Lexana Finance Limited v Jason Andrew Francis

His Honour Judge Stephen Davies:

This is my judgment on the Claimant’s application for summary judgment against the Defendant on the basis that he has no defence to liability as regards two specific pleaded allegations of breach of warranties contained in a Share Purchase Agreement (“the SPA”) made between 13/7/23.

Under the SPA the Defendant sold the entire shareholding in his company, Jaama Ltd (“the Company”), to the Claimant, for a cash consideration of £50 million. The Claimant contends that the impact of the warranties said to have been breached is that the Company’s business had no or only nominal value. Although this is disputed by the Defendant, if the Claimant is correct the claim is a substantial one.

The application has been very well argued by leading counsel on both sides, to both of whom I am grateful. They have referred me to the relevant evidence, including a witness statement in support from Mr Marie (who only had involvement with the Company immediately post-acquisition and is now its IT and R&D director of the Claimant), a witness statement from the Defendant and from Mr Thresher (the Company’s former IT director), and a witness statement in reply from Mr Marie.

There are two key issues.

The first is whether the Defendant has a reasonable prospect of successfully defending the claim on the basis that both warranties said to have been breached are qualified by the words “so far as the seller is aware” (“the qualification”). The Defendant says that so far as he was aware the warranty was true.

The Claimant says that this defence cannot succeed because the Defendant has no reasonable prospect of establishing this defence given the additional hurdle imposed by clause 5.3 of the SPA, which provides:

“In each Warranty, where any statement is qualified as being made “so far as the Seller is aware” or any similar expression, such statement shall be deemed to be given to the best of the knowledge, information and belief of the Seller after he has made due and careful enquiries of James Thresher and Martin Evans.”

The Defendant says that there is plainly an arguable case on this point which can only be determined at trial.

The second is whether the Defendant has a reasonable prospect of successfully defending the claim on the basis that his liability is limited to £1 unless his “liability arises from [his] fraud, fraudulent misrepresentation, wilful concealment or dishonesty of the Seller” (par. 10 Sch. 5).

The Claimant says that the Defendant has no reasonable prospect of success on the basis that the evidence shows that he was plainly reckless in relation to the subject-matter of the warranties in question, whereas the Defendant says that there is plainly an arguable case on this point which can only be determined at trial.

In short, my decision is that the application fails.

My reasons follow.

There is little dispute as to the essential facts, which I can take largely from the written submissions of Mr Harper.

The business of the Company was that of supplying fleet and asset management software. The software incorporates a Microsoft database that is integral to the function of the product. The Company had the benefit of a development licence that entitled it to use the necessary Microsoft products to create the software (“the Development Licence”).

Where the Company hosted the software for the customer the responsibility for acquiring the licence to enable the Company to use the Microsoft database to host the software for the customer was that of the Company. However, the Development Licence did not cover the supply of software to the Company’s customers and/or the terms of the licence prohibited the same, so that the Company was required to obtain a licence for each hosted customer. The Company did not do so and, as a result, was in breach of the Development Licence. This was not disclosed by the Defendant to the Claimant and, as a result, the Defendant was in breach of the two warranties which, as relevant, were in the following terms (emphasis added to show the qualification).

“So far as the Seller is aware, the operation of the Business, the processes employed, or products or services offered by the Company do not use, embody (save to the extent that they are licensed) or infringe the Intellectual Property Rights of any third party or make the Company liable to pay a fee or royalty” (Sch. 3 par.16.5(a)).

“The Company has obtained all necessary licences, registrations, consents, permits and authorisations (public and private) which are required for it to carry on its business in the places and manner in which such business is now carried out. All such licenses, registrations, consents and authorisations are valid and subsisting and, so far as the Seller is aware, there are no circumstances likely to lead to any of them being suspended, cancelled or revoked” (Sch. 3 par. 19.3).

The Claimant pursues the summary judgment claim on the basis that its claims as advanced under these warranties are both subject to the qualification.

The principles governing applications for summary judgment are well known. The decision of Henshaw J in Lex Foundation v Citibank NA [2022] EWHC 1649 (Comm) helpfully refers and sets out at [33] a summary taken from The LCD Appeals [2018] EWCA Civ 220, where the Court of Appeal quoted with approval the following considerations applicable to summary judgment applications, taken from passages in Easyair Ltd v Opal Telecom Ltd [2009] EWHC 339 (Ch) and Swain v Hillman [2001] 1 All ER 91 at 94.

