IPSOS SA v Dentsu Aegis Network Ltd

By its application, dated 25 November 2014, the Defendant (‘Aegis’) applies to strike out this claim, or alternatively, to enter summary judgment against the Claimant (‘Ipsos’).

In broad summary, Ipsos, as buyer, has brought a claim for damages for breach of a warranty in a share sale and purchase agreement against Aegis, as seller; and Aegis contends that Ipsos failed to comply with a contractual notification requirement for such a claim.

Under the terms of the share sale and purchase agreement dated 26 July 2011 (‘the SPA’), Aegis sold and Ipsos purchased shares in companies in the Synovate Group which conducted a world-wide business in market research. The present claim relates to a Brazilian company within the group, Synovate Brazil Ltda.

Under clause 9.1 of the SPA, Aegis warranted to Ipsos that each of the ‘Seller Warranties’ was true and correct at the signing date. Clause 11 confined Ipsos’s remedies for breach of the Seller Warranty by the extent that the relevant circumstances had been disclosed; and clause 12 provided for Aegis to indemnify Ipsos, inter alia, in relation to matters disclosed in the section of the Disclosure Letter headed, ‘Litigation’.

Schedule 3 contained the Seller Warranties. These included §17 which related to employment.

…

17.9.

So far as the Seller is aware, no person who is not an employee of a member of the [Synovate] Group has made or threatened to make any claim, which is currently pending or unresolved, to be treated as, or no less favourably than, an employee of a member of the [Synovate] Group and, so far as the Seller is aware, no circumstances exist which might give rise to such a claim.

…

17.14.

So far as the Seller is aware, no liability has been incurred by, and no material claim has been notified to or is anticipated by any member of the [Synovate] Group for breach of any contractual arrangement or Law relating to an employee of the [Synovate] Group save as and to the extent disclosed in the litigation summaries in folder 3.2 in the Data Room.

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17.24.

Each member of the [Synovate Group] has at all times materially complied with all applicable employment and social security Laws or other Laws affecting contractual or other relations between employers and their officers, employees or workers.

Specific disclosures were made in a Disclosure Letter; and Ipsos agreed that it would not be entitled to claim any fact, matter or circumstance which caused any Seller Warranty to be breached if fairly disclosed in, or by virtue of, the Disclosure Letter.

Ipsos’s claim in the present proceedings is that some 200 claims have been made in Brazil by contract workers against Synovate Brazil Ltda alleging that they should have been treated as employees, and claiming additional benefits to which they would have been entitled as employees. It accepts that 62 of these claims were the subject of disclosure by Aegis in the Disclosure Letter.

On 26 March 2014 Ipsos issued a Claim Form in the following terms:

Contrary to paragraph 17.24 of Schedule 3 to the SPA (‘Seller Warranty 17.24’), [Aegis] breached a number of Brazilian Labour laws by failing to treat a number of individuals as employees and subsequently failing to offer them the benefits and mandatory contributions to which they were statutorily entitled.

As Mr Fealy QC pointed out, the claim is not founded on the existence of the Brazilian claims nor on the basis that they were not disclosed.

Aegis relies by way of defence on the contractual limitations on the Seller’s Warranty claims. These ‘limitations on Seller’s liability’ were set out at Schedule 5 of the SPA. The two material limitations are set out in §3.1 and §5.1.

3.

Time Limitations.

3.1

No Seller Warranty Claim, … Indemnity Claim … shall be brought against the Seller unless (and the Seller shall only have liability in respect of any such Claim if) the Purchaser shall have given to the Seller written notice of such Claim … (a ‘Claim Notice’) specifying in reasonable detail: (i) the matter which gives rise to the Claim; (ii) the nature of the Claim; and (iii) (so far as is reasonably practicable at the time of notification) the amount claimed in respect thereof (comprising the Purchaser’s good faith calculation of the loss thereby alleged to have been suffered) … such Claim Notice to be given by:

(A)

in the case of a Seller Warranty Claim…, or an Indemnity Claim, the second anniversary of Completion.

