England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM QBD (May J.) on 20.12.96

		Royal Courts of Justice Strand, London, WC2A 2LL
		22 June 1998

Lord Justice Stuart-Smith:

Introduction

The Agreement

1. By an agreement in writing (the Agreement) made in Paris and dated 19.4.91, STC Submarine Systems Limited (STC) which subsequently changed its name to Alcatel Submarine Networks Ltd, the defendants, sold to the plaintiffs, Senate Electrical Wholesalers Limited (Senate), (which at the time of the agreement was called Sashtime Limited) a business formerly known as STC Distributors (the Business) being a division of STC. The Business was one of the four major electrical wholesale distributors in the United Kingdom.
2. The effective purchaser of the Business was CDME (now Rexel SA), a French company and the second largest electrical wholesaler in the world, the largest being Otra/Sonepar. Senate was a subsidiary of CDME. The ultimate vendor was Northern Telecom Limited (NTL) which had purchased STC early in 1991 and wished to dispose of those businesses of STC not concerned with telecommunications.
3. The sale was of the assets (other than cash and intercompany balances) and goodwill, and the consideration was expressed to be divided as to £70m for the estimated capital employed (net assets as defined) and goodwill at £20m. There was provision for adjustment of the figure of £70m for the assets on the taking of completion accounts. This figure was eventually determined at £68,832,000 on 10.12.92.

The Warranty

4. The Agreement contained a number of warranties. The relevant one is as follows:

11.1.5 Management Accounts

11.1.5.1 The Management Accounts:

(a) have been diligently and carefully prepared in accordance with generally accepted accounting principles and practices and are true and accurate in all material respects; and

(b) give a true and fair view of all the assets and liabilities and the state of affairs, financial position and results of the Business in the case of the unaudited balance sheet, as at and up to 31 March 1991, and in the case of the unaudited income statement, up to 31 December 1990.

5. The Management Accounts warranted are defined in clause 1 of the Agreement as:

'The unaudited Income Statement of the Business for the twelve months ended 31 December 1990 and the unaudited balance-sheet of the Business at 31 March 1991.'

The profit and loss account which formed part of the management accounts at 31 December 1990 showed a profit for the year of £9.7m on sales of £201.7m. The balance sheet at that date showed capital employed as £43.6m. Since the capital employed figure does not include cash or intercompany balances, it varies from time to time depending largely on the state of debtors and creditors. This explains why at the time of completion it was approximately £70m.

The breach of warranty

6. The judge held that the profit figure was overstated by approximately £1.9m and that this constituted a breach of warranty. This figure was made up of overstatement of the Rebate Reserve account to the extent of £1.697m (£1.7m) and under provision in respect of vehicle leases to the extent of £203,000. The judge held that the £203,000 in respect of vehicle leases did not affect the maintainable earnings and was not relevant in assessing the plaintiff's loss. Mr Field QC who appeared on behalf of Senate accepted this finding. We are concerned therefore with the overstatement of profit of £1.7m. STC do not appeal the judge's finding as to breach of warranty.

The provision as to notice

7. Clause 11.5 of the Agreement provided:

"11.5 Notwithstanding any other provisions of the Agreement, the Vendor shall not be liable under this Agreement in respect of any breach of any of the warranties:

11.5.1 Unless notice of it is given in writing by the Purchaser to the Vendor setting out such particulars of the grounds on which such claim is based as are then known to the Purchaser promptly and in any event.........within eighteen months of the completion date.""

8. The judge held that notice of the claim was given by letter dated 26.12.91 and although no particulars were set out in the letter, it incorporated particulars which had been given orally at two meetings between the parties or their representatives on 15.11.91 and 11.12.91. Accordingly the requirement was satisfied.

Damages

9. Senate's primary case (STC say their only case) was that damages should be assessed by applying a price/earnings ratio (p/e) of 13.67, derived from the actual transaction, to the difference between the warranted profit and the actual profit (maintainable earnings). In the Amended Statement of Claim the sum claimed was £25.95m to £27.317m. This was based on a number of alleged breaches of warranty which together showed that the profit for 1990 was overstated by about £3.34m. But Senate failed to establish a number of the alleged breaches and at the conclusion of the trial the overstatement was £1.9m which, after allowing for tax, produced a claim of £16.99m (on a figure of £1.7m it is somewhat less).
10. STC contended that Senate had suffered no loss. They did so for four main reasons:

(a) They submitted that Senate had not adopted a p/e approach when valuing the Business for the purpose of the purchase. On the contrary other powerful considerations weighed with them.

(b) Having regard to the fact that the assets were valued at £68m and the goodwill at £20m, a p/e calculation applied to a relatively modest difference in the profit led to an absurd result that the goodwill was worth virtually nothing and, as originally claimed by Senate, even the sum paid for the assets would be eaten into.

(c) That assuming that the warranted accounts, as a matter of accountancy practice, did not show a true and fair view, the damage had to be calculated on the basis that there was a significant difference between the warranted figure for profit and the actual profits (maintainable earnings) for 1990; and that for various reasons there was no such difference.

(d) That in any event at the time the final negotiations were being conducted between 17 & 19 April 1991 STC knew that Otra/Sonepar were still very keen to purchase and had offered £3m more than the £90m agreed with Senate. If, therefore, the error in the accounts had been disclosed and Senate had sought to negotiate a lower price, either they would still have been prepared to pay £90m to prevent Otra/Sonepar buying the Business; or if they did not, STC would have sold to Otra/Sonapar at £90m.

11. The judge rejected the p/e approach. Equally, he did not accept that the plaintiffs had suffered no loss or damage. He said that if the accounts had disclosed the correct figure the whole negotiation would have been conducted at a somewhat lower level and that the price would have been £5m less. He awarded interest on this sum at base rate plus one per cent, amounting to £2,334,153.23. So far as costs were concerned he ordered the plaintiffs to pay the costs on three issues but otherwise he awarded them 80% of their costs.

The appeal and cross-appeal

12. STC appeal on two main grounds:

(a) On damages they submit that the judge should have found that there was no loss and that his approach to the assessment of damages was not open to him since it was not the way the case was conducted at trial; alternatively that his figure of £5m was excessive.

(b) That the judge was in error in holding that Senate had complied with the notice provision.

Additionally STC appeal the amount of interest and costs.

Senate cross-appeal on damages. They submit that the judge ought to have adopted the p/e approach to the assessment of damages.

The Facts

13. In a full and careful judgment, which demonstrates a masterly grasp of the highly complex facts, the judge set out in great detail the steps in the negotiations which led to the Agreement. It is only necessary for the purpose of this judgment to refer to them in outline before coming to the judge's findings.
14. In the latter part of 1990 Barings, the merchant bankers, were instructed by STC to find a purchaser for the Business. By the end of November a number of possible purchasers had been identified; two, Newey & Eyre and Edmundsons were UK based; three, Hagemeyer, Otra/Sonepar and CDME were based on the Continent and anxious to break into the UK market. On 26.2.91 Barings sent to CDME copies of a Preliminary Information Package. They disclaimed responsibility for the accuracy or completeness of the information. Financial information from the management accounts of the Business to 31.12.90 was provided including a profit of £9.7m before interest and tax on sales of £201.7m; the capital employed at the end of 1990 was £43.6m.
15. By 20.3.91 offers of £80-95m had been received from Hagemeyer and Edmundsons, £70-90m from Otra/Sonepar and £67.5m from CDME, but the latter was based on the net asset value of £43.6m. Shortly after this CDME were told that the assets were nearer £70m, and on this basis they indicated that they were prepared to increase their offer to at least £75-80m. All four candidates were then invited to take part in the second round, with final offers to be made by 3pm on 17.4.91. There followed a period of intense negotiations and investigations. Barings set up a data room to which bidders had full access for the purpose of conducting a due diligence exercise. On 4.4.91 CDME's team, including their merchant bankers Rothschilds' London section, met the management of the Business and were given a presentation. Mr Bamforth was effectively the Managing Director of the Business; he forecast 1991 sales of £217m with profits of £8.2 - 8.7m. On about 12 April STC granted CDME a period of exclusive negotiation provided a contract was signed by 19.4.91. On 14.4.91 there was a strategy meeting with CDME, Rothschilds and their French lawyers. It was thought that the likely profit for the Business for 1991 might be as low as £7m. On 15.4.91 Mr Weinberg, Chairman and Chief Executive of CDME, offered Barings £85m. Mr Taylor, who was Barings' senior representative, said they were expecting an offer at around £95m. Later that day the difference was reduced to £5m, Mr Weinberg offering £87.5m with a counter offer at £92.5m. The deal was closed at £90m. This represented £20m for the goodwill and £70m for the capital employed.
16. On 17 April Otra/Sonepar made a binding offer of the value of the net assets plus £23m for the goodwill, although the offer appears to have been received after the 3pm deadline. But it is clear that Otra/Sonepar were still very interested. On this date also Hagemeyer withdrew from the bidding as they were involved in another major take-over, but continued to express interest if the sale did not go through. Edmundson made an offer; it was differently structured, but does not seem to have equalled CDME's.
17. The final negotiations and drafting took place at Barings' Paris office over a period of 48 hours more or less continuously. The warranties were introduced on the night of the 18th and the Agreement was signed on 19.4.91. Completion took place on 25.4.91. Preparation of the Completion Accounts proceeded, KPMG acting for Senate and Coopers & Lybrand acting for STC.

