Global Draw Ltd v IGT-UK Group Ltd & Anor

This is a claim by the claimant, Global Draw Limited, for summary judgment. Global Draw is a subsidiary of Scientific Games Corporation, which is a US company whose business is gaming systems. The first defendant, IGT-UK Group Limited, is an English company which is a subsidiary of International Game Technology, a US corporation also in the gaming equipment business. Both are substantial businesses with international interests. I record that the court was in a position to hand this judgment down on 21 August 2014, but deferred hand down at a request of the defendants who were unavailable because of vacation arrangements.

The claim arises out of the purchase by Global Draw from IGT-UK of the shares in a company called Barcrest Group Limited in 2011. Barcrest’s business was also in the gaming field. As explained later, there are various claims between the parties, but Global Draw’s summary judgment application seeks declarations in respect of the indemnity provisions in the Share Purchase Agreement (SPA). The indemnity is invoked in respect of legal proceedings brought in Italy against Barcrest and Global Draw in respect of a contract which Barcrest had with an Italian company. The amounts potentially at stake in terms of legal costs and liability could be considerable.

In short, Global Draw says that its claim for an indemnity arises from a point of construction of the SPA and other contractual documentation to which there is a clear answer and no defence, and the court has the material necessary to decide it. IGT says that its contrary construction of the relevant terms – that no indemnity arises – is the correct one, or arguably so, which it is all it needs to show on a summary judgment application, and its resolution depends on material not presently available and factual disputes. International Game Technology (the second defendant) is a guarantor of IGT-UK, and no separate issue arises in its case, since it is not in dispute that its liability under the guarantee is coextensive with that of IGT-UK to Global Draw.

The principles governing applications for summary judgment and contractual construction are not in dispute.

In setting out the factual background, I make clear that I am making no findings of fact. Some, but not all of what is set out below, is not however disputed. IGT-UK was the sole legal and beneficial owner of the issued share capital of Barcrest. In 2011, Global Draw purchased the entire issued share capital of Barcrest from IGT-UK. The acquisition took place pursuant to an SPA dated 26 April 2011. Completion under the SPA occurred on 23 September 2011.

Among the products produced by Barcrest were Video Lottery Terminals (VLTs). VLTs are networked computer controlled terminals running gambling games, and returning a minimum fixed percentage of the sums wagered as prizes to players. Each VLT is linked to and controlled by a central server. Barcrest sold VLTs in packages, consisting of the terminals, game software, a game library and access to Barcrest’s central server.

An Information Memorandum prepared in connection with the sale of Barcrest referred to the fact that during the 2010 financial year (ending 30 September 2010) Barcrest had secured two contracts with Italian concessionaires for the provision of 1,500 VLT machines to each customer. Both systems were expected to launch early in the 2011 financial year. One of these contracts was with an Italian company, SNAI SpA (“SNAI”), and this is what is relevant for these proceedings. The position is that on 30 December 2009, Barcrest and SNAI had entered into a Supply, License and Distribution Agreement (the “SNAI Supply Agreement”) for Barcrest to supply VLT packages to SNAI for the Italian market.

It appears that some time prior to 2011, Barcrest’s Italian operations had experienced difficulties and SNAI was alleging breaches by Barcrest of the SNAI Supply Agreement. In March 2011 during Global Draw’s pre-acquisition due diligence, IGT-UK disclosed correspondence between SNAI and Barcrest, describing the difficulties, and setting out proposals for their possible resolution, including a proposed amendment to the SNAI Supply Agreement. Ultimately, SNAI did not agree to amend the SNAI Supply Agreement prior to the signing of the SPA on 26 April 2011. The matters referred to in the correspondence between SNAI and Barcrest were formally disclosed to Global Draw in a Disclosure Letter, dated 26 April 2011 (the “First Disclosure Letter”).

Global Draw’s case (not accepted by IGT) is that it was apparent to both parties by the time the SPA was executed that: (i) there were unquantified and unquantifiable (but potentially significant) difficulties in Barcrest’s Italian operations; (ii) these included the SNAI problems; (iii) the problems with SNAI had not yet been resolved; (iv) there was a risk that the difficulties would not be resolved; and (v) the risk that the difficulties would not be resolved would have to be expressly taken into account in the SPA.