The decision of Henshaw J in the Lex Foundation case is also helpful because it conveniently summarises the principle that “in appropriate cases, summary judgment can be granted … even where there is an allegation of fraud …, though the court must be very cautious about doing so” [36] and refers to the authorities which establish this principle in some detail at [36] – [39].

In relation to the sources of evidence to which the court may have regard on the hearing of a summary judgment application, although there was ultimately no dispute it is worth recording the position because one of the points taken by Mr Harper was as to the lack of detail in the witness statements adduced by the Defendant even when compared with its Amended Defence and Further Information served in response to a request made in relation to that statement of case. CPR 24.5(1) refers to reliance on written evidence. As the note at 24.5.2 of the current 2025 White Book says at 24.5.2, this may be set out in their claim form, statement of case, or application notice or in a witness statement, which must contain a statement of truth. CPR 2.3(1) provides that a statement of case includes a defence any further information given in relation to [a defence] voluntarily or by court order under rule 18.1.

In this case both the Amended Defence and Further Information served in response to a request made in relation to it were verified by statement of truth signed by the Defendant personally.

In the circumstances, although it is open to Mr Harper to comment on any discrepancies between these various pieces of written evidence, they are all capable of being received as written evidence adduced by the Defendant in response to this application.

A question had arisen as to the proper interpretation of the qualification. However, the interpretation of a similar clause has previously been considered by O’Farrell J in Triumph Controls v Primus International [2019] EWHC 565 TCC where she said this at [316]:

“The effect of this provision [clause 8.2] is that Primus is deemed to have knowledge of the matters covered by the warranties if reasonable enquiries of and by the named individuals (“the Knowledge Group”) would have disclosed such matters. The test is an objective one. The nature and level of enquiries made by Primus is immaterial. Any lack of knowledge or lack of understanding by Primus as to the operational failings is immaterial. The deeming provision is concerned with what was known or should have been known to Primus from the reasonable enquiries stipulated in clause 8.2.”

In the circumstances and whilst reserving his position to argue the contrary at any trial or appeal, Mr Harper sensibly and realistically accepted for present purposes that I would be satisfied that it is – at the lowest – reasonably arguable that this is the correct interpretation of clause 5.3 in this case. In other words, it is a deeming clause, which is not concerned with what actual enquiries the Defendant may or may not have made but with the best of the knowledge, information and belief which the Defendant would have had had he made due and careful enquiries of the two persons identified. Obviously, this in turn will require an investigation as to what enquiries were required to have been made by him in the particular circumstances of the case and what information such enquiries would have revealed had they been made.

However, in the light of the oral submissions made by Mr Harper, in particular in relation to recklessness, it is worth considering this a little further. Under clause 5.1.2 the Defendant “warrants to the Purchaser that each of the Business Warranties … is true, accurate and not misleading as at the date of this Agreement”. In relation to warranties to which the qualification applies, the Defendant is only warranting the matters stated so far as he is aware. In determining how far the Defendant was to be taken to be aware the deeming provision in clause 5.3 applies. However, the Defendant is not additionally warranting that he has made due and careful enquiries of the two persons mentioned in relation to the matters warranted. It is still only a deeming provision for the purposes of deciding whether the warranties have been breached.

Finally, I need to say something about recklessness, given that Mr Harper also sensibly and realistically acknowledged that he could not seek to persuade me that the Claimant could not persuade me at this summary judgment stage that the Defendant had no real prospect of successfully defending a case based on deliberate fraud or on fraudulent misrepresentation, wilful concealment or dishonesty.

Mr Harper referred me to Clerk & Lindsell on Torts (24^th edition), chapter 17 – Deceit, par. 17-20, under the heading “The state of mind necessary for liability in deceit”, as a convenient reference point to the well-known summary of Lord Herschell in the House of Lords in Derry v Peek (1889) 14 App. Cas. 337:

“First, in order to sustain an action of deceit, there must be proof of fraud and nothing short of that will suffice. Secondly, fraud is proved when it is shown that a false representation has been made (i) knowingly, (ii) without belief in its truth, or (iii) recklessly, careless whether it be true or false. Although I have treated the second and third as distinct cases, I think the third is but an instance of the second, for one who makes a statement under such circumstances can have no real belief in the truth of what he states. To prevent a false statement from being fraudulent, there must, I think, always be an honest belief in its truth.”

As the editors state: “It follows from this that a statement honestly believed to be true, however implausible it may be, is not capable of amounting to fraud”.

