England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London WC2A 2LL
		10 February 2006

HHJ NORRIS
1. Mandrake Associates Ltd ('Mandrake') was a small independent financial adviser specialising in pension and life assurance products. From 1987 it was the wholly-owned subsidiary of Hambro Countrywide plc ('Countrywide'). On 1 March 1996 Countrywide sold the entire share capital of Mandrake to Plusnet Ltd (which later changed its name to Mandrake Holdings Ltd) ('Holdings'), a holding company formed for the purpose of the acquisition by Mr John Pirie (a director of Mandrake) ('Mr Pirie') and Mr Ron Pritchard (a director of one of Mandrake's appointed agents) ('Mr Pritchard'). As part of the transaction Countrywide, Holdings, Mandrake and Mr Pirie entered into a deed for the purpose of allocating responsibility for any redress due to Mandrakes clients arising out of bad advice given in connection with pensions ('the deed').
2. In this action Mandrake and Holdings (who appear by Mr Lowe) seek declaratory relief as to the scope of the deed and, in the alternative, rectification of the deed. Countrywide (which appears by Mr Soole QC and Mr Liddell) opposes the declaratory relief sought, denies Mandrake's entitlement to rectification, and counterclaims for the recovery of £642,667 actually paid by Countrywide under the deed but which Countrywide allegedly was not (on the true construction of the deed and the events which have happened) liable to pay.
3. The action before me may not be in its final and complete state. In March 2005 Mandrake and Holdings sought to amend their case so as to include a claim for damages (one of the issues in which would be the recoverability of loss). Countrywide opposed the amendment on the ground that the amended case could not succeed on the law as it stood in the light of decisions of the Court of Appeal. Mr Justice Lightman agreed with Countrywide, and the Court of Appeal upheld his decision, whilst acknowledging that the point at issue might merit consideration by the House of Lords. In the course of the debate about amendments to the pleadings Countrywide indicated that it too wished to raise a further point based on a 'loss of cover' clause in the deed. The management of the case contemplated by the Court of Appeal was that the trial now before me should proceed on the presently pleaded issues, that if Mandrake and Holdings succeed and obtain permission to appeal to the House of Lords against the exclusion of their damages claim, and succeed on that appeal, then there will be a further trial on the damages claim so introduced, at which trial the additional point sought to be advanced by Countrywide would in principle be open. In this situation I must therefore be careful not only to distinguish between the evidence admissible on construction and the evidence admissible on rectification, but also to avoid making unnecessary findings of fact which might influence the inchoate damages claim and the reserved 'loss of cover' point.
4. The first issue for determination is the true construction of the relevant provisions of the deed. The process of interpretation is the ascertainment of the meaning which the deed would convey to a reasonable person having all the background knowledge which would reasonably have been available to Mandrake, Holdings, Countrywide and Mr Pirie in the situation in which they were at the time of the buyout. Accordingly a court of construction seeks to know the commercial purpose of the deed (and so the genesis of the transaction, the background, the context, and the market in which the parties were operating) to see if this is cogent to the joint intention of the parties and assists in deciding the meaning of what was agreed. Excluded from this process are the negotiations of the parties and their declarations of subjective intent. Also excluded is the conduct of the parties subsequent to the deed (for this is not a legitimate aid to construe the meaning of the words they have used). These are familiar propositions drawn from Investors Compensation Scheme v West Bromwich Building Society [1998] 1 WLR 896, BCCI v Ali [2002] 1 AC 251, Reardon Smith Line Ltd v Hansen-Tangen [1976] 1WLR 989 and The Tychy [2001] 2 Ll LR 403.
5. I therefore turn to my findings of fact relevant to this process of interpretation. I shall state my conclusions, referring only to particular evidence where it is necessary to decide significantly conflicting versions.
6. Mandrake was founded in 1974 as an insurance broker exploiting a client base principally amongst members of the armed forces, In 1985 Mandrake became linked to two estate agencies, and 'the Mandrake Group' was formed. In 1987 the Mandrake Group was bought by Countrywide, principally for its estate agency components. Countrywide was a listed estate agency and financial services group whose principal shareholders were Hambro's plc and GRE. In 1988 they launched Hambro Guardian Assurance, and the launch of a linked insurer left a much reduced role for Mandrake as an insurance broker, especially in relation to house purchase products. The focus of Mandrake's operation therefore shifted to the provision of independent financial advice, including significant advice on pensions.
7. This shift of focus coincided with substantial changes in the pensions market. In July 1988 retirement annuity contracts were replaced by a new product called a 'personal pension'. Under a personal pension the ultimate sum available for pension provision was based on the value of the fund created by the contributions made. The growth rate assumptions which providers and advisers where permitted to make meant that the anticipated returns made personal pensions apparently far more attractive than other pension arrangements. In particular, they were apparently more attractive than occupational pension schemes where the ultimate pension provision depended on (and was limited by) final salary and length of service.
8. Personal pensions became very popular amongst both the self-employed and the employed. Amongst the employed three particular types of client could be identified for whom the consequences of an inadequate comparison between a personal pension and other pension provision might be serious:

(a) active members of an occupational pension scheme who withdrew from the scheme whilst continuing in the employment that gave rise to their scheme membership, taking out a personal pension contract as a vehicle for their future pension contributions ('opt-outs');

(b) people who were eligible to join an occupational pension scheme but who decided not to do so, taking out a personal pension contract as a vehicle for their pension contributions ('non-joiners'); and

(c) active members of an occupational pension scheme who took the cash equivalent of their occupational pension scheme benefits and used that transfer value to purchase benefits under a personal pension contract ('transfers').

In relation to each of these three categories there was a risk that an accurate comparison had not been made between the two forms of pension provision: although equally there would be many cases where a rigorous comparison was made and the purchase of a personal pension was financially justifiable. But the 'pensions misselling' situation was complex. On the one hand, overoptimistic advice might equally taint the purchase of personal pensions by self-employed people, or those who took from the government a rebate of their SERPS contributions for investment in a personal pension ('rebate-onlys'), or those who made freestanding additional voluntary contributions ('FSAVCs'), or those who took out executive pension plans ('EPPs'). On the other hand, not everyone in the three categories of employee I have identified would be affected in the same way by any advice given. The effect perhaps depended on individual circumstances. For example, employees who had frequently changed job (and so would never have built up any substantial entitlement in any one occupational pension scheme) would not suffer in the same way as someone who remained in the same job. Again, there might be no causal link between the taking out of a personal pension and the advice which preceded it – perhaps because the investor was an 'insistent client' (proceeding in spite of the advice given). In other cases he effect perhaps depended on more general circumstances. For example, if the transfer was occasioned because the occupational pension scheme was in any event being wound up or because the trustees had simply determined to make the change ('bulk transfers'), or because the transfer was out of a 'money purchase' occupational scheme.

9. The body charged with the overall regulation of the provision of financial services was the Security and Investments Board ('SIB'). The particular regulator for Mandrake was the Personal Investment Authority ('PIA'). In 1993 the SIB became concerned that there had been pensions misselling on a significant scale. It commissioned research from KPMG and from Bacon and Woodrow on the basis of which it prepared and published in October 1994 some guidance entitled 'Pension Transfers and Opt-outs: Review of Past Business'. The subtitle was 'Statement of Policy': there was a separate publication which contained a specification of standards and procedures.
10. Paragraph 1 of the SIB guidance was in these terms:

… this statement outlines standards for a programme of review, by investment firms, of pension transfer and opt-out business transacted between 1988 and 1994, and for the provision of redress to investors where due.

Paragraph 2 declared that:

… in determining the scale and focus of the review of past business, SIB has been guided by the principle that effort should be concentrated on those cases where investors are most likely to have suffered loss, Firms will therefore be expected, as a priority, actively to review certain categories of business.

Paragraph 7 enlarged on this by saying that SIB's objective had been to establish a framework by which all investment firms in the personal pensions market would revisit certain batches of past transactions methodically and systematically, but that effort should be concentrated where it was most immediately likely to be needed. Paragraph 3 indicated that the end of 1995 SIB would consider the experience gained from the early stages of the review and assess whether further categories of business should be actively reviewed on an industry-wide basis, and whether to refine and adapt the programme. It stated:

In addition to the active review of priority categories of business any other investor who received relevant pensions advice between 1988 and 1994 may ask the investment firm to review his or her case on a similar timetable.

11. Paragraph 5 of the Guidance elaborated on the programme of review identified in paragraph 1:

Firms' reviews of past business can be divided into a number of stages - identification of the cases in question; fact gathering; assessment of compliance at the time; assessment of loss by the investor; and provision of redress, when due.

All cases of pension transfer and opt-out business transacted between 1988 and 1994 had accordingly to be identified and fact gathering undertaken to see where they fitted in the review programme. From that process could be identified priority cases that would proceed to automatic review within a defined timetable.

12. For opt outs and non-joiners the priority categories were as follows:

(a) first tranche (December 1995)

• retired/dead investors

• opted out investors aged 35 or more still in the same employment

(b) second tranche (June 1996)

• non-joiners aged 35 or more still in the same employment but not 'rebate only'

• opted out investors aged under 35 still in the same employment but not 'rebate only'

(c) third tranche (December 1996)

• opted out investors aged 35 and no longer in the same employment.