The SPA contained provisions expressly addressing what it defined as the “SNAI Matter”. These were clauses 4.8-4.10, which required the parties to co-operate and work together in good faith with a view to addressing and resolving the issues that had given rise to the SNAI Matter as soon as possible, and in any event, by no later than Completion, to the extent reasonably practicable, and clauses 6.5-6.6, which made specific provision for a payment by IGT-UK to compensate Global Draw in the event that the SNAI Supply Agreement was terminated during a specified period following Completion as a result of a (defined) SNAI Matter, an event defined as a “Covered Termination”.

However, the most important clause for present purposes is clause 9 of the SPA, which contains a list of matters in respect of which IGT-UK agreed to indemnify Global Draw, including clause 9.9(n), which contained an indemnity granted by IGT-UK to Global Draw in respect of the “SNAI Matter”.

In July 2011, which was after execution of the SPA in April 2011 but before Completion, which as noted did not happen until 23 September 2011, an Italian individual called Mr Stefano Tesi was allegedly issued in error with a ticket in the amount of €13,476,000 while playing a Barcrest game provided to SNAI. I am told that the true balance on the ticket was only €11.40. The maximum permissible prize for this game was apparently between €5,000 (for a non-jackpot prize) and €100,000 and €500,000 (for a jackpot prize).

On 9 September 2011, Mr Tesi issued proceedings against SNAI in the Italian courts, namely the Tribunal in Pistoia. I do not have the details, but presumably he is seeking payment of the face value of the ticket he received.

On 23 September 2011:

Global Draw says that the difficulties identified in relation to SNAI, both before execution of the SPA and before Completion, had no effect on the commercial terms of the acquisition, i.e. the purchase price, as calculated in accordance with the SPA. In other words, the parties did not adjust in any way the consideration payable for the business, despite being aware of these issues. This was because, it is submitted, those issues were clearly to be dealt with by the indemnity.

IGT takes issue with this saying that the price was in effect subject to adjustment by clauses 6.5 and 6.6 of the SPA which applied to the unilateral termination by SNAI of the SNAI Supply Agreement by providing a tapering claw back payment from IGT to Global Draw, starting at £8m reducing to zero over about 18 months.

On 16 March 2012, SNAI joined Barcrest as a third party to Mr Tesi’s proceedings before the Tribunal of Pistoia, seeking indemnification from Barcrest in respect of Mr. Tesi’s claim. I am told that these proceedings are now well advanced. A final hearing was scheduled for 2 July 2014, and a final decision is expected during the latter part of 2014.

On 16 April 2012, there were further incidents involving Barcrest-supplied VLTs which occurred at a number of SNAI locations in Italy in which certain VLTs again erroneously printed tickets showing various purported winnings. The purported winning jackpots were substantial, with values between €490,000 and approximately €10.1 million, and gave rise to more threatened and actual claims against SNAI both by players alleging that they had been issued with winning tickets, and by owners of establishments in which VLTs affected by the incident were located.

As a result of the April 2012 incidents, on 4 October 2012 SNAI commenced proceedings in the Tribunal of Rome against both Barcrest and Global Draw, claiming (i) a declaration of liability to SNAI for breach of the SNAI Supply Agreement and in tort; (ii) termination of the SNAI Supply Agreement; and (iii) compensatory damages. Barcrest filed its defence in these proceedings on 12 June 2013. A directions hearing was scheduled for 26 June 2014. A trial date is yet to be fixed.

Barcrest is defending the Tesi proceedings in Pistoia and both Barcrest and Global Draw are defending the SNAI proceedings in Rome. Global Draw and Barcrest say that they have incurred legal costs of at least US$4,145,681 to the end of February 2014 arising out of these various proceedings (though I understand that that figure includes the present proceedings in England). Until the Italian proceedings are finally resolved, it says that these legal costs will inevitably continue to increase.

IGT says that Global Draw has not kept it properly informed about the progress of Mr Tesi’s claim, or the circumstances of the Rome proceedings, which of course arose after it had sold the shares in Barcrest. That is disputed, but it is correct to say that some of the information requested was not disclosed by Global Draw until ordered to do so by Judge Mackie QC on 14 March 2014.

