England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM QUEEN'S BENCH DIVISION
MR JUSTICE STANLEY BURNTON
Tllc160/05

		Royal Courts of Justice Strand, London, WC2A 2LL
		31st July 2006

Lord Justice Ward:

Introduction

1. In issue in this appeal is the construction of contractual time-bar clauses in commercial agreements.
2. By an agreement dated 24th November 2000 the six appellants, an investment syndicate led by Mr Henrik Kjellin, subscribed for ninety-six shares representing 48.95% of the issued shared capital in a company called Glasser Whitley Ltd at a price of £700,000. By a second agreement dated 2nd January 2001 they acquired further shares in the company from the respondents for £900,000. It is common ground that the two agreements are to all intents and purposes in similar terms and I shall confine myself to reciting the terms of the subscription agreement.
3. Unfortunately for the subscribers, their hopes and expectations of good fortune were dashed as the company failed to perform satisfactorily with the result that it entered into a creditors' voluntary liquidation on 1st August 2003 and has since been wound up.
4. The appellants were aggrieved and in the autumn of 2003 they began to question whether there had been full compliance by the respondents with their contractual obligations. Legal advice was taken on both sides and there was an exchange of correspondence and emails between Mr Kjellin and Mr Glasser about a "potential warranty claim".
5. The respondents had entered into a number of warranties – 29 in one agreement and 32 in the other, so we were told – particularly as set out in clause 5 and schedules 2 and 4 of the subscription and acquisition agreements respectively. They included warranties that the audited accounts gave a true and fair picture of the assets, liabilities, commitments and profits of the company as at the end of the last accounting year, 31st December 1999, and also that the accounts had been prepared in accordance with generally accepted accounting principles. The relevant warranty contained in paragraph 5.3 of schedule 2 was this:

"The Management Accounts have been prepared in accordance with generally accepted accounting principles and to the best of the Warrantor's knowledge and belief reflect the state of affairs of the Company in all respects and the profits/losses of the Company during the period to which they relate and adequately disclose all assets and liabilities of the Company at the relevant balance sheet date to which they relate and applied bases and policies of accounting which have been consistently apply in the Accounts …"

6. On 24th November 2003 the appellants' solicitors wrote to each of the respondents' saying:

"We hereby give notice on behalf of the [appellants], of their intention to make a claim against you …

The claim arises out of the fact that the management accounts of Glasser Whitley Limited dated 31st October 2000 and provided to our above named clients by you … were not in accordance with the warranties given in clause 5 of the Subscription Agreement dated 24th November 2000 and paragraph 5 of schedule 2 thereto and as repeated in clause 5 and schedule 4 of the Agreement for the Acquisition of part of the issued shared in Glasser Whitley Limited dated 2nd January 2001.

We shall be writing to you further in due course, however, the purpose of this letter is formally to notify you of the claim."

7. On 17th November 2004 the appellants issued a claim for the recovery of their investment based on breach of warranty. An amended Particulars of Claim allege that the warranted management accounts dated 31st October 2000 had not been prepared in accordance with generally accepted accounting principles, did not reflect the state of affairs of the company in respect of the profits/losses of the company during the period to which they were related, did not accurately or adequately disclose all assets and liabilities of the company and did not apply bases and policies of accounting which had been consistently applied in the accounts. The particulars were these:

"(e) The balance sheet as at 31st October 2000 incorrectly valued work in progress at £148,000, whereas it should have valued the same at between £76,465 and £38,215. Accordingly, the value of the company's work in progress was overstated by not less than £71,535.

(f) The balance sheet as at 31st October 2000 stated that the company owed creditors £21,000, whereas it should have stated that the company owed trade creditors around £43,134 and that there was deferred income of around £130,148. Accordingly, the company's liabilities to creditors were understated by £135,282."

8. The respondents denied being in breach as alleged and by an amendment to the Defence made on 14th September 2005 for the first time took the further point that the claim was time-barred under clause 6.3.1 of the agreement. The material clauses are these:

"6.3 Any Claim by the Subscribers:

6.3.1 which shall not have been notified in writing to the Company on or before the third anniversary of the Completion Date, or the sixth anniversary in the case of matters relating to Taxation; and

6.3.2 in respect of which court proceedings have not been issued and served on the Warrantors within 12 months of the date of notification of such claim to the Company

(except that the time limits shall not apply in respect of Claims arising from fraud or wilful misconduct or wilful concealment by the Warrantors, the Company or any of its officers or employees) shall be deemed to have been waived.

