers under clause 5.1 and not satisfied, settled or withdrawn will be unenforceable against the Sellers on the expiry of nine months starting with the day of notification of Claim, unless proceedings in respect of the Claim had by then been both issued and served on the Sellers.

Mr Odgers’ submissions on the language began with the proposition that, by using the phrase “aware of the matter” rather than “aware of the Claim” the draftsman must have intended to identify something other than the Claim as that about which awareness would start time running. If the draftsman had intended to relieve the reader from wearying repetition of “Claim” then he could have used the phrase “aware of it”. He then sought to illustrate by reference to clauses 7 and 15 a tendency of the draftsman to treat a Claim as something which arises out of a matter. Clause 7 provides that :

“The Sellers will not be liable for any Claim and accordingly no Claim may be brought by the Buyer if it is a Claim which arises wholly or partly out of or in connection with any fact, matter or circumstance Fairly Disclosed.”

Clause 15 provides that:

“The Buyer will not be entitled to recover damages or any other amount in respect of any claim under this Agreement or otherwise obtain reimbursement or restitution more than once in respect of the same matter, loss or liability, and for this purpose any payment by the Sellers under the Tax Covenant will be deemed to satisfy any other Claim or other claim under this Agreement in respect of the same matter and visa versa”

Returning to clause 5.1, he submitted therefore that the use of “matter” as conveying the same notion of something out of which a Claim arises must mean the set of facts which gives rise to the Claim. Seeking to fend off the Buyer’s argument that “matter” in clause 5.1 simply means entitlement to make the Claim, he invited comparison with clause 12.1(a) which obliges the Buyer to notify the Sellers of a right to recover from a third party any sum for any damage or liability which is or could be the subject of a Claim, defined as “a Third Party Recovery”:

“Within 20 Business Days after the Buyer or relevant Buyer Group Company becomes aware that it may be entitled to make the Third Party Recovery.”

There, he submitted, is the draftsman using the concept of entitlement expressly, when he wishes to do so.

Finally, Mr Odgers challenged the judge’s conclusion that “aware of the matter” meant knowing that a claim had a proper basis by pointing to the absence of any formulation of such a concept in clause 5.1. He submitted that the “proper basis” concept had been plucked from the air by the judge, that it was unsatisfactory, uncertain and too subjective, by comparison with the concept of awareness of the relevant underlying facts.

For his part, Mr Edey QC submitted that “awareness of the matter” clearly took the reader back into clause 5.1 to find out what that matter might be, to which the only answer could be the three times repeated “Claim”. He pointed out that, in clause 7, fact and matter were treated as distinct and that there was to be found in clauses 12.1, 13.1 and 13.2 general provision of awareness of various forms of claim which operated harmoniously with treating awareness in clause 5.1 as being also about a Claim. He concluded that the judge’s “proper basis” concept was simply a convenient way of putting flesh on the bones of a concept of awareness of a Claim, so as to distinguish between awareness of a merely speculative possibility and awareness of something which a businessman could conscientiously and in good faith put forward as something to which he could claim to be entitled, without necessarily having any precise view as to his prospects of success.

Looking at the matter linguistically, and encouraged by Lord Neuberger’s observations in Arnold v Britton[2015] AC 1619, at paragraphs 17-20, to treat the natural meaning of language as the best guide to interpretation, I have not found in any of counsel’s submissions a clear answer to the question which of the three alternative interpretations of “aware of the matter” is correct. The word “matter” within that phrase does not clearly mean Claim and perhaps could not strictly do so. The defined term “Claim” means a claim that is actually notified and later pursued by the institution of proceedings, and which during the limited 20 day period prior to notification is not yet in existence at all. It could therefore easily refer to some entitlement to bring the Claim or to some basis of fact, or mixed fact and law, from which the Claim would arise. The natural meaning of the language is by no means so clear as to preclude serious consideration of the commerciality or otherwise of rival interpretations or, for that matter, to preclude recourse to the principle that ambiguous exclusion clauses should be construed narrowly.

Looking at the commercialities, Mr Odgers submitted that the “proper basis for bringing the Claim” concept identified by the judge, and indeed any concept focused upon awareness of an entitlement to bring the Claim was bound to introduce open-ended and subjective uncertainties which would subject any litigation about the effect of clause 5.1 in a particular case to such a level of forensic uncertainty that commercially sensible parties would have chosen to avoid it. He said that any analysis of the Buyer’s state of awareness in relation to a Claim that went beyond awareness of the relevant facts would introduce hopeless uncertainty as to the perceived strength of the claim necessary to start time running. Any such analysis would, he said, risk delving into the content of advice as to the merits which might have been tendered to the Buyer, all of which would be bedevilled by the Buyer’s entitlement to legal professional privilege. This appears to have been the main reason why Sir Robin Jacob granted permission to appeal.