A number of claims between the parties do not fall within the summary judgment application, and it is common ground that whatever the outcome, the matter will proceed to trial. The first is an indemnification claim by Global Draw in the sum of £1 million from IGT arising from the winding up of a company called Cyberview Czech. The second is a warranty claim arising from a claim brought by Oracle Corporation UK Limited, which has now been settled, but there is a sum claimed over. The third is IGT’s counterclaim against Global Draw in respect of various receivables that IGT says are due. Further, the summary judgment application seeks declarations as to Global Draw’s entitlement to an indemnity. The amounts concerned would in any case have to be settled by the court at some stage, if the parties were unable to agree them.

It is relevant to note in that regard that these proceedings were begun by Global Draw on 17 September 2013. Following the Defence and Counterclaim, and Reply, the Case Management Conference was fixed and took place on 14 March 2014. The application for summary judgment was not made until 28 March 2014, though it had been flagged up shortly before the CMC. According to the IGT’s chronology, a trial date has now been set in May 2015. According to the fixing sheet signed by both counsel, the estimated length of the hearing is 5-7 days depending on the summary judgment hearing. It was suggested in argument on behalf of Global Draw that this could be less if the summary judgment application was decided in its favour, which seems likely.

Clause 9.9 of the SPA provides for IGT-UK’s obligation (as “Seller”) to indemnify Global Draw (as “Buyer”) in respect of certain matters, including, by clause 9.9(n), what is defined as the “SNAI Matter”. Clause 9 is the provision that defines the term “Losses”. Clause 9.9(n) limits the indemnity “to the extent that the relevant Loss is suffered or incurred by the relevant Group Company in the period between the Completion Date and the second anniversary thereof”. This gives rise to a construction issue between the parties, but it is not in dispute that the second anniversary of the Completion Date is 23 September 2013.

Clause 9.9 of the SPA provides that:

“The Seller hereby undertakes to indemnify and keep indemnified the Buyer (for itself and as trustee of each Group Company) against all costs (including any costs of settlement), obligations, fines, penalties, losses, liabilities (including liabilities to Tax), present and future damages, claims and expenses (including legal and other professional fees and other losses, liabilities, costs, charges, or expenses suffered or incurred in disputing, defending, investigating or providing evidence in connection with establishing its right to be indemnified pursuant to this clause) (collectively, “Losses”) suffered or incurred by the Buyer, any Group Company or any of their Related Persons in connection with or arising out of:

…

(n)

the SNAI Matter and/or the SNAI Consent Matter, to the extent that the relevant Loss is suffered or incurred by the relevant Group Company in the period between the Completion Date and the second anniversary thereof, save only for Losses comprising diminution in value of the Shares or loss of revenues or loss of profit of the Buyer, any Group Company or any of their Related Persons from a Covered Termination;”

By clause 1.1(h) (part of the interpretation clause) of the SPA:

“a reference to “indemnify” and “indemnifying” any person against any circumstance include indemnifying and keeping that person harmless from all actions, claims and proceedings from time to time made against that person and all loss or damage and all payments, costs or expenses made or incurred by that person as a consequence of or which would not have arisen but for that circumstance (save only for any indirect or consequential losses)”

The letter agreement of 23 September 2011 introduced amendments into the SPA, of which two are relevant. A new clause 9.10 was added after the indemnity provisions in clause 9.9 indicating that the indemnity in relation to the SNAI Matter was to be without monetary limitation:

“…

(b)

without prejudice to the Seller’s other obligations under clause 9.9(n) to indemnify the Buyer against all Losses suffered or incurred by the Buyer, any Group Company or any of their Related Persons in connection with or arising out of the SNAI Matter and the SNAI Consent Matter … shall not be subject to the limitations in amount set forth below or any other limitations as to monetary amount …”

The definition of SNAI matter was itself amended to replace that in the executed version of the SPA, and is shown below with the deletions shown and the amendments underlined:

““SNAI Matter” means any allegations, complaints or claims of any nature whatsoever, whether in tort, contract or under any other principle of applicable law or legal or equitable theory (including any claim of breach of, or default under, the SNAI Supply Agreement by a Group Company, or for termination of the SNAI Supply Agreement), by SNAI (or any of its Related Persons) arising out of, or in connection with or relating to:

(i)

any actual of alleged failure to supply VLT Packages (as defined in the SNAI Supply Agreement), or any part thereof, in a timely manner or otherwise,

(ii)

…

(iii)

any actual or alleged defect, technical issue, anomaly, malfunction, interruption, inadequacy, instability, or non-compliance with any applicable standard or service level (including the Performance Criteria (as defined in the SNAI Supply Agreement)) relating to the VLT Packages … (collectively, a “SNAI Related Fault”), or any part thereof, or

(iv)

any part or portion of any of the foregoing,

in any case of (i), (ii) or (iii) that: (A) subparagraphs (i) through (iv) (inclusive) above that:

(A)

may have occurred or arisen at or prior to Completion,

(B)

has occurred or arisen at or prior to Completion and that continues or becomes apparent or manifest after Completion, or

(C)

that may become apparent or manifest after Completion,

including: (x) any matters related to the allegations by SNAI referred to in the Disclosure Letter or the correspondence between SNAI (or its counsel) and any Group Company (or its counsel) included in the Data Room; and (y) any matters referred to in paragraphs 5.8.2 and 5.8.3 of the letter from the Seller to the Buyer dated 21 September 2011 delivered pursuant to paragraph 4 of schedule 4 of this Agreement, and any other fact, matter or circumstance, directly or indirectly arising out of, or caused by or relating to the SNAI Related Fault that gave rise to any matters referred to in paragraphs 5.8.2 and 5.8.3 of that letter, or any other fact, matter or circumstance falling within sub-paragraphs (i) through (iv) (inclusive) above directly or indirectly arising out of, caused by, or relating to the SNAI Related Fault similar to or related to the SNAI Related Fault that gave rise to those matters, in each such case to the extent based on facts, matters, circumstances, defects and/or failures to comply with any applicable standard or service levels (including, for example, difficulties in scalability required in order to comply with [Barcrest’s] obligations under or as contemplated by the SNAI Supply Agreement) which that are in existence at Completion, but whether such facts, matters, circumstances, defects and/or failures to comply are known or unknown or manifest or otherwise at Completion (it being understood and agreed, for the avoidance of doubt, that any matters relating to (X) the allegations by SNAI referred to in the Disclosure Letter or the correspondence between SNAI (or its counsel) and any Group Company (or its counsel) included in the Data Room are and (Y) the matters referred to in paragraphs 5.8.2 and 5.8.3 of the letter from the Seller to the Buyer dated 21 September 2011 delivered pursuant to paragraph 4 of schedule 4 of this Agreement, will be deemed to be in existence at Completion)”

It is not in dispute that the “SNAI Ticket Issued in Error (€13 million)” was defined as a SNAI Matter, and as explained above, the parties were aware of Mr Tesi’s claim prior to completion, and included it by reference in the contractual indemnity. On the face of it, therefore, Global Draw is entitled to be indemnified against this claim.

IGT nevertheless submits that it has incurred no liability in respect of the claim because the indemnity applies only to the extent that the relevant Loss was actually “suffered or incurred” by Global Draw in the period between the Completion Date and the second anniversary thereof. Global Draw is not entitled to an indemnity, IGT says, in the absence of any liability of Global Draw or Barcrest having been established in the Tribunal of Pistoia or proved in England, which Global Draw does not seek to do. Losses suffered after the two year period which has now expired are not within the indemnity.

IGT argues that if Global Draw had wanted an indemnity unlimited in time it could have stipulated for one, if IGT was prepared to agree (which it says it would not have been). In respect of an indemnity against damages, costs and own party defence costs of litigation arising out of the SNAI Matter, then it is necessary for Global Draw to establish its liability in such litigation before there can be any obligation to indemnify. Unless and until a liability in such litigation is established then it has not been established that any damages, costs and own party defence costs were caused by the SNAI Matter as opposed to an incorrect allegation by a claimant.

Further, IGT argues, a “claim” is “issued” and not “incurred”, and if Global Draw is correct to say that “a “liability” is “incurred” when the facts giving rise to the liability arise or take place, not when that liability is established by a judgment or settlement, the facts giving rise to the liability arose or took place on 11 July 2011, when Mr Tesi got his ticket. However, that would mean that the claim fell outside the indemnity altogether, which cannot have been the parties’ intention.