6.4 Without prejudice to the provisions of Clause 6.3 hereof, the Subscribers will notify the Company and the Warrantors in writing as soon as reasonably practicable after the date upon which the Subscribers became aware of a Claim against the Warrantors, such notification to be in sufficient detail to enable the Company and the Warrantors to identify the Claim and to respond to it."

9. On an application to strike out, Stanley Burnton J. decided without objection to resolve the matter by a trial of preliminary issues which were formulated as follows:

"(A) Does the content of the letters dated 24th November 2003, sent by Clifton Ingram on behalf of the Claimants to the Defendants and Glasser Whitley Limited, comply with the requirements of clause 6.3 of the Subscription Agreement dated 24th November 2000 and Clause 6.3 of the Acquisition Agreement dated 2nd January 2001, and,

(B) If the answer to (A) above is negative, are the claims made in these proceedings deemed to have been waived by the Claimants pursuant to those clauses."

10. On 7th December 2005 he ordered that the answer to preliminary issue A was negative and the answer to preliminary issue B was positive. However, he gave permission to appeal.

The judgment

11. Stanley Burnton J. held that the first question to consider was:

"whether the earlier correspondence, and indeed the later correspondence, is to be taken into account in deciding whether there has been a compliant notification in writing by the letters of 24th November 2003."

He decided:

"34. The letters of 24 November 2003 are the only claim letters relied upon. In my judgment those letters fall to be considered and interpreted in their own terms. Had they expressly, or by implication, referred to earlier correspondence the position, as I have already said, would have been different, but they do not. They give notice of an intention to make a claim arising out of the fact that the management accounts were not in accordance with the warranties and no more. Looking at those letters it seems to me that a recipient could not know which aspect of the management accounts were to be the subject of the claim which was referred to, so that, for example, if a claim had been asserted three months later in respect of something other than the value of work in progress or creditors, or anything else that had not been touched on in earlier correspondence, the recipient would be unable to say that the matter had, or had not, been the subject of the letters of 24 November 2003.

35. Since it is the letters of 24 November 2003 which are relied upon as the claim letter, it must be interpreted in their terms, and in their terms they do not call up or refer to any antecedent correspondence."

12. He thought the commercial purpose of the provisions was obvious, namely that:

"37. … It is to draw a line above the liability of the warrantors in the event that clause 6.3 is not complied with. It introduces a contractual limitation period. In terms, in this case, the provision is a deemed waiver of a claim, but it seems to me that that can make no difference to the operation of this clause as against other clauses which have been considered by the court.

38. Parties to contracts such as this are entitled to contract for a degree of certainty in their financial positions after an agreed period of time has elapsed, here, effectively, three years from completion. What was negotiated by the company and the defendants … was certainty as to their position after three years or, if there was a claim, notify them under 6.3.1 after four years if proceedings seeking a remedy in respect of that claim had not been issued."

13. He considered clause 6.4 and held:

"41. Clause 6.4 requires notification of a claim to be in sufficient detail to enable the company and the warrantors to identify the claim and to respond to it. It seems to me, and I think Mr Houseman [counsel for the appellants] accepted this, that it would be illogical for that requirement to be greater than the requirement of notification of a claim under 6.3. It seems to me that 6.3, like 6.4 requires a sufficient identification of the claim to enable the warrantors to respond to it. It follows that a mere assertion of breach of contract would clearly be inadequate. The question, therefore, is whether an assertion that the management accounts are incorrect is sufficient in circumstances where the letter does not identify what entries in the management accounts are incorrect or the degree to which they are incorrect."

14. His conclusion was that the claim was too vague and unspecific. In his judgment:

"44. … the claim letter in this case was not a claim letter which contained sufficient detail to enable the warrantors to identify the claim and to respond to it. It covered any inaccuracy of any kind, in either the balance sheet or the profit and loss account, comprised within the management accounts."

15. Of that conclusion he said:

"47. That is a conclusion which I reach with a degree of discomfort because the parties were aware of the matters which were causing concern at the time of the claim letter. The problem in this case is that the claim letter, although drafted by a solicitor, was entirely general in its terms, and did not, as it could have done, identify those matters within the management accounts which were, in fact, the subject of complaint."

The issues arising in the appeal

16. There are, it seems to me, five questions which need our consideration:

(1) Does clause 6.4 govern clause 6.3.1 so that the notification under clause 6.3.1 must also be in sufficient detail to enable the respondents to identify the Claim and to respond to it?

(2) If not, what degree of specificity is required upon a proper construction of clause 6.3.1 to constitute the valid notification of any Claim?

(3) Are the requirements of clause 6.3.1 satisfied in this case?

