Case No : QBENF 97/1641/CCase No : QBENF 97/1641/C
BAILII Citation Number: [1999] EWCA Civ 3029
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
(HIS HONOUR JUDGE BRUNNING)

Royal Courts of Justice
Strand, London WC2A 2LL
Date: 27 October 1999

Before:

LORD JUSTICE PETER GIBSON
LORD JUSTICE PILL
and
LORD JUSTICE CHADWICK
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E A GRIMSTEAD & SON LTD	Respondent
and
FRANCIS PATRICK McGARRIGAN	Appellant
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(Transcript of the Handed Down Judgement of
Smith Bernal Reporting Limited, 180 Fleet Street
London EC4A 2HD
Tel No: 0171 421 4040   Fax No 0171 831 8838
Official Shorthand Writers to the Court)
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MR PAUL DOWNES (instructed by Messrs Pothecary & Barratt for the Appellant)
MR MICHAEL CRANE QC & MR BANKIM THANKI (instructed by Messrs
Herbert Smith for the Respondent)
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Judgment

LORD JUSTICE CHADWICK:	This is an appeal from an order made on 7 November 1997 by His Honour Judge Brunning, sitting in the Queen’s Bench Division of the High Court, in proceedings arising out of a share sale agreement made on 13 September 1989 between the plaintiff, E A Grimstead & Son Limited, as purchaser and the defendant, Mr Frank McGarrigan, and his son as vendors in respect of the entire issued capital of J R Bradford & Co Limited (“the company”). 

At the time that the share sale agreement was made the company was the owner of a valuable freehold property known as 200/210 Dunmow Road, Bishops Stortford, Hertfordshire. That property was the principal asset of the company. It had been purchased in May 1989 for £550,000 with the assistance a loan from the company’s bankers, Lloyds Bank plc; and was charged to secure that loan. The company carried on its business, as motor dealers and service agents, with the benefit of a dealer agreement under the terms of which vehicles were supplied on consignment;  that is to say, the vehicles did not become the property of the company and the company did not come under an obligation to pay the supplier until they had been sold on to a customer. The effect of those terms was that the vehicles on consignment did not appear as trading stock in the company’s balance sheet. The company’s trading stock, other than its own vehicles, comprised (in the main) spare parts. 

From 1983 or thereabouts the company had been under the control of Mr McGarrigan.  In 1989 Mr McGarrigan was approached by Mr Eddy Grimstead. Mr Grimstead was interested in purchasing the property at Dunmow Road. Mr McGarrigan and Mr Grimstead entered into discussions. Those led to the agreement for the purchase of the company itself. In the course of negotiations Mr McGarrigan made the representations as to the financial state of the company which have given rise to these proceedings. 

The representations
The representations, which were all made orally, are said to have been in these terms: (i) at a meeting in or about July 1989, that “the company’s trading assets and liabilities would be in balance to within a few pounds at the date of sale”; (ii) in the course of a telephone conversation in or about August 1989, that “by the date of exchange of contracts the 

company’s trading assets and liabilities would balance to the nearest £5,000” and (iii) at a meeting on 12 September 1989, “that the assets and liabilities of the company balanced and the money owed by the company did not exceed £10,000”.

The circumstances in which those representations were made may be summarised as follows:
(1)	The decision to proceed by way of a share sale - rather than the sale of the freehold property itself - was reached at the end of July. It seems to have been common ground - although the judge made no finding on the point - that the first representation was made at the meeting at which that decision crystallised.

(2)	Mr McGarrigan was pressing for an early completion. Mr Grimstead instructed his solicitor, Mr Keith Darvill of Duthie Hart & Duthie, to prepare a share purchase agreement.  Mr Darvill wrote to Berwin Leighton, the solicitors for Mr McGarrigan, on 1 August 1989.  He enclosed a draft share purchase agreement in a standard form which, as he said, would be updated upon receiving the information sought in the letter.  Berwin Leighton replied on 3 August 1989.  They wrote:
	We understand from our clients that the transaction is fundamentally to be structured as follows:
	1.  	Draft accounts of the Company are being prepared for the year to 30 June 1989 which it is currently anticipated will show positive net assets and which if included the freehold property at a re-valuation of £1,050,000 would show net assets of approximately £470,000.
	
	2.  	The Share Sale Agreement will provide that Completion Accounts are prepared as soon as possible after completion by the Vendor’s Accountants but jointly certified with the Purchaser’s Accountants in respect of the period to 11 August 1989 [that being the completion date originally intended].  The Completion Accounts will be prepared on the same basis as the June accounts, but will have three adjustments as follows:
	
	(a)  the profits of the Company between 30 June and 11 August 1989 (an estimate of which should be available shortly) will be included; and
	
	(b)  an adjustment to the stock value in relation to motor vehicles, will be made so that whilst in the draft accounts these will be shown at the lower of cost and net realisable value, a different amount (slightly higher) will be agreed between our clients and will appear in the Completion Accounts; and

	(c) a revaluation of the freehold property to £1,050,000 will be made.
	
	These adjustments will be set out in a Schedule of Adjustments to be certified by both sets of Accountants on behalf of their respective clients.
	
	3.  	It is intended that the consideration for the shares will be based upon the net asset position as shown by the Completion Accounts (as adjusted above), but that on Completion an amount equal to net assets as disclosed in the June accounts (but as notionally adjusted in the manner set out in sub-paragraphs (b) and (c) of paragraph 2 above), will be paid on account.  . . .
	
The second representation must, I think, have been made after that letter and at a time when the parties and their advisers were proceeding towards a conventional share sale agreement on the basis there indicated.
(3)	On 30 August 1989 Berwin Leighton wrote again to Duthie Hart & Duthie providing the information which had been sought in the letter of 1 August 1989.  The final paragraph of that letter was in these terms:
	We would stress that the information in this letter has been provided to us by our clients as an initial response to Mr Darvill’s letter of 1st August and that we shall be embarking upon a full disclosure process with our clients upon receipt of your draft share sale agreement which I understand you are now preparing.
	
(4)	Mr Reg Ryan was the accountant advising Mr Grimstead and his company, E A Grimstead & Son Limited.  On 2 September 1989 he wrote to Mr Stephen Huggett at Casson Beckman, the accountants acting for Mr McGarrigan, in these terms:
	
	In connection with the purchase of the shares in J R Bradford, could you let me have a statement indicating the various underlying assets values and liabilities comprised in the consideration to be paid for the shares.
	
	The current assets and liabilities (of which the precise amounts will not be known until after completion) can be estimated.
	
	I am requesting this information in order to ensure that there will be no further misunderstanding as to precisely what assets and liabilities are being taken-over and their agreed prices.
	
He asked that a reply be faxed to the purchaser by Monday 4 September.

(5)	By way of reply Casson Beckman sent two fax messages to Mr Grimstead, each dated 4 September 1989.  The second, which seems to have been transmitted on 5 September 1989, was in the following terms:
	
	It is my understanding that the consideration will be made up of the following:
	
	(i)  £1.05 million less the outstanding bank loan together with any accrued interest thereon, being the consideration due in relation to the acquisition of the fixed assets owned by the company at 30 June 1989.
	(ii)  £100,000 and the transfer of the following four motor vehicles [describing them] being the consideration due in settlement of the net current assets/(liabilities) at 30 June 1989 together with any goodwill associated with the company but excluding stocks.
	
	(iii) Stocks at a valuation (excluding the four cars as in (ii) above at the value of £20,000) as at completion to be agreed jointly by Mr E Grimstead and Mr F McGarrigan.

	As you may be aware our clients have been offered more than the above for the freehold property alone, but in the interests of continuity of the business and its staff are prepared to accept consideration on the above amount on the instructions that: -
	
	(a)  Completion takes place this week.
	(b)  Warranties are restricted to title and taxation matters only.
	
	It is suggested that exchange of contracts and completion are simultaneous and that the amount of £620,000 calculated as follows is paid at that stage together with the transfer of the four cars.
									£                       £ 
		Property Valuation                                              1,050,000
		Less: Mortgage and accrued interest                      600,000            450,000
		
		Stocks (book value at 30 June 1989)                       90,000
		Less: 4 motor vehicles                                             20,000              70,000
		
		Goodwill and other net current assets                    		          100,000
		                                                                                		          620,000

	The final consideration will therefore (after completion) be subsequently adjusted to reflect the exact values as at completion.  Such adjustment to reflect the following matters only:-

	(i)  Mortgage balance and accrued interest.
	(ii)  Stocks at valuation.