13. For transfers the priority categories were as follows:

(a) first tranche (December 1995)

• retired/dead investors

• men aged over 55

• women aged over 50

(b) second tranche (December 1996)

• men aged between 50 to 54 at the time of the transaction

• women aged between 45 and 49 at the time of the transaction.

Transfers imposed by occupational scheme trustees ('bulk transfers'), and transfers out of money purchase schemes were originally excluded from the priority categories (though investigation was necessary in order to identify such cases).

14. If an investor fell within one of the categories summarised in paragraphs 12 and 13 above the automatic review had to be undertaken. This assessment required three questions to be answered:

(a) Was there a material compliance fault?

(b) Was there an actual or prospective loss?

(c) If so, was the loss the result of that fault?

15. In paragraph 40 of its guidance the SIB recognised the danger that firms reviewing past business in accordance with its programme might thereby jeopardise their professional indemnity cover, and gave advice designed to minimise the risk.
16. I have dealt in some detail with the SIB guidance because it is the essential background to the deed which I have to construe. The detail of the priority categories (which became known as 'the phase 1 cases') is not material to the essential issue that I have to decide. I have referred to it for the purpose of drawing attention to the following matters:

(a) from the publication of the SIB guidance (if not before) it was clear to IFA's that the regulatory authority considered that some pensions business had been done in a materially non-compliant way and that some investors had suffered as a result of the advice that had been given;

(b) the exposure of a firm to the liability to make redress to an investor who had suffered arose from the non-compliant advice which the firm had given, not from the existence of the review demanded by SIB (though the active review would have the effect of crystallising claims that might otherwise not have been brought);

(c) the SIB guidance used the word 'review' in two different contexts. First, in connection with 'a programme of review … of pension transfer and opt out business transacted between 1988 and 1994' which involved all the stages that I have identified in paragraph 11 above. Second in relation to 'the active review of priority categories of business', where the review involved the process of assessment that I have identified in paragraph 14 above and the making of redress. For clarity in this judgment I will refer to the process summarised in paragraph 11 as 'review' and that in paragraph 14 involving priority cases as 'active review'.

(d) the review involved the identification of all cases where there was the potential for non-compliant advice that had caused loss, and the active review required the assessment of loss and the making of redress in priority cases;

(e) the priority cases were the focus (but not necessarily the limit) of the programme of review;

(f) the guidance dealt not only with priority cases but required active review also in cases where a non-priority investor had made a complaint;

(g) the guidance contemplated that some non-priority cases might in the future become priority cases and further that the ordinary complaints procedure would continue;

(h) the definition of the priority cases was principled but inevitably involved the drawing of arbitrary lines; a man aged 54 at the date of a transfer out of an occupational pension scheme had in legal terms no less strong a case than the man aged 55, but the latter was a priority case and the former not;

(i) all firms, however careful their original advice had been, were required to undertake the review (even if that process did not result in the active review of any case) and the costs of that were substantial.

17. In February 1995 the PIA (Mandrake's direct regulator) changed its rules to enable it to require a member or class of members to carry out a review of any aspect of its investment business. In exercise of that power it required members 'to review their past pension transfer and opt out business', the determination being 'founded on a belief that there [had] been a significant degree of misselling of personal pension contracts and that the need for business of this kind to be reviewed [outweighed] the risk that some firms [would] incur costs unnecessarily.' The pensions business to be reviewed was advice on or arrangement of personal pensions, section 32 contracts and section 226 contracts. It identified priority cases which were to be the subject of active review (although it made some alterations to the order of priority). In April 1995 the PIA issued 'process maps' (or flow charts) to facilitate the identification of priority opt outs and non-joiners from within the relevant classes of business, and to prioritise the claims of investors so identified.
18. On 16 January 1996 (in the middle of the negotiations between Holdings and Countrywide for the purchase of Mandrake) the SIB issued a press release giving a progress report on 'The Pensions Review'. It noted that 'the review programme is underway' and that:

no grounds have so far emerged to suggest that priority categories established by SIB in 1994 should be changed, but this will reviewed again later in 1996 when more information on reviews undertaken is available.

I think the reference to 'reviews undertaken' must be a reference to what I am calling 'the review', and not a reference to what I am calling 'the active review', ie the SIB was saying that it would consider the material produced by the identification of cases in question and the fact gathering exercise carried out in relation to transfer and opt out business transacted between 1988 and 1994 to see whether there should be active review in additional cases, The press statement did not deal with those cases that fell outside the review then current, viz 'rebate only' cases, FSAVCs, EPPs and the self-employed. These were all potential claimants (but did not fall within the broad class of 'pension transfers and opt-outs'). But the statement did say that the SIB '[would not] not be satisfied until redress has been given to all those to whom it is due' and that the SIB was determined 'to ensure that this redress programme is now completed as quickly as is humanly possible'. I think that this can only be read as a warning that within the chosen class of business it was 'all those to whom [redress was] due' who would be addressed by the SIB review.

19. The 'pensions misselling scandal' and the manner in which the SIB proposed to address it had implications for the calculation of reserves by life insurers and implications for the preparation of accounts within the financial services industry. In December 1994 the Institute of Actuaries gave guidance as to the level of provisions to be made for the purpose of calculating reserves, It is unnecessary to quote it. Two points may be drawn from this guidance. First, the provision was to include the administrative cost of carrying out the review. Secondly, it was noted that 'although SIB have indicated categories requiring priority treatment, the review applies to all cases and provision should not be restricted to cases in the priority categories'. The Institute of Chartered Accountants issued a Technical Release in January 1995 which also addressed the SIB review. The guidance given was:

[3] The directors of intermediaries and personal pension providers will need to include their estimate of the total anticipated financial effect of the investigation and compensation (and not just the costs relating to priority cases) in the next set of financial statements, even if they are at an early stage of the process of identifying the total compensation due.

[37] … consideration should be given to the extent to which provision should be made for non-priority cases. Since there is not currently a requirement to review actively non-priority cases, provision may be made for that proportion of cases where the pension purchasers are themselves likely to seek redress.

Those concerned in the field were therefore aware that liability did not simply arise in relation to priority cases but had to be provided for on a broader basis. The broader basis suggested by the ICAEW was that provision be made for the proportion of non-priority cases who might be expected to claim. This guidance was directed at the SIB review and its direct impact on the proper preparation of accounts. It did not absolve the directors of intermediaries and pension providers of the need to make proper provision for cases that fell outside the review at all.

20. This was the regulatory background to the sale and purchase of Mandrake in January 1996. One of the potential purchasers was Holdings, the vehicle of Mr Pirie and of Mr Pritchard. A Memorandum for Sale was prepared by Countrywide and seen by Mr Pirie and Mr Pritchard. In dealing with Mandrake's profits it noted that they would be altered by two provisions to be made in the balance sheet, and continued:

The first of these is the provision for pensions remedial action, The current provision was fixed at £30,000 in late 1994. With additional pronouncements from the PIA, and the early results from customer mailings, it is clear that the provision will need to be increased, The size of the increase is not yet certain, but will reflect known liabilities at the year-end.

Objectively viewed the reference to 'known liabilities' must be a reference to the liabilities for which the ICAEW had said that provision ought to be made i.e. priority cases (entitled to active review), non-priority cases who had complained (and by so doing had become entitled to active review), and the proportion of non priority cases who had not yet complained but who were likely to seek redress.

21. The Memorandum for Sale also drew attention to Mandrake's indemnity insurance cover. It noted that Mandrake was covered by a policy held by Countrywide with a £5,000 excess, so that Mandrake's liability was limited to £5,000 plus the processing costs per case. The practical effect of this must be noted. It meant that Mandrake's maximum exposure was to non-priority cases. The priority cases were those identified by the regulatory authorities as giving rise to significant loss that required rapid redress. Subject to the excess, such cases were likely to be covered by the Countrywide policy. The non-priority cases were those giving rise to smaller loss: few of such cases were likely to be covered by the Countrywide policy (because of the excess), so that there was a real risk that Mandrake would, out of its own resources, have to meet the whole of the redress and the costs of investigation. (It happens that this was explicitly recognised by Mr Nower of Countrywide in a report made by him to the Countrywide board on 4 March 1996, after the transaction; he stated that 'the greatest risk to [Countrywide] was an increase in the average cost of the low priority cases where the redress cost was under £5,000'. But at this stage I am not concerned with the subjective understanding of one side to the transaction).
22. The course of negotiation (including the preparation of heads of agreement that were expressed not to be legally binding) is not material to the process of construction. But the form of the transaction ultimately negotiated is.
23. The transaction took the form of a sale of Mandrake's shares by Countrywide to Holdings completed on the ₁st March 1996. On 27 February 1996 Mandrake's accounts for the year ending 31 December 1995 were approved by the board and signed by Mr Pirie. A dividend of £334,000 was recorded as payable to Countrywide. As to assets, Mandrake was left with its tangible assets (valued at some £267,000) and with the benefit of a debt in the sum of £621,000 owed by Countrywide: but the dividend due to Countrywide was off-set with the effect that (together with other inter-company investments) the value of this debt was reduced to £265,000. Not recorded by way of specific entry on the balance sheet was what Holdings was really buying, namely, the 'goodwill' consisting of the benefit of a stream of renewal commissions from existing policies (subject to clawback for lapses), and the advantage of the connections and contacts of an established sales force. As to liabilities, the accounts contained no explicit provision for pensions misselling liabilities, and accordingly KPMG as auditors reported to Countrywide that it was appropriate to include Mandrake's accounts in the consolidated financial statements of Countrywide subject to 'any adjustments arising out of further consideration of the need for pension opt-out provisions...'.
24. The Sale Agreement was dated 1 March 1996 and was made between Countrywide (1) Holdings (2) and Mr Pirie (3) and Mr Pritchard (4). The key features relevant to the present dispute are as follows:

(a) The price to be paid by Holdings to Countrywide for Mandrake's shares as was some £469,000, £84,000 of which was deferred. The balance of £385,000 was to be funded in part by a loan by Mandrake to Holdings of~265,000, ie the sum due from Countrywide to Mandrake.