…

provided that the liability of the Seller in respect of any such Claim shall absolutely determine (if such Claim has not been previously satisfied, settled or withdrawn) if legal proceedings in respect of such Claim shall not have been commenced within six (6) months of the service of the relevant Claim Notice (the ‘Proceedings Commencement Period’) …

…

5.

Actions by third parties.

5.1

If the Purchaser (or any member of the Purchaser’s Group) becomes aware of any claim, action or demand made against it (or any member of the Purchaser’s Group) by a third party (a ‘Third Party Claim’) which will or may give rise to a Seller Warranty Claim (other than a Tax Warranty Claim), an Indemnity Claim or an Interim Covenant Claim, the Purchaser shall:

(A)

as soon as practicable, notify the Seller by written notice specifying (in reasonable detail) the matter which may or will give rise to the relevant Claim and that there will or may be a relevant Claim as a result of the Third Party Claim …

…

5.3

Any failure by the Purchaser to comply with the provisions of this paragraph 5 shall not prevent any relevant Claim by the Purchaser or extinguish any liability of the Seller in respect of the relevant Claim in question but shall be taken into account in calculating any such liability of the Seller to the extent that such liability is increased by such failure.

Paragraphs 3 and 5 cover different situations; and in case of non-compliance lead to different consequences.

Paragraph 5 is concerned with claims by third parties against the business; and a failure to comply with the obligation to notify the Seller under this paragraph does not prevent the claim succeeding, although it may be taken into account if the liability to a claimant is increased by the failure to give notice, for example, by losses attributable to a lost opportunity for the Seller to take on the sole conduct of the claim under 5.1(C).

Paragraph 3 is concerned with claims brought by the Purchaser and provides for a time limit for giving notice of such claims (two years from the date of completion) and a further time limit for bringing proceedings (within six months of the giving of notice).

It is common ground that two letters were written by Ipsos which purported to constitute compliance with its obligation to give contractual notices. The issue on this application is whether they were effective.

Before considering the letters it is convenient to consider the purpose of notification provisions in share sale agreements.

The starting point is the statement of Ward LJ in Forrest v. Glasser [2006] 2 Lloyd’s Law Rep 392 at [24] in which, referring to the observations of Gloster J in RWE Nukem Ltd v. AEA Technology plc [2005] EWHC (Comm) 78, he observed that the only true principles to be derived from the authorities is that every notification clause turns on its own wording.

Not discouraged by these observations the parties referred to a number of authorities, including the decision of the Court of Appeal in Senate Electrical Wholesalers Ltd v. Alcatel Submarine Networks Ltd [1999] 2 Lloyd’s Rep 423 and the decision of Cooke J in Laminates Acquisitions v. BTR Australia Limited [2004] 1 All ER (Comm) 737.

It seems to me that four broad propositions can be derived from those cases which are of potential relevance to the present application.

First, §3.1 is an example of a common type of provision whose purpose is to debar claims which are not notified within a finite period. The commercial purpose includes ensuring that sellers know in sufficiently formal terms that a claim for breach of warranty is to be made, so that financial provision can be made for it. Such a purpose is not served if the notice is uninformative or unclear, see Stuart-Smith LJ in the Senate Electrical case at [90]. Stuart-Smith LJ went on to add, in the context of the particular wording in that case and a particularly uninformative notice, at [91]:

Certainty is only achieved when the vendor is left in no reasonable doubt not only that a claim may be brought but of the particulars of the ground upon which the claim is based. The clause contemplates that the notice will be couched in terms which are sufficiently clear and unambiguous as to leave no such doubt and to leave no room for argument about the particulars of the complaint. Notice in writing is required in order to constitute the record which dispels the need for further argument and creates the certainty.

Secondly, in construing such a notice the question is how it would be understood by a reasonable recipient with knowledge of the context in which it was sent, see the Laminates case at [29].

Thirdly, the notice must specify that a claim is actually being made, see the Laminates case at [33], the notice:

… must make it clear that such a claim is being pursued whatever wording is used, rather than indicating the possibility that a claim may yet be made.

In this respect, there is a clear difference between a Claim Notice under §3.1 and the notice under §5.1.