Rebates

18. The only error in the 1990 Income Statement with which we are now concerned is the overstatement of profit at £9.7m by £1.7m. This resulted from an overstatement of the Rebate Reserve. Rebates are essentially delayed trade discounts allowed by manufacturers to wholesalers in reduction of their published prices. They are generally paid, after payment of a higher amount, by credit note or sometimes by cheque. There is a scale of secrecy about rebates. Some are more or less routine and were entered as available on the Business'computer system. Others were known only to the senior people who negotiated them and these tended not to be recorded in writing lest the secret leaked out. Rebates were usually agreed by reference to particular purchases. They might or might not depend on the volume of purchases. The more secret rebates were referred to as "loyalty" or "top hat" rebates, or sometimes as "promotional" or "advertising" rebates. Thus, they were effectively debts.
19. The Business accounted for rebates by compiling a rebate reserve, the responsibility of Mr Collins, which was intended to calculate the amount of unreceived rebates which had been earned on purchases already made. There was an element of estimation in the amount of purchases especially where the amount of a rebate depended on an annual volume where the supplier's accounting year straddled the Business' accounting year. Mr Collins calculated the rebate reserve in April and November following the half yearly stock take. He got his information from various sources. For confidential rebates, his source of information was the person who had negotiated the rebate, usually Mr Ivan Taylor or Mr Bamforth. The November rebate reserve, adjusted for the month of December, was included in the Business' December Income Statement in reduction of the cost of sales, thus directly affecting both gross margin and profit. Rebates were also relevant to the valuation of stock in the Balance Sheet. Stock was valued net of a standard rate of rebate entered into the computer which did not take account of loyalty rebates.
20. The total of the rebate reserve as at 30.11.90 was £10,362,580. Of this £5,801,261 was the total of rebates recorded as due from BICC plc ("BICC"), Pirelli Cable Limited ("Pirelli") and Delta Crompton Cables Limited ("Delta"). The total overstatement of £1.697m found by the judge was made up of the Delta loyalty of £1.1m (the Delta rebate) , BICC and Pirelli loyalty of £374,000 (sometimes referred to as the 'spread rebate') and the balance in respect of BICC fast movers and others and Pirelli loyalty (copper), totalling £223,000. The judge held that there was no justification for including the BICC and Pirelli rebates, which together amounted to £597,000, since these had never been agreed. But there was no allegation or finding of fraud or improper conduct on the part of STC personnel who had included these amounts wrongly in the rebate reserve.

The Delta Rebate

21. The position with regard to the Delta rebate was more complex. In December 1990, before he knew of any impending sale of the Business, Mr Bamforth was anxious to boost the profits of the Business so that they would more nearly approach the forecast figure. He accordingly approached Mr Gibson of Delta and asked for a large rebate telling him that he needed help with his 1990 accounts. In due course this was agreed at a lump sum of £1.1m; it was not calculated as a percentage of any figure but was to be against a high level of purchases from Delta in 1991. Mr Gibson treated this as a rebate against the 1991 sales and so accounted for it within Delta. But within STC on Mr Bamforth's instructions it was treated as having been earned in 1990 and hence was included in the 1990 Rebate Reserve account. The judge held that as a matter of accounting practice it should not have been; it was a matter to be included in the 1991 accounts since it was dependent upon the 1991 sales.
22. After completion the Delta rebate was taken out of the 1990 accounts and written into the 1991 accounts. The first tranche of £191,000 was paid on 17.4.91. The balance was paid to Senate during 1991, the other rebates amounting to £597,000 were not received and were written off.
23. In as much therefore as the Management accounts overstated the 1990 profit by £1.7m there was a breach of warranty. STC no longer contest this.

Senate's case at trial

24. It was common ground that if Senate established a loss, the measure of damages was the difference between the price actually paid, that is to say with the benefit of the warranty, and the true value of the Business at the time of the Agreement (although the parties were not agreed as to whether this value was to be assessed subjectively or objectively). The eventual price was £88.832m comprising net asset value as determined by the expert and £20m for goodwill. Senate's case was that the true value of the Business is to be calculated by multiplying the true 1990 profit/maintainable earnings net of tax by a p/e multiplier of 13.67. They deduce the figure of 13.67 as their p/e multiplier from the actual transaction as being the number by which £9.744m net of tax has to be multiplied to get the price actually paid. Based on the more extensive breaches of warranty claimed at trial this produced the pleaded claim of £25.95m to £27.317m.
25. Adjusted to the figures actually found by the judge this works out as follows:

Gross profit in 1990 Income Statement	£9.7m
Less	£1.7m
Profit before tax	£8.0m
Less tax at 35%	£2.8m
	£5.2m
True value of business £5.2m x 13.67 =	£71.084m
Difference between price paid £88.832m - £71.084m =	£16.748m

26. It was Senate's case that they had in fact valued the Business by applying a p/e ratio of about 14. This was the evidence of Mr Weinberg and Mr Viry, CDME's finance director. But the judge did not accept this evidence. It is we think necessary to set out in full the judge's reasons for rejecting the p/e approach.
27. At p82 of the judgment he said:

"The trouble with Senate's damages calculation is that, in my judgment, their evidence simply does not establish that they themselves calculated the price which they paid by reference to the profit figure in the 1990 Income Statement nor that they used a p/e multiplier of 13.67 or around 14 nor that a p/e calculation of any kind featured importantly in their assessments. In theory Mr Swinson's opinion method might conceivably stand alone, but it cannot in my view do so in this case where it is so at variance with the only evidence of what actually happened. Although the true value of the Business has to be assessed objectively, the only evidential starting point for that inquiry in this case is to see the way in which CDME themselves did in fact come to offer £90m. The question then has to be what would CDME have done and what would other potential purchasers have done, if the Income Statement had shown a profit of around £7.844m. It then has to be asked whether the result of that inquiry may be taken as a route to the objective true value of the Business.

In my judgment, there were many factors which contributed to the assessment by CDME of the offers which they made and the price which they eventually paid. These included:

- CDME were keen to acquire the Business which they saw as something of a special opportunity. It is to be supposed that Otra were equally keen, so that CDME's price is not to be seen as containing a special opportunity premium unique to themselves.

- The value of the net assets was an anchor and M.Weinberg "reasoned" the final offer as comprising a finite amount for net assets plus a figure for goodwill. The goodwill element was loosely, but only loosely, related to profit potential.

- One consideration about goodwill was how it might be treated in CDME's accounts after the purchase. Goodwill could not for them be more than about £30m since, with a turnover of about £200m, the rules of the Paris Bourse would have required any excess to be written off.

- M. Viry made calculations mainly by reference to assessments of 1991 profits. In some of these calculations, he worked out relationships between assessments of profit and the cost of financing the purchase.

- The range of M. Viry's assessments of 1991 profits before interest and tax were generally between about £7m and £8m but one assessment went as low as £5.2m. The figure in mind on 14.4.91 was £7m.

- CDME paid little, if any, attention to p/e calculations. The notional p/e multiplier implicit in an offer of £90m based upon maintainable earnings of £7m would be 19.19 and a figure as high as this features in no one's evidence.

- Still less did CDME base their offer on any p/e calculation by reference to the profit figure in the 1990 Income Statement.

- With considerations such as these in mind, the offers which CDME made were pragmatic and pitched at each stage to achieve the eventual purchase.

Senate's case in the Court of Appeal. The cross-appeal.