(b) By clause 5.1 Countrywide warranted the accuracy of Mandrake's accounts subject to any specific disclosures made. By clause 5.6.3 Holdings acknowledged that there had been disclosure of the absence of any provision in the accounts in relation to actual or potential claims against Mandrake concerning the sale of personal pension products in the light of the review by the SIB.

(c) By clause 4 it was provided that there should be exchanged at completion the document called 'the pensions deed'.

(d) By clause 8.8 it was declared that the agreement superseded any heads of agreement or letters of intent entered into between the parties prior to that date.

25. The pensions deed was made between Countrywide (1) Holdings (2) Mandrake (3) and Mr Pirie (4). The key features relevant to the present dispute are as follows:

(a) Recital (C) recorded that the SIB '[had] required all insurance companies and pensions advisers to carry out a review of the advice given on a case by case basis in relation to pension products since 30 April 1998'.

(b) Recital (D) recorded that 'as a result of this review it [was] apprehended that [Mandrake] may be liable to make compensation payments if it [was] unable to prove the best advice [had] been given and that this [had] resulted in those being advised incurring a loss'.

(c) Recital (E) recorded that Countrywide had agreed to make certain payments to Holdings in the circumstances and subject to the conditions set out in the deed.

(d) Clause 1.1 imposed on Mandrake the obligation to 'continue with and complete at its own expense [its] review of that part of its business relating to the sale of personal pension policies in accordance with the standards and requirements of SIB and PIA as published from time to time'.

(e) Clause 1.2 stated that Mandrake would be 'responsible for contacting and communicating with [its] clients .....the purposes of the continuing SIB review'.

(f) Clause 1.5 required Mandrake 'at all times [to] comply with the rules regulations and guidelines and recommendations of SIB and/or PIA'.

(g) Subject to the performance by Holdings and Mandrake of all their respective obligations under the deed Countrywide covenanted with Holdings by clause 2.1 to pay to Mandrake (or at Countrywide's option, to the relevant investor) an amount equal to each 'Pension Liability'.

(h) Clause 2.2 of the deed contained the definition of Pension Liability. In essence, it was a 'liability' suffered or incurred by Mandrake as a result of wrongful advice:

to the extent that it arises from:

2.2.1 the transfer of a person's rights or entitlement under any pension;

2.2.2 the opting or contracting by a person into or out of any pension scheme;

2.2.3 a person not becoming a member of or not accepting any pension scheme

Although at first blush this categorisation of liability would appear to reflect the three categories of 'transfers' 'opt outs' and 'non joiners' which were the concern of the SIB review, the reference to 'any pension scheme' (rather than for example 'any final salary occupational pension scheme') and the inclusion of persons who had opted into schemes meant that the definition of Pensions Liability was extremely broad.

(i) The scope of the definition was cut down by the terms of clause 2.3.1 which excluded certain investors, Thus investors who were self-employed, or who were simply contracting out of SERPS, or who had transferred from one occupational pension scheme to another, or who had bought personal pensions before 29 April 1988 were excluded.

(j) The key exclusion for present purposes was the exclusion (by clause 2.3.1.6) of 'any person not falling within any class of business or category of investor requiring investigation according to the published recommendations of SIB or PIA at the date of [the] deed...'.

(k) Also to be excluded (by clause 2.3.1.7) was any person whose claim was not duly notified to and received by the agents for Countrywide's insurers in writing before 30 May 1995.

(1) The scope of the obligation was further limited by the exclusion of certain sorts of liability. Thus Countrywide was not to be made liable in respect of any liability of Mandrake's which was not covered by Countrywide's professional indemnity insurance (save for any excess) due to any act or omission of Mandrake or Holdings (cl 2.3.3), or for remedial action required by the PIA to be undertaken by Mandrake 'in respect of its conduct of the SIB review'.

(m) Clause 3.1 contained a warranty by Holdings, Mandrake and Mr Pirie that all investors who had intimated or were likely to intimate a claim in respect of a Pensions Liability had been duly notified to agents for the insurers before 1 June 1995, and clause 3.2 contained an obligation on the part of Holdings and Mandrake immediately to notify Countrywide on becoming aware of any information likely to give rise to a claim in respect of a Pension Liability.

(n) Clause 4 contained an irrevocable appointment by Mandrake of Countrywide as its attorney 'concerning all or any of the matters referred to in [the deed] all of which [Mandrake placed] in the unfettered control and discretion of [Countrywide]' including the conduct and defence of any action or proceedings.

26. The transaction duly completed on these terms.
27. In the spring of 1998 the FSA issued a consultation paper proposing an approach to be adopted in relation to Phase 2 of the review. This was designed (broadly) to bring within the scope of active review those investors in personal pensions who were 'opt outs', 'non joiners' or 'transfers' but who were previously excluded from active review (principally on grounds of the age). Phase 2 (as developed in August 1998) still left out of account some categories of customer (in particular 'rebate only' cases) and other categories of business such as FSAVCs and EPPs.
28. On 26 June 1998 the Group Financial Controller of Countrywide wrote to Mr Pirie commenting upon the recent announcement of the Phase 2 investigation and saying:

As you know, the deed between yourselves and [Countrywide] signed on the disposal of Mandrake provides that [Countrywide] will indemnify Mandrake against liabilities relating to pensions which the SIB required to be investigated as of the date of the deed. Accordingly the cost of compensation of non-priority cases does not fall under the indemnity.

The question is whether that is correct. Clause 2.3.1.6 of the deed excluded from the scope of the indemnity 'any person not falling within any class of business or category of investor requiring investigation according to the published recommendations of SIB at the date of the deed'. Do the words 'requiring investigation' identify only the priority classes who were the subject of active review? Do they identify the classes of business and the categories of investor who were within the review (even if not the subject active review)?

29. Two other ways of approaching the issue occur to me (though it was put in neither way at the trial). I have found them helpful in keeping my bearings in what is otherwise a dispute about language.

(a) Clause 2.3 establishes a series of 'gates' through which a person must pass if their claim against Mandrake is to be indemnified by Countrywide. Clause 2.3.1.6 of the deed excluded certain potential claimants by reference to the SIB review. Clause 2.3.1.7 excluded certain potential claimants by reference to notification to the insurers. Which is the narrower gate? Does clause 2.3.1.6 potentially exclude from the scope of indemnity persons not in priority categories subject to active review even though their claims have already been notified the insurers? Or does clause 2.3.1.7 confine the indemnity only to those within clause 2.3.1.6 whose claims have been notified?

(b) Given that there is an excess on the insurance policy, was the risk of the excess in non-priority cases (effectively the whole risk of redress) intended to be borne by Mandrake or by Countrywide?

30. I hold that upon its true construction the obligation imposed by the deed on Countrywide in respect of Pension Liability was not confined to priority cases, ie those under active review at the date of the deed.
31. The process of ascertaining the meaning of a document (that I identified in paragraph 4) will sometimes involve the isolation and analysis of individual elements which compel a particular conclusion: but more often (as here) it will involve scanning the document and picking up clues from its language and context to see whether a pattern emerges which enables one to form a clear impression of the true meaning of the relevant provision. The following features underpin the impression I have formed.
32. First, the extent of the problem. The possibility of pensions misselling was a feature of many classes of business and many categories of investor (see paragraph 8). Mandrake's exposure to claims arose from its having undertaken such business. But the SIB had identified one particular type of investor (those who had the alternative of an occupational pension scheme) and three particular contexts ('opt-outs', 'non-joiners' and 'transfers') where there was a risk of potentially significant damage. The purpose of the review was to identify this 'eligible population'. Recital (C) to the deed appears to recognize this context. Within this eligible population there were some investors who were peculiarly at risk and on whom limited resources had to be concentrated: these were the subject of the active review. But it was well understood that liabilities generated by the active review of artificially defined classes could not properly be taken as the limit of exposure (see paragraph 19 above). On the sale of an independent financial adviser one would expect to see the problem as a whole substantially addressed. If the whole risk was not being borne by one side on the other, one would expect to see a clear allocation of the risk. (By way of illustration, the extent of the problem is demonstrated by the provision actually made by Hambro Guardian Assurance. Following the guidance given by the Institute of Chartered Accountants working party recommendations Hambro Guardian Assurance – a company associated with Countrywide – made a reserve based on a prudent best guess. The report to the directors noted that 'the reserve was estimated on all policies eligible for a review, not just the SIB priority groups'. This involved consideration of 7,800 cases 'due or eligible for a review' and lead to an overall recommended reserve of £2.5 million (against the reserve calculated on the most pessimistic basis of £9.7 million)).
33. Secondly, the financial context. There are four points:

(a) As a matter of general principle, one would expect that if a risk is being undertaken there would be a financial provision against that risk. No provision was made in Mandrake's accounts (even that recommended by the ICAEW Technical Release of January 1995) for the liabilities generated by the active review on for the proportion of non-priority cases where pension purchasers were themselves likely to seek redress (see clause 5.6.3 of the agreement). Holdings was therefore acquiring a company with inbuilt liabilities that were not reflected in the purchase price it was paying. This would be understandable to an objective outsider if either the terms of the acquisition provided for these liabilities to be substantially covered by the vendor or it was apparent to him that the potential liabilities are so unlikely to eventuate that the risk need not be reflected in the price or was adequately covered by transferred assets. In the instant case however the need to make provision beyond that generated by the active review was a commonplace in the industry, and Mandrake's free assets were either stripped out (by way of dividend) or utilised in the acquisition itself. Moreover, the non-priority cases were the very cases where insurance cover was least likely to be of benefit. If potential liabilities to non-priority cases within the existing review are not covered by the Pensions deed it would seem to follow that the board of a listed company had intended to divest itself of ultimate responsibility for redness to a recognised class of potential claimants (for whom provision ought to have been made in its subsidiary's accounts), leaving those claimants to look to the subsidiary whose free assets were absorbed in the disposal process itself and which had limited effective insurance cover (or to look to industry-wide compensation funds). That is of course possible, although I do not think it probable.