Global Draw’s case is that this interpretation takes no account of the natural and ordinary meaning of the words the parties used. In particular, IGT-UK undertook not just “to indemnify” Global Draw, but to “keep [it] indemnified”. The indemnity extended not just to Losses “suffered” but also to Losses “incurred”. The disjunctive “or” makes clear these were alternates.

Global Draw says that among the items that constituted indemnified “Losses” were “claims” and “liabilities”. On the natural and ordinary meaning of the words used, a “claim” can only naturally be said to have been “incurred” when it is first made, not when it is finally found by a court to have been well founded. A “liability” is “incurred” when the facts giving rise to the liability arise or take place, not when that liability is established by a judgment or settlement (see for example Bosma v Larsen [1966] 1 Lloyd’s Rep. 22; Telfair Shipping Corp. v Insersea SA [1985] 1 WLR 553, per Neill J, at 566F-G).

Global Draw says that the indemnity therefore extends to “keep [Global Draw] indemnified” in respect of “claims” and “liabilities” that it has “incurred” within the two-year period following Completion, even if those claims and liabilities do not result in a final judgment (or an award of damages) until some point after that period. (The “claims” or “liabilities” in this instance are the Tesi claim and the Rome proceedings.) Counsel made it clear in submissions that for the purposes of the summary judgment application, Global Draw advanced its case predominantly on the basis of “claim” rather than liabilities.

Global Draw argues that this is the meaning which the clause would convey to a reasonable person having all the background knowledge reasonably available to both parties at the time: which principally consisted of their knowledge that there were unresolved problems with SNAI which had already given rise to a claim (the Tesi claim) and might well give rise to further claims by SNAI against Barcrest, and which might well not be resolved before the second anniversary of Completion. The overall scheme of the provisions dealing with the SNAI Matter was that they were to provide Global Draw with protection against the open-ended and unresolved nature of the problems with SNAI, and the claims to which those problems might well give rise. Otherwise, it would be indemnified if it settled on adverse terms within the two years, but not if it resisted an unmeritorious claim but it took longer to dispose of, which would be absurd.

Global Draw says that the indemnity requires IGT-UK to indemnify it in respect of: (1) any damages that may in due course be payable by Barcrest to SNAI in respect of SNAI’s “claim”; (2) any payment that Barcrest might be required to make to SNAI as a result of a settlement reached with it; (3) any legal costs incurred by Barcrest (or Global Draw) in defending the Tesi proceedings brought by SNAI; and (4) any legal costs incurred by Global Draw in establishing its right to be indemnified by IGT-UK in respect of the matter. Since SNAI formally made its “claim” against Barcrest in respect of its allegations in the Tesi proceedings on 16 March 2012, the claim was clearly “incurred” before the two-year anniversary of Completion, and IGT-UK is obliged to indemnify and keep indemnified Barcrest (and Global Draw) in respect of that claim, and in respect of “all loss or damage and all payments, costs or expenses made or incurred by [Barcrest]”, whether before or after the two-year anniversary.

IGT advances other reasons why it says that Global Draw should not have summary judgment, and it also has an argument as to whether the Tesi claim was a “defect” within the definition of “SNAI Matter” before it was established whether it was well grounded or not. I deal with these points below.

The Rome claim is different from the Tesi claim in that the allegedly erroneous tickets were issued and legal proceeding brought in Rome after the sale of the shares in Barcrest was completed. I am told that this claim accounts for the bulk of Global Draw’s claim by value.

Global Draw submits that the Rome proceedings are also a SNAI Matter because they involve “allegations, complaints [and] claims … by SNAI … arising out of, or in connection with or relating to: (iii) [an] alleged defect … relating to the VLT Packages, … that may have occurred or arisen at or prior to Completion …”. The relevant allegations are made by SNAI in its material filed in the Rome proceedings which alleges that the Barcrest System had serious defects which rendered it impossible to use, and that the causes of the April 2012 incident related to “a programming error which was individuated in a component of the gaming software supplied by Barcrest to SNAI (and to faults in the monitoring of the functions of the gaming platform).”