28. It is convenient at this stage to consider the cross-appeal. Mr Field submits that the judge was wrong to reject the p/e approach. He accepted it would be an impossible task to seek to persuade the Court to reverse the judge's finding that Mr Weinberg and Mr Viry did not value the Business on this basis. But he submitted that the judge should nevertheless have adopted it because it produced an objective assessment of loss. Indeed he submitted that as a matter of law this was the only correct method of assessing the value of the Business where the maintainable profits are less than those warranted, because it was the only objective way.
29. Mr Field accepted all the judge's findings of fact set out against the bullet points, save the second. He submitted that the judge had underestimated the importance of the 1990 profits in relation to the calculation of goodwill. He submitted that the 1990 profits were fundamental; that any purchaser of a business as a going concern is buying a profit-stream and it is the profits he is interested in. He showed us a number of documents produced during the negotiations where at times p/e ratios are referred to, sometimes in relation to 1990 profit, sometimes in relation to projected profits for 1991. He referred to the evidence of Mr Gorringe, a relatively junior member of Barings' team that the sale 'was on the back of the 1990 accounts'. He further submitted that since the assets were valued on the basis of a going concern, if the profit was substantially reduced (in his example he reduced it by 80%) he said that the assets could no longer be valued on this basis and it was therefore legitimate that the damages should eat into the value of the assets (as the claim was originally pleaded) or as now, taking 85% of the value attributed to goodwill.

Conclusions on the cross-appeal. The Law.

30. The guiding principle in the assessment of damages for breach of contract has long been established. In Robinson v Harman 1 Exch 850 Parke B. said at p855:

"The rule of the common law is, that where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed."

In Livingstone v Rawyards Coal Co. (1880) 5 App Cas 25 at p39 Lord Blackburn said that damages for breach of contract should be:

"....that sum of money which will put the party who has been injured, or who has suffered, in the same position as he would have been in if he had not sustained the wrong for which he is now getting his compensation or reparation."

And in British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co. of London Ltd [1912] AC 673 Viscount Haldane LC at p689 after stating that the quantum of damage is a question of fact said:

"....as far as possible, he who has proved a breach of a bargain to supply what he contracted to get is to be placed, as far as money can do it, in as good a situation as if the contract had been performed. The fundamental basis is thus compensation for pecuniary loss naturally flowing from the breach...."

31. The passage from the judgment of Parke B. and the speech of Viscount Haldane were cited in the speech of Lord Lloyd of Berwick in Ruxley Electronics Ltd v Forsyth [1996] 1AC 344, at p365. Lord Lloyd also pointed out that in order to obtain damages for breach of contract the plaintiff had to prove a loss, "If he has suffered no loss, as sometimes happens, he can recover no more than nominal damages. The object of damages is always to compensate the plaintiff, not to punish the defendant".
32. It is for the plaintiff to prove both the fact of the loss and the quantum of damage (McGregor on Damages 16th Ed. para.357). Moreover, the assessment of damages is subjective in the sense that the loss is loss sustained by the actual plaintiff, not some hypothetical plaintiff (see per Phillimore J. in Thomas McGhie & Sons Ltd v British Transport Commission [1962] 2 All ER 646.656G).
33. Mr Field relied upon three cases where the Court had applied a p/e ratio to the difference between the actual and warranted profit. The first of these is Lion Nathan Ltd v CC Bottlers [1996] 1 WLR 1438. That was a case involving a share sale. The price paid by the plaintiff was calculated on the basis of 20 times the forecast profits after tax in the company's year of account ending 2 September 1989. The forecast for the two months in issue was warranted to have been 'calculated on a proper basis' and 'was achievable based on current trends and performance'. There was a substantial shortfall. The measure of damages was assessed by multiplying the shortfall by the multiplier of 20. We can find nothing in the decision of the Privy Council or the opinion of Lord Hoffmann to indicate that this is the only way in which damages for breach of warranty or the sale of assets and goodwill in a business is to be calculated. In our view it is quite clear that if this is how the original price is calculated, it is the obvious way to calculate the damages by applying the same multiplier to the shortfall in maintainable earnings/profits.
34. A similar exercise was done by May J. in ADT v BDO Binder Hamlyn [1996] BCC 808 and Jacob J. in Witter v TBP Industries [1996] 2 All ER 573 at 606. But these are also cases where the original price appears to have been calculated on a p/e basis or the experts were agreed that it was the proper basis for assessment. But in this case the judge rejected Senate's case that the price was calculated on this basis. This was a crucial part of their case. We agree with Mr Field that this would not necessarily be fatal to the adoption of a p/e calculation to assess damages. There may be cases where it is appropriate to do so, even if the original price was not so calculated, particularly if this is the agreed approach of the valuation experts. As the passage we have cited from the judge's judgment shows, he did consider whether Mr Swinson's method could stand on its own. But for the reasons he gave he rejected it. It was simply not appropriate when there were so many other factors which induced CDME to pay the price they did, not least the desire to get into the UK market, to retain their position as market leaders and to keep Otra/Sonepar out. In our opinion, for all the reasons given by the judge in the passage cited he was right to reject Senate's case as to the method of calculation of damage.
35. Furthermore in the context of a sale where the assets were valued at £70m and the goodwill at £20m Senate's method of assessing the loss would result in an absurd conclusion. The reduction in the 1990 profit was 17%; the Business was still profitable and there is no question of the value of the assets being affected because the Business was not viable as a going concern. It would be extraordinary if a reduction in profit for one year of 17% could produce a reduction of 80% in the value of the goodwill. In the course of argument Stuart-Smith LJ suggested to Mr Field that one way of approaching the assessment of damages would be to apply the percentage shortfall in the profit to the goodwill figure; this produced a figure of £3.4m; but that is a gross figure. Net of tax it would be £2.2m. He accepted that this might be a logical way of approaching the damages. It is an eighth of the figure contended for by Senate.
36. There is a further way in which it can be shown that the p/e ratio is inappropriate. CDME's original offer was £67.5m based on net assets of £44m and goodwill of £23.5m. The 1990 profit was throughout shown as £9.7.m. These figures would have produced an entirely different p/e ratio for the same business. Moreover, we agree with the judge that a reduction of 80% in the goodwill figure (it was of course much more in Senate's original claim and totally extinguished it) was inconsistent with the treatment of goodwill in Senate's statutory accounts for the year ended 31 December 1991 and 1992 where it was not written down at all but put in at cost. We will have to return to this matter when considering STC's appeal.

STC's appeal

37. It is necessary to set out that part of the judge's judgment where he arrived at the figure of £5m. Having rejected Senate's p/e approach he said at p83:

"STC say that Senate have not seen fit to put forward any alternative claim for damages. They say that the Court is faced with this very large multiplier type claim which is defective in all its parts and produces a quite ridiculous total figure for damages; if the Court is not persuaded by that claim, it should simply dismiss it, and not seek an alternative. But in my view this is rather a case where the Court, having rejected one route to an assessment of damages, has to do the best it can on the quite extensive factual evidence available to make an assessment, less favourable to Senate than that claimed, of what the true value of the Business was.

The starting point is, I think, that the way in which CDME approached this purchase may be seen in the absence of other evidence as the way in which purchasers generally did or would have approached it. In other words, the evidence of what CDME actually did may be used with caution to reach an objective assessment of value.

Although the 1990 profit figure was not used other than peripherally by CDME in their calculations and was not in the forefront of their minds, it was part of the information provided to them and other potential purchasers. It was not of no significance and in general terms I have no doubt that CDME place some reliance on it. I have no doubt that, if the profit figure had been £7.844m or if during negotiations it had been disclosed that there was a bit of a problem with the cars and that yes, the 1990 profit figure was down but we have negotiated some hefty additional loyalty rebates for 1991, all those concerned, the seller and purchasers alike, would have started with somewhat more cautious expectations. [That would have applied just as much to Otra as to CDME, so that STC's submission that Otra were waiting in the wings to snap up the Business for at least as much as Senate paid fails.]The 1990 margin would have been seen as reduced somewhat, but the margin for the later months of 1990 was low anyway. The problem with the cars and the position with loyalty rebates would have been discussed.

I have no doubt that the cars would not have been seen as a major problem. The amount of any provision was relatively small and I am sure that any purchaser would have seen it as a temporary problem.