They add at par. 17-22 specifically in relation to recklessness:

“Even if the party making the representation may have had no knowledge of its falsehood, he will still be responsible if he had no belief in its truth and made it, “not caring whether it was true or false”. … This principle can have wide-ranging consequences. For example, it means that a seller who says a property is in good condition without having taken steps to check, or an indolent surveyor who provides production-line valuations of numerous properties without bothering to appraise each individually, may be liable in deceit”.

In my judgment, this makes clear that it is not enough to establish recklessness simply to show that the defendant did not care whether it was true or false, because that is just as consistent with carelessness, even gross carelessness. The court must also be able to conclude that he had no belief in its truth.

They also observe at 17-21 that, whilst the defendant’s motive in making the representation is irrelevant, so that the fact that the representor was not actually dishonest, or acted with the aim of facilitating a bona fide business transaction, is beside the point, nonetheless “lack of dishonest intent may be powerful evidence of a bona fide belief in the truth of the facts asserted by the defendant”.

I am satisfied that it is at least reasonably arguable that the nature and extent of the due and careful enquiries which the Defendant was required to make, as well as what information would have been revealed had such enquires were made, are fact sensitive questions. Thus, the Defendant’s background knowledge and reasonable beliefs, as well as those of Mr Thresher, would be relevant questions.

In pars. 5-7 of the Amended Defence the Defendant pleads the background which, summarised, is that although he conceived the essential business model and set up the Company and the business in 2004: (a) the software development work was always undertaken by Mr Thresher and Mr Mills was responsible for general development; (b) Mr Evans was appointed managing director in 2012, which was when the Defendant relocated to Australia, relinquished day to day management and became CEO, involved in strategic governance and sales; (c) in 2021 the Defendant was diagnosed with a rare and serious condition which restricted his working ability and led him to desire to sell the Company.

In par. 13 onwards the Defendant pleads that he was not aware of the detailed arrangements made by the Company in relation to software licences and understood that because the Company was a gold accredited developer it had a free licence to use Microsoft software which, he believed, extended to use by the hosted customer end users of its product with embedded Microsoft software in it. He relied on Mr Thresher and Mr Mills in particular to deal with such issues and draw any problems to his attention, which they never did, there never being any queries or complaints from Microsoft or any hosted customers.

In pars. 30-31 the Defendant pleads that given the above history there was no need for him to make any enquiry of Thresher pre-SPA, but that even if he had he would not have been informed of anything material, because Mr Thresher believed that there was no issue in relation to Microsoft licensing. He specifically repeats this in his witness statement at par. 13.

Further particular points emerge from the Further Information provided in response to the Requests made of the Defence. Mr Thresher was always responsible for the software development and the Defendant relied on Mr Thresher to inform him in relation to any necessary licensing requirements and had given him a general explanation at the time as to how it worked. The Defendant says that he had always understood that where the Defendant hosted the system for its customers it was not for the sub-contractors to obtain their own licences but always believed that the Defendant was able to so through its Gold Partnership programme with Microsoft. He says that the only time he was aware of a query in relation to Microsoft licensing was when he needed a new Windows licence for a laptop he had purchased and asked Mr Thresher why he needed one given the Company’s Gold Partnership status. He says he was told that it did not cover Windows licences, but there was no suggestion that it did not cover other Microsoft products. He also points out that in around 2011, following a lengthy process, the Company obtained ISO 27001 accreditation, an accreditation specific to the IT sector, which was regularly reviewed subsequently, and which did not result in any issues in relation to licensing being raised. He says that he never saw anything in writing about the Gold Partnership programme. He says that at the last Board meeting preceding the SPA there was a discussion about Microsoft having decided to withdraw the Gold Partnership programme generally so that the Company needed to understand whether anything was to be brought in to replace it, that Mr Mills was tasked with investigating and reporting back.

In his witness statement the Defendant strongly refutes the allegation of fraud or dishonesty. He makes it clear that at the last board meeting referred to above no question arose about there being any licensing issues with the existing arrangements. He says that if he had ever been aware of the problem he would have ensured that it was resolved as the cost of obtaining any necessary licences would have been small in comparison to the potential impact on the reputation and profitability of the Company.

He says that the Claimant undertook a lengthy due diligence audit of the Company’s technology matters pre-SPA, assisted by Mr Thresher. He says that he had a debrief with Mr Thresher afterwards. He says that “whilst I didn’t specifically ask James if Jaama had all the necessary software licences in place (that would be like me asking our accountant if she had paid all of the electricity bills), I did ask him if he knew of any problems and what areas were covered by the audit. He did not make me aware of any such issues”.