(b) It would also mean that as soon as the transaction completed Mandrake's accounts (prepared for the sale) would fail to comply with the applicable standards (particularly the guidance contained in the ICAEW Technical Release) because they contained no provision at all for non-priority cases (whereas they should have provided for the costs of investigation and the costs of redress to those investors likely to claim) (compare the provision made by Hambro). Again, such a deliberate breach is possible, although I do not think it probable.

(c) Not only was the misselling provision removed from Mandrake's accounts it was instead put into the group accounts (as Mr Nower of Countrywide explained). This provision (of £250,0000) was not only for priority cases but (in accordance with the ICAEW guidance) extended to anticipated claims from non-priority cases. If Countrywide was not exposed to claims in respect of non-priority cases it would seem to follow that the board was making provision for a risk to which Countrywide was not exposed. Again, that is of course possible; but again I do not regard it as probable.

(d) The transaction was structured in a manner that required Mandrake to give financial assistance to Holdings, and was so structured by the choice of Holdings and Countrywide. Mandrake could not give financial assistance unless its directors took the view (supported by an auditor's certificate) (i) that there could be no ground on which the company could then be found unable to pay its debts and (ii) that the company would be able to pay its debts for the ensuing 12 months. The pro forma balance sheet prepared by Countrywide for the purposes of this exercise contained no provision at all against pensions misselling liability, either in the next 12 months on over any longer period. For reasons explained below this suggests (i) the existence of an unqualified indemnity from a third party against all the pensions misselling liabilities, or (ii) a view that there were no real pensions misselling liabilities of which proper account needed to be taken or (iii) a view that there were no significant pensions liabilities not covered by any qualified indemnity. Option (ii) can be excluded. Given the SIB Press Release of 16 January 1996 option (iii) seems less likely than option (i).

34. Thirdly, the range of the agreement. It is clean that the draftsman understood the scope of the review and Countrywide's interest in seeing that it was properly completed. The deed imposed obligations on Mandrake in relation to the review (not simply the active review) in clauses 1.1, 1.2 and 1.5. Clause 4 granted a power of attorney in relation to all matters referred to in the deed (not simply the conduct of the active review and the settlement of claims arising therefrom). One would objectively expect the rights and powers of Countrywide under the deed to bear some relationship to its liabilities under the deed. One would not expect Mandrake to promise Countrywide to conduct the review in accordance with the future requirements of the SIB if the conduct of the review and its outcome was of no consequence to Countrywide. One would not expect Countrywide to have insisted upon a power of attorney in relation to the conduct of claims where the liability for the claim rested with Mandrake and was of no consequence to Countrywide. (Although I have approached this is a matter of theoretical analysis, it is in fact a very real problem in the present case: there is a number of specific cases, identified in the pleadings, in which Countrywide has conducted a claim, has admitted liability to the claimant (in the face of opposition from Mandrake, which has asserted that there is no causal link between their alleged misselling and the losses claimed), and now says that Mandrake is liable for the admitted amount).
35. Fourthly, the structure of the deed. If the object of the pensions deed was to secure that Countrywide indemnified Mandrake against the pensions liability arising under the active review in the form current at 1 March 1996 (so far as covered by insurance) it is difficult to understand why it did not simply say so. Instead, clauses 2.1 and 2.2 contained a broadly worded obligation from which clause 2.3 then excluded certain types of investor and certain types of liability. This suggests that Countrywide was accepting responsibility for the liabilities created by pensions misselling, save for some clearly identifiable cases. In essence, I think these excepted cases were where the potential liabilities were clearly unlikely to eventuate, and the risk could prudently and properly be borne by company like Mandrake, eg the self-employed (where an occupational scheme was not an alternative), on rebate-only SERPS cases.
36. Mr Soole QC made two arguments on the structure of the deed. First, he said that it was important to understand that clause 2 contained not a promise by Countrywide subject to exceptions but a qualified promise: and he submitted that this altered the burden of proof. For the purposes of construction I do not think that it matters which categorisation is connect. There is no burden of proof on questions of construction: there is a burden of proof in relation to the facts necessary to establish whether a case falls within or without a provision properly construed, but that is not the issue in this case. Secondly, he submitted that the initial promise (whether it was to be regarded as subject to exceptions or qualifications) was not as wide as its literal wording would suggest: he submitted that where clause 2.2 refers to ' a liability suffered..,, to the extent that it arises from the transfer of a person's night or entitlements under any pension' it was really referring to the transfer of night on entitlement under 'any occupational pension'. This submission required him also to submit that substantial parts of clause 2.3.1 were in fact otiose and had been incorporated by way of 'belt and braces', eg clause 2.3.1 which excepted (or qualified the promise in relation to) self-employed persons (who, on the suggested reading of clause 2.2, would never have been within the scope of the original obligation). I do not see the need to read clause 2.2 in this restricted way, and have held that it imposed a broad obligation, the subject of the exceptions or qualifications contained in clause 2.3. In my view each part of clause 2.3 was intended to have a real function, each sub-clause removing a particular description of investor as a claimant against Mandrake for whom Countrywide accepted responsibility. As against that, it must be acknowledged that the draftsman did not succeed in creating discrete categories of exclusion, and there is overlap.
37. Fifthly, the language of the sub-clause, Although for the purpose of exposition I have placed this factor here, the language is of course the starting point, and it has been where I began the formulation of my view. There are a number of points (not all tending the same way).

(a) The language is obscure. The words to be construed are part of a sub-clause that provides 'The expression "Pension Liability" shall not include any liability of the Company where the investor or investors claiming fall into any one on more of following categories ... Any person not falling within a class ... or category requiring investigation …' The category of persons to whom no liability is owed is defined by reference to the exclusion from some other category (rather than by their possession of a positive or negative attribute, as is the case with the other sub-clauses). This should warn against an over literal approach.

(b) Clause 2.3.1.6 removed as a potential claimant a person who did not fall within a 'class of business or category of investor requiring investigation'. On one reading (favoured by Mr Lowe) an investor who fell within 'a class of business.., requiring investigation' would not be removed and would remain within the scope of the broad obligation, as would an investor who fell within a 'category of investor requiring investigation'. Each satisfied one of the alternatives ('or' being used disjunctively). On another reading (favoured by Mr Soole QC) if it could be said of any given person either that he did not fall within ' a class of business' or that he did not fall within 'a category of investor' then that person would be removed as a potential claimant, 'Or' is being used conjunctively. I incline to the view that as a matter of literal construction Mr Soole QC is probably right. Not too much weight can be placed on this, given the obscurity of the entire clause: and, of course, it is still necessary to define 'category of investor', because the expression does not necessarily mean 'priority case'.

(c) The relevant category or class is one requiring 'investigation'. This word is apt to describe both the process of review and the process of active review. In all cases of pension transfer and opt-out business transacted between 1988 and 1994 fact gathering had to be undertaken to see whether they were to be the subject of active review. If the intention had been to confine the clause only to the priority cases and the 'write-ins' one might have expected the draftsman to use a much more precise term such as 'requiring redress'. Mr Soole QC submitted that if 'investigation' is given such a wide meaning then the entire client database would be within the scope of the clause because in some sense that database had to be 'investigated' in order to ascertain the eligible population. I do not agree. What is to be 'investigated' is not the client database but' any class of business' or ' any category of investor' according to the published recommendations of SIB, so it is known what they are before process of 'investigation' begins.

(d) The expressions 'class of business' and 'category of investor 'are not themselves clean. The former may refer to personal pensions and the s 226 retirement annuity contracts and s.32 contracts entered into within the 'window' defined by the SIB and PIA. The 'category of investor' in that case would refer to persons who were eligible to join an occupational pension scheme but who opted out, or did not join or (being members) transferred existing entitlements in order to effect the 'class of business' with which the review dealt. This is substantially the meaning for which Mr Lowe would contend, Its consequence is that someone who bought a personal pension but opted out of an occupational scheme to do so was required to be 'investigated', ie subject at least to the fact-finding exercise and so was not excluded from indemnity by clause 2.3.1.6. On the other hand, the 'class' of business might mean 'pension transfer and opt out business' and the 'category of investor' might mean the priority cases who were required to be 'investigated' (in the sense of compliance being tested, causation established and redress assessed). This is substantially the meaning for which Mr Soole QC would contend. Its consequence would be that someone who entered into 'opt-out business' with Mandrake but who was not in a priority category would be excluded from the indemnity by clause 2.3.1.6. I say 'substantially' in the case of each argument because there are almost endless refinements and variations, drawing on different parts of the SIB and PIA guidance and process maps. My preference is to take Mr Lowe's approach (which has some resonance with the language of Recital (C) to and clause 1.1 of the deed ('advice in relation to pension products since 29 April 1988' and 'that part of its business relating to the sale of pension policies')).