The absence of the non-Delta rebates amounting to £597,000 would have been a factor tending to depress the price. I do not consider that the £374,000 could have been argued back when no one in fact had set about trying to negotiate any part of it. On one view taking the £1.1m Delta rebate out of 1990 only meant putting it into 1991. There would have been discussions about whether it was additional to or in substitution for other possible 1991 rebates - in the event other such rebates were obtained and it may be supposed that Mr Bamforth would have been reasonably optimistic prospectively. There might have been arguments about whether increased 1991 rebates would be offset by increased discounts to purchasers. There may have been inquiries about the extent to which rebates reserved in 1989 had affected the 1990 profit.

Mr Swinson's opinion was that any reduction in the 1990 earnings should be seen as directly affecting maintainable earnings to which a large p/e multiplier was to be applied. I have rejected the structure of his approach, but I have no doubt that he would say that the rebates wrongly included in the 1990 Income Statement would have had a profound effect on any pragmatic calculation.

Mr Boulton considered that the adjustment of the Delta rebate for one year to another was one off. Either it was a one time special deal or an advancement of where the market was moving and of what would be achieved in future years. It was suggested that market movements affected both rebates and discounts. Mr Boulton said however that this would affect the market whichever year the rebate went to. He accepted that there might be a general relationship between rebates and discounts, but that the accounts of the Business indicated that the amount of discounts allowed was in the order of only 10% of rebates received.

Mr Boulton considered that an assessment of maintainable earnings would have to take account of any overstatement of 1989 rebates. He emphasised that Mr Swinson appeared to agree that this was the position with bonuses. Mr Swift, understanding that the rebates' issue concerned whether rebates should have been taken in 1990 or 1991, said that this was a question of timing which would not have affected a purchaser's assessment of the goodwill value based on cashflow. Mr King's evidence was that in order to consider whether an over provision for rebates affected the underlying profitability of the Business it was necessary to see whether there had been an over provision or under provision in the 1989 accounts.

In my view, (a) the seller would have had the better of any argument about whether the absence of the Delta rebate from the 1990 profit should be seen as depressing the value of the Business, but (b) the whole negotiations would have been conducted at a somewhat lower level. There would still have been more than one purchaser keen to acquire the Business. The pragmatically achieved purchase price would have been somewhat less than the amount Senate paid and the scale of the reduction would have been in the context that it was a reduction of the £20m for goodwill. The reduction would not have been nearly as great as the £16.99m resulting from Mr Swinson's method of calculating. It would have been sufficiently modest to make sense of the subsequent accounting treatment which I have discussed. I assess the reduction as £5m. The negotiations would probably have proceeded in steps of £5m as in fact in the main they did. A reduction of £10m is in my estimation too great and a figure between £5m and £10m improbable. The debate about car leases does not materially contribute to my assessment, so that the fact that Senate succeeded in having the net asset value of the Business reduced for car leases cannot affect the £5m as an assessment of damages for breach of warranty. Nor has Senate received any other relevant compensation which would go in reduction of the damages since the damages address the goodwill element of the price and the Completion Accounts matters all addressed the net asset value."

38. Mr Lyndon-Stanford QC, on behalf of STC, has criticised this part of the judge's judgment on a number of grounds:

(A) That the judge's approach was never considered or put forward at the trial with the result that STC were deprived of the opportunity to make submissions upon it or to call evidence. This has been referred to as the 'natural justice point'.

(B) That the judge failed to consider whether Senate had proved any loss. Had the matter been approached in the light of the true position he should have concluded, on the basis of his own findings, that there was none. There are two aspects of this argument:

(a) An overestimate of the 1989 Rebate Reserve of £750,000 was available to boost the 1990 profits. After taking into account any overstatement in the 1990 estimate (apart from the £1.7m Delta, BICC and Pirelli rebate) this would effectively have cancelled out the £600,000 shortfall allocated to the BICC and Pirelli rebate overstatement (the 1989 Rebate Reserve point).

(b) (i) If the Delta rebate of £1.1m remained in the 1990 accounts, it would have been regarded as a one-off and not affect maintainable earnings/profits; and /or alternatively

(ii) if taken out of the 1990 accounts but put into the 1991 accounts (as it should have been) it would have boosted profits for 1991 pro-tanto; that would have been a bonus because, as the judge found, CDME were more interested in 1991 profits than 1990 (the Delta rebate point).

(C) Because of the presence in the wings of Otra/Sonepar who were prepared to offer £3m more than Senate (and possibly even £5m) Senate would not have been able to negotiate a price below £90m (the Otra/Sonepar offer).

(D) That there is no basis for the judge's selection of £5m which is not a modest reduction in the price, being 25% of the goodwill, other than that negotiations were conducted in £5m steps and in this regard the judge was in error (the £5m steps point).

(E) That any loss was inconsistent with Senate's treatment of goodwill in the statutory accounts for 1991-1992 (the statutory accounts point).

A. The natural justice point

39. Mr Lyndon-Stanford submits that in adopting the approach that if the correct treatment of rebates had been dealt with in the accounts 'purchasers would have started with a somewhat more cautious approach' and 'the whole negotiations would have been conducted at a somewhat lower level' the judge was adopting an approach which was not opened by Senate, did not feature during the trial, was eschewed in Senate's final submissions and upon which STC called no evidence and Mr Lyndon-Stanford was not invited to make any submissions. In the result the judge reached a conclusion which was unsupported by any evidence, because none had been directed to it. In so doing, submits Mr Lyndon-Stanford, the judge fell into error.

The way the case was presented

40. In the Amended Statement of Claim in para. 20 Senate claimed the difference between the value of the business as warranted and its value in fact. In paras 21-23 the p/e method is set out with the resultant claim of £25.95m to £27.317m. Para 25 is in these terms:

"Further or alternatively, had the representations pleaded........not been made or had adequate and sufficient disclosure been made of the facts and matters pleaded (the alleged breaches) then Senate would have sought and procured a commensurate reduction in the consideration, namely in the range of £25.95m and £27.317m"

In Further and Better Particulars it was said that Senate would have procured the reduction through negotiation with STC.

41. STC understood the pleading to mean that a lower price would have been negotiated in Paris, not that negotiations would throughout have proceeded at a lower level. Although the pleading of para 25 lacks clarity, especially as it refers to representations and not warranties, we consider that Mr Lyndon-Stanford's understanding was correct. STC also took the view that a suggestion that a reduction in the price of £26m could have been negotiated in Paris was absurd. We agree.
42. Written opening submissions were exchanged before trial. Senate dealt exclusively with the p/e approach. In their opening submission STC dealt with the alternative pleaded case very shortly. They said it was wrong on the facts; STC would not have tolerated any reduction in Senate's offer for any reason; several other parties were interested including Otra/Sonepar. In their oral submissions Senate's counsel referred only to the p/e method of assessment.
43. In his witness statement Mr Weinberg said that if he had known the profits were overstated by £1.8m (the Rebate Reserve) he would have paid a lower price of approximately £66m to £70m. This again seems to reflect the p/e approach. The cross-examination of Mr Weinberg did not deal with the topic of renegotiation in Paris. In re-examination he was asked what he would have done if he had known around 16/17 April that the Rebate Reserve was overstated by £1.7m. He said "it would have had a direct impact on their valuation.....they would have reviewed their acquisition not only by applying a lower multiple". This again seems to relate to his evidence that they applied a p/e ratio - evidence which the judge rejected. We do not think it supports either a case for renegotiating the price (the para 25 case) or that posed by the judge.
44. Mr Viry's witness statement contains a similar paragraph to that in Mr Weinberg's. The same comment applies. Our attention was not directed to any oral evidence given by Mr Viry which supported either a renegotiated price in Paris - let alone one for £26m or even £16m or which supported the judge's approach.
45. So far as STC was concerned Mr Mand, the Senior Vice-President Finance and Chief Operating Officer for NTL who had executive responsibility for handling the sale of the Business, said in his witness statement:

"I have been asked to comment on the instructions that NTL would have given to Barings if, for any reason, CDME had in those final negotiations sought to renegotiate the price which it had agreed to pay for the Business. At the time I understood from Mr Taylor and Mr Allen that there were other potential purchasers competing to acquire the Business.In particular, they told me in a telephone conversation that, during those negotiations, one potential purchaser was in principle willing to pay a price which was slightly higher that the price that CDME had offered to pay. I cannot recall the name of that other purchaser.