(6)	On 6 September 1989 Casson Beckman wrote to Berwin Leighton:
	Frank McGarrigan has held meetings with Mr Grimstead at which my assistant, Steve Huggett, was present regarding finalising  negotiations for the disposal of the above company.  I enclose copies of communications sent by fax recently which are self-explanatory and summarise the terms of the revised consideration which has been agreed by the principals.  You will see that this is now to be a fixed sum and completion accounts will no longer be necessary although there is likely to be some minor adjustment  in respect of two items.

	I trust that you will forward a copy of the draft contract as soon as you have received this from the purchaser’s solicitors.
	
(7)	The third of the representations was made following that exchange of correspondence - and, in particular, following the second fax of 4 September 1989 - at a meeting on 12 September 1989 attended by Mr Grimstead, Mr Ryan and Mr Darvill for the purchaser and Mr McGarrigan with representatives from Berwin Leighton and Casson Beckman, for the vendors. The purpose of the meeting was to agree and sign the share sale agreement.
(8)	The agreement, produced to the meeting as a draft prepared by Mr Darvill, was in the form envisaged by Berwin Leighton in their letter of 3 August 1989 - that is to say, it provided for a sale of the shares at a consideration equal to the net value of the assets of the company as shown in completion accounts subject to adjustments (i) in respect of profits made between 30 June 1989 and the completion date and (ii)  to the stock value of motor vehicles and spare parts. Recital (E) to the draft agreement was in these terms:
	(E)	The Vendor’s accountants have prepared draft accounts of the Company for the year ending 30th June 1989 a copy of which is annexed to this Agreement and upon which the parties hereto have relied in agreeing the terms hereof.
	
The completion accounts were defined in terms which required them to be prepared by the vendor’s accountants, following completion, on the same basis as the draft June 1989 accounts. The fourth schedule to the draft agreement set out extensive warranties to be given by the vendor. These included, in particular, a warranty as to the financial position of the company in these terms:

	
	3.1	The draft Accounts of the Company annexed hereto to the best of the knowledge information and belief of the Vendor give a true and fair view of the financial position of the Company as at 30th June 1989 (“hereinafter called the said date”) and that since the said date that there has been no reduction in the aggregate respective net asset position of the Company as represented thereby; . . .     

(9)	The draft accounts for the year ending 30 June 1989 - which, as the purchaser accepts, were made available at or before the meeting on 12 September 1989 - showed an excess of current liabilities over current assets of £13,251:
	Current Assets							   £
	     Stocks                                                                            89,072
	     Debtors                                                                        110,744
	     Cash at bank and in hand                                                     565
	                                                                                          200,381
	                                                                                         
	Creditors:  Amounts falling due
	                  within one year                                                 213,632

	Net Current (assets/liabilities)                                             (13,251)

(10)	Mr McGarrigan made it plain at the outset of the meeting on 12 September 1989 that he would not sign an agreement which contained warranties and indemnities in the terms of the draft. The sequence of events at the meeting is conveniently set out in the witness statement of Mr Darvill, with which (in substance) Mr Ryan and Mr Grimstead agreed:
	
	6.	On 12 September 1989 I attended a meeting at Bishop’s Stortford with Eddy Grimstead, Reg Ryan (Mr Grimstead’s accountant), Neil Moorhouse (who was to be General Manager of the Company) and Frank McGarrigan and his solicitor and accountant. We had been intending to complete the transaction and for both parties to sign the Share Purchase Agreement (“the Agreement”). However Frank McGarrigan refused to sign the Agreement and the warranties contained in it saying that the Company was “clean”. He argued that he was about to retire and that he therefore wanted a complete break from the business. I was concerned because I felt that we were being rushed into completing the transaction and that it was therefore possible that certain matters may have been overlooked.
	
	7.	I advised Eddy Grimstead that the warranties ought to retained in the Agreement. Reg Ryan was also concerned because the Statement of Affairs which Casson Beckman had agreed to provide to cover the period between the year end accounts as at 30 June 1989 and the date of completion had not been provided. Both Reg Ryan and I advised Eddy Grimstead of our concerns regarding the lack of warranties and we urged caution. I also indicated to Mr McGarrigan that if the 

	Company was “clean” as he had said then he should have no concerns about agreeing to the inclusion of the warranties. At this point Frank McGarrigan stood up and spoke again in terms of the Company being “clean” and there being no hidden liabilities. Eddy Grimstead said that he would take him at his word and agreed to go ahead with the purchase. As the Agreement had to be amended, we agreed to delay the signing of the Agreement until the following day.
	
Mr Grimstead’s evidence was to the effect that, after he had received advice from Mr Darvill that the purchaser would be exposed without the warranties, Mr McGarrigan said there was absolutely nothing to worry about as the assets and liabilities would almost certainly be in balance and that in any event the money owed by the Company would not exceed £10,000: “He said that I should trust his word that the liabilities of the Company would not exceed £10,000 and that if this amount was exceeded he would repay the difference.”

The share sale agreement
The share sale agreement was amended overnight and signed on the following day, 13 September 1989. Mr Grimstead was not then present. The agreement was signed on behalf of the purchaser by Mr Darvill acting for Mr Grimstead under a power of attorney.

The agreement was made between Mr Frank McGarrigan and Mr Kevin McGarrigan, his son, as vendors and E A Grimstead & Son Limited as purchaser.  There were set out, in the third schedule, a number of defined terms of which the following are material: “The Company” and “the Shares” mean respectively J R Bradford & Co Limited and all the issued shares of that company; “the Warrantor” means Mr Frank McGarrigan alone; “the Warranties” means the warranties, representations, covenants and undertakings set out in the fourth schedule; and “the Disclosure Letter” means any letter pursuant to clause 2.9 of the agreement making disclosures against the warranties and representations in the agreement from the warrantor to the purchaser.  

The form of the agreement as signed had changed significantly from the draft of the previous day. The consideration was no longer to be determined by reference to completion accounts; it was fixed by clause 4 of the agreement itself. That clause recorded that the purchaser agreed to purchase and the vendors agreed to sell the shares for an aggregate purchase consideration of £669,000.  Completion was to take place immediately after the signing of the agreement.

Clause 2.1 of the agreement contained what was described as a representation, warranty and undertaking by Mr Frank McGarrigan, as warrantor, to the purchaser in the terms of the fourth schedule. The fourth schedule contained only one warranty.  It was in these terms:
	
	Litigation and statutes
	Otherwise than as plaintiff in the collection of debts arising in the ordinary course of business neither the company nor so far as the warrantor is aware any person for whose acts or defaults the company may be vicariously liable is engaged in any litigation, arbitration, prosecution or other legal proceedings (whether as plaintiff, defendant or third party) and so far as the warrantor is aware there are no such proceedings pending or threatened and so far as the warrantor is aware or any proceedings in respect of which the company is or might be liable to indemnify any other person concerned therein and so far as the warrantor is aware there are no claims, facts or events which are likely to give rise to any such proceedings.
	
	The warranties as to accounts, which had been in the draft on the previous day, were not in the agreement as signed.

Clause 2.5 was in these terms:
	2.5  	The Purchaser confirms that it has not relied on any warranty representation or undertaking of or on behalf of the Vendors (or any of them) or of any other person in  respect of the subject matter of this Agreement save for any representation or warranty or undertaking expressly set out in the body of this Agreement and for the avoidance of doubt no representation or warranty is given or made in respect of any of the matters contained in schedule 2 save in respect of the facts and to the extent as expressly therein stated.
	
The second schedule to the agreement contained information, described as “Details of the Company”, which included the facility letter and the Lloyds Bank charge. Clause 2.6 provided that:
	2.6	The Vendors shall be under no liability (whether by way of damages rescission or otherwise howsoever) in respect of any claim arising under the Agreement unless the Purchaser shall have given notice thereof to the Vendors on or before the expiry of the period of one year commencing with the Completion Date; and such notice contains details of the event or circumstance giving rise to such claims, the nature thereof and the total amount of the liability therefor and the purchaser commences legal proceedings in respect thereof within one year thereafter.