Fourthly, in the present case (as in other cases) requirement of the notice of a claim is matched by a requirement for certain matters to be specified in the notice. The use of the word ‘specifying’ in §3.1 suggests very strongly that it is not sufficient that the matters referred to in (i)-(iii) may be inferred.

The notification provisions in the Laminates case were in similar terms to those in the present case. Thus §2 in Schedule 8 of the contract in the Laminates case was substantially similar to § 3.1 of Schedule 5 in the present case; and there were similarities between the ‘Conduct of Litigation’ notice in §3 in the Laminates case and §5 of the SPA in the present case.

In the course of his judgment Cooke J at [31] considered the need to specify the matter which gives rise to the claim, the nature of the claim and the amount claimed.

The notice must specify ‘the matter which gives rise to the claim’. This must mean the underlying facts, events and circumstances, which constitute the factual basis on which the claim is posited … the notice must specify ‘the nature of the claim’. The parties agree that this must mean notification of what is being claimed and the basis of it by reference to the SPA – namely the form and substance of the claim … the notice must set out the ‘amount claimed’. This specifically requires a calculation on the part of [the purchaser] of the loss which is allegedly suffered.

The Judge noted, in that case as in this, that the obligation in the Claim Notice included a requirement of ‘reasonable detail’.

In the ROK Plc (in administration) v. S Harrison Group Ltd [2011] EWHC (Comm) at [67] Richard Siberry QC (sitting as a Deputy High Court Judge) considered the requirement of ‘reasonable detail’.

The words ‘in reasonable detail’ were presumably intended to add something to a requirement to specify the nature of the Claim and the amount claimed. It is impossible to define, in abstract terms, what would, or would not, constitute reasonable detail-though it is clear, as ROK submitted, that these words did not require ROK to give as much detail as possible in the light of the available information. What constitutes reasonable detail will depend on the nature of the Claim, bearing in mind also that it is unlikely to have been the parties’ intention, at the time of contracting, that the details to be provided should be as extensive as those that would be required, doubtless after further investigation, in the legal proceedings to be issued and served within six months of the notice.

Ipsos relied on two letters in support of its case that it gave a contractual Claim Notice in respect of the present claim. It is common ground that the first letter was not intended to be a Claim Notice within the meaning of §3.1. Ipsos relied on it both to establish the context for the second letter and in order to draw contrasts with the second letter.

Ipsos’s first letter (dated 14 August 2012) was in the following terms:

Re: Brazil Labour Claims

We refer to (i) the Share Purchase Agreement dated 26 July 2011 (the ‘SPA’) for the sale and purchase of the Synovate Group. Unless otherwise defined, capitalised terms defined in the SPA shall have the same meaning in this letter.

Pursuant to paragraph 5 of Schedule 5 of the SPA we hereby notify you of a set of claims made against Synovate Brazil Ltda that may give rise to a Seller Warranty Claim. Details of the claim are set out in the attached annex.

For the avoidance of doubt, this is not a Claim Notice.

This letter is without prejudice to any of our rights under the SPA and any applicable laws.

The letter was signed by Ipsos’s Group Corporate Counsel.

Attached to the letter was a schedule of the individual claims referred to in the letter. The subject of the claims was the asserted right of contract workers to the rights enjoyed by employees of Synovate Brazil Ltda. Simply by way of example, the second claim (by Adriana Alves dos Santos) was described under the heading ‘Subject’:

The plaintiff is demanding recognition of their employment agreement against Synovate, overtime work, vacation, vacation bonus, 13th month salaries, indemnified prior notice, balance of salary, overtime, monthly deposits on the employee’s salary in a Fund administered by a Federal Financial Institution (FGTS), the 40%-fine over the FGTS deposited amounts, and the specific fines stated in articles 467 and 477 of the Brazilian Labor Code (‘CLT’).

Aegis replied to the 14 August letter on 15 August 2012.

We refer to: (i) the sale and purchase agreement between Aegis Group plc (‘Aegis’) and Ipsos S.A. (‘Ipsos’) dated 26 July 2011 (the ‘SPA’), and (ii) your letter dated 14 August 2012 regarding the above-captioned matter (the ‘Letter’). Capitalised terms used in this letter shall have the meanings ascribed to them in the SPA.