I instructed Mr Allen and Mr Taylor to proceed to conclude an agreement with CDME because the negotiations with CDME were at a more advanced stage than was the case with any other purchaser. If, however, CDME had sought to renegotiate the price to any material extent, then I am confident that I would have instructed Barings to seek to conclude a sale of the Business to the other purchaser for the higher price than it had put forward (whilst also speaking to other interested potential purchasers). This would not have involved a change of NTL's policy with regard to the sale of the Business."

We were told by Mr Lyndon-Stanford that a decision was taken not to call Mr Mand to give oral evidence because it was not considered that the issue was a live one. His evidence was put in under the Civil Evidence Act. The judge did not refer to his evidence.

46. Mr Gorringe, in his witness statement, confirmed that if any attempt had been made to renegotiate the price in Paris, Barings could have reverted to Otra/Sonepar. We are told that Mr Bernard Taylor, Barings' chief negotiator in Paris, would have given evidence to a similar effect as that of Mr Mand. An attempt was made to adduce his evidence, which was of course relevant on other issues, under the Civil Evidence Act. The judge refused the application. He thought that Mr Taylor could be called to give oral evidence. Mr Lyndon-Stanford told us that a conscious decision was taken not to try and call him as he was a very busy man - because it was not believed that the renegotiation issue was a live one. He also said that Mr Taylor's evidence would have been relevant on the judge's approach.
47. It is important also to look at the closing submissions of counsel to see how the case was put and what were the issues before the judge. Very full written submissions were presented to the judge. In the section on damages Senate's counsel said:

"Senate pleads two alternative measures of damages in respect of its contractual claim. These are: (i) the difference between the value of the Business if the warranties had been true and its actual value; and (ii) the difference between the price paid and the price which would have been paid had Senate known the true level of operating profit for 1990. The evidence has focused on the first measure and Senate puts its case in these closing submissions exclusively on this basis."

This was elaborated on in Appendix 1 where the importance of the factual evidence of Mr Weinberg and Mr Viry was emphasised as an important part of the p/e approach. In his oral submissions, which admittedly were limited in time, no mention of the alternative approach was made.

48. STC's counsels' understanding also clearly emerges from their closing submissions. The suggestion that Senate could have renegotiated a reduction of c£26m was described as absurd. As to the alternative claim it was said in para 145.6:

"For the pleader to say that "Senate would have sought and procured" any reduction is not supported by any evidence, and does not seem to be persisted in at all - it has not featured in Senate's opening, either written or oral, and has not featured in any cross-examination. Paragraph 25 of the Statement of Claim is without substance and can be ignored."

And at para 149.3 they said:

"However, Senate has not seen fit to put forward any alternative claim for damages. The Court is faced with this very large multiplier type claim which is defective in all its parts and produces a quite ridiculous total figure for damages; if the Court is not persuaded by that claim, it should simply dismiss it, and not seek an alternative."

In his oral submissions Mr Lyndon-Stanford said, "The suggestion.....that they could have negotiated a reduction in price is no longer being pursued." There was no dissent from Mr Field and no suggestion from the judge that he was contemplating some other method of assessing the loss.

49. In our judgment it is clear that from the outset of the trial the renegotiation in Paris envisaged by paragraph 25 of the Amended Statement of Claim was never a live issue. The judge's approach was not one that was put forward by Senate and was not considered by the defendants.

The Law

50. A plaintiff must plead the damage claimed and set out the method by which he arrives at the claim. An alternative approach should also be pleaded. In Anglo-Cyprian Trade Agencies v Paphos Wine Industries [1951] 1 All ER 873 at p875G-H, Devlin J. said:

"....in my view the special damage which is pleaded should make quite clear to the other side what measure of damage is being relied on. If the plaintiff wishes to say that the goods are valueless, the special damage will be pleaded in the way in which it was done in this case, but, if he also wishes to say that, if they are not valueless, they have depreciated substantially in value, then it is his duty, I think, to plead in the alternative that they have depreciated in value and to set out the method of calculation by which he arrives at the figure claimed in the alternative, so as to enable the defendant to know what is the case against him and to obtain evidence for his defence."

51. In our judgment the judge's approach was not covered by the pleading of paragraph 25 of the Amended Statement of Claim. Moreover, there is all the difference between a modest reduction in the price because the bidding would have been at a somewhat lower level and a massive claim for £26m. A defendant may well wish to protect himself against a modest alternative claim by making a payment into Court, especially when he is faced with a very long and expensive case and a plaintiff who is seeking massive damages (see Beoco Ltd v Alfa Laval Co Ltd [1995] QB 137 at p154G to 155C). It would not have been possible for STC in this case to make a modest payment into Court to protect themselves against the decision as formulated by the judge. The judge's approach would have required an amendment.
52. This case lasted for 30 days and many complex issues arose, many of which have not concerned this Court. Counsel have to direct the evidence, cross-examination and their submissions to the live issues in the case. They should not waste time tilting at windmills. It is important, if the judge has it in mind to adopt an approach to some important issue which has not been canvassed at trial that he should give the parties a proper opportunity to deal with it. In Hoecheong Products Ltd v Cargill Ltd [1995] 1 WLR 404 at 409A-C, Lord Mustill said:

"It does, of course, happen from time to time that a court comes to learn of a statute or authority bearing importantly on an issue canvassed in argument but, through an oversight, not then brought forward. The court may wish to take the new matter into account. Before doing so it should always ensure that the parties have an opportunity to deal with it, either by restoring the appeal for further oral argument, or at least by drawing attention to the materials which have come to light and inviting written submissions upon them."

That case related to a new question of law and fact raised for the first time in the Hong Kong Court of Appeal. But in our judgment the principle is applicable here.

53. It not infrequently happens, especially in personal injury cases in relation to the assessment of future loss of earnings, that the plaintiff's case is greatly exaggerated, being based on unrealistic prospects of promotion and success which the judge rejects. In such cases, provided that the judge is satisfied that there will be continuing loss of earnings, he may well have to do his best on such material as is available to find a proper and reasonable basis of assessment of the question. The plaintiff cannot complain if, through opening his mouth too wide, he fails to prosecute a more modest claim and the judge does not deal with the matter as sympathetically as he might otherwise have done. Recent examples of where the Court has had to adopt this approach are Vernon v Boseley (No. 1) [1997] 1All ER 577 and Cornell v Green (unreported CA transcript 20 March 1998).
54. But that is not this case; and while we sympathise with the judge's view that having found that there was a breach of warranty and thinking that some modest loss should be attributed to it, he was anxious not to send the plaintiff away empty handed, we think that he should have resisted the temptation to do so. The plaintiff deliberately adopted a high risk policy of aiming at jackpot damages. We have little doubt that it was part of that policy not to offer the judge a much more modest alternative.
55. If the judge's approach had been a live one we have no doubt that Mr Lyndon-Stanford would have wished to call evidence, probably from Mr Mand and Mr Taylor in person, possibly to recall Mr Swift, a Barings' director second in command to Mr Taylor, and for Mr Gorringe to deal with it. Certainly he would have wished to make submissions. Mr Field submitted that evidence relating to the Otra/Sonepar offer was advanced and Barings' reaction to it, and that Mr Lyndon-Stanford made submissions on it and on aspects such as the 1989 Rebate Reserve and the effect of putting the Delta rebate into the 1991 accounts. But we do not consider that this really meets the objection. And in reaching the conclusion he did, the judge seems to have overlooked Mr Mand's evidence; he also, for reasons which we develop later on in this judgment appears to have overlooked some of the findings that he himself made. In our judgment the learned judge should not have attempted to rescue the plaintiff's case by adopting the line he did, at least without giving Mr Lyndon-Stanford an opportunity to object to it, and if his objection was overruled, to make submissions upon it and tender evidence, if he was so advised. The points made in the following paragraphs of this judgment in paras 56-68 are all matters which in our view Mr Lyndon-Stanford would have wished to make submissions upon, if he had appreciated that the judge was minded to adopt the approach he did. While it can be said that Mr Lyndon-Stanford did make the points , they were not directed to the judge's particular approach and the judge did not have the advantage of their being focused on that approach. Had he done so, it seems to us that he would have given much greater weight to them.

B. What was the actual profit/maintainable earnings in 1990

56. Although the 1990 Management accounts did not show a true and fair view because rebate reserves were overstated by £1.7m, in order to see if the plaintiff has suffered any loss and, if so, how it should be quantified, it is necessary to establish the actual profit for that year. Thus if some credit or profit has been omitted which can properly be taken into account in the 1990 profit, the apparent loss is pro tanto extinguished or diminished. For this purpose, in our judgment, it is permissible to take into account hindsight to arrive at the actual figures.