Clause 2.8 purported to limit the aggregate liability of the vendors in respect of all breaches of the terms of the agreement to £50,000.  Clause 2.9 was in these terms:
	
	2.9	The Vendors shall have no liability under this agreement to the extent that the matter giving rise to such liability is fairly disclosed in the Disclosure Letter.
	
Clause 8 was in terms sometimes known as an “entire agreement” clause:
	
	8.1  	This Agreement sets out the entire agreement and understanding between each of the parties hereto in connection with the Company and the sale and purchase of the Shares and no party hereto has entered into this Agreement in reliance upon any representation, warranty or undertaking of any other party which is not set out or referred to in this Agreement.
	
	8.2  	This Agreement shall not be varied unless it is in writing and signed by or on behalf of each of the parties hereto.
	
The price payable on completion, £669,000, differed from that envisaged by Casson Beckman in the second fax of 4 September 1989. It was made up of the following items:
						        £
	Freehold property			1,050,000
	Less outstanding loan			   560,000
		 				   490,000
	Goodwill				   100,000
	Stock					     79,000
						   669,000

The financial position of the company as at 13 September 1989

Following completion of the share purchase the final accounts of the company for the year to 30 June 1989 were prepared by the auditors. They were approved by Mr Grimstead and his wife, as directors of the company, on 8 January 1990. The audited accounts showed a position in relation to net current assets which was slightly more favourable than that which had appeared in the draft accounts which had been available at the time the share sale agreement was signed. The figure for debtors, within current assets, was adjusted to £122,744 (an increase of £12,000). The figure for creditors falling due within one year, within current liabilities, was adjusted to £211,632 (a reduction of £2,000).  The effect of those adjustments (in aggregate an increase of £14,000 in net current assets) was to alter the previous balance (net current liabilities - £13,251) to a figure for net current assets of £749. 

The current assets and the current liabilities as at 30 June 1989 appear from the audited accounts in the following amounts:
	Current assets 				    £		    £
	Stocks							  89,072
	Trade debtors				50,002
	Other debtors				55,200
	Prepayments				17,542		122,744
	Cash in hand						       565		
								212,381
	
	Current liabilities			    £		    £
	Bank overdraft			81,495
	Trade creditors			89,582
	VAT and PAYE			  5,195
	Other creditors			30,164	
	Accruals 			 	  4,696		211,132
	
	Payment on account					       500											211,632

Two conclusions can be drawn from the audited accounts: (i)  that as at 30 June 1989 there was an excess of current assets over current liabilities of £749; (ii) that, if stocks (£89,072) are 
excluded from current assets, there was a deficiency of net assets in the amount of £88,323 at that date.

The position as at 13 September 1989, as it appeared in a schedule of assets and liabilities prepared by Mr Ryan from the company’s books of account at, or shortly after, the directors had approved the audited accounts to 30 June 1989, indicated a reduction of current assets from £212,381 to £62,569  and a reduction of current liabilities from £211,632 to £168,966. Other than a small increase in cash (from £565 in hand to £983 at bank) the difference in the figure for current assets is attributable (i) to the exclusion of stocks from the computation, (ii) to the elimination of the items “other debtors” and “prepayments”, and (iii) to an increase in trade debtors from £50,002 to £61,586. The difference in current liabilities can be analysed as follows:

					      13 Sept 1989	Increase/Reduction
						     £		       £		
	Bank overdraft			     -		  (81,495)
	Trade creditors			117,314	   27,732
	VAT and PAYE			  21,634	   16,439  
	Other creditors			     -		  (30,164)	
	Accruals 			 	  30,018	   25,322
	Payment on account			       -      	       (500)									168,966	   42,666

The figure for “accruals” (£30,018) included an amount of £19,863 in respect of interest accrued on the loan of £550,000 secured on the company’s property.

It was on the basis of those figures that the amount claimed by the purchaser in the writ as served was £106,397 - being the excess of current liabilities (£168,966) over current assets excluding stocks (£62,569). 

The schedule of assets and liabilities as at 13 September 1989, which had been prepared by Mr Ryan and which was served with the writ and statement of claim, was adjusted during the course of the trial - in the light of the expert evidence adduced by the purchaser - to show a deficiency of net current assets (excluding stocks) of £94,277.84. The adjustment appears at paragraph 5.29 in the expert’s report dated 13 October 1997. A reconciliation of the figures shows how that deficiency arises.		                                                                                                         	
	Net current assets as at 30 June 1989 (per audited accounts)        		749
	Less: Stock								       89,072
										      (88,323) 
	Adjusted to 13 September 1989	      	     £		  £
	Current assets: 			  	  62,569
		Add	(per expert’s report)		  12,119		
							  74,688
		Less					123,309       (48,621)

         Current liabilities				 168,966	   
		Less					 211,632       42,666	         (5,955)	
										       (94,278)	

	
It can be seen that the net current assets of the company, excluding stock, reduced by £5,955 between the date of the last audited accounts (30 June 1989) and the date of completion. The whole of that reduction, and more, was attributable to the accrual of interest on the company’s loan account with its bank. If the accrued interest had been taken into account in computing the amount of the loan to be set against the value of the property - as it should have been, consistently with the second fax dated 4 September 1989 - the figure for net current assets, excluding stock, would have shown an increase of £13,908 in respect of that period. If stock is added back at the figure agreed for the purposes of completion (£79,000), the comparable figures are these:
	
						             Draft 		Audited       	Statement
	                                                                      accounts	accounts	of affairs
							30 June	30 June	13 Sept	
							     £		     £		      £
	Net current assets excluding stock		(102,323)	(88,323)	  (94,278)
		Add accrued loan interest		                 		  	   19,863             
	Net current assets excluding stock
		and accrued interest			(102,323)	(88,323)	  (74,415)
		
	Add stock					 89,072	 89,072	    79,000	
	Net current assets including stock		(  13,251) 	      749	      4,585	

The truth of the representations

The relevance of this examination into the financial position of the company may be summarised as follows:

(1)	Representations made in July and August 1989 that “the company’s trading assets and liabilities would be ‘in balance to within a few pounds’ at the date of sale” or that “by the date of exchange of contracts the company’s trading assets and liabilities would balance to the nearest £5,000” were plainly correct if made and understood in what may be described as the usual sense applicable in discussions as to the value of a company on the basis of its financial statements - that is to say, in discussions in which it is understood that “trading assets” means current assets (as distinct from fixed assets) and “trading liabilities” means current liabilities falling due within one year (as distinct from longer term funding) - and in a context where “trading liabilities” does not include interest accruing on loan capital.
(2) A representation made on 12 September 1989 “that the assets and liabilities of the company balanced and the money owed by the company did not exceed £10,000” was plainly incorrect if construed literally, so as to include fixed assets and long term liabilities. But the statement was not made and could not have been understood in that sense - for the obvious reason that the deal was based on the premise that, taking account of the freehold property and the bank loan, the company had substantial value. If the reference to “assets and liabilities” were confined to trading assets and liabilities - in the sense already described - then the representation that the assets and liabilities balanced was substantially correct as at 12 September 1989; in fact the position was slightly more favourable to the purchaser because the trading assets exceeded the trading liabilities, excluding accrued loan interest.  The representation that “the money owed by the company did not exceed £10,000” was incorrect even if understood in the sense that £10,000 was the limit of the company’s net current indebtedness - that is to say, in the sense that debts to creditors falling due within one year did not exceed the aggregate of monies due from debtors and cash in hand or at bank. It is only if 
the representation that “the money owed by the company did not exceed £10,000” were made and understood in the sense that “money owed” was synonymous with “net current liabilities” that the representation could be correct.
(3)	If accrued loan interest is understood to be included as a current or trading liability - falling due within one year - then the representation that trading assets and liabilities would balance, or would balance within £5,000 (or within £10,000), at the relevant date was not correct.
	
