This appeal is against the refusal by the judge, Mr Recorder Gardener QC, to order summary judgment on the Claimants’ claim for an indemnity from the Defendant.

The Claimants (“the Sellers”) were the owners and proprietors of a business – Beside the Seaside Ltd (“the Company”). The Sellers were friends with the Defendant (“the Buyer”). In 2012 the Buyer agreed to purchase the Company from the Sellers, under a Share Purchase Agreement drawn up by solicitors dated 5 March 2012 (“the SPA”). Consideration for the sale was £1. At the time of the sale, the Company had a substantial bank loan secured on Company assets and guaranteed by the Sellers. Under the terms of the SPA, the Sellers agreed to continue as guarantors of the bank loan after the sale, in return for an indemnity from the Buyer.

Unfortunately, in the years following the sale the business failed and the bank appointed receivers. The Company assets realised less than the outstanding indebtedness owed to the bank, which claimed the shortfall from the Sellers under the guarantee. The Sellers negotiated the sum down to £130,000 and paid this to the bank, after which they sought reimbursement from the Buyer, together with associated costs of £9,414.84, under the indemnity. Proceedings were issued on 24 April 2015.

The Buyer lodged a defence and counterclaim alleging various breaches of contractual warranties and misrepresentations. The Sellers issued an application to strike out the defence and counterclaim and/or for summary judgment, relying on the Buyer’s failure to notify of any claim within 2 years of sale, as required under the terms of the SPA.

In his judgment dated 14 February 2017, the judge held that (i) the notification provisions contained in the SPA were mandatory and had not been complied with, precluding any counterclaim in respect of losses arising from breach of warranty; however, (ii) that the Buyer could nevertheless rely on those same alleged breaches of warranty as a defence, by way of equitable set-off. The judge also held that the Buyer could not rely on any separate misrepresentation claims. Accordingly, he struck out the counterclaim, but refused summary judgment on the claim.

The Sellers now appeal that decision, permission having been granted on the papers. The Buyer sought permission to bring a cross-appeal against the judge’s refusal to permit her to counterclaim for various alleged pre-contractual misrepresentations. Permission for the cross-appeal has been refused.

The material provisions of the SPA are as follows:

There was no cross-appeal against the judge’s decision that the effect of clause 8.3 is to preclude any claim for breach of warranty that has not been notified in correct form within 2 years from of the Completion Date (as defined). The Buyer accepts that she did not give timely notification in proper form. Mr Wolman, representing the Buyer at this appeal, did not seek to challenge that part of the judge’s decision.

The single remaining issue arising out of the judge’s decision, therefore, is whether the terms of clause 8 of the SPA permit the Buyer to rely on alleged breaches of warranty as a set-off, reducing the value of the Seller’s claim for reimbursement under the indemnity.

In Hanak v. Green [1958] 2 QB 9 at 23 Morris LJ set out the three categories of set-off, of which only the third is relevant here, namely:

Mr Catherwood, for the Sellers, argued that the effect of the limitation provision in clause 8 of the SPA, as well as precluding any counterclaim for breach of warranty, was also to prevent an equitable set-off which might otherwise arise by virtue of any breach of warranty.

He relied for this purpose on the House of Lords decision in Aries Tanker Corporation v. Total Transport Ltd[1977] 1 WLR 185. That case concerned a claim by owners against charterers for an outstanding sum in respect of freight which had been withheld by the charterers owing to short delivery of the cargo. The charterers defended the claim asserting a counterclaim and an entitlement to set-off their loss against the unpaid amount of freight. The owners obtained summary judgment and the House of Lords dismissed the appeal, holding that article III, r.6 of The Hague Rules operated as a time bar with the result that the charterers’ claim had ceased to exist. It could not therefore be introduced for any purpose into legal proceedings, whether as a counterclaim or as a defence by way of set-off.