The 1989 Rebate Reserve

57. In the 1989 accounts the rebate reserve was overstated by approximately £750,000. The effect of this was that the profits disclosed in the 1990 income statement were understated by the same amount. At one stage this appears to have been accepted by Mr Swinson, Senate's expert (transcript 2970/15), where he drew a distinction between the effect on maintainable earnings/profits, and a true and fair view. Later in his cross-examination he seems to have resiled from this because the overstatement of rebates in 1990 was not a genuine overestimate, but an unjustifiable inclusion as to £600,000 and wrongful accounting in respect of the Delta rebate of £1.1.m. On this basis he sought to distinguish his own treatment of the underprovision for bonuses.
58. Mr Boulton did not accept this distinction. And in the absence of fraud or misconduct it does not seem to us to be a valid one. What is more important is that the judge appears to have accepted Mr Boulton's and STC's argument on this point. At p42, after rehearsing the argument, he said:

"There would not cease to be a misstatement [in the accounts] because mathematically compensating estimates properly made in 1989 turned out to be wrong. That outturn would affect the 1990 profit and could affect a calculation of maintainable earnings, but would not alter the fact that the 1990 profit resulted from a misstatement and that without the misstatement the 1990 profit would have been different"

The judge also refers to this point at p85 in the passage quoted. Though it is not entirely clear whether he is making a finding to this effect.

59. Even when account is taken of an overestimate of the 1990 rebate reserve of £150,000 (in addition to the £1.7m) it is clear that the balance of the overstated 1989 reserve ie. £600,000, effectively balances the £600,000 overstatement of the Pirelli and BICC rebates for 1990.
60. Mr Field submitted that the Court should not look at the matter with hindsight but as at 26.4.91. Even if that is done Mr Lyndon-Stanford demonstrated that at that date all but £318,000 of the 1990 rebates had come in and it was known that the balance of the Delta rebate £918,000 was going to be paid (£191,000 had been paid on 17.4.91).

The Delta Rebate

61. STC advanced two different arguments in relation to the effect of the overstatement of the Delta rebate in the 1990 accounts and its impact on a purchaser if the true position had been disclosed:.

(a) that if the £1.1m was properly included in the 1990 accounts it was a one-off payment and, like a property profit, would not affect maintainable earnings and would therefore be ignored, at any rate so far as the application of a p/e ratio.

(b) that if the £1.1m had been taken into the 1991 year, as it should have been, it would have boosted the profits for that year and that was what CDME were primarily interested in. There is a subsidiary point that by taking this sum out of the 1990 accounts the net assets were reduced by £918,000 (the amount of the Delta reserve not received by 26.4.91), and CDME therefore paid a lower price for them.

62. As to the first of these arguments, Mr Field submitted that although the Delta rebate was very large, rebates were not like property profits, being more part of the regular trading of the Business and therefore affected maintainable earnings. We think there is force in this argument. The trouble with STC's argument on this is that it is based on the hypothesis that it was correctly included in the 1990 income statement and the hypothesis is not correct.
63. As to the second point, Mr Field submitted that the benefit of the Delta rebate was counterbalanced by the need for STC to grant corresponding discounts to its purchasers. There does seem to have been some confusion about this point. But it was cleared up in further cross-examination of Mr Boulton at p3502/3 where he pointed out that the important thing was the effect on margin of profit in 1991. Mr Lyndon-Stanford showed the Court KPMG's audit highlights memorandum for the period ended 31.12.91 which demonstrated that the margin for 1991 showed an improvement over 1990 (18.7% to 18.2%).
64. The judge refers to this argument on the Delta rebate in the passage cited at p85 and says that STC would have had the better of any argument about whether the absence of the Delta rebate from the 1990 profit should be seen as depressing the value of the Business. We consider this is a clear finding and is supported by the evidence of Mr Boulton and Mr Swift.
65. In the light, therefore, of this conclusion, coupled with that relating to the 1989 rebate overstatement, Mr Lyndon-Stanford submits that it is difficult to see how there was really any basis for saying that the negotiations would have been at a lower level. If the disclosure of the true facts would have led to a discussion, the discussion would have led to the conclusion that the error in the income statement did not really affect the profit stream at all and hence would not affect the price being paid for the goodwill. In our judgment there is much force in this submission.

C. The Otra/Sonepar offer

66. STC's argument was that CDME could not have negotiated a lower price, even if the true position had been disclosed in the income statement (and assuming the arguments relating to the 1989 rebate reserve and the Delta rebate which we have dealt with in paras 56-65 are rejected) because Otra/Sonepar were prepared to offer a significantly higher price. The judge dealt with this point in the passage in brackets on p84 of his judgment previously cited. He is of course right that on this hypothesis the profit statement in the 1990 income statement would have been £8m and not £9.7m. But what he appears to overlook is that Otra/Sonepar's offer received on 18.4.91 was in fact £3m higher than CDME's. Moreover, there was evidence that a few days later Otra/Sonepar would have been willing to pay an additional £2m, thereby topping CDME's offer by £5m. If the judge was correct in concluding that had the income statement been accurate the price paid by CDME would have been £5m less, Mr Lyndon-Stanford submits that by the same reasoning Otra/Sonepar would still have been prepared to pay £90m and if CDME wanted to purchase the Business, as they did, they would have had to top this offer. It is this point, he submits, that the judge appears to have overlooked. Again we consider there is force in this submission.

D. The £5m steps

67. Mr Lyndon-Stanford submits that in the last paragraph of the passage we have cited from the judgment it is difficult to ascertain any rational basis for the judge's assessment of damages at £5m other than the parties would have taken a pragmatic approach and that the negotiations proceeded in £5m steps. The judge, he submits, was in error in thinking that negotiations went in £5m steps and in any event a reduction of 25% in the value of the goodwill is scarcely modest. It does not appear that the negotiations proceeded in £5m steps. CDME's original offer was £67.5m (based on assets of £43.6m); it was then increased to £75m-80m; in the final stages Mr Weinberg offered £85m and Mr Taylor was holding out for £95m; the gap then narrowed to £87.5m and £92.5m, and finally closed at £90m. It is very difficult to reconcile the judge's £5m figure with his finding that the Delta rebate point would not have depressed the value of the Business, since this was the largest element in the error. If one uses as a cross-check the method of assessing the loss, which Mr Field accepted was a rational one, namely taking a percentage of the £20m goodwill figure, the answer comes out at £2.2m (see para 35). We have reached the conclusion that even if the difference is to be taken at the full £1.7m, £5m represents substantially too high a figure.
68. Mr Field submitted that this Court should not interfere with the judge's assessment. He had the feel of the case and was in a better position after a long hearing to judge the effect of the overstated profit than this Court. We cannot accept this submission. A similar submission was made to the Court of Appeal in Jade Tower Ltd v NM Schroder Financial Management Ltd (unreported transcript 6 April 1995). In his judgment agreeing with Nourse and Kennedy LJJ, Evans LJ said :

"Mr Aaron, for the respondents, to whose clear and careful submissions I would pay tribute, does not suggest that the figure of 1,500 can be justified on any mathematical basis or by extrapolation from other figures stated in the judgment. He resists Mr Reid's submission that some justification should be sought. He also resists any suggestion that the figure was plucked out of the air; he submits that its origin lies in the learned judge's "feel" for the case, which is likely to have been acute after a hearing which, regrettably, occupied more than 50 days of the court's time.

I cannot accept this submission. The judge was required to make a considered and justifiable estimate and he purported to do so."

E. Senate's statutory accounts

69. Senate's statutory accounts for the year ended 31 December 1991 showed the purchased goodwill as an intangible asset in the balance sheet at £23.894m. This included the £20m paid for the goodwill of the Business. A note to the accounts indicated that the goodwill relating to the Business would be amortised over 20 years. Subsequent accounts included the purchased goodwill figure at cost subject to amortisation. The duties of directors and auditors in the preparation, signing and auditing of accounts are laid down in the Companies Act 1985 (ss226, 233, 234, 234A, 235-7 and 4th Schedule).
70. SSAP 22 is the Statement of Standard Accounting Practice in respect of goodwill. The amount to be attributed to purchased goodwill should be the difference between the fair value of the consideration given and the aggregate of the fair values of the separable net assets acquired (para 36). Purchased goodwill should normally be eliminated from the accounts immediately on acquisition against reserves (para 39). If it is not so written off immediately para 41 provides:

"Purchased goodwill (other than negative goodwill) may be eliminated from the accounts by amortisation through the profit and loss account in arriving at profit and loss on ordinary activities on a systematic basis over its useful economic life ('amortisation'). When this treatment is selected, the following points apply:

(a) Purchased goodwill should not be revalued. If there is a permanent diminution in value of purchased goodwill, it should be written down immediately through the profit and loss account to its estimated recoverable amount.