The claim made by the purchaser in these proceedings 
On 19 January 1990 the purchaser wrote to Mr McGarrigan, enclosing a letter from Mr Ryan. As I have already mentioned, Mr Ryan had prepared a statement of affairs in respect of the company as at 13 September 1989 which showed an excess of current liabilities over current assets (excluding stocks) of £106,397. Mr Ryan explained that deficiency in the following paragraph of his letter:

	
	
	Deficiency £106,396.84
	Most of this is due to the fact that £79,000 for stock of second-hand cars and parts had already been paid to Mr McGarrigan in the share price.
	
Much of the difference between £79,000 and £106,397 was attributable to accrued interest (£19,863.43) on the bank loan, which should have been, but was not, taken into account when computing the monies payable on completion. The purchaser’s letter of 19 January 1990 referred to the deficiency shown in Mr Ryan’s computation and continued:
	In addition to the above we would expect to receive interest at 17 1/4% on the deficiency from 13 September 1989.
	
	The company was purchased on the basis of the assets and liabilities being in balance. Perhaps, therefore, you would like to refer to your accountants and contact us after they have advised you.
	
Notwithstanding clause 2.6 of the share sale agreement - which required that proceedings in respect of claims under the agreement should be commenced within one year of the notification of the claim - these proceedings were not commenced until 10 February 1993; that is to say, some three and a half years after the purchase had been completed. The writ was re-issued on amendment on 25 February 1994 - then some four and half years after the agreement - so as to include a claim in the alternative for breach of the warranties contained in the agreement; in the alternative, for breach of collateral warranties said to have been made at the time of the representations in July, August and September 1989.  An amended statement of claim was served with the amended writ, setting out the provisions of the agreement itself.

As issued the writ claimed damages in the amount of £106,396.84 - the figure taken from Mr 
Ryan’s letter. On 4 November 1997, in the course of the trial, the claim was revised downwards to £84,277.84. There were two explanations for that revision: (i) that the estimated statement of affairs as at 13 September 1989 had been adjusted to show a deficiency of net current assets (excluding stocks) of £94,277.84 and (ii) that the purchaser was willing to allow a margin of £10,000 to accord with the third of the representations relied upon.

The judgment below 
The judge directed himself that the first question or questions which he had to decide were whether the purchaser could establish that the representations alleged had been made.  He said this (transcript, pages 4F-5B):
	In order to determine this extensive issue, I have had the advantage not only of reading the parties’ statements and the statements of their witnesses, I have also had the great advantage of seeing the parties giving their evidence.  The process of an oral hearing has a number of disadvantages; but the manifest and extensive benefits which come as a result of the process of evidence in chief and cross-examination are really indispensable to assist the tribunal in coming to a view about fact.  The way in which a witness deals with  questions can reveal, in my judgment, a good deal about the credibility of that  witness.  In this case that has been of particular assistance to me in ways which I shall indicate. 
	
The judge made his assessment of the witnesses in the following terms (transcript, pages 7G-8D):
	Mr Grimstead struck me as candid and straightforward.  He was visibly embarrassed by his failure to have enquired more closely, as he had some opportunity to do during the negotiations.  He refrained, as he could very well have done, from casting blame either upon his accountant, whose approach to this had been, in my judgment now, superficial or upon his solicitor and advisor whose approach was not as thorough going as in hindsight it should have been.  
	
	The defendant, Mr McGarrigan, gave evidence and was in the witness box yesterday.  He was there for a lesser time but was also asked a number of acute and well directed questions.  He struggled to find answers and created an impression of reluctance to face what was the weight of the evidence against him.  He was not, I regret to say, convincing.  He seemed at times indeed to be evasive in refusing to face the difficult questions he had to face.
	
	When I compare the two, I say without hesitation that where there is any difference in their evidence, I prefer the evidence of Mr Grimstead.
	
Having reviewed the evidence the judge held as a fact that Mr Grimstead was told that the monies owed by the company did not exceed £10,000 and that the assets and liabilities would more or less balance.  

The judge accepted that what Mr Grimstead had been told was inaccurate. He said this (transcript, page 10F):

	Has Mr McGarrigan, however, proved that he had reasonable grounds to believe and did believe that what he was saying was accurate, for indeed it is shown now that it was inaccurate to the extent of £94,000 when the final calculations had been done. 

There are a number of assumptions which are implicit in the judge’s conclusion that a statement that “the monies owed by the company did not exceed £10,000 and that the assets and liabilities would more or less balance” was shown to be “inaccurate to the extent of £94,000”. First, it is clear that the judge was leaving fixed assets and long term liabilities out of account. For the reason which I have already given he was plainly correct to take the view that the statement did not encompass fixed assets or long term liabilities. Secondly, it is clear that he did not give a literal meaning to the statement “the monies owed by the company did not exceed £10,000”. It can be seen from the schedule of assets and liabilities as at 13 September 1989 that the monies owed by the company to trade creditors and in respect of VAT and PAYE exceeded £138,000. The figure of £94,000 is a net figure; reached after deducting the monies owed to the company by its trade debtors. Again, it seems to me that the judge was plainly correct to take the view that, in the context in which it was made, the statement as to “monies owed” referred to a net position, not to gross indebtedness. Indeed, the contrary was not argued before him. Thirdly, it is clear that the judge was treating accrued loan interest as a current liability within the equation between current assets and current liabilities. It is impossible to reach the conclusion that current liabilities exceeded current assets at the date of the agreement (or at any other relevant date) “to the extent of £94,000” without including the accrued interest (£19,863.43) on the bank loan as a current liability. Fourthly, the judge excluded stocks from the equation between current assets and current liabilities. 

The exclusion of stocks from the equation between current assets and current liabilities is implicit in the conclusion to which the judge had come at page 10G in the transcript of his judgment. But he considered that question expressly in the final paragraphs of his judgment. 

He said this (transcript, pages 14G-H):
	The final matter to which I now turn is the question of whether or not the stock, valued at £79,000, should be included in the balance between assets and liabilities. This is an argument which, when I first embarked on this case, seemed to give of but one answer, and an answer in favour of the defendant.

But, after referring to the fact that the second fax dated 4 September 1989 provided for stocks to be valued and paid for as an element distinct from the payment for “net current assets/(liabilities) together with any goodwill associated with the company”, he went on (transcript, pages 15H-16C):
	Mr Thanki’s first argument [for the plaintiff purchaser] is therefore that it is clear when I look, as I am required to look, at the surrounding circumstances that the parties themselves well knew that both the capital of the land and the stocks were excluded from the asset liability balancing exercise. The second argument is that this point, that the assets should include the stocks, was never raised by the defendant until about a week ago. It was never challenged in January 1990, it was not raised on the pleadings, and it did not see the light of day until the preparation of this case began in earnest last week. I raised it myself, no doubt to the anticipatory delight of the defendant at that stage. Looking at it, as I do, in the light of that correspondence, I am satisfied that it is not appropriate to include stocks in the assets when the balance is struck. 
 
The first issue on this appeal is whether the judge was right to take the view that the representations which, as he found, were made by Mr McGarrigan in the course of negotiations - and, in particular, the representation made at the meeting on 12 September 1989 
“that the monies owed by the company did not exceed £10,000 and that the assets and liabilities would more or less balance” - were made and understood in a sense which (a) included accrued interest on the bank loan and (b) excluded stocks.

The judge rejected the allegation that the representations which he found to be false had been made fraudulently. But he found  that Mr McGarrigan was negligent in that he had no reasonable grounds to believe that the representations were true. He said this (transcript, page 10A-G):
	Having seen him [Mr McGarrigan], and looking at all the circumstances of this case, I am satisfied that it [the relevant representation] was made negligently. I do not regard him, from the assessment I have made, as a man who lied his way through this, but he was undoubtedly negligent in continuing to make the assertions he did. I have considered very carefully the effect of the undoubted fact that a number of sales had been made of new cars for which the proceeds had been received but for which the manufacturer had not been paid. There was something in the order of £92,000 outstanding which had to be met.

	I have concluded that Mr McGarrigan had not in his mind worked out the implications of that in the somewhat casual approach he took to this. He was keen to get the deal done but had not worked out what was involved or, in my judgment, examined the figures with the degree of care that one might have expected. He was content, in a rather rounded way, to ease the passage of this agreement by an emollient answer 
	
	which, had he thought about it with the care which I am sure he customarily gives to these things, he would not have done.