(4) If not, is it permissible to take account of the preceding correspondence and emails as part of the context in which the notice of claim is to be understood?

(5) If so, does that background material sufficiently supplement the notice so as to satisfy clause 6.3.1?

The first question: does clause 6.4 govern clause 6.3.1?

17. Although Mr Houseman, counsel for the appellants, did not seem to demur either in the court below or in his skeleton argument from the proposition, to quote from his written argument, that "the content of the notification required under clause 6.3.1 should be equated to or aligned with that set out in clause 6.4 for practical purposes", we did not understand that the point was conceded and Mr Reeve, counsel now appearing for the respondents, did not argue otherwise. Under gentle prodding from Longmore L.J. Mr Houseman was very happy to leave the answer to us.
18. Although couched in slightly different language, clause 5 of each of the agreements records the warranty given by the respondent and clause 6 of the subscribers' agreement is headed "Limitation to Warranties" and clause 6 of the acquisition agreement is headed "Vendors' Limitations". Clause 6.1 provides in each case that:

"all claims under the Warranties ('Claims') shall be qualified by the provisions of this Clause and in the event of any inconsistency between the provisions of this Clause and the provisions of Clause 5 the provisions of this Clause shall prevail."

Clause 6.2 exempts the respondents from liability in respect of any Claim to the extent that the matter giving rise to the Claim had been fairly disclosed in the Disclosure Letter the respondents were required to give. I have already cited clauses 6.3 and 6.4. Nothing in the remainder of Clause 6 seems to me to be remotely material.

19. The first point to notice, therefore, is that clause 6.3 and clause 6.4 are quite separate from each other. Their legal effect is quite different. The provisions of clauses 6.3.1 and 6.3.2, being deemed waivers of the claim, operate as contractual time-bars in the event that the claim is not notified before the third anniversary of the completion date and in the event that court proceedings are not issued and served within 12 months of the date of the notification of such claim. Clause 6.4, on the other hand, is not a time-bar provision: it imposes a contractual obligation to notify the warrantors as soon as reasonably practicable after the date upon which the appellants become aware of a claim against them. Failure to give that notice may be a breach of contract, though I confess it may be difficult to establish the damage that flows from the breach, but that does not matter for present purposes. It is, however, no defence to a claim which is brought in time in accordance with clause 6.3. The introductory words of clause 6.4, "without prejudice to the provisions of clause 6.3" serve only to emphasise the fact that clause 6.3 and clause 6.4 are separate and apart and independent of each other. The phrase "without prejudice to" means literally that clause 6.4 is without damage or detriment to clause 6.3, in other words, clause 6.4 does not in any way affect clause 6.3. Whatever is required for clause 6.4 purposes will not bear upon what is required for 6.3 purposes. Each is freestanding and independent and, with respect to the learned judge, I cannot accept "that it would be illogical for [the requirements of clause 6.4] to be greater than the requirement of notification of a claim under 6.3." On the contrary, the phrase "without prejudice to" makes it explicit that the specific requirements of clause 6.4 are not imported into the different and general provisions of clause 6.3.1. In my judgment clause 6.3.1 stands alone and must be construed accordingly.

The second question: what degree of specificity is required upon a proper construction of clause 6.3.1?

20. The principles by which contractual documents are nowadays construed were elucidated by Lord Hoffmann in his by now well-known speech in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 912/913. The essential points for this case are these:

"(1)  Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

(2)  … it [background knowledge] includes absolutely anything which would have affected the way in which the language of the document would have been understood by a reasonable man.

…

(4)  The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. The background may not merely enable the reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax. (See Mannai Investments Co. Ltd v. Eagle Star Life Assurance Co. Ltd [1997] AC 749.)

(5) The "rule" that words should be given their "natural and ordinary meaning" reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in The Antaios Compania Naviera S.A. v Salen Rederierna A.B. [1985] A.C. 191, 201:

"… if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.""