We do not consider the Letter to be valid for the purposes of paragraph 5 of Schedule 5 to the SPA. In particular, the Letter does not specify, in reasonable detail, the matter which may or will give rise to the relevant Claim (as required by subparagraph 5.1(A) of Schedule 5 to the SPA). In this regard: (i) some of the claims referenced in the annex to the Letter appear to have been made after the date of the SPA and do not, therefore, appear to us to be relevant to the Seller Warranties; and (ii) in other cases, the claims appear to pre-date the SPA but no account appears to have been taken of the disclosures made by Aegis in relation to the Brazilian labour claims which were set out in the Disclosure Letter.

Given the above, if there are claims made against Synovate Brazil Ltda that will or may give rise to a Seller Warranty Claim, please provide us with a notification which satisfies the requirements of paragraph 5 of Schedule 5 to the SPA.

There was no further communication about this until over a year later when Ipsos wrote again on 30 September 2013. I have added paragraph numbers for ease of reference. They do not appear in the original.

[1] We refer to previous correspondence pursuant to paragraph 5 of Schedule 5 of the SPA in relation to certain Brazilian labour claims as being circumstances that may give rise to a Seller Warranty Claim (see for example our letter dated 14 August 2012 and your letter dated 15 August 2012). We adopt the definitions of the SPA.

[2] As previously advised, Synovate Brazil Ltd (‘Synovate Brazil’) is facing a number of employment claims, which were not disclosed in the Data Room or Disclosure Letter in breach of, inter alia, paragraph 17.24 of Schedule 3 of the SPA regarding compliance with employment and social security Laws.

[3] Although some disclosure was made by Aegis in relation to 62 employee claims (the fairness of which is not admitted), these claims cannot be matched to the records of claims held by Synovate Brazil. Further, the number of employee claims recorded by Synovate Brazil greatly surpasses the number of claims disclosed by Aegis. All these claims are made by contract workers claiming that on the facts of their relationship with Synovate Brazil, they were entitled to the status of employees. Each claimant typically claims for the recognition of their employment status and the rights this entails (including but not limited to retirement contributions, vacation, overtime, a 13th month salary, severance pay, travel allowance, meal allowance), and bases their claim on the nature of their work for Synovate Brazil over a period of time, which commenced prior to the SPA. A summary of the closed claims, which includes the claims Synovate Brazil has settled, claims where payment was made pursuant to a court judgment, and claims it successfully defended is attached at Schedule 1. A summary of all the open claims of which Synovate Brazil is currently aware is attached at Schedule 2. Accordingly Synovate Brazil has so far recorded a total of 135 employee claims (both open and closed). Please confirm which of these claims Aegis considers it had disclosed.

[4] The closed claims amount to R$801,105.70 (approximately £293,327, based on the conversion rate on the date of the SPA). However, the amount that remains in dispute is at least R$2,533,595 (approximately £709,162 based on today’s exchange rate). Estimates from Synovate Brazil’s lawyers, Abril Herrera e Advogados Associados (‘Abril’), suggested, as at late 2011, that the total loss may in fact be even higher, in the region of R$3,945,893 (approximately £1,117,894 based on today’s exchange rate) (see attached report from November 2011, Portuguese original). Additional claims have of course been made since that date. For the avoidance of doubt, these figures do not include the settled claims brought by four senior executives of Synovate Brazil in relation to which Ipsos is already claiming breach of warranty in paragraphs 144 to 150 of the Particulars of Claim dated 2 April 2013 or the related claim of Katia Jotten referred to below.

[5] The merits are not in favour of Synovate Brazil in relation to these labour claims because of the state of its internal records for the relevant periods. Abril’s report advises that Synovate Brazil has a 90% chance of losing the claims and having to pay out. To mitigate its losses, it is likely to be advised to settle the majority of the outstanding (and any similar future) claims.