Accordingly, the judge held that Mr McGarrigan had not established the statutory defence to a claim under section 2(1) of the Misrepresentation Act 1967. 

The judge went on to consider whether liability for misrepresentations made prior to the agreement was excluded by the terms of the agreement itself - in particular, by clauses 2.5 and 8.1.  He directed himself that he should adopt the approach of Mr Justice Jacob in Thomas Witter Limited v TBP Industries [1996] 2 All ER 573. In his judgment in that case, when considering the effect of an entire agreement clause the terms of which were similar to those of clause 8.1 in the present agreement, Mr Justice Jacob had said this, at pages 595h-596b:
	
	The first thing to do is to construe the clause. ...In my judgment the first sentence does not operate to exclude remedies for pre-contractual misrepresentations.  It simply does not say it does.  If it said, for instance, ‘The vendor (sic) agrees he will have no remedy in respect of any untrue statement made to him upon which he relied in entering this contract, and that his only remedies can be for breach of contract’ the clause would probably have done the job.  Then, if  he is sold a pup, he will have no remedy, unless it is a contractually warranted pup . . . Unless it is manifestly made clear that the purchaser has agreed only to have a remedy for breach of warranty I am not disposed to think that a contractual term said to have this effect by a roundabout route does indeed do so.  In other words, if a clause is to have the effect of excluding or reducing remedies for damaging untrue statements, then the party seeking that protection cannot be mealy-mouthed in his clause.  He must bring it home that he is limiting his liability for falsehoods he may have told.
	
The judge held that there was nothing in either clauses 2.5 or 8.1 of the agreement which made it clear that the purchaser was to have no remedy for pre-contractual representations.  The second issue on this appeal is whether he adopted the correct approach in the circumstances of this case. 

In the light of his conclusion as to the effect which, as a matter of construction, should properly be given to clauses 2.5 and 8.1 it was, perhaps, unnecessary for the judge to consider the restriction imposed by section 3 of the Misrepresentation Act 1967, as amended by the Unfair Contract Terms Act 1977. But he did so, at pages 11H-13A of his judgment. The section is in these terms:

	3.  If a contract contains a term which would exclude or restrict
	(a)  any liability to which a party to a contract may be subject by reason of any misrepresentation made by him before the contract was made, or;
	(b)  any remedy available to another party to the contract by reason of such a misrepresentation
	that term shall be of no effect except in so far as it satisfies the requirement of reasonableness as stated in section 11 (1) of the Unfair Contract Terms Act 1977; and it is for those claiming that the term satisfies that requirement to show that it does.
	
Section 11(1) of the 1977 Act explains what is meant by “the requirement of reasonableness”:
	11(1)	In relation to a contract term, the requirement of reasonableness for the purposes of . . . section 3 of the Misrepresentation Act 1967 . . .  is that the term shall have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made.
	
The judge held that the provisions in clauses 2.5 and 8.1 did not satisfy the test of reasonableness. He relied on a further passage in the judgment of Mr Justice Jacob in the Thomas Witter case, at page 598c-e:
	But I have to say that even if clause 17.2 had exclusionary effect it would to my mind be neither fair nor reasonable. The problem is its scope. The 1967 Act calls for consideration of the term as such. And it refers to ‘any liability’ and ‘any misrepresentation’. It does not call for consideration of the term so far as it applies to the misrepresentation in question or the kind of misrepresentation in question. The term is not severable: it is either reasonable as a whole or not. So one must consider its every potential effect. The clause does not distinguish between fraudulent, negligent or innocent misrepresentation. If it excludes liability for one kind of misrepresentation it does so for all. I cannot think it reasonable to exclude misrepresentation for fraudulent misrepresentation - indeed Mr Kaye accepted it would not work in the case of fraud. It may well be, with a different clause, reasonable to exclude liability for innocent misrepresentation or even negligent misrepresentation. But since the width of this clause is too great I would have held that it failed the requirement of reasonableness and so was of no effect.

The judge rejected the claim based on breach of contractual warranty in the agreement itself. But, for the reasons which I have set out, he found in favour of the purchaser and awarded damages of £84,227.84 with £61,385.51 interest and costs.

The first issue
The grounds of appeal set out in the amended notice of appeal and extending over some nine pages of typescript do not challenge the judge’s primary findings of fact that Mr McGarrigan had represented to Mr Grimstead before the agreement was signed on 13 September 1989 that 

“the money owed did not exceed £10,000” and that “the assets and liabilities would effectively more or less balance”. Nor does the appellant challenge the judge’s findings that “the purchaser proceeded with the agreement because of those representations” and that “had he been told the reality. . . there would have been a check to the agreement and it is probable that it would not have been made in the way that it was”. The challenge, on the facts, is to the judge’s conclusion that the representation - in the terms in which he had found it to have been made - was false.

For the reasons which I have already sought to explain, it is impossible to decide whether a representation that the assets and liabilities would balance - or would balance to within £10,000 - was true or false without, first, determining the sense in which that representation was made and understood. In particular, it is necessary to decide (i) whether the representor intended (and was understood by the representee to intend) that the assets within the equation would include stock and (ii) whether the representor intended (and was understood by the representee to intend) that the liabilities within the equation would include accrued interest on the bank loan. It is, of course, possible to reach the conclusion that a representation was intended by the representor to mean one thing; and understood by the representee to mean another. In such a case it will be necessary to go on to consider whether the meaning as understood by the representee was one which the representation could properly bear in the circumstances in which it was made. But that enquiry will not arise if representor and representee made and understood the representation in the same sense - whatever that sense may be.

The judge’s task in the present case was made difficult by the fact that it was never made clear in the pleadings served on behalf of the purchaser that it was the purchaser’s case that the representation was made and understood in the sense that the assets within the equation did not include stock or that that the liabilities did include accrued interest; nor was it made clear until the service of a re-amended defence on 3 November 1998 (in the course of the trial) that it was Mr McGarrigan’s case that representation was made and understood in the sense that the assets did include stock and the liabilities did not include accrued interest. The real issue eventually emerged in the re-amended defence, at paragraph 14:

	14.	Further, it is averred that if, which is not admitted, the representations and/or warranties set out in paragraph 5 of the Amended Statement of Claim were made, they were in any event true, and it is further averred that, as at the 12th/13th September 1989 the trading assets and liabilities of the Company were in balance to within £10,000. It is denied that there was a net liability of £106,396.84 and averred that Schedule 1 [to the statement of claim] artificially and mistakenly excludes the stock of the company and includes a sum for mortgage interest.
	
In those circumstances it is, perhaps, not surprising that the real issue is not addressed in any of the witness statements served in respect of those who were present at the meeting on 12 September 1989 when the relevant representation was made.  Mr McGarrigan’s position was that he had not made the representations alleged. Mr Grimstead stated, at paragraph 8 of his statement, that he was told that “the trading assets and trading liabilities” of the company would balance; at paragraph 11 that “the assets and liabilities” would balance; and, at paragraph 13 that “the books would balance”; without indicating what he thought those expressions meant or (in particular) whether he thought they had different meanings. 

The issue was addressed in the course of the trial. The following questions and answers appear in the transcript of Mr Grimstead’s evidence in cross-examination (transcript, 3 November 1997, pages 25C-26G):
	Q.	The point is really this, Mr Grimstead: in balancing the assets and liabilities of this company, and if that is what Mr McGarrigan said in July of 1989, one must include the assets of the company, including the value of the used stock and the value of the spare parts, that is right?
	A.	That’s right,
	. . .
	Q.	. . . And a telephone conversation [at the end of August] in which you agreed a final price with Mr McGarrigan and you say that he said or indicated that “The trading assets and trading liabilities of the company would be more or less in balance, at least to the nearest £5,000”?
	A.	Yes, that was the conversation.
	Q.	Again, in drawing up that balance of the trading assets and trading liabilities, one would put on one side the liabilities of the company, what it owes, and on the other side its assets, or trading assets and that would obviously include used cars and the spare parts?
	A.	Yes.
	Q.	. . . you say that Mr McGarrigan said to you [at the meeting on 12 September 1989] “Absolutely nothing whatsoever to worry about as the assets and liabilities would almost certainly be in balance” Now, if I cut it off at that point for present purposes: that is a repetition of the phrase that had been used before? The word “trading” is not used there, but the assets and liabilities, is that not right?
	A.	Yes.
	