21. The natural and ordinary meaning of the words in clause 6.3 seem to me to be plain enough. "Claim" is defined in clause 6.1. Reading it into clause 6.3, the clause provides that "any Claim under the Warranties which shall not have been notified in writing to the company on or before the third anniversary of the completion date … shall be deemed to have been waived." Thus what has to be notified is a claim under the warranty. "Claim" is an ordinary word which does not need further definition. The requirement is that the warrantors must be informed that a demand is being made for damages for breach of warranty. That is all. On the ordinary meaning of the words, no particulars have to be given of that claim.
22. That no particulars have to be given is consistent both with the structure of clause 6 and with the authorities on these contractual time-bar clauses. As for the structure of clause 6, the notification required under 6.4 is specific. That notice must be in sufficient detail to enable the company and the warrantors to identify the claim and to respond to it. Thus the draftsman was well aware of the need to be specific where specificity is demanded. Consequently imposing specific requirements in clause 6.4 in contrast to being silent of any specificity in clause 6.3.1 argues strongly in favour of a bald notice of claim being sufficient for the latter's purposes.
23. Moreover, in each of the authorities to which we have been referred, some greater or lesser specificity was stipulated in the relevant clause. Thus in Senate Electrical Wholesalers Ltd v Alcatel Submarine Networks Ltd [1999] 2 Lloyd's L.R. 423 the relevant clause required notice to be given "setting out such particulars of the grounds on which such claim is based". In Laminates Acquisition Co. v BTR Australia Ltd [2003] EWHC 2540 the clause required "written notice of such claim specifying (in reasonable detail the extent that such information is available at the time of the claim) the matter which gives rise to the claim, the nature of the claim and the amount claimed in respect thereof (detailing the purchaser's calculation of the loss thereby alleged to have been suffered by it or the relevant member of the purchaser's group." In Bottin (International) Investments Ltd v Venson Group Plc & ors [2004] EWCA Civ 1368 notice of the claim had to be made in writing "specifying such details of the event or circumstances giving rise to such claim as are available to the investor and an estimate (if capable of preparation by the investor) of the total amount of the warrantor's liabilities therefor claimed." Finally, in RWE Nukem Ltd v AEA Technology Plc [2005] EWHC 78 the requirement was for "written particulars of such claim (giving detail of the specific matter as are available to the purchaser in respect of which such claim is made)." The reasonable man will know, therefore, that clauses requiring a degree of specificity can easily be drafted but he will also know that no such detail was provided for in clause 6.3.1.
24. If the natural and ordinary meaning of the words is that a bald notice of claim is sufficient to satisfy clause 6.3.1, is that a conclusion that flouts business commonsense? Is there something in the background which drives one to a different interpretation? It is strongly submitted on the respondents' behalf that the purpose of a clause like this is to promote certainty and that certainty requires the giving of as much information about the claim as would be required for a properly pleaded particulars of claim supplemented if need be by the particulars given under a request for further information. I cannot accept that submission. It seems to me to be impossible to identify that purpose from the background of this case and the business commonsense of these transactions. Mr Reeve relies on dicta in the cases I have set out above. I am quite prepared to accept (but then I would because I was a member of the Court) the observation in Senate Electrical that "certainty is a crucial foundation for commercial activity". That observation was, however, made in the context of that case and the clause there in issue. As Peter Gibson L.J. said in Bottin: "Those remarks were made in the context of a different wording of the agreement under consideration in that case and against the background of the wholly uninformative notice." The only true principle to be derived from these authorities is the first proposition which Gloster J. distilled from them in RWE Nukem Ltd namely that –

"Every notification clause turns on its own individual wording."

25. The most that can be said for this clause is that it was intended to meet the sensible commercial purpose of providing a cut-off point for liability for breach of warranty after the expiration of three years from completion. The subscribers/purchasers then have a further twelve months, ample time for negotiation and settlement of the claim, before the second time barrier falls if proceedings have not been issued by then. The very fact that proceedings are contemplated with all the formality of pleading and particularity at that second stage itself militates against the argument that the same degree of particularity should have been given at the first stage twelve months earlier when the claim was notified.
26. In my judgment, upon a proper construction of clause 6.3.1, a bald notification of the claim is sufficient and no particulars of it need be given.

The third question: are the requirements of clause 6.3.1 satisfied in this case?

27. The first paragraph of the notification letter gave notice of the intention to make a claim. The letter went further by informing the respondents that the claim arose out of the fact that the management accounts were not in accordance with the warranties given in clause 5. In other words, notice was given that the breach of warranty was confined to errors in the management accounts and that no other warranty claim was being made. The respondents submit that notice of an intention to make a claim was merely notice that a claim would be made at some time in the future and that that was not good enough to satisfy the requirement that a present claim should be asserted. I reject that submission. Any reasonable recipient of the letter would understand the letters to be notification of an existing claim for breach of warranty through inaccuracies in the management accounts. The concluding paragraph of the letter makes that abundantly clear:

"We shall be writing to you further in due course, however, the purpose of this letter is to formally notify you of the claim," with emphasis added by me.

In my judgment those letters satisfy the requirements of clause 6.3.1.

The fourth question: is it permissible to take account of the preceding correspondence and emails as part of the context in which the notice of claim is to be understood?