[6] Further, Synovate Brazil is aware of additional workers who are in a similar position to those who have made claims. Ipsos therefore reserves its right to supplement this letter and Schedule 2 with any future claims that come to light as appropriate.

[7] We also write to notify you of an employment claim issued against Synovate Brazil by Katia Jotten, who was the Healthcare Director at Synovate Brazil from 1 March 2005 until her termination on 3 September 2012. The nature of her claim is similar to those of the four executives detailed in the Particulars of Claim dated 2 April 2013, paragraphs 144 to 150, in that she was also given split designations as an employee and independent contractor. Ms Jotten is now claiming for various contributions and damages under the Consolidation of Labour Laws 1943. The initial sum of her claim is R$50,000, but the total exposure as calculated by our expert is R$198,377.02 (see the expert’s report attached, Portuguese original).

[8] Once Aegis clarifies which claims it considers were disclosed pursuant to applicable warranties, Ipsos will provide a further breakdown of which of these losses, costs and expenses, if any, fall, or may fall, under the indemnity of clause 12.1 of the SPA and which it claims or may claim from Aegis for breach of warranty.

[9] In the meantime, Ipsos reserves its rights under the SPA in full.

This letter too was signed on behalf of Ipsos by its Group Corporate Counsel.

Schedule 1 consisted of 40 ‘closed cases’ of which 8 had been successfully defended and 8 had been the subject of adverse Court decisions; and schedule 2 was a list of ‘open’ decisions.

Mr Fealy QC (for Aegis) submitted that to be an effective Claim Notice Ipsos should (at least) have notified Aegis that a claim was being made for a breach of §17.24 of the Seller Warranty, as was later done in the Claim Form (see above).

The letter of 30 September 2013 did not give written notice of a Seller Warranty claim, it purported to give written notice of a number of third-party claims additional to those notified in the 14 August 2012 letter.

Mr Zacaroli QC (for Ipsos) accepted that, to the extent that the 30 September 2013 letter was intended to serve as a notice of a Seller Warranty claim, it was not well drafted. Nevertheless, he submitted that the necessary information was contained within the letter and that a reasonable person with knowledge of the background, including the history of claims made by contract workers and the contents of the 14 August 2012 letter, would have read the letter as constituting a Claim Notice. Ipsos was asserting a breach of §17.24 by reason of the failure to treat contractual workers as employees. In contrast to the position in the Laminates case (see [37]), Ipsos stated what was being claimed and what warranty was said to have been broken.

It is clear that Ipsos intended that its letter of 14 August 2012 was to give notice of a third party claim under §5.1 and did not intend it to be a Claim Notice under §3.1: not least because it expressly stated that it was ‘not a Claim Notice’. It is not necessary to form a concluded view about the merits of Aegis’s response that the letter was not valid as a §5.1 notice, since the relevance of the 14 August letter is confined to it forming the background against which the 30 September 2013 letter must be construed. What is clear from Aegis’s response to the 14 August 2012 letter is that it was insisting on strict compliance with the notice provisions of the SPA.

A contractually effective Claim Notice under §3.1 should make clear that a claim was being made. A general notification that a claim might be made at some time in the future would not be sufficient. In this respect a §3.1 notice is to be contrasted with a notice under §5.1 which required notice of a third-party claim which would, or might, give rise to a Seller Warranty claim.

I turn then to the contents of the 30 September letter by reference to the enumeration I have adopted.

[1] referred back to Ipsos’s letter of 14 August 2012 and made clear that the letter was to be read as part of continuing correspondence which included the clear statement that its earlier letter was not a §3.1 Claim Notice, but was intended to be a notice under §5.1. It did not use the opportunity to state by way of contrast that it was intended to be a Claim Notice under §3.1. [2] referred to §17.24 in the context of the prior disclosure of third-party claims, and imparted information about them. Again there was no reference to §3.1, nor did the letter otherwise give notice of a Seller Warranty claim for breach of Brazilian Labour law. [3] elaborated on the nature of the third-party claims, based on breaches of Brazilian Labour law, and set out the current status of the claims. [4] gave details of the sums involved. [5] and [6] addressed the difficulties in defending the third-party claims due to the state of the company’s records, and envisaged further similar claims, which may have to be the subject of notification. Again, the context appeared to be §5.1 and not §3.1. [7] dealt with a separate claim from another employee; and [8] referred to Cl.12.1 on the basis that what was disclosed about the potential claims was misleading. [8] sought clarification about disclosed claims and reflected uncertainty as to the extent, ‘if any’, of further claims. The passage appeared to be dealing partly with an indemnity claim and partly with a claim for breach of warranty, but used the language of §5.1.