	Q. 	And so, again, one sets the liabilities against the assets, including the stock?
	A.	Yes. 
	. . . 
	Q.	So, you accepted, clearly, that the parts would be included in that balancing act?
	A.	Yes, I would expect all the parts, the things that we’d physically we’d agreed to buy, and that he didn’t owe any money that he hadn’t disclosed.
	
It would have appeared reasonably clear from that evidence that Mr Grimstead understood each of the representations - made respectively in July, August and September 1989 - in the same sense; that is to say, he understood that stock would be included as an asset within the equation. But he was brought back to the point in re-examination (transcript, 3 November 1997, page 36D-F):
	Q.	If you turn to paragraph 4 [of your witness statement]. My friend took you to the middle of the paragraph: “Mr McGarrigan informed me that the assets and liabilities of the company would be in balance to within a few pounds as at the date of completion of the sale”. And you will remember that what my friend asked you was that, when balancing the assets and liabilities of the company, he suggested to you that one should include assets, including stocks, in that balancing, and I noted your first answer down as, “No, I bought the stock separately.” Can you explain what you meant by that answer?
	A.	I meant that the agreement was that we were buying the freehold property for £1,050,000, we were paying £100,000 for a company and we were buying the stock on the day, the day being the 12th of September 1989.
	Q.	So, does it follow from that that anything which was said about assets and liabilities, would you understand that to include the stock or to exclude the stock?
	A.	No, to exclude the stock.
	
In evaluating those answers in re-examination, it is necessary to have in mind that, in paragraph 4 of his witness statement, Mr Grimstead had been referring only to the representation said to have been made at the end of July 1989. There was nothing in the evidence to suggest that, at that stage, the parties had in mind that the agreement would take the form which it eventually did, following the discussion at the end of August and the fax dated 4 September 1989. There was no reason why, at the end of July, the need to exclude stock from any equation between assets and liabilities should have been in the mind of Mr Grimstead or anyone else. 

Mr Ryan was taken, in cross-examination (transcript, 3 November 1997, pages 41C-42A), to his account of the meeting at the end of July 1989; and was asked:
	
	Q.	. . .  in drawing up that  balancing  exercise of trading assets and liabilities, one puts the liabilities on one side and the trading assets on the other side, and that would include the stock?
	A.	Yes, that is so.
	
He was not asked about his understanding of any representation made by Mr McGarrigan at the meeting on 12 September 1989. His evidence, as set out in his witness statement, was that he had not been present for the whole of that meeting and, perhaps for that reason, contained no clear reference to the representation relied upon by Mr Grimstead. But, in re-examination (transcript, 3 November 1997, page 54A-B), he was referred back to the question and answer which I have just set out and asked:
	Q.	. . . in this particular transaction, when people spoke about assets and liabilities, did you understand that to include the stock?
	A.	No, it referred to the remaining asset value
	Q.	Why do you say that?
	A.	Because the stock had all been paid for.
	
Again, that evidence needs to be approached with caution. The basis for excluding stock from current assets in the equation between assets and liabilities did not arise until after the discussion at the end of August and the fax dated 4 September 1989. Mr Ryan’s evidence was that, following the discussion at the end of August, he was in doubt as to the make-up of the purchase price; and that his doubt had not been resolved by the date of the meeting on 12 September 1989 because he did not see the fax dated 4 September 1989. 

Mr McGarrigan’s evidence was  that he made no representation at the meeting on 12 September 1989 as to assets and liabilities being in balance. He was prepared to accept, in cross-examination, that he had said something to that effect at an earlier stage in the negotiations. The substance of his evidence on this point is, I think, sufficiently clear from the following passage (transcript, 4 November 1997, page 34B-D):    
	Q.	What is being suggested . . . is that, if any representations were made as to assets and liabilities being in balance, such representations were true if you take stock into account. That is your case, is it not?
	A.	If I was doing a net balance, I would take stock into account.
	Q.	I see. Did you have stock in mind when considering the net current asset/liability position in September 1989?
	. . . 
	A.	I had made my statement about being in balance at an earlier date.

	Q.	But in September, if you had considered the net current asset/liability position of the company, would you have considered stock as being relevant to that equation?
	A.	Yes, I believe it consists of stock. 

Neither Mr Grimstead, nor any other witness called on behalf of the purchaser, suggested that the representation as to assets and liabilities being in balance was understood to include the accrued interest on the bank loan. The accrued interest, as Mr Grimstead accepted in the course of his cross-examination, was to come off the £1.05m in computing the sum to be attributed to the property - see the question and answer at transcript, 3 November 1997, page 20D:
	Q.	. . . The basis of the deal was that, whatever was owed on the property, it would be deducted from the 1.05 million, is that right?
	A.	Yes, I think that should be right.

Mr McGarrigan was pressed to admit that, as things had turned out, he had been paid some £19,000 too much - because the accrued interest had not been taken into account (as, plainly, it should have been) when computing the purchase price under the formula which had been agreed. The following exchange appears in his evidence (transcript, 4 November 1997, page 46B-D):
	JUDGE BRUNNING:		In other words, you were paid 19,000 too much. You should have had 650,000 rather than the 669.
	A.	I left it up to the accountants. I was not aware of that.
	. . . 
	JUDGE BRUNNING: 	Mr Thanki [counsel for the purchaser], you are not seeking recovery of the 19,000, are you?
	MR THANKI:		My Lord, no.  . . .

In the light of that evidence it is difficult to see how the judge arrived at a figure for damages suffered by reason of the alleged misrepresentations which included the £19,863.43 in respect of accrued interest. It was clear that that sum had been overpaid by mistake, not as the result of any representation by Mr McGarrigan. Further, it was clear that the purchaser was not seeking to recover that sum under a claim based on mistake. 

I have reviewed the evidence at some length because an appellate court should not reverse a judge’s finding of primary fact, based on the evidence given by witnesses which he has seen and heard at the trial, without very good reason. As the judge himself observed, in a passage 

to which I have already referred (transcript of judgment, page 5B), his assessment of the way in which the witnesses had responded to the question put to them had been of particular assistance to him in the present case. But, giving to the undoubted advantage which the trial judge had in assessing credibility the weight which it demands, I am persuaded that he was wrong to hold that the representations which, as he found, were made by Mr McGarrigan - and, in particular, the representations made at the meeting on 12 September 1989 - were made or understood in the sense that the assets within the equation did not include stock or that that the liabilities did include accrued interest.

I reach that conclusion for the following reasons. First, it appears to me that, on a fair reading of his judgment, the judge did not rely on the oral evidence of Mr Grimstead, or of any of the other witnesses called on behalf of the purchaser, in reaching the conclusion that the assets within the equation did not include stock. There were, as I have sought to point out, considerable difficulties in basing that conclusion on the oral evidence. Further, the judge did not rely on the oral evidence adduced before him in reaching the conclusion that the liabilities within the equation did include accrued interest. There was no oral evidence to that effect. The judge, as he was entitled - indeed, bound - to do, sought to construe the words used in the context in which they were used. He directed himself, correctly, that he should have regard to the observations of Mr Justice Mance in Bankers Trust International plc v P T Dharlmala Sakti Sejahtera [1996] CLC 518, 531C:

	The meaning and effect of words never falls to be viewed in a vacuum. It is shaped by the context of their communication, including the parties’ respective positions, knowledge and experience.  . . . Whether there was any and if so what particular representation must thus depend on an objective assessment of the likely effect of the proposal or presentation on the recipient. In making such an assessment, it is necessary to consider the recipient’s characteristics and knowledge as they appeared, or ought to have appeared, to the maker of the proposal or representation. 
	
In particular, the judge sought to construe the words used at the meeting on 12 September 1989 in the light of the second of the faxes dated 4 September 1989. Plainly, he was right to do so; but that task did not require an assessment of the credibility of the witnesses who had given evidence before him. It is a task which an appellate court is in as good a position as the trial judge to undertake.