(e) Mr Soole QC argued that if the paragraph bone the meaning suggested by Mr Lowe then it really added almost nothing to the other provisions of sub-clause 2.3, and that the only way of giving it real content was to attribute the meaning for which he contended. I do not agree. His own argument renders almost all of clause 2.3 otiose, and he was constrained to acknowledge that it amounted to 'clarification'. The clause as interpreted by Mr Lowe would I think exclude from indemnity those who had opted or transferred into schemes (so oddly included in the general obligation), those who were not eligible to join an occupational scheme, and pure defined contribution (money purchase) schemes, for example.

(f) Some weight must be given to the words 'published recommendations at the date of this deed'. This is an indication that the parties were intending to draw a line (and it contrasts, for example, with the requirement in clause 1.1 that Mandrake shall complete the review in accordance with the requirements of the SIB 'as published from time to time'). Mr Soole QC would draw the line between Phase 1 and Phase 2, between the priority classes as defined in the then current guidance, and the re-assessment promised in the January 1996 press release. Mr Lowe would say that since the published guidance had never sought to draw a line within the opt-out/non-joiner/ transfer group, but only to establish priorities within that group (contemplating the development of further categories) the only line drawn was between the opt-out/non-joiner/transfer group (who were within the scope of the review) and purchasers of FSAVCs, EPPs and other products (who were not). Looking only at the language and structure of the deed, I would have favoured the argument of Mr Soole QC. But there is, of course, a broader context.

(g) Clause 2.3.1.6 has to be considered in the context of clause 2.3.1.7. The latter excluded persons whose claim had not been notified to the insurance agents on or before 30 May 1995. This was the last date for notification of claims arising in the policy year 1994/1995. Mandrake quite plainly bore the risk of having to make redress in case where there had been no notification. There was no provision in its accounts for such risk. That is explained by the confidence that Mr Pirie felt that he had duly notified all relevant claims. This is embodied in clause 3.1 of the deed which contains a warranty that ' all persons who intimated or were likely to intimate a claim in respect of a Pension Liability were duly notified', It would in those circumstances be slightly odd if (supposing a non-priority claim to exceed the policy excess) the effect of clause 2.3.1.6 was to make Mandrake assume the total cost of redress, even though cover (subject to excess) was available under Countrywide's policy.

38. Trying to discern the true meaning of the deed from these clues, and reminding myself that my task is to ascertain the reasonable meaning of the agreement that the parties have made, not to make a reasonable agreement for them, I have concluded that the deed is not confined in scope in the manner suggested to the priority classes in Phase 1 together with 'write-ins'. In my judgment it extends to all pension opt out/non-joiner and transfer of business transacted between 29 April 1988 and 30 June 1994 other than those who were self-employed, were not eligible to join an occupational pension scheme, were members of group personal pension schemes, were 'rebate only' or (though this was not the subject of detailed argument) were members of defined contribution schemes.
39. The matters that have most influenced me to this view are:

(a) the industry-wide knowledge of the risk of claims from non-priority classes of investor (emphasised in the ICAEW Technical Release and in the SIB Press Release);

(b) the absence of any clear language in the deed allocating that risk to Mandrake (the structure of the deed being the assumption of a broad obligation by Countrywide which is then qualified or made subject of exceptions);

(c) the use of language which is no less consistent with the meaning for which Mandrake contends than it is with the meaning for which Countrywide contends;

(d) the financial context;

(e) the imposition of obligations on Mandrake in relation to and the granting to Countrywide of control oven claims by investors to whom (on Countrywide's reading) it was not liable;

(f) the provision of financial assistance by Mandrake to Holdings with the active participation of Countrywide, being dependent on prospective liabilities either not existing or being covered by an indemnity.

These are the principal features: I am sure that the other matters which I have noted above have contributed to the overall understanding that I have gained from scanning the language of the document and the context in which the transaction occurred.

40. I will therefore make a declaration in the form that the parties agree to be appropriate in the light of this judgment..
41. Since this is my conclusion Mandrake's alternative case and some of the issues raised in the Counterclaim do not arise for adjudication (though further arguments may anise as indicated at the outset the judgment).
42. But I should proceed to record my findings of fact in the event in my legal conclusion is shown to be wrong. In that event, Mandrake's alternative claim to rectify the deed would have to be addressed. In approaching this evidence I remind myself that for a claim to rectification to succeed it must be established by convincing evidence:

(a) that the parties reached an agreement other than that embodied in the written document properly construed;

(b) that there is an outward expression of their accord;

(c) that their agreement continued up until the day the formal document was signed.

With that approach in mind I will state my conclusions, recognising that there is a real difficulty in so doing. I have formed a view as to what the true meaning of the document is: for the purposes of this exercise I must set that view on one side, and consciously avoid approaching the evidence with a predisposition to find that it supports what I consider to be the true legal meaning.

43. Both Mr Pirie and Mr Pritchard were straightforward witnesses doing their best to recollect a short period of intense activity nine years ago. Within their generally reliable testimony were occasions when I considered that each of them could not distinguish between actual recollection and a belief (coloured by hindsight) that matters must have been as they 'recollected' them (Mr Pritchard more than Mr Pirie). Further, each of them told me (in answer to Mr Soole QC's carefully structured cross-examination) what 'must have been' in their minds at various stages of the evolution of the draft documents. This evidence I did not find of assistance. I feel quite unable to rely on a nine-year-old recollection, unsupported by any documents, of what was the initial or considered reaction to a particular change in the detail wording of part of a document presented in a period of intense negotiation (though I do not blame Mr Pirie or Mr Pritchard for trying to answer the questions). But they convinced me in their evidence that it was always their understanding that Countrywide would provide them with an indemnity against the pension liabilities arising from the review, and that the risk they were undertaking was confined to the classes of business outside the scope of the review (EPPs, FSAVCs and so forth). If a claim arose from a class of business within the scope of the SIB review (whether as a result of the then current active review of certain priority categories of investor, or any revision or expansion - the possibility of which had been signalled by the SIB) then Mandrake was protected. As Mr Pritchard pointed out, it was all about cash flow: Countrywide had taken all the cash out of Mandrake, and Holdings was going to be operating on a £50,000 overdraft. So obtaining indemnities against prospective liabilities was from their perspective something of great importance.
44. Mr Soole QC mounted two lines of attack to dissuade me from this conclusion, The first was that Mr Pirie regarded the whole risk (even under the current active review, let alone under any development) as extremely small, and it was one that he was prepared to take. The second was that after the deed had been entered Mr Pirie gave indications that he did not think the deed covered anything other than the then current active review. These deserve a detailed answer.
45. Was the risk in fact seen as small by Mr Pirie and Mr Pritchard? The review required by the SIB/PIA was of course well under way before the sale of Mandrake arose. A 'Pension Review' document prepared in early 1995 shows that in the relevant period Mandrake sold 5,375 pensions (of which 943 were not in any relevant class of business). The remaining 4,432 were either potential 'opt-out'/'non-joiner' cases on 'transfer' cases. Further investigation had shown that were 765 'transfer' cases, of which only 24 fell within the priority categories. The balance of 3,667 were people who had taken a personal pensions and were therefore potential 'opt-outs' on 'non-joiners'. Further investigation had shown that 2,946 were outside the scope of the review altogether (because for example they were self employed). That left 721 cases. In relation to those, 704 letters had been written (there was a discrepancy there which required further investigation but is not material to the exercise I am undertaking). At the time of the 'Pension Review' document this had produced 20 further cases for investigation out of 464 responses. There were thus 44 (the document says 43) 'opt-out'/'non-joiner' and 'transfer' cases for active review. There were some 741 'transfer' cases and 444 'opt-out'/'non-joiner' cases that might have to be revisited if the scope of the review changed. In reporting to the insurers Mr Pirie assessed the risk as 'minimal'. He estimated Mandrake's exposure to the 20 'opt-out'/'non-joiner cases' to amount to £106,000. As to 'transfers' he expressed the belief that there was 'a minimal risk of [Mandrake] having problems with [its] pension transfers'. The total value of the funds transferred was £423,000, and Mr Pirie appears in November1995 to have recommended a provision at 4 per cent of the fund value, ie £17,000.
46. There seems to have been no significant shift from these figures throughout the negotiations for the purchase of Mandrake, though there was further analysis of why the priority category was small, Thus of the 440 potential 'opt-outs'/'non-joiners' it could be shown that 315 could be excluded because there was no occupational scheme that they were eligible to join or because they were self-employed. But that left 125 excluded essentially because they did not fit the profile of the priority cases.
47. In fact in February 1996 Countrywide/Hambro Assured prepared its own 'PTA Pension Review Cost Model' for Mandrake in which it reserved (in compliance with the professional guidance issued) for both priority and non-priority cases. For 'opt-outs'/'non-joiners' the reserve figure was just under £200,000, and for 'transfers' the reserve was just under £170,000. Crucially in each case more than half of the reserve (about 60 per cent) was attributable to non-priority cases. By the time administrative charges for consideration of the potential claims was added the total provision exceeded £555,000.
48. When Mr Pritchard gave instructions to the solicitor acting for himself and Mr Pirie in the acquisition he stated: 'contract to include retention by [Countrywide] of the liability for pension transfers opt-outs and non-joiners'. I have no doubt that that was his intention, and remained his intention. He told me in oral evidence that although Mr Pirie's view was that the exposure was about £100,000, in his view the potential claim was £5 million. This large figure is not supported by any indication in the documents, nor (crucially) was it mentioned when Grant Thornton came to consider the potential liabilities of Mandrake in the context of the provision of financial assistance; and though honestly given I consider that this evidence is a false recollection coloured by hindsight. Nor do I feel able to accept his evidence that Mr Nower of Countrywide had said to Holdings' solicitor that Countrywide's concern was not to be caught by any additional product that the SIB decided to review, but would otherwise accept all liability under the SIB review. (This evidence was not supported by the documents or by Mr Pirie; it is, I think, coloured by hindsight.) What I do accept (as I have indicated) is Mr Pritchard's evidence that he thought Countrywide was taking responsibility under the SIB review, that they knew how to handle it, and that he did not understand Countrywide to be trying to limit its liability: and that a broad indemnity was important given Mandrake's limited cash resources.
49. Mr Pirie's evidence was to the effect that he was very aware that there were non-priority cases for which provision would have to be made: and that he thought he had an unqualified indemnity. He said that 'one of the major financial keys was that the pensions liability was removed: we had at the time of the purchase no room for manoeuvre'. Mr Pirie told me that the fact that he had estimated liabilities of one type at £100,000 did not mean that he regarded that as the limit of exposure under the whole review (in the context of looking for indemnity). He said that in reporting such figures to the insurers he was assessing 'the immediate loss, the direct figures [he] could predict'. He said that he was still building a model to predict the total losses from the whole review. However, the PTA had expressed the view that too many investors were being excluded on the grounds that there was 'no causal link', so that such cases were really only temporarily closed and were the subject of re-review: 'they were all sitting there as potentially redressable. On the known facts the position was not too bad. But there were 'potential facts' which made it much more serious'. At another point in his evidence he said:

There is a difference between a short-term problem (head down and working out the figures) and the answer to the question 'What do I need to protect myself?'.... it is dramatically different... a different mindset..., looking at the risk from a different perspective …

50. I would accept Mr Pirie's evidence that he did not think the risk was so small it could be ignored and that he thought he had an unqualified indemnity (in his view essential to the success of the purchase), both because it was given on this issue in a convincing manner, and because it is supported by the following considerations:

(a) An indemnity against the future risk inherent in the SIB/PTA review was the obvious thing to ask for. In a note dated 30 November 1995 prepared by Mr Gunn for consideration by the Countrywide board he comments in relation to another bidder for Mandrake he made it clear that he is looking for protection against the upside risk on pensions compensation (he'd be an idiot not to!) … Mr Pirie may have been keen to purchase and confident of his past management, but he was not an idiot.

(b) It seems clear that such an indemnity was sought by Mr Pirie. Mr Wylie (the Corporate Finance Manager of Countrywide) prepared manuscript notes of a meeting held in early December 1995: under the heading of 'Pension opt-outs etc' Mr Wylie records '[Mr Pirie] suggests [Hambro Assured] should take this on. We would keep the pensions problem'. When Mr Pirie's bid was made on 18 January 1996 it was supported by an offer of finance (with which Countrywide was provided) which made it a condition of the loan that the acquisition should include' confirmation from [Countrywide] that they will indemnify the new company for all 'bad' pensions advice and liabilities resulting from pension transfers and opt outs up to and including the date of purchase'. Countrywide did not indicate that this was a false basis on which to proceed.

(c) The acquisition of Mandrake by Holdings involved Mandrake in giving financial assistance to Holdings (both because Mandrake was lending Holdings a sum equivalent to the debt owed to Mandrake by Countrywide, and because Mandrake was granting changes over its property effectively to secure the deferred consideration due from Holdings to Countrywide). This would only be lawful if the directors made a statutory declaration that they had formed the opinion that immediately following the date on which the assistance was to be given there could be no ground on which Mandrake could then be found unable to pay debts, and that Mandrake would continue to be able to pay its debts as they fell due during the immediately following year. Mandrake's balance sheet contained no provision for any pension liabilities. Any opinion that an immediate or contingent pension liability could be met by Mandrake was therefore wholly dependent upon an indemnity from Countrywide in respect of pension liabilities then due or becoming due within the next 12 months. If Countrywide's indemnity extends to all classes of business within the scope of the SIB/PTA review (whether within or outside the then current priority classes) there is no difficulty. If the indemnity is confined only to priority classes at the date of the transaction the directors would have had consciously to form the view that either (i) there was no risk of amendment to those priority classes or (ii) that any liability that eventuated from amendment was otherwise covered (eg by insurance cover made available by Countrywide). Since it seems to have been the common understanding that any amendment to the priority classes would bring in claimants for whom insurance provided only very limited cover, the latter is extremely unlikely. As to the former, the risk of amendment to the priority classes was well recognised (indeed in the very middle of these negotiations on 16 January 1996 the SIB issued a press release saying that it would review the position later in 1996): and there is no hint in any of the documents that the risk was addressed by the directors (or more crucially, the accountants providing a certificate under section 151). This might be oversight but I think the more likely explanation is that everyone on the Mandrake side believed and intended that the indemnity should cover the possibility. Certainly Mr Brockway of Grant Thornton (who was advising Mr Pirie) conducted an overview of the transaction on 15 February 1996 and identified that the personal pension liabilities should be retained by Hambro and not transferred to Holdings. The documents show that this was confirmed to him by Countrywide, and do not show that it was thereafter qualified in any way.

(d) Mr Pirie's view of the size of the liability to the priority classes is not really that significant. Mr Soole QC submits that because Mr Pirie thought the known liability was small he was therefore prepared to run the risk of the potential liability. But on any view he obtained an indemnity against the known liability. If he insisted on an indemnity against a known liability on which he placed a small value, why should he take a different view about a potential liability (even on the hypothesis that he also placed the small value on that)?

51. Whatever Mr Pirie thought about the size of the known liability to the priority classes, that matter does not dissuade me from accepting his evidence that he wanted his potential liability covered. His position did not change at all right up to the signing of the deed. As Mr Pirie put it:

Nobody said that something was being removed from what we had agreed. I took the minor alterations as tidying up. There is no way we would have accepted a reduction in Countrywide's total liability I cannot see the legal nuances. [The drafting] was all to make legal sense and to embody the concept that never changed.

52. I therefore turn to the second line of objection. Do Mr Pirie's post-transaction dealings undermine the credibility of this evidence? In 1996 Mr Pirie sought to obtain replacement professional indemnity insurance (because he was held under temporary cover on the Countrywide policy until renewal). His initial position was the Countrywide would be bearing the loss. On 26 April 1996 he wrote to potential insurers:

All final loss assessments etc will be carried out by Hambro at their cost and any ensuing losses coming from any of the 700 plus cases listed will be met in the future by Hambro. I enclose that portion of the sale agreement that relates to pensions … [this was the deed].

This appears to be a reference to the 756 clients with whom contact had been made as part of the active review, rather than reference to the eligible population which was subject to the review. Much of the subsequent correspondence was conducted with a similar focus. Mandrake obtained an endorsement. They were covered:

in respect of those cases for which the Insured are liable as outlined in an agreement between [Countrywide] and [Mandrake].

When Phase 2 of the SIB review started Mr Pirie contacted his insurers. The Phase 2 review had thrown up an additional 858 cases to those in the original priority classes that had been actively reviewed. The insurers made a note that Mr Pirie felt that 253 of those would be covered by Countrywide's insurers, and a further note that Mr Pirie 'would be going to see Hambro's in the next couple of weeks to discuss their reviewing of his phase two cases that were not encaptured within the agreement'.