He says that he also reads through Mr Thresher’s replies to the questions asked in the due diligence exercise. He refers to a reference in one answer which states: “Licences are covered by our Microsoft Partnership Benefits”. It is true that the relevant part related to development software, but there is no suggestion that any other due diligence questions asked a similar question in relation to hosting software.

In his witness statement Mr Thresher confirms his responsibility for IT whilst IT director of the Company. Referring to a meeting which Mr Marie says he attended with him post-acquisition of the business he says: “Prior to the meeting with [Mr Marie], and at all times before Jaama had been sold, I believed that all necessary software licences were in place for live hosted customers as part of the company’s Microsoft Partnership Benefits package”. He says that at the time he wrote the replies referred to above he “also believed, honestly but mistakenly as it turned out, that these same licences also covered Jaama’s live hosted customers. It was only following the discussions with [Mr Marie] in August 2023 that, for the first time, I began to suspect that in fact all of the necessary Microsoft licences might not have been in place”. His evidence was that it was only as a result of Mr Marie’s specific questions at the meeting that he first questioned the position, saying that it was possible that there could be a licence “shortfall” and recommending that a full audit be carried out.

Although his recollection of what he said differs somewhat from that of Mr Marie, there is a consistency in that Mr Marie explains that he had been asked to undertake an “in-depth tech stack review” of the company post-acquisition and that this evolved to extend to the licensing position, hence why he specifically raised the issue of software licensing for live histed customers in the meeting he had with Mr Thresher. It appears from his witness statement that he discovered that the Company had been in the habit of purchasing licenses through a third-party supplier and, after he investigated this further, held a further meeting with Mr Thresher where he says he “changed his position”.

Mr Marie does not, however, point to any clear uncontradicted evidence which shows that either the Defendant or Mr Thresher knew, or even suspected, pre-SPA that the Microsoft licences needed for customer hosting were not covered by the Gold Partnership programme. Whilst he says that “there is no basis for such an assumption” and that “anyone with a basic knowledge would have known that the Gold Partner programme did not include a right to host live customer environments”, there is no objective evidence from which it can clearly be concluded that this is something which either the Defendant or Mr Thresher knew at the time. It may well be said that his knowledge base was significantly higher at all relevant times than either of those two. It is of note that in his second witness statement, made in response to those of the Defendant and Mr Thresher, although he states that “these statements are inconsistent with the facts that were known to Mr Thresher”, the most which he can say is that in July 2019 Mr Thresher signed a version of the Microsoft Developer Agreement” on behalf of the Company which, if it like the current one, runs to 52 pages and includes one sub-clause from which it would be apparent to a careful and informed reader that software may not be made available to customers save for contracted development or testing purposes.

It will be apparent from the above that the Claimant has a strong case on the facts in relation to the first issue, i.e. the question as to whether the Defendant can successfully defend the issue of liability by reference to the qualification.

In truth, the Claimant’s case is founded largely on the twin supports of a lack of any real interest or enquiry, both by the Defendant of Mr Thresher and by Mr Thresher into the whole question of licensing for customer hosting and the ambit of the Microsoft Gold Partnership programme.

However, the crucial question is whether the strong case is so overwhelming as to satisfy the court at this stage that the Defendant has simply no real prospect of defending the claim on this issue.

In my judgment I cannot be satisfied on the available evidence that this is the case.

First, as I have already said, the question as to what due and careful enquiries the Defendant was to make of Mr Thresher and Martin Evans is in my view a fact sensitive question. The temptation in a case such as this to treat this particular issue as the only issue which the Defendant needed to consider, and to do so with the benefit of hindsight, must be resisted. Instead, the Defendant was faced with a large number of separate warranties in three categories (referred to in the SPA as Fundamental Warranties, Business Warranties and Tax Warranties) and with an obligation to deal with due diligence and to make due and careful enquiry in relation to many separate aspects of the business. There was no specific warranty or question in relation to Microsoft licenses, let alone Microsoft licenses for live customer hosting. In the particular circumstances of the Defendant’s limited involvement in the detail of the business since 2012, and in the further particular circumstances of his reliance on Mr Thresher and others in relation to all IT related matters over a very lengthy period, and in the absence of any issue ever being raised in relation to Microsoft licensing for customer hosting, and in the context of the discussion at the board meeting and the consideration and discussion of the answers to the due diligence process, it seems to me that it is at least reasonably arguable that the Defendant was under no duty to do any more than he did. It may very well be that this defence will be rejected at trial, having had the benefit of disclosure and cross-examination of the witnesses. But that is a different question.