28. In the light of the conclusion I have reached above, it is strictly unnecessary to consider this question. Nonetheless, in view of the importance it played at the hearing, I shall express my views very shortly.
29. Mannai Investment Co. Ltd v Eagle Star Life Assurance Co. Ltd [1997] AC 749 sets out the principles for the construction of notices, in essence, that the question is how a reasonable recipient would have understood the notice bearing in mind its context. The contextual scene is always relevant. To cite but one passage, Lord Hoffmann said at p. 775:

"The meaning of words, as they would appear in a dictionary, and the effect of their syntactical arrangement, as it would appear in a grammar, is part of the material which we use to understand a speaker's utterance. But it is only a part; another part is our knowledge of the background against which the utterance was made. It is that background which enables us, not only to choose the intended meaning when a word has more than one dictionary meaning but also, in the ways I have explained, to understand a speaker's meaning, often without ambiguity, when he has used the wrong words."

30. In my respectful judgment the fact that the letters did not incorporate the preceding correspondence and emails and did not refer to them is neither here nor there. The recipient will have read the notification letters against the background of what had gone before them. That is the context. That context has to be considered in order to decide what a reasonable recipient would understand when he read the letter. In my judgment the judge was wrong to exclude consideration of the antecedent correspondence.

The fifth question: does the background material sufficiently supplement the notice so as to satisfy clause 6.3.1?

31. Assuming I am wrong in my conclusion that no particulars of the claim need be specified in the notice, then the antecedent correspondence makes it plain what claim is being asserted. In the light of my earlier judgment it is unnecessary to recite this correspondence at length. This is but a summary of it. It begins on 23rd September 2003 when Mr Kjellin wrote to Mr Glasser "Re: potential warranty claim". That heading is frequently adopted thereafter. That letter encloses a letter from the subscribers'/purchasers' solicitors, referring to substantial and unexplained discrepancies in the management accounts of 31st October 2000 and the subsequently audited accounts of 31st December 2000. The preliminary view was expressed that the management accounts could not have reflected the true financial position of the company and that there was prima facie good evidence to support a claim for breach of warranty. The solicitors pointed out that notice of the claim should be given as soon as possible and in any event within the three year period from the completion date. Three discrepancies seem to be identified namely the increase in creditors, in salaries and pension and in the cost of sales. In the correspondence which follows the respondents make clear that they too had taken legal advice and they refer to the relevant warranty at paragraph 5.3 of schedule 2 of the agreement. They do their best to refute the argument. They seem to have done so successfully in respect of the salaries and pensions issue. The other inaccuracies about work in progress and creditors are debated as the correspondence continues. On 31st October 2003 Mr Kjellin emailed Mr Glasser thanking him for "the salary responses which I received on the fax, and will circulate. Apart from the WIP [work in progress], the only other seriously large discrepancy is the Creditors." Mr Glasser's response was to say that his solicitors would be dealing with the matter on 18th or 19th November and that as soon as he has a response he would be in touch. On 19th November Mr Kjellin emailed Mr Glasser saying this:

"Please don't take it badly, but as we have not received your input before 24th November I have had to instruct our solicitors to issue you with notice of our intent to proceed with a warranty claim against yourself and John Whitley. Our intention remains to resolve this amicably."

On 20th November Mr Glasser did attempt to give a further lengthy explanation of the matters still in controversy. The solicitor's letter followed on 24th November 2003.

32. Against that background any reasonable recipient of the solicitor's letters would have understood that the appellants were notifying a claim under the warranty clause. The recipients would have had, moreover, sufficient information to identify the warranty concerned and the particular inaccuracies to which the complaint related. When the proceedings were launched, the particulars of claim identified the same inaccuracies, namely work in progress and over-stated creditors. Thus the respondents had all the information they needed by November 2003 to know the nature of the claim made against them and to prepare to meet a claim in respect of work in progress and overstated creditors. They could safely close their books on any other claim. If I were in any previous doubt about it, there is an ample sufficiency of information in the antecedent exchanges for the letters of 24th November to constitute valid notification pursuant to clause 6.3.1.
33. Though it may not be a valid tool for construction of the notices, the glaring fact is that no point was taken to question the validity of the notices until the amended defence was served nearly two years later.

Conclusion

34. In my judgment the judge's sense of discomfort was properly felt. I would allow the appeal, set the order aside and answer preliminary issue A in the affirmative. Accordingly no answer to preliminary issue B is required.

Lord Justice Laws:

35. I agree.

Lord Justice Longmore:

36. I also agree.