53. Mr Soole QC pressed Mr Pirie in cross-examination to accept that this demonstrated that he understood that under the deed Mandrake was left with liability for everything except the priority cases (and non-priority cases that had requested a review). Mr Pirie declined to accept this and expressed his amazement at the terms of the insurers note. He said that his objective had been to obtain insurance cover for any possible exposure, and that he felt his real concern had been to exposure under clause 2.3.1.7 of the deed (failure to notify). I accept his answer. The terms of the correspondence do not disclose any consistent view. All that is clear is that Mr Pirie was trying to obtain insurance cover against the risk that Mandrake might in some circumstances have some liability no matter what the deed said. When the Phase 2 claims arose he brought a claim on the policy. That does not surprise me. I certainly do not treat it as an admission that Countrywide was not liable for Phase 2 claims under the deed. Mr Pirie was simply seeking coven (under the Countrywide indemnity or under his professional indemnity insurance) wherever he could get it. This does not cause me to reject the evidence of Mr Pirie and Mr Pritchard as to their belief that the indemnity in the deed covered them.
54. The final post-transaction conduct with which Mr Pirie was pressed was his failure immediately to challenge Countrywide's assertion that they were not liable under the deed for Phase 2. Countrywide's view was unequivocally put in a letter dated the 26th of June 1998. Mr Soole QC challenged Mr Pirie with the failure to respond inviting him to accept that the absence of the response was attributable to the absence of an answer. Mr Pirie declined to accept this, saying that he did not respond because he thought that the letter was 'a try-on'. Although the answer was not wholly convincing (and I was left with the impression that Mr Pirie's real response was to bury his head and hope that the problem would go away), this post-transaction conduct does not cause me to reject the evidence that Mr Pirie and Mr Pritchard as to their belief that the time the transaction was entered.
55. Because I am clear that both Mr Pirie and Mr Pritchard believed that they had an unqualified indemnity the focus of this part of the case was for me whether those negotiating on behalf of Countrywide (and the organs of Countrywide that under its constitution authorised the entry of the transaction) shared that belief, on knew that it was the belief of Holdings and took unconscionable advantage of the mistake.
56. My findings on this aspect are as follows:

(a) Countrywide made a strategic decision to rid itself of Mandrake. The alternative it faced was either to sell Mandrake or to close Mandrake down. Mr Nower of Countrywide acknowledged that if the latter option was taken Countrywide would have been bound to accept liability for all pensions misselling. He said: 'They were creditors, and we would have felt duty-bound, so we would not have wound up without ensuring that the creditors were paid off.' Mr Wylie of Countrywide acknowledged that the sale of Mandrake could either have been an asset sale (explored at one stage, but prevented by the PTA) or a sale of shares. If the sale had been an asset sale Countrywide would have been left with the liability for all pensions misselling. There was a degree of inevitability about Countrywide retaining the pensions liability.

(b) From the outset Countrywide knew that potential purchasers would be looking for an indemnity against pension liabilities arising from pre-completion activities. I have already remarked upon Mr Ben Gunn's note of the Redwood bid: Mr Wylie also noted that they would want '100 per cent cover for pensions liabilities up to completion'. I have also noted Mr Pirie's requirement that the commencement of his negotiations that '[Countrywide] would keep the pensions problem'.

(c) On 3 January 1996 there was a meeting of the key management team at Countrywide in relation to the Mandrake disposal. The proposed purchasers were other members of the management team at Mandrake (a rival bid to Mr Pirie's). Mr Nower stated that Countrywide 'would be prepared in principle to take on the historical liabilities for pension transfer compensation'. He went on to consider what control Countrywide could exercise over the conduct of the claims to keep down the liability under the indemnity. One possibility was that Countrywide could take over the administration of all claims. This was the alternative adopted on the disposal to Holdings. Control over and liability for claims went hand-in-hand.

(d) On 18 January 1996 Mr Pirie and Mr Pritchard made their bid (including the terms of finance which I have noted). Following that Countrywide prepared an analysis of the offers. Countrywide's understanding of the offers was recorded in these terms:

All liabilities for compensation/rectification costs as a result of misselling or bad advice, as defined by current PIA rules and/or guidance, on individual pension contracts (of all types) issued up to completion to remain with [Countrywide] It is further agreed that Mandrake will undertake all mailings to potentially 'at risk' current or ex policy holders as specified by current PIA regulations … Once the response is received from a policyholder indicating any possibility of misselling or bad advice [Mandrake] will immediately forward the entire case file to [Countrywide] who will at that time take total responsibility and management of the case and all costs associated with the case … For the avoidance of doubt [Mandrake] will bear responsibility for any misselling on policies issued after completion - however any claims that have already risen or may arise in the future on policies issued prior to completion shall be the sole account of [Countrywide].

I find (principally upon the basis of that last clause, but also upon the language of the first clause) that no one at Countrywide was at that stage drawing a distinction between the review and the active review, or focusing on priority cases.

(e) On 19 January 1996 there was a meeting between Mr Nower and other members of the Countrywide team on the one hand and Mr Pirie and Mr Pritchard on the other. A note of the meeting records the issues discussed 'in order of priority'. The second was under the heading 'Pensions'. It records an agreement that Hambro Assured should take on 'all responsibilities and benefits from the pensions side of the business'. Mr Soole QC said this related only to the administration of claims and how the costs were to be borne. But that hardly accords either with the language or with its status as the second most important issue discussed. I consider that it records an understanding that the claims liabilities of the pensions business were to remain with Countrywide/Hambro Assured, A further issue (ranked number seven in the record) concerned professional indemnity claims. Countrywide accepted liability for claims 'made up to the date of the sale and no further': I consider that this relates to claims other than those arising from pensions claims (which had earlier been dealt with, and where the relevant professional indemnity policy was a 'circumstances notified' and not a 'claims made' policy).

(f) On 22 January 1996 heads of agreement were settled upon and (after approval by Countrywide's board) signed. Only two clauses (the lockout agreement in clause 4 and the confidentiality obligation in clause 5) were intended to have legally binding effect. The remainder had the status accorded in the preamble which stated: 'These heads of agreement set out the basis of a transaction to be negotiated in detail they are subject to contract and are not legally binding ...' Clause 2 (not binding) provided the parties should enter into a sale and purchase agreement under which '[Countrywide] will indemnify [Holdings] from and against any liability for pension transfers, opt outs and non joiners arising from business written by [Mandrake] prior to completion'. I would hold that these heads of agreement are an outward expression of accord as to the key terms of the transaction. I would further hold that the indemnity for which provision is there made is not one confined to the priority classes. I would finally hold that the outward expression of accord itself recognises that the transaction is to be negotiated in detail, so warning that the final formal agreement may not exactly replicate the key terms and that the intention of the parties as expressed may alter in detail. In approving the heads of agreement the board directed that enquiry should be made of Countrywide/Hambro Assured's actuary as to 'the liability (as we know it) that we are assuming'.

(g) Because Mandrake was providing financial assistance to Holdings it was necessary for a directors' declaration of solvency to be supported by an accountant's certificate; KPMG (Countrywide's accountants) felt unable to supply this because of a potential conflict of interest. Accordingly on ₁₉th February 2006 Grant Thornton's Mr Brockway contacted Mr Wylie of Countrywide for 'confirmation of Hambro indemnifying potential pension claims'. Mr Wylie responded that: 'Countrywide will assume liability relating to pensions business written prior to completion, under the SIB review. The terms of such indemnity are being drafted as a side agreement to the sale and purchase agreement.' When this response was put to him in cross-examination Mr Wylie acknowledged that Countrywide was accepting all liabilities 'as we knew them to be' and that he did not know that there were any additional liabilities. I find that at that stage Mr Wylie probably had no exact conception of what liability 'under the SIB review' would be, that he had in mind no specific restriction (in particular, there was not present to his mind the specific exclusion of non-priority cases), and that he was looking to the terms of the indemnity as drafted for the definition of the final liability.

(h) Also on 19 February 1996 Mr Wylie wrote to Countrywide's accountants explaining that '[Countrywide] will assume liability related to pensions business written prior to completion under the SIB review.' In relation to this I would again find that Mr Wylie probably had no exact conception of what liability 'under the SIB review' would be, that he had in mind no specific restriction (in particular, there was not present to his mind the specific exclusion of non-priority cases), and that he was looking to the terms of the indemnity as drafted for the definition of the final liability.

(i) Countrywide was to handle the claims against Mandrake and was arranging for Hambro Assured to do the case handling. On 20 February 1996 Hambro Assured wrote providing terms of reference 'for handling Mandrake's priority cases as agreed in our meeting yesterday' (emphasis supplied). So far as I can see this is the first suggestion that priority cases should be singled out, but I cannot determine whether Hambro Assured misunderstood Mr Wylie at the meeting or whether Mr Wylie had on that occasion said something to indicate a belief that only priority cases were relevant.

(j) On 25 of February 1996 Countrywide's solicitors sent a first draft of the deed to the solicitors acting for Holdings. Its structure was essentially the same as that ultimately adopted, but the following differences should be noted. First, the obligations in clause 1 of Mandrake and Holdings to continue with the SIB review were far less elaborate (being only those found in clause 1.1 of the final deed). Secondly, the Pensions Liability was at this stage to be confined to 'any one or more of the persons listed in the Schedule', ie to an identified class each member of which could be named. There is no draft Schedule, but clause 3.1 of the draft makes it clear that the Schedule was to be a list of names notified to the insurers of investors who had intimated on were likely to intimate a claim. This proposal was abandoned in the deed. Thirdly, clause 2.3.1.2 excluded all persons contracting out of SERPS; but the deed brought back in those who did so 'in conjunction with leaving, joining or transferring benefits from an occupational pension scheme'. What eventually became clause 2.3.1.6 was already in the deed (albeit differently numbered).

(k) On 28 February 1996 the Hambro Assured actuary sent to Mr Wylie at Countrywide his estimate of the liability was being assumed under the indemnity pursuant to the request that I have noted that sub-paragraph (e) above. The precise figures do not matter. What is of importance is that 60 per cent of the provision relates to non-priority cases. This is of course not surprising, for the actuary was simply following the professional guidance in relation to what he thought he had to do (namely, estimate a provision). So I draw no inference that Mr Wylie instructed him to include non-priority cases. There is no indication that Mr Wylie regarded this report as odd (as he might have done had he believed that non-priority cases were excluded from the scope of the indemnity). But no conclusion can be drawn from this because on the same day Hambro Assured also sent their Terms of Reference for administering claims which quite plainly stated that they would 'provide support to process cases identified by Mandrake as being inside the current SIB priority tranches' but that they would 'not project manage or administer any cases falling outside the current SIB priority tranches'. This does not seem to have been queried by Mr Wylie either.