Article III rule 6 of the Hague Rules provides that:

In Macquarie Internationale Investments Lts v. Glencore UK Ltd[2009] EWHC 2267 (Comm) the claimant purchaser brought a multi-million-pound breach of warranty claim which failed; however in the course of his judgment the trial judge, Andrew Smith J, dealt with an argument by the defendant vendor to be entitled to a credit, in response to which the claimant had asserted an entitlement to off-set a claim for certain transportation costs. The claim for such costs had not been notified in accordance with the provisions of the contract but the claimant maintained that it was still entitled to a set-off. The judge held as follows (at para 243):

Mr Catherwood’s submission, based on the Aries Tanker and Macquarie decisions, was that liability in respect of any claim for breach of warranty under the SPA ceased to exist (or never came into existence) unless notified in proper form within 2 years of the sale, as provided for by clause 8.3 of the SPA.

Mr Wolman argued that the decision in the Aries Tanker case has to be understood in the context of the special rules applicable to freight cases. He submitted that clause 8.3 of the SPA, unlike Art III, r. 6 of the Hague Rules, acts only to bar the judicial remedy and not to extinguish the underlying right generating the remedy.

Mr Wolman relied in support of this submission on the following matters:

The heading applied to clause 8, viz. “Limitations on claims”;

The wording of clause 8.4: “the Sellers shall not be liable for a claim unless the amount of all Substantiated Claims together exceeds £500...”, where a “Substantiated Claim” is one in respect of which liability has been admitted or on which judgment has been obtained.

His interpretation of “claim” in clause 8, Mr Wolman suggested, was supported by the dicta of Lord Denning in The Brede [1974] QB 233, a case that he said had not been overruled by the House of Lords in Aries Tanker.

As to the first of Mr Wolman’s points, Clause 1.2 of the SPA specifically provides that “Clause and Schedule headings do not affect the interpretation of this agreement”. The heading to clause 8 cannot, therefore, avail Mr Wolman’s argument.

Mr Wolman next relied on the definition of “Substantiated Claim” in Clause 8.1 and its use in clause 8.4. If I followed Mr Wolman’s argument correctly, it was that in this context a “Claim” is to be understood as the assertion of a cause of action in judicial proceedings, and that this was open to interpretation. He argued that the assertion of a cause of action should be understood on the basis that a cause of action, if upheld by the court, merges into the judgment or order granting a remedy. He referred me to the judgment of Parke B in King v. Hoare [1844] 13 M & W 494 at 504, approved by the Supreme Court in Virgin Atlantic Airways v. Zodiac Seats UK [2013] UKSC 46 at para 17. Mr Wolman submitted that the wording “shall not be liable” in clause 8.4 refers to preventing the conversion/merger of the cause of action into the judgment or order granting the remedy, rather than the extinguishing of the cause of action itself. He pointed out that if the intention had been to extinguish the underlying right then very clear words should have been used. He compared the wording of Art III r.6 of the Hague Rules (“shall be discharged from all liability…”) with the wording in clause 8.3 (“are not liable for a claim...”).

Mr Wolman emphasised that the equivalent provision in Marquarie[2010] 1 BCLC 238 was constructed differently to clause 8 of the SPA. He suggested that the first part of the relevant provision in Macquarie, dealing with notification, only operated as a limitation clause. The second part operated to extinguish the right but in the case of clause 8.3 of the SPA, Mr Wolman pointed out, there was no second stage.

Mr Wolman submitted that the default position at common law is that parties should be entitled to assert a set-off. He relied upon the dissenting judgment of Lord Denning MR in The Brede at 249C, approved and applied by the Court of Appeal in the case of Filross (1999) 31 H.L.R. 456.

Mr Catherwood rejected the notion that clause 8.3 was in any way ambiguous. He submitted that the word “Claim” is defined at clause 8.1 as “a claim for breach of any of the Warranties”; it is not defined by reference to any court procedure. Use of the word “Claim” in other parts of clause 8 – to be notified before proceedings are commenced (clause 8.3), capable of being admitted prior to any proceedings being commenced (clause 8.1), or as arising as a result of dishonesty (clause 8.5) - indicated that a “Claim” for the purposes of the SPA existed independently of any court proceeding. Moreover use of the word “claim”, he suggested, was consistent with the parties having intended the contractual limitations to apply as much to equitable set-off as to a free-standing claim. He referred me in this context to the case of Fearns (trading as Autopaint international) v. Anglo-Dutch Paint & Chemical Co Ltd and others [2011] 1 WLR 366where George Leggatt QC (sitting as a deputy High Court Judge), dealing with equitable set-off, reviewed a number of lines of authority and concluded as follows:

Mr Catherwood submitted that the assertion of liability which forms the basis of the equitable set-off was a “claim” in the same way as the Sellers’ claim against which it operated as a defence.