Global Draw says that this allegation is expressed to be supported by a report by NTT Data, and that a further report on which the NTT Data Report was expressly based explains that all of the relevant source code was in place in 2011 (i.e. before Completion). In this respect, Global Draw relies on the witness statement of Mr Gareth Phillips, who is its Chief Technical Officer, filed in support of the summary judgment application.

Global Draw asserts that the fact that these allegations have been made is a matter of record in the Rome proceedings, and there is no realistic prospect of IGT-UK establishing at trial that SNAI has not made these allegations in the Rome proceedings, or that they are not allegations that fall within the definition of SNAI Matter.

Global Draw says that SNAI formally filed its “claim” against Barcrest and Global Draw in respect of the allegations advanced in the Rome proceedings on 4 October 2012, and so the claim was clearly “incurred” before the two-year anniversary of Completion. It follows that the claim made by SNAI against Barcrest and Global Draw in the Rome proceedings is a SNAI Matter, and that the obligation on the part of IGT-UK (as Seller) to indemnify and keep indemnified Global Draw (as Buyer) extends to the “claim” or “liability” it has “incurred” in connection with or arising out of it.

This therefore requires IGT-UK to indemnify Global Draw in respect of: (1) any damages that may in due course be payable by Barcrest and Global Draw to SNAI in respect of SNAI’s “claim”; (2) any payment that Barcrest and Global Draw might be required to make to SNAI as a result of a settlement reached with it; (3) any legal costs incurred by Barcrest and Global Draw in defending the Rome proceedings; and (4) any legal costs incurred by Global Draw in establishing its right to be indemnified by IGT-UK in respect of the Rome proceedings.

IGT makes the same points as it does as regards the Tesi claim to the effect that nothing has been established in the Rome proceedings prior to the closing of the two year window, and no loss having been “suffered or incurred” within the window, the indemnity does not apply. The parties’ respective arguments are essentially as set out above.

There is a further construction dispute between the parties as regards this claim which arises on Global Draw’s case that it is sufficient that allegations are made by SNAI in the proceedings, and that Global Draw does not have to show any actual defect.

IGT relies on the words used in the definition of SNAI Matter set out above, “…in each such case to the extent based on facts, matters, circumstances, defects … that are in existence at Completion”, to argue that the requirement to prove an actual defect in existence at Completion, while removed in respect of Mr Tesi’s claim which is deemed to have been in existence at the date of Completion, remains for other matters including the April 2012 incident which gave rise to the Rome proceedings.

Global Draw responds that the word “facts” as used in this part of the definition means “actual or alleged facts”, and relies on the earlier words in the definition which refer to “any actual or alleged defect”, and submits that the passage relied on by IGT only applies to the part of the definition which is immediately above.

Further, IGT raises a factual issue which applies even if Global Draw is correct on its submissions on the adequacy of allegations for the purpose of establishing liability under the indemnity. IGT says that contrary to Global Draw’s contentions, SNAI does not, as a matter of fact, allege that a technical defect caused SNAI’s losses. SNAI alleges that the cause was a technical defect in the source code combined with a failure by Barcrest to monitor the system adequately on or in the days leading up to 16 April 2012. Although it is correct, therefore, that SNAI alleges a software error as a cause of the 16 April 2012 incident, the error would not have led to any problem had Barcrest monitored the system. Having sold the shares, IGT cannot be held responsible for subsequent failures of this kind.

Global Draw responds that it is apparent that the alleged defect in the software code, identified in the NTT report as being a cause of the incident, is one that pre-dates Completion of the SPA. It says that the materials filed in support of SNAI’s claim in the Rome proceedings make clear that the allegedly defective software code was first deployed in January 2011, three months before the SPA and eight months before Completion, and relies on Mr Phillips’ evidence in this respect. It accepts that there is a factual issue between the parties as to when the software code was actually installed in the VLT packages, but there can be no serious dispute that SNAI alleges that the defective code pre-dated Completion, which is sufficient, it submits, to establish its claim under the indemnity.

I can understand why Global Draw wishes to have clarity as to its rights under the indemnity, but my conclusions on whether it is entitled to have declarations on a summary basis are as follows:

The parties can draw up an order that gives effect to the above. It may be sensible to agree any further directions that can usefully be given at this stage.