(1) Although it is possible to trace the course of the amendments from the first draft to the final deed I do not think it is possible to draw any relevant conclusions of fact, I do however note that the draft deed was submitted to the agents for Countrywide's insurers and was on 1 March 1996 specifically approved by them.

(m) The transaction completed on 1 March 1996 simultaneously with the entry of the Sale Agreement. Clause 8.8 provided that the agreement' [superseded] any heads of agreement or letters of intent entered into between the parties before the date thereof all of which [were] thereby terminated by mutual consent and [should] be of no further effect'. Mr Soole QC submitted that this rendered the heads of agreement incapable of operating as an outward expression of accord for the purposes of the doctrine of rectification. I do not agree. In the present case (I say nothing of others) so far as the heads of agreement had imposed legally binding obligations, those obligations were of no further effect on completion. The heads of agreement survived as an expression of intent at the time they were made. But the deliberate inclusion of a term that the heads of agreement had been superseded by the formal agreement places very great difficulties in the way of a party who asserts that an the intention expressed in the heads of agreement continued until the execution of the formal agreement (if the formal agreement properly construed does not embody that intention).

(n) On 7 March 1996 there was a meeting of the board of Countrywide. The minutes record that Mr Nower reported that the company 'had assumed liability for the exposure arising from the SIB mi-selling review for Mandrake'. A reference to Mr Nower's report shows that he was also reporting exposure in respect of 'SIB misselling review for both Hambro Assured and Premium Life'. In the case of the former the exposure under 'the SIB misselling review' included both priority and non-priority cases. From that language the board would not have understood (if Mr Nower intended) that the exposure in relation to Mandrake was different from the exposure in relation to Hambro Assured. Indeed the provision in Hambro Assured's accounts included a provision in respect of non-priority claims against Mandrake. This is, however, post-transaction evidence.

(o) On 15 April 1996 Mr Jim Gunn of Countrywide wrote a summary of the deed. His summary of clause 2.3.1.6 was that it excluded 'cases outside SIB priority groups as of 1 March 1996'. Mr Jim Gunn was not part of the negotiating team. His understanding appears to derive from his reading of the deed. I do not find that I can place reliance upon the summary as indicating the intention with which the deed was entered.

57. On the assumption that the deed does not have the legal meaning which I have found it bear (and that clause 2.3.1.6 effectively restricts claimants to those within the priority classes) then on these findings of fact I would hold that the claim for rectification has not been made out. There is insufficient convincing evidence to satisfy me on the balance of probabilities that those responsible for the negotiation on the part of Countrywide (in particular Mr Wylie) had any intention different from that embodied in the draft deed. Whilst the position that time of the heads of agreement seems relatively clear, thereafter there is no clear evidence that Countrywide intended to enter into any bargain other than one in terms of the drafts which their solicitors prepared. The detailed technicalities were not known to or considered by Mr Wylie or any other member of the Countrywide negotiating team. The mind of Countrywide was the mind of its draftsman and their intention is to be derived from the legal meaning of the words used in the document. Nor is there sufficient convincing evidence to satisfy me on the balance of probabilities that Countrywide must have known that Mr Pritchard and Mr Pirie and their solicitor were reading the agreement in a different sense from that which (on this assumption) it legally bore, and took unconscionable advantage of their mistake. If the board of Countrywide (on its delegates) had sat down and thought hard about the transaction from Holdings' side it might have occurred to them that (if clause 2.3.1.6 was confined to priority cases) Holdings was taking a real gamble that in the next 12 months the PTA would not revise its guidance so as to require pro-active review of non-priority cases (as had been hinted in the January 1996 press release): but there is no evidence that they did so. And if they had done so, Mr Pirie's conduct might well have led them to think that any gamble was based on an assessment that the chance of change was small and was underpinned by Mr Pirie's belief that in any event the exposure was minimal (Mr Pirie's view as to the difference in assessing immediate liabilities and in estimating the degree of protection required being unknown to them). But none of this actually happened. Mr Nower and Mr Wylie were no more reliable than Mr Pritchard and Mr Pirie in recalling (nine years after the event) what was their subjective intention in relation to forms or words devised by other professionals for them, nor was their recollection any less affected by hindsight than that of Mandrake's witnesses. But I am absolutely clean in my mind that they personally are not guilty of trickery or sharp practice or of taking unconscionable advantage of Mr Pirie.
58. On the assumption that my legal conclusion as to the meaning of the deed is wrong, I would not rectify it to bear that meaning.
59. That leaves one further matter to be dealt with: the counterclaim. I will deal with this extremely shortly. The counterclaim relating to the Phase 2 claims generally is dismissed as a consequence of my holding as to the true meaning of the deed. I would in substance dismiss the counterclaim (though it succeeds in two very minor respects).
60. Clause 2.3.1.7 of the deed excludes from the scope of indemnity 'any person whose claim was not duly notified to and received by [the insurers' agents]'. The policy was not in fact a 'claims made' policy. It was common ground that what required notification was circumstances out of which a claim might arise. Countrywide's counterclaim asserted that indemnity payments been made in respect of claimants (a) who had never been notified to the insurers agents at all or (b) who had not been duly notified.
61. There was little enthusiasm at trial for issue (a). Countrywide alleged three cases of non-notification: Mitchell (whose redress was £1); Rees (whose redress was £7,099); and Boustead (whose redress was £7,171). Mitchell was admitted not to have been notified. The counterclaim succeeds in respect of his £1. I find that Mrs Boustead was notified by Mandrake to the insurers' agents on 16 May 1995 (in response to the request of those agents for the names. of each opt-out or non-joiner client to whom a review letter had been sent). She had not in fact made a complaint to Mandrake but had directed her complaint to Countrywide. Notification would therefore have been their responsibility in any event, in all probability. I cannot in the evidence trace any notification by Mandrake of Rees; Mandrake has therefore not established that his claim was in the scope of the indemnity. The Counterclaim succeeds in respect of his £7,099. So the counterclaim succeeds in those two cases as to £7,100.
62. The 'due notification' argument is more serious, though comparatively little time at trial was addressed to it. What is 'due notification'? Because of the anticipated volume of claims the underwriters of Countrywide's policy prepared a modus operandi in June 1994. This provided that all claims and circumstances which may give rise to a claim were to be notified by Countrywide's subsidiaries to CE Heath. I hold that CE Heath were the appointed agents of the lead underwriters to receive notification. Whatever the detailed policy wording may have required, the lead underwriters did not need to be notified. I further hold that notification to those providing the primary layer of cover is sufficient notice to the providers of excess layers: see Friends Provident v Sirius Insurance [2005] EWCA Civ 601. If the party to be notified is CE Heath what (within the context of the deed) is 'due' notification? In my judgment it is notification in accordance with the terms of the policy as modified (if at all) by the modus operandi and the practices that had arisen under it. I do not think that the terms of the deed retrospectively required Mandrake to have adopted a different procedure from that which was in place before the deed was executed in order to obtain indemnity.
63. Notification of claims was the subject of consideration from time to time. On 24 February 1995 (within weeks of the policy year end) there was a meeting between representatives of Countrywide, CE Heath and the underwriters. The representative of the underwriters advised that they would need the names of pension holders or 'opt-outs', but that 'claims arising out of pension transfers and notified in general terms during the policy period would fall be dealt with under the 1994/1995 policy year'. The acceptance of notification in general terms (or bulk notification) was a commercial expediency, for it discouraged contact with individual potential claimants. Mandrake made a 'block notification' of transfer cases on 22 May 1995, but did not individually name them. No point was taken on this. An internal memorandum at CE Heath records a telephone conversation with the underwriters on the ₈th June 1995 in which at that stage the underwriters confirm that they are willing to accept Mandrake's notification in the year 1994/1995. Matters proceeded accordingly, Mandrake later providing a printout from their database of the relevant names identifying the investors to whom they intended to write. Thus by the date of the deed there was a well established mechanism for the reporting and analysis of potential claims. It is important to note that so far as appears from the evidence Countrywide was adopting the same procedure in relation to its reporting, and it was being kept fully informed of Mandrake's reporting to CE Heath. Against this factual background I have no doubt that the words 'duly notified' when used in the deed between Mandrake and Countrywide refer to compliance with established procedure at the time of notification, not to adherence to literal policy wording in respect of events that had already occurred a year earlier. As between Countrywide and Mandrake it is not open to Countrywide to say that bulk notification of cases is not due notification. Mandrake did what Countrywide required, participated in and approved. Any other reading appears to entail the parties imposing on Mandrake an obligation of which it was known by both sides Mandrake would already be in breach, making the Countrywide indemnity substantially worthless.
64. Accordingly I hold that the expression 'duly notified' means, as between Countrywide and Mandrake 'duly notified in accordance with the operative procedures current at the date of the deed'. The counterclaim therefore fails except to the extent indicated.
65. I will hand down this judgment (subject to editorial correction) at 10.00 am on 10 February 2006 in Birmingham. I do not expect attendance by counsel or solicitors. I will on that occasion adjourn all questions of costs and any other applications that counsel may wish to make to a further hearing on a date to be fixed by counsels' clerks through the usual channels. I will make every effort to see if that can be held in London.