Having considered the matter, I have concluded that a reasonable recipient of the letter with knowledge of the previous correspondence and the business context in which it was written would not have understood it to be a Claim Notice.

First, as already noted, there was no reference to a Claim Notice, nor any reference to §3.1; nor was there any statement that Aegis was giving notice of a claim for damages for breach of a Seller Warranty. On the contrary there were references to ‘circumstances that may give rise to a Seller Warranty claim’ (see [1]) and to potential claims which might fall under the indemnity clause, and which it ‘may claim from Aegis for breach of warranty’ (see [8]). While I accept that the language that Ipsos used was intended to convey its difficulty in matching the third-party claims to what had been disclosed, the attempt to cover a large number of different points added confusion to what should have been a relatively straightforward notice of a claim being made under §17.24. I should add that I do not accept Mr Zacaroli’s submission that the timing of the letter, a matter of days before the 2 year deadline for claims, should have suggested to the reasonable reader that it was to be understood as a Claim Notice.

Secondly, the letter did not specify, ‘(i) the matter which gives rise to the Claim’. The essential complaint was that Synovate Brazil Ltda breached Brazilian Labour law in its treatment of contract workers. Mr Zacaroli QC accepted that there was no allegation of a breach of Brazilian Labour law; but submitted that, read with the rest of the letter, including the reference to §17.24 in [2], it must have been clear that this was what was being alleged. The difficulty with this submission is that the letter is largely a description of events; and the reference to §17.24 in [2] is linked to non-disclosure which cannot give rise to a claim under §17.24. There was no sufficient attempt to specify, ‘the underlying facts, events or circumstances, which constituted the factual basis upon which the claim was posited’, to adapt the words of Cooke J in the Laminates case at [31].

Thirdly, the letter did not specify, ‘(ii) the nature of the Claim’. If the claim was made under §17.24 the reasonable reader with knowledge of the background would, in my view, have expected to see rather more than the single reference in [2] to, ‘in breach, inter alia, of paragraph 17.24 of Schedule 3’. There was no real attempt to identify the form and substance of the claim. While I accept that it is not necessary to go into the detail which one might expect in a pleading, it is striking that the relevant averments in the pleadings are relatively concise. I have already referred to the Claim Form. The nature of the claim was also expressed shortly in the Particulars of Claim:

20.

Contrary to Seller Warranty 17.24, members of the [Synovate] Group had failed to comply materially with all applicable employment and social security Laws or other Laws affecting contractual or other relations between employers and their officers, employees or workers. The warranty given by Aegis pursuant to Seller Warranty 17.24 was, therefore not true and accurate at the signing date.

…

21 …

(5). Synovate Brazil however did not treat the Contract Workers as employees for the purposes of the Brazilian employment and social security laws set out above and did not provide the Contract Workers with the benefits to which they were entitled under such laws. As a result, Synovate Brazil is liable to the Contract Workers in respect of its breaches of the Brazilian employment and social security laws.

Furthermore such light as was shed on the nature of the claim by the reference to §17.24 (in [2]) was diffused by the reference to a possible claim to an indemnity under Clause 12.1 (in [8]). In addition, the existence of third-party claims alleging breaches of Brazilian Law might give rise to breaches of §§17.9 and 17.14 but was not a basis for alleging a breach of §17.24. The relevant legal averment would have been that the local company had acted in breach of local Labour law.

It follows that I find that no Claim Notice in respect of the present claim was given prior to 12 October 2013 (the second anniversary of the Completion Date); and that, accordingly, the claim must fail. I will hear the parties on the form of order which should be made.