Mr Odgers pointed out that there was no uncommercial hardship caused to the Buyer from having time running from the moment of awareness of the relevant facts, first because 20 Business Days was ample for him to obtain any necessary advice as to whether those facts disclosed a Claim and further because, even after notification of a Claim, the Buyer had a further 9 months within which to issue and serve proceedings.

Mr Edey’s main point on commerciality, to which he regularly returned, was that construction (a), which started time running from the moment of awareness of the underlying facts, could easily lead to a Claim being time-barred before the Buyer knew, or indeed even suspected, that those facts could found a Claim under the warranties. He suggested that no purposive interpretation of clause 5.1 could have been intended to have that draconian consequence. Clause 5.1 was, he submitted, merely designed to ensure that the Buyer did not keep up its sleeve claims of which it was aware. He pointed out that, among the numerous warranties in the SPA, there were plenty (including the accounting warranties) where knowledge of the relevant facts would by no means lead to an awareness that they gave rise to entitlement to a Claim without sophisticated assistance from expert accountants. Further, he submitted that no comforting certainty was in fact likely to be achieved by an interpretation which focused on awareness of facts, rather than awareness of a Claim, because many warranty claims could be based upon a multitude of facts, giving rise to grave forensic difficulty in identifying that group of them of which awareness would be sufficient to start time running.

Finally, he submitted that construction (b), under which time runs from the moment when the Buyer is aware that there might be a Claim, is both hopelessly uncertain, as to the degree of suspicion required and uncommercial, in apparently requiring a Claim to be notified, between parties with a continuing business relationship (as these parties had following the SPA), when the Buyer had no better perception than that a Claim might, or might not, be available. This consideration formed an important part of the judge’s commercial analysis.

Save that I do regard construction (b), requiring notification of a Claim when it was merely suspected, as so uncommercial that it ought to be rejected, I do not consider that the rival commerciality arguments provide any fatal obstacle to either of the other two constructions. It is not an insuperable objection that a time-bar in clause 5.1 should prevent a claim at a time when the Buyer was unaware of it. This is in any event the clear consequence of the expiry of the 12 month period for making Claims provided in clause 5.2(c).

Conversely, I am not persuaded that one or other of constructions (a) or (c) give rise to such forensic difficulties in litigation about clause 5.1 that the parties cannot have intended them. On the contrary, it seems to me that forensic difficulties about the level of assurance in the Buyer’s awareness of a Claim are not inherently larger than difficulties in identifying the relevant facts of which the Buyer must be aware in a complicated warranty Claim. Further I doubt the value of treating an evaluation of the forensic difficulties of litigation as shedding much light on the presumed reasonable intentions of commercial counterparties. Nor does the relative shortness of the 20 Business Days period for turning knowledge of facts into a sufficient understanding of the consequent Claim to be able to formulate it in a notice complying with clause 5.1 seem to be so draconian that the parties cannot have intended it.

More generally, I am persuaded that Mr Edey correctly identified the purpose behind clause 5.1, namely to prevent the Buyer from pursuing claims previously kept up its sleeve, rather than to goad him towards analysis and the obtaining of advice about known facts sufficient to enable him within 20 Business Days to notify a Claim. That being the purpose, it seems to me that it is better served by an interpretation which focuses upon awareness of the Claim than upon awareness of the underlying facts. Although the language of clause 5.1 does not, viewed separately from its purpose, point clearly to that conclusion, it is by no means inconsistent with it.

My analysis thus far leads me, but with less assurance than the judge, to the same conclusion that he reached. But whereas he rejected any contra proferentem principle as assisting him towards that conclusion, I have been considerably assisted by my perception that the undoubted ambiguities in this exclusion clause are properly to be resolved by having recourse to the narrower of two available interpretations or, if construction (b) survives commercial absurdity (which I doubt), the narrowest of the available three. Clause 5.1, interpreted as contended for by the Sellers, would make such a large inroad into the Buyer’s entitlement to compensation for breach of warranty, for no sensible purpose, that it would have taken clearer words than the parties have chosen to use to achieve that result.

In conclusion therefore, I consider that a purposive interpretation of clause 5.1 on a fairly narrow balance favours the judge’s conclusion, but that it is significantly reinforced by being the narrower of the available interpretations of a seriously ambiguous exclusion clause. In this perhaps unusual case, a thoroughly modern recourse to purposive construction happily marches hand in hand with a perhaps more old-fashioned recourse to rules or canons of construction, which continue to assist the court where all else fails.

For those reasons I would dismiss this appeal.

It is clearly not necessary for me to add anything given the outcome of this appeal as expressed by Briggs LJ and agreed by Hallett LJ.  However, on the difference between them, as identified by Hallett LJ, I too would have placed greater weight on commercial sense in upholding the judge's decision.

I am indebted to Briggs LJ for the clarity of his analysis. I agree with him that the appeal must be dismissed. I part company from him only in one respect. For my part, I would place greater emphasis, as Blair J did, on the commerciality of the Respondent's interpretation.