Secondly, the conclusions which the judge reached in the light of the fax dated 4 September 1989 - that stock was excluded from the equation, but that accrued interest was included - are mutually inconsistent. The fax provides for the aggregation of three distinct elements in computing the purchase price for the shares in the company: (i) the property element - £1.05m 
“less the outstanding bank loan together with any accrued interest thereon”, (ii) the stock element - “Stocks at a valuation (excluding the four cars . . . ) as at completion”, and (iii) the goodwill element - £100,000 (together with the four cars) “representing the net current assets/(liabilities) together with any goodwill associated with the company but excluding stocks”. It is clear that the part of the purchase price attributed to the goodwill element (£100,000 and four cars, together valued at £20,000) has been fixed on the basis that it takes 

no account of either (a) the accrued interest - which is to be a deduction in fixing the property element - or (b) the stocks - the value of which is the basis of the stock element. There is, of course, force in the view that a representation as to assets and liabilities made after receipt of the 4 September 1989 fax would be understood as applying only to the goodwill element - so excluding stocks from the assets within the equation; but, if so understood, it would, equally, exclude accrued interest from the liabilities within that equation. To reach a conclusion that the representation was made and understood in a sense which excluded the one but included the other would have required the most cogent evidence. To reach that conclusion as a matter of construction, in the absence of direct evidence, is, to my mind, impossible.   

Thirdly, to construe the representation made at the meeting on 12 September 1989 in the light of the 4 September 1989 fax alone is to ignore three other relevant - and important - facts which form part of the context in which that representation was made. First, it is to ignore the fact that the draft accounts of the company to 30 June 1989 - which were available to those at the meeting - showed that, if stocks were excluded from current assets, current liabilities exceeded current assets as at that date by  £102,323.  So, ignoring interest accruing after 30 June 1989, a representation that current assets (excluding stocks) equated to current liabilities as at 12 September 1989 implied an increase in net current assets of £100,000 or thereabouts over the period 1 July 1989 to 12 September 1989. If interest on the outstanding property loan 
of £555,500 - shown in the draft accounts - during that period were to be included within current liabilities the apparent improvement in the company’s net current assets is increased 

accordingly. Second, it is to ignore the fact that the representation was made in the context of a refusal by Mr McGarrigan to give the warranties in the draft agreement which was under discussion at the meeting on 12 September 1989. The proposed warranties included, at paragraph 3.1 in the fourth schedule, a warranty that, since 30 June 1989, “there has been no reduction in the aggregate respective net asset position of the Company” as represented by the 
draft accounts as at 30 June 1989. It would have been remarkable if Mr McGarrigan were, on the one hand, refusing to give a warranty in those  terms while, on the other hand, asserting by implication that the net asset position of the company had actually improved by over £100,000 since 30 June 1989. Third, it is to ignore that the fact that the representation was made in the context of a draft agreement which contained, at clause 2.5, the purchaser’s confirmation that it had not relied on any warranty, representation or undertaking made by or on behalf of the vendors other than those expressly set out in the body of the agreement. It would, to my mind, have been quite extraordinary for Mr Grimstead, knowing that there were to be no warranties or representations in the body of the agreement as to the financial performance of the company since 30 June 1989, to raise no objection to a clause in the agreement by which the purchaser was going to confirm in the agreement that it had not relied on any other warranty or representation if he had thought that Mr McGarrigan was giving an assurance that the company’s net asset position had improved by over £100,000 from that disclosed by the draft accounts. 

The judge did not address these points in his judgment. It may be that they were not advanced before him with the same force as they were advanced before this Court. Be that as it may, I am satisfied that the judge’s conclusion on the first issue cannot stand. I accept, of course, that, with the benefit of hindsight, it can be seen that a representation that assets and liabilities are in balance makes little or no sense in the light of the price computation introduced by the fax of 4 September 1989 unless it refers only to the assets and liabilities relevant to price agreed in respect of what I have called the goodwill element; but that leads to the conclusion that both stocks and accrued interest must be excluded from the equation. There was no evidence that anyone at the meeting on 12 September 1989 understood the representation in that sense. Nor did the judge find that they did. Construction of the words used by Mr McGarrigan in the light of the fax of 4 September 1989 cannot lead to the conclusion that stocks should be excluded, but accrued interest included, when striking the balance between 

assets and liabilities. There are indications - to my mind, powerful indications - that Mr McGarrigan could not, absent dishonesty, have intended to represent that the net asset position of the company had improved by £100,000 between 1 July 1989 and 12 September 1989; and nothing to suggest that Mr Grimstead or his advisers thought that he was making any representation of that nature. 

The second issue

The view which I have expressed in relation to the first issue makes it unnecessary for me to consider the second issue - was the judge correct to hold that that there was nothing in either clauses 2.5 or 8.1 of the agreement which made it clear that the purchaser was to have no remedy for pre-contractual representations?  Nevertheless, in the circumstances that the point has been fully argued and is of some general importance, it seems to me appropriate that I should do so.

Clauses 2.5 and 8.1 of the agreement overlap to a substantial degree:
	2.5  	The Purchaser confirms that it has not relied on any warranty representation or undertaking of or on behalf of the Vendors (or any of them) or of any other person in  respect of the subject matter of this Agreement save for any representation or warranty or undertaking expressly set out in the body of this agreement and for the avoidance of doubt no representation or warranty is given or made in respect of any of the matters contained in schedule 2 save in respect of the facts and to the extent as expressly therein stated.
	
	8.1  	This Agreement sets out the entire agreement and understanding between each of the parties hereto in connection with the Company and the sale and purchase of the shares and no party hereto has entered into this Agreement in reliance upon any representation, warranty or undertaking of any other party which is not set out or referred to in this Agreement.

As I have already indicated, in determining the effect of those clauses the judge relied on the observations of Mr Justice Jacob in Thomas Witter Ltd v TBP Industries Ltd [1996] 2 All ER 573. The clause which Mr Justice Jacob had to consider in the Thomas Witter case was in terms which are, in substance, indistinguishable:

	
	17.2	This agreement sets forth the entire agreement and understanding between the parties or any of them in connection with the Business and the sale and purchase described herein. In particular, but without prejudice to the generality of the foregoing, 
	the Purchaser acknowledges that it has not been induced to enter into this Agreement by any representation or warranty other than the statements contained or referred to in Schedule 6.

But, in the Thomas Witter case, schedule 6 of the agreement included a paragraph in these terms - see [1996] 2 All ER 573 at 596c-d:

	All statements of fact made in the Disclosure Letter (but not including the Disclosed Documents as defined therein) are true and accurate in all material respects and are not misleading in any material respect (including by reason of any omissions therefrom).

The disclosure letter contained reference to a change in accounting policy relating to the write-off of expenditure incurred in respect of pattern books which, as Mr Justice Jacob held, was misleading - see [1996] 2 All ER 573 at 581j, 591g, 594c-d. So, in the Thomas Witter case, the plaintiff was able to identify a pre-contractual representation which was within schedule 6 of the agreement and so outside the acknowledgement of non-reliance contained in the second sentence of clause 17.2. Accordingly, the only question which Mr Justice Jacob needed to consider was whether the first sentence of clause 17.2 excluded remedies for pre-contractual misrepresentations. If, as a matter of construction, the first sentence of the clause did not have that effect, the vendor could gain no assistance (on the facts in that case) from the acknowledgement of non-reliance contained in the second sentence of that clause.

In the present case Mr McGarrigan does not, as I understand the submissions made on his behalf, seek to rely on the first limb of clause 8.1 - which corresponds to the first sentence of clause 17.2 in the Thomas Witter case. He can rely on the second limb of that clause and on the first limb of clause 2.5 (both italicised in the extracts set out above) which contain acknowledgements of non-reliance in terms corresponding to those in the second sentence of clause 17.2 in the Thomas Witter case. So the observations in the Thomas Witter case on which the judge relied - which relate to the first sentence of clause 17.2 - are not in point in the present case. But, in a passage to which the judge did not refer in express terms, but which he may have had in mind, Mr Justice Jacob had said this, [1996] 2 All ER 573, at page 597e-f:

	Of academic importance here would be a misrepresentation of fact not contained or referred to in schedule 6. Would the second sentence preclude the purchaser from saying that he had relied upon this? I rather doubt it. Again, the point of exclusion from liability is not made explicit. It is perfectly possible to read the clause as doing no more than attempting to set out such representations as the purchaser thinks he is relying on at the time. He may have difficulty later in proof of any further representation, but if he can prove one, then his acknowledgement that there was no other may amount to no more than an acknowledgement of what he thought was the position at the time. 
	