(b) The useful economic life should be estimated at the time of acquisition. It should not include any allowance for the effects of subsequent expenditure or other circumstances subsequently affecting the company since these would have the effect of creating non-purchased goodwill."

71. Mr Lyndon-Stanford submitted to the judge that Senate's massive claim was quite inconsistent with the treatment in the accounts. The judge agreed. But he said at p81 that the accounts gave 'a general indication that the true value of the Business in April 1991 was at most modestly less than the price paid, 'modestly' to be seen in the light of the purchased goodwill of £20m which did not in consequence need to be written down'. Mr Lyndon-Stanford submitted that the accounts show that there was no loss at all. Any permanent loss would have to be written down; a temporary diminution would not need to be written down provided the expenditure of money was not required to correct it.
72. We do not think that the accounts create any statutory estoppel, though it hardly lies in the mouths of the directors or auditors of Senate to say that the accounts were wrong having regard to their statutory duties. And indeed they did not say so. We think the treatment in the accounts can be reconciled with a modest difference in the price for the goodwill. But it is very questionable whether a 25% reduction was modest.
73. For all these reasons, in our judgment the appeal succeeds on its merits.

NoticeNotice

74. The letter dated 26.12.91 from CDME on which the judge based his conclusion that the plaintiff had complied with clause 11.5 of the Agreement, after referring to and quoting the relevant part of the warranty, concluded as follows:

"It is now clear that the Management Accounts were manifestly inaccurate and did not take into account certain matters which they should have taken into account. Further, it appears that by 26^th April 1991 (the date of the completion of the acquisition) there had been a severe downturn in the trading position of the Business.

The purpose of this letter is to notify you for the purposes of clause 11.5.1 of the Agreement, on behalf of Senate, that a substantial claim is likely to be made against STC for breach of the warranties contained in the Agreement.

We shall provide you with further details of the grounds of this claim and of the quantum in the near future".

75. The judge held that a further letter of 22 June 1992, which contained further particulars of the grounds which were in his view adequate for the purposes of the notice clause, could not be relied on because it had not been sent promptly: but that the letter of 26 December 1991 had been sent promptly. Neither of these findings is challenged. The remaining question for the judge was whether the earlier letter complied with the requirement promptly to give "notice.... in writing.... setting out such particulars of the grounds on which [the claim for breach of warranty].... is based as are then known to the Purchaser...." He held that it did. In the course of reviewing the evidence bearing on what the plaintiff knew and when such knowledge was acquired the judge said this:

"KPMG [ the accountants advising the plaintiff] reported on 11.11.91. saying that there was a clear case [for a breach of warranty claim]... At a meeting on 15.11.91 considerable oral information was given of the possible breach of warranty claims. At the meeting of 11.12.91, clear oral particulars of the claim as it essentially now is were given (with the exception of bonuses)..... On 19.12.91, Mr. Bernard Taylor telephoned Mr. Weinberg saying that [the vendors] had considered "the issues under discussion" and that they did not consider that CDME had ground for a claim. I accept Senate's evidence to the effect that the November and December meetings were an attempt to negotiate a settlement of both the completion accounts and the breach of warranty issues together".

The judge then answered the critical question as to particulars as follows:

"I also conclude that CDME gave "such particulars of the grounds on which such Claim is based as are then known to the Purchaser" orally at the meetings on 15.11.91 and 11.12.91. They gave written notice promptly on 26.12.91. Upon receipt of that notice, STC were well aware of relevant particular bases for the claims to which the notice related and the contention that the notice fails for want of formal written particularity is technical and without merit. In substance the notice served its commercial purpose and it may be seen as serving its contractual formal purpose by reading the expression "certain matters" as implicitly in the circumstances in which it was written carrying words such as "which we clearly told you about in detail on 15.11.91 and 11.12.91" and the expression "further details" as implicitly referring to the details already known to STC. I am quite sure that this is how STC understood the letter and I hold that in the circumstances there was sufficient particularity. "Certain matters" in the notice may be seen as essentially the same as "the issues under discussion" in Barings' note of Mr. Bernard Taylor's telephone conversation with M. Weinberg on 19.12.91 (N7/1941). Barings understood the one shorthand just as they understood the other".

76. It is necessary to say a few words about the two meetings and the telephone conversation referred to in that passage. The meeting of 15 November 1991 was called to discuss matters to do with the completion accounts. It is evidenced by a note prepared by Mr. Dowie of Barings, from which it is clear that while attention was devoted to that topic, Barings were also told that KPMG had advised that the 1990 profits had been overstated and that CDME had grounds for a claim under the warranty, particularly in relation to rebates, which were said to account for an overstatement of profits of the order of £1.8 m. At the meeting of 11 December (evidenced by a detailed minute prepared by Dawn Mackie of Coopers and Lybrand, the vendor's auditors) the plaintiff's representatives again advanced a claim for breach of warranty based among other things on the alleged overstatement of rebates by £1.8 m. It is clear that there was a good deal of confusion and uncertainty as to the nature and basis of the claims being advanced, and in evidence at the trial there was considerable debate as to what had been said. It is unnecessary to go into details.
77. The note of the telephone conversation of 19 December 1991 records that Mr. Bernard Taylor telephoned Mr. Weinberg to report that, after further consideration of the issues under discussion, the vendors did not consider that the purchasers had grounds for a claim relating to the reported profitability of the Business and that he was therefore not authorised to discuss the issue.
78. Another matter to which we should refer is that for a considerable period during the progress of the action Senate claimed that the November and December meetings had been without prejudice and therefore could not be referred to at all in the proceedings. They went so far as to resist an application for specific discovery of notes of these meetings. While it is true that the affidavit sworn by Senate's solicitors in terms refers only to the November meeting in connection with the without prejudice claim, (saying of the December meeting no more than that the plaintiff had no documents relative to it) we have no reason not to accept that the same point had been taken in relation to both: Mr. Lyndon - Stanford told us that the plaintiff's solicitors maintained that no reference must be made to either meeting, and only changed their stance when, in the amended reply shortly before trial, it was contended that the relevant information as to grounds had been given at the meetings.
79. For the appellant Mr. Lyndon-Stanford argued that the judge's construction of the letter cannot be correct. The clause requires that particulars of the grounds should be set out in the notice and, while he accepted that this could be achieved by reference to another document - say a letter previously sent to the vendors - what is clear is that the particulars must be in writing. He also contended that, even if it were permissible to provide the particulars by reference to what had been communicated orally, that is not what the letter does: so far from referring to something that has been provided it indicates that particulars will be provided in the future. He relied on an observation by the judge that:

"The clear commercial purpose of the clause includes that the vendors should know at the earliest practicable date in sufficiently formal written terms that a particularised claim for breach of warranty is to be made so that they can take such steps as are available to them to deal with it"