Secondly, and perhaps more important, the question as to what information would have been revealed had the Defendant made what might well only have been required to have been a general enquiry in relation to the Microsoft licensing position is even more uncertain. On the basis of Mr Thresher’s evidence at the time he seems to have had no doubt that the Gold Partnership programme provided licensing for live hosted customers. It would appear that it was only as a result of Mr Marie’s focused questions, in the context of him being brought in to conduct a very detailed IT review post-acquisition and with what appears to have been his superior knowledge of such issues, that he was caused to doubt the position. Even then, it appears that it needed Mr Marie to conduct a further detailed investigation, including checking with the third party which procured the necessary licences, before even he was able to be confident. If at this stage the only hard evidence which the Claimant has against Mr Thresher is that he would have appreciated the position had he been asked to and conducted a similar detailed investigation, or gone back and read through a 52 page Developer Agreement, then again I do not find myself able to conclude that the Defendant’s case is not reasonably arguable.

As regards the second issue, I am more strongly satisfied that the Defendant’s case passes the hurdle of being at least reasonably arguable.

There is no evidence which demonstrates that the Defendant did not genuinely believe that the Company held a valid licence from Microsoft to provide services to its customers using the software which had been developed using Microsoft software, including the provision of live customer hosting. That belief may well have been based on what now appears to have been a mistaken reliance on Mr Thresher and other senior employees having sufficient knowledge and expertise to understand the extent of the licensing authorisation provided by the Gold Partnership programme, but in my judgment there is no reason to consider on the evidence before me that it was not, nonetheless, a genuine belief. There is no evidence which shows conclusively that he had never even thought about it, so that he could not have had a belief in the matter one way or the other. On the evidence adduced by the Defendant he did have a general awareness of licensing and a general awareness of the fact that the Company did have this Gold Partnership programme status which did provide a wide level of licensing authorisation. The question had arisen on at least two occasions before the SPA on his evidence (i.e. the Windows laptop and the board meeting) and no concerns had been raised by anyone. No question or concern had arisen during the ICO accreditation process or had ever been raised by Microsoft or any customer and no question or concern had been raised during the due diligence process and the Defendant had seen and discussed the answers provided by Mr Thresher which referred, at least at first blush, to Microsoft licences being covered by the Microsoft Partnership Benefits.

Again, it may well be the case that the intense focus in the context of litigation on this particular issue makes it more difficult to see the position as it really may have appeared to the Defendant at the time. But equally it may well be the case that at trial a judge is prepared to accept that the Defendant did genuinely believe that since the Company had the right to use Microsoft products under the Gold Partnership programme and, since it was the Company which was using the software itself in its business, albeit to provide remote live hosting services to its customers, that he genuinely believed that the Company did not need to obtain a further and separate licence.

The weight which the trial judge may be prepared to attach to his evidence that had he not held that genuine belief he would have taken prompt steps to resolve it, especially in the run-up to the SPA given what he says were his very compelling reasons to step away from the business at the time and not jeopardise the sale, is something which cannot be prejudged.

In his submissions in response Mr Harper argued that the question of the Defendant’s state of mind had to be approached in the context that the Defendant either actually knew about or must be taken as knowing about the clause 5.3 obligation on him to make all due and careful enquiries of Mr Thresher and Mr Evans in relation to all the matters covered by the qualification, including the particular question which arises in this case. However, it seems to me to be at least reasonably arguable that a deeming clause such as that cannot be used so as to deem an answer when the real focus at trial will have to be a careful investigation as to the actual state of the Defendant’s mind at the time. Otherwise, that clause would appear to have the effect of deeming fraud where there might be none, which seems to me to be a conclusion which is unlikely to be right.

For all of those reasons, I am not satisfied that the test for summary judgment is met with the result that the application must be dismissed.

As I said at the end of submissions, since there would have had to have been a further directions hearing after this judgment regardless of the outcome, it would appear sensible to defer all consequential matters to that hearing, subject of course to addressing any matters for which there is a timescale, i.e. any application for permission to appeal. It may well be that this would be an opportune time to pause to consider ADR in any event before rushing into the further directions hearing, but I will leave that to the parties, well-represented as they both are, to consider.