I find difficulty in following that reasoning. I can understand an argument that a purchaser who acknowledges that certain specified representations are the only representations which have been made to him may be able to say that that was what he thought at the time; and so not be prevented from attempting to prove that other representations were, in fact, made.   But that does not seem to me to be the effect of the acknowledgement in the second sentence of clause 17.2 in the Thomas Witter case; and it is, plainly, not the effect of the acknowledgements in clauses 2.5 and 8.1 in the present case. The acknowledgements in the present case are not acknowledgements as to what representations were made to the purchaser; they are acknowledgements as to what acknowledgements the purchaser relied upon. I can see no difficulty in an acknowledgement by a purchaser that a representation which was made was not relied upon; but I cannot see how a purchaser who has acknowledged that a representation 
was not relied upon can afterwards say that that was nothing more than what he thought was the position at the time. Put another way, I reject the contention that it is open to a purchaser to assert both that he did not rely on a representation which was made to him and that he did rely upon that representation. He must be taken to know, at the time when he enters in to the agreement, what representations he is relying upon.

In my view an acknowledgement of non-reliance, in the form which appears in clauses 2.5 and 8.1 in the present agreement, is capable of operating as an evidential estoppel. It is apt to prevent the party who has given the acknowledgement from asserting in subsequent litigation against the party to whom it has been given that it is not true. That seems to me to be a proper use of an acknowledgement of this nature, which, as Mr Justice Jacob pointed out in the Thomas Witter case, has become a common feature of professionally drawn commercial contracts. He identified, as the genesis of such clauses, remarks of Mr Justice Browne-
Wilkinson in Alman and another v Associated Newspapers Group Limited (unreported, 20 June 1980) that:

	If it [the entire agreement clause which he was considering] were designed to exclude liability for misrepresentation it would, I think, have to be couched in different terms, for example, a clause acknowledging that the parties had not relied on any representations in entering into the contract.

It is of interest to note that Mr Justice Browne-Wilkinson found as a fact on the evidence that entire agreement clauses in the form which he had to consider - that is to say in a form which extended only to the first sentence of clause 17.2 in the Thomas Witter case - were commonly included by skilful and reputable solicitors in share purchase agreements.
	
It is, of course, not sufficient that the acknowledgement - in the form in which it appears at clauses 2.5 and 8.1 of the agreement in the present case - should be capable of operating as  an evidential estoppel. In order to establish an estoppel it was for Mr McGarrigan to plead and prove that the three requirements identified by this Court in Lowe v Lombank Ltd [1960] 1 WLR 196 were satisfied - that is to say, (i) that the statements in those clauses were clear and unequivocal, (ii) that the purchaser had intended that Mr McGarrigan should act upon those statements and (iii) that Mr McGarrigan had believed the statements to be true and had acted upon them. The difficulty in Mr McGarrigan’s way in the present appeal, in relation to the second issue, is that he did not rely on estoppel in his defence (as originally drawn or as amended or re-amended). The relevant pleading appears in paragraph 7 of the re-amended defence:
	7.	In the premises and upon a true construction of the Agreement (in particular, Clauses 2.5 and 8.1 thereof):
	(a) 	The Plaintiff did not rely and/or was not influenced by any representation made by or on behalf of the Defendant or Kevin John McGarrigan or either of them in deciding to enter into the Agreement, other than any representation expressly set out in the Agreement itself; 

I would have no difficulty in holding that the acknowledgements of non-reliance contained in clauses 2.5 and 8.1 were clear and unequivocal. For my part, had the matter been investigated at trial, I have little doubt that the judge would have found as a fact that the purchaser intended that Mr McGarrigan should act on the terms of the agreement, including the terms in 

clauses 2.5 and 8.1. That was, after all, the purpose of including those clauses in the agreement. I do not think that it would have been any answer, in the present case, for Mr Grimstead to assert that he had not himself read the clauses. There were solicitors and accountants advising the purchaser in the transaction who must have known that the clauses were in the agreement and why. But, in the absence of evidence on the point from Mr McGarrigan, I do not think it safe to assume, in a case in which the point was not pleaded, that the judge would have reached the conclusion that Mr McGarrigan entered into the agreement on the basis that the purchaser was not relying on whatever representations he had made at the meeting on 12 September 1989. Mr McGarrigan’s case was that he had made no representations at that meeting. The judge held that he had made the representation alleged. If Mr McGarrigan did make that representation, in the circumstances alleged, it is difficult to avoid the conclusion that he did so in order to persuade Mr Grimstead to agree to the purchase. In that case it would have been open to the judge to hold that Mr McGarrigan knew that the acknowledgements of non-reliance in clauses 2.5 and 8.1 did not reflect the true position. If he knew that, he could not rely on any estoppel which might otherwise have been created by those acknowledgements.

For these reasons - which differ from those given by the judge - I would not have been prepared to hold, in the circumstances of this case, that Mr McGarrigan could rely on the acknowledgements of non-reliance contained in clauses 2.5 and 8.1 of the agreement.

The test of reasonableness

The conclusions which I have reached on both the first and the second issues make it unnecessary for me to decide the question whether, if Mr McGarrigan had been able otherwise to rely - and had needed to rely - on the acknowledgements of non-reliance contained in clauses 2.5 and 8.1 by way of an estoppel, he would have been precluded from doing so by the provisions of section 3 of the Misrepresentation Act 1967 as amended by the Unfair Contract Terms Act 1977. But, as the point is of some importance generally and I have formed a clear view upon it, I think it right to express that view. I can do so shortly. 

Assuming (but without deciding) that the acknowledgements of non-reliance fall within section 3 of the 1967 Act - as terms which exclude any remedy available to a party to a contract by reason of a pre-contractual misrepresentation - the question is whether those terms satisfy the requirement of reasonableness as stated in section 11 (1) of the Unfair Contract Terms Act 1977. The requirement is that the term shall have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made.
	
In the present case the evidence showed that the draft accounts as at 30 June 1989 were available; and that the purchaser had had the opportunity to investigate the company’s books and records, if it had chosen to do so. The parties entered into the agreement on 13 September 1989 with the benefit of advice from accountants and solicitors on each side. Subject to the question which I have considered under issue 2 - whether Mr McGarrigan thought Mr Grimstead was relying on assurances given on 12 September 1989 (in which case the further question of reasonableness does not arise) - it would have been clear that Mr McGarrigan was only prepared to enter into the agreement on the basis that the purchaser relied on its own investigations and judgment. In such a case it seems to me wholly fair and reasonable that the purchaser should seek his remedies (if any) within the four corners of the agreement; and should not be permitted to rely on pre-contractual representations which are, deliberately, not reflected in contractual warranties. 

There are, as it seems to me, at least two good reasons why the courts should not refuse to give effect to an acknowledgement of non-reliance in a commercial contract between experienced parties of equal bargaining power - a fortiori, where those parties have the benefit of professional advice. First, it is reasonable to assume that the parties desire commercial certainty. They want to order their affairs on the basis that the bargain between them can be found within the document which they have signed. They want to avoid the uncertainty of litigation based on allegations as to the content of oral discussions at pre-contractual meetings. Second, it is reasonable to assume that the price to be paid reflects the commercial risk which each party - or, more usually, the purchaser - is willing to accept. The risk is determined, in part at least, by the warranties which the vendor is prepared to give. The tighter the waranties, the less the risk and (in principle, at least) the greater the price which the vendor will require 

and which the purchaser will be prepared to pay. It is legitimate, and commercially desirable, that both parties should be able to measure the risk, and agree the price, on the basis of the warranties which have been given and accepted.

Conclusion

For the reasons which I have given I am satisfied that the judge was wrong to hold that the representations which, as he found, were made by Mr McGarrigan were false. I would allow the appeal on that ground.

LORD JUSTICE PILL:			I agree that the appeal should be allowed.    

LORD JUSTICE PETER GIBSON:		I also agree.

Order:  Appeal allowed with costs on standard basis; leave to appeal refused; Mareva order and charging order discharged as far as extant.