Mr Catherwood accepted that the notification provision in Marquarie was in different and more explicit in its terms. He submitted, however that the substantial effect of the provision in Marquarie was the same as that of clause 8.3, namely to extinguish the underlying liability upon a failure to give timely notification.

Finally, Mr Wolman relied on the wording in clause 7.3, suggesting that the initial phrase “[w]ithout prejudice to the right of the Buyer to claim on any other basis or to take advantage of any other remedies available to it…” indicated that the Buyer retained for itself a right to other forms of remedy such as set-off, which as he pointed out is sometimes referred to as a “self-help remedy”. Mr Catherwood responded arguing that clause 7.3 was dealing with claims and remedies in respect of any breach of warranty and was not apt to open up the field to a claim by way of set-off.

I do not find myself much assisted by the wording of notification provisions in other contracts. Clause 8.3 must be construed, in accordance with ordinary principles of contractual construction, in its own context. If on its proper construction the phrase “The Sellers are not liable for a Claim…” in clause 8.3 is apt to refer to the underlying liability, and not just to the monetary remedy, then Aries Tanker applies to exclude any equitable set-off. Whilst the principle was enunciated by Lord Wilberforce in the context of a freight case, it is evident that the principle was of general application, and not specific to such a case.

That part of Lord Denning’s judgment in The Brede to the effect that a set-off falling within the third of Morris LJ’s categories would not be subject to a time-bar (at pp.247F-249A) did not form part of the reasoning in the judgments of Cairns or Roskill LJJ in the same case. Moreover the decision of the House of Lords in Aries Tanker contradicts that part of Lord Denning’s reasoning. The case of Filross, in which the Court of Appeal approved and applied Lord Denning’s reasoning, involved a statutory limitation time bar. Lord Wilberforce in Aries Tanker specifically distinguished statutory time-bars from contractual ones (see the passage set out above).The present case, unlike Filross, does not concern a statutory limitation: clause 8.3 of the SPA is a contractual limitation provision.

The learned recorder took the view that clause 8.3 could not be construed to preclude a set off; his reasoning was that the Buyer would otherwise have been required to bring protective proceedings “which might have the effect of provoking a claim by the Claimants that might otherwise not be brought” (see paragraph 39 of the judgment). But this is not the effect of clause 8.3, which required the seller only to have notified of a claim, not actually to have commenced proceedings, within 2 years of the sale.

I find myself arriving at the opposite conclusion to the learned recorder. I entirely agree with his conclusions up to this point in his excellent judgment, but find myself differing from him in the final part of the argument. In my view the effect of clause 8.3 on its proper construction is plain: the words “..are not liable for a Claim unless..” in clause 8.3 operate to extinguish the underlying claim, not merely to bar the remedy whilst leaving the claim intact. As Mr Catherwood pointed out, even if one understands “Claim” in clause 8.3 to refer to the assertion of an entitlement as Mr Wolman submitted, the barring of that assertion applies equally to a set-off as to a claim.

Clause 7.3 does not influence the construction in the way Mr Wolman suggested, as in my view the clause is dealing only with claims and remedies in respect of any breach of warranty. The middle part of the clause “…if any Warranty is breached or proves to be untrue or misleading...” in my view makes this quite plain.

I do not accept that there is any ambiguity in the wording of clause 8.3, or that the circumstances of the case require the contract to be read in a particular way, or that there is a need, given the presence of the guarantee and indemnity clauses, to construe the provision in the Buyer’s favour. Both sides were represented by solicitors and must be taken to have understood the implications of all the provisions, including the notification provision. There seems to me to be no especial hardship in requiring the Buyer, who takes the benefit of the warranty provisions, also to be bound by the notification requirements.