80. Counsel also submitted that in any event the uncertainty and dispute as to what was said at the meetings prevents their constituting particulars of grounds (even if otherwise they were capable of doing so) and he argued that such uncertainty and dispute is what a requirement for written notification is, inter alia, designed to avert. He made the further point that the contention so long persisted in, that the meetings were without prejudice, is inconsistent with the suggestion that the letter was intended to incorporate the information conveyed at the meetings or had the effect of doing so.
81. For the respondent Mr. Field argued that it was permissible to construe the letter as impliedly incorporating what passed at the meeting of 11 December only two weeks earlier. He relied on the words "It is now clear", "certain matters" and, in particular "we shall provide you with further details of the grounds of this claim.... in the near future", emphasising the word "further" which, he submitted, imports that some details have already been given. He suggested that the judge found that the defendants understood the letter as referring to the meeting (though we doubt this) and that he was in any event correct in so construing it. He submitted that whatever confusion or uncertainty there may have been in the discussions, what is clear is that the defendants would have understood that the essence of the contention being advanced was that rebates had been wrongly included in the 1990 accounts. Thus the underlying commercial purpose of the notice provision had been achieved. The vendor did not need anything further, and to require the service of a notice in strict compliance with the clause would be futile. The defence of lack of notice was in such circumstances technical and unmeritorious and the judge rightly rejected it.
82. From this summary it will we hope be clear that the case for Senate on the notice requirement has been put in two quite distinct ways: first, that the judge was right to construe the letter of 26 December 1991 as satisfying the requirements of clause 11.5.1. and, alternatively, that even if it did not strictly comply, the vendors were not entitled to rely on the deficiencies to defeat the plaintiff's claim because, in the light of what they knew as a result of the meetings - especially that of 11 December - service of a notice would have been otiose or futile. The judge, who accepted the first proposition, did not deal with the second.
83. We cannot accept the judge's reasoning as to the construction of the letter. While it is true, as Mr. Field submitted, that the letter was plainly intended to be a notice pursuant to clause 11.5.1, it patently failed to meet the requirements of that clause. Of the three passages to which Mr. Field draws attention, only the words "further details" even begin to support the contention that the letter is to be understood as making reference to some previous communication of grounds. However, in our view, those words are far more readily explicable as being a reference to the assertion in the first sentence of the quoted passage that the management accounts were materially inaccurate and did not take into account certain matters that they should have taken into account. Reading the three paragraphs together, we see no answer to the appellant's contention that the reference to the provision of particulars is prospective rather than retrospective and that there is nothing whatever to support the notion that what had passed at the meetings was incorporated. Indeed, coming as it did so soon after the meeting of 11 December, it seems to us that this letter - which we are told was professionally drafted - was couched in language designed not to refer to what had passed at the meetings: a conclusion that would be consistent with the stance adopted by the plaintiff as to the meetings having been without prejudice.
84. In any event we cannot accept that, even if it could be said that the letter implicitly incorporated a reference to the meetings, this would have constituted compliance with the clause. This is because in our view it is plain that the clause requires that the grounds known to the purchaser shall themselves be set out in writing. We have already said that this would allow incorporation of another document but we cannot accept that it could be satisfied by a bald reference to an earlier oral exchange.
85. Our conclusion is that the judge was wrong to hold that Senate had complied with clause 11.5.1. It follows that, unless Senate can make good its alternative argument (raised in the amended respondent's notice) to the effect that the clause imposed no obligation to give written notice of facts and matters which were already known to the vendors, Senate's claim should have failed by reason of their failure to give proper notice of their breach of warranty claim. That requires a consideration of the authorities to which we were referred.
86. The starting point for Mr Field's submission is Barrett Bros. (Taxis) Limited -v- Davies Lickiss and Milestone Motor Policies at Lloyd's, Third Parties [1966] 1 W.LR. 1334. There the due observance of the terms of the policy was a condition precedent to any liability arising under the policy. One such term was that:-

"The insured shall...forward immediately any letter, notice of intended prosecution, writ, summons or process relating (to any accident)."

The defendant was in breach because he did not forward the notice of prosecution and the subsequent summons but the police wrote to the insurers giving them notice of the pending proceedings and the insurers acted upon that information. Lord Denning M.R. found against the insurers on the ground that:-

"First, it was unnecessary for the motor-cyclist to send the documents to the insurers. They had all the relevant facts, and that absolved the motor-cyclist from doing more. The Police Headquarters at Blackpool by their letter of June 18, 1964, gave to the insurers all the material information. The insurers would be entitled, if they wished, to send their own representative to the Magistrates' Court and watch the proceedings or, indeed, take such other steps, if any, as they were entitled to take. Seeing that they had received the information from the police, it would be a futile thing to require the motor-cyclist himself to give them self-same information. The law never compels a person to do that which is useless and unnecessary": p. 1339 D-F.

He also "put the matter more broadly" as follows:-He also "put the matter more broadly" as follows:-

"This condition 1 was inserted in the policy so as to afford a protection to the insurers so that they should know in good time about the accident and any proceedings consequent on it. If they obtain all the material knowledge from another source so that they are not prejudiced at all by the failure of the insured himself to tell him, then they cannot rely on the condition to defeat the claim": p. 1340 A-B.

Danckwerts L.J. agreed with him, whilst Salmon L.J. dissented.

87. In Farrell -v- Federated Employers Insurance Association Ltd [1970] 1 W.L.R. 498 MacKenna J, expressed his surprise at this broad proposition and said:-

"I do not regard the Master of the Rolls' judgment as authority for the wider proposition that an insurer cannot rely on a breach of condition unless he has suffered actual prejudice."

In any event he was able to distinguish Barrett Bros. on its merits.

88. In The "Mozart" [1985] 1 Ll. L.R. 239 the terms of the charterparty provided that:-

"No deduction of time shall be allowed for stoppage unless due notice be given at the time through the master or owner."

Mustill J. held that:-Mustill J. held that:-

"The requirement to give a due notice - which in my judgment means no more than a notice which is appropriate in the circumstances - cannot sensibly be understood as requiring the charterers to notify the master of something which, by combining his own observations with information conveyed to him by the people on the spot, he knows perfectly well already."

He said of Barrett Bros:-He said of Barrett Bros:-

"If it were necessary to base a decision on the third and broadest of the propositions advanced by the Master of the Rolls, I would venture to share the reservations expressed by Mr Justice MacKenna in Farrell...It is not, however, necessary to enter into this, for the (first) ground (as set out above) is much narrower. It is directly in point, and binding on this court. I see no reason not to apply it here. The master had received all the information which, if I have correctly construed the charter would have been contained in the notice. This being so, I conclude both by way of interpreting the words "due notice", and by applying the law as stated in Barrett -v- Davies, that the charterers are not precluded from relying on the exception."

89. In Vallo Giovanni & C.S.p.A. -v- Gebr. van Weelde Scheepvaartkantoor B.V.(The "Chanda") [1985] 1 LI L.R 563, Bingham J dealing with a similar charterparty held that is was unnecessary for the charterers to repeat to the master that which had already been clearly communicated to the owners. He said:-

"In reaching that conclusion I rely on the observation of Lord Denning, M.R., Barrett Bros... at p. 1339 D-F (the first and narrower ground above). Whatever doubt may have been cast on other parts of that judgment I do not understand the authority of that particular observation to have been in any way undermined."

90. We share the reservations expressed about Lord Denning's broad proposition but, whatever the correctness of Barratt Bros, the question whether or not the appellants had been prejudiced and whether or not it is futile to require strict compliance with clause 11.5 of the Agreement must depend upon the construction to be placed upon that clause and the commercial purpose it was intended to serve.

As we have already pointed out, the judge defined the purpose in these terms, to which we now add our emphasis:-

"The clear commercial purpose of the clause includes that the vendor should know at the earliest practicable date in sufficiently formal written terms that a particularised claim for breach of warranty is to be made so that they may take such steps as are available to them to deal with it."

We agree. He also suggested that:-We agree. He also suggested that:-

"The commercial purpose may not be sensibly served if an uninformed and uninformative notice is given at the earliest conceivable moment."

The implication, with which we agree, is that the notice should be informative.

91. It does not stop there. Certainty is a crucial foundation for commercial activity. 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 to be 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. Thus there is merit in certainty and accordingly, in our judgment the point taken by the appellants is not a matter of mere technicality and it is not without merit.
92. Closer examination of the facts makes that plain. The judge did not permit any serious challenge to the accuracy of Miss Mackie's minute of the meeting of 11 December. That records, apparently as an agreed conclusion, that:-

"The matter of profits being misrepresented was obviously a grey area..."

That is not sufficiently clear and unambiguous to leave STC in no reasonable doubt of the detail of Senate's claim. In our judgment, given the need for certainty, the need to avoid argument, the need for a written record, it is not a futile thing to require that the commercial purpose of clause 11 be fulfilled. The very fact that Senate sent their second but late letter dated 22 June 1992 was itself a demonstration of the fact that giving particulars in writing was not something which was then regarded as "useless and unnecessary."

93. In our judgment the letter of 26 December was inadequate notice. Notice complying with clause 11.5 was a contractual bar to Senate's bringing their claim. As they have failed to give proper notice, their claim should be dismissed. For all these reasons the appeal must be allowed and the cross-appeal dismissed. In the circumstances it is unnecessary to consider the appeal on interest or costs.

Order: Appeal allowed; cross-appeal dismissed; costs of appeal and cross-appeal be against plaintiff; order below as to costs and payment to plaintiff of monies in court be set aside; plaintiff to repay defendant £7,389,980.25 plus interest to today's date; further payment of interest at £1798.73 a day until payment in full.