England and Wales High Court (Commercial Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		28th January 2005

Mrs Justice Gloster, DBE:

1. This is a trial of four preliminary issues. The action concerns allegations of breach of warranty made by the Claimant, RWE Nukem Limited ("RWE"), which purchased the nuclear engineering business ("the Business") belonging to the Defendant, AEA Technology Plc ("AEAT") for £23.7 million pursuant to a contract in writing dated 1 June 2001 ("the Agreement").
2. The relevant factual background to the claim is set out in the pleadings. In summary, however, the essential facts are as follows:

i. The Agreement contained numerous warranties as to the accuracy of information relating to the Business which had been supplied by AEAT prior to the sale thereof. Those warranties were qualified by a detailed contemporaneous disclosure letter ("the Disclosure Letter").

ii. At the date of the Agreement the parties agreed to the completion of the sale of the Business at a future date ("Completion"). Completion was to be one day after various conditions were met by each party. Thereafter, pursuant to Schedule 14 of the Agreement there would be a final sum agreed by way of a completion statement ("the Completion Statement").

iii. Paragraph 2.4 of Schedule 9 to the Agreement provided that, if RWE wished to make any claim ("Claim") for breach of warranties under the Agreement, it would provide written particulars of all such claims within 24 months of Completion and that any intended proceedings would be commenced within six months thereafter. The relevant provisions of the Schedule were in the following terms:

paragraph 2.4:

"the Vendor [the Defendant] will be under no liability in respect of any Claim unless written particulars of such Claim (giving details of the specific matter as are available to the Purchaser [the Claimant] in respect of which such Claim is made) have been given to the Vendor [the Defendant] within a period of 24 months from the date of Completion …"

paragraph 1:

"… 'Claim' means any claim which is or would (but for the provisions of this Schedule 9) be capable of being made against the Vendor [the Defendant] in respect of any liability for breach of the Warranties."

iv. Completion took place on 1 October 2001 and the Completion Statement was agreed on 26 June 2002.

v. On 29 September 2003, the day before the expiry of the 24 month period, RWE's solicitors, Halliwells, wrote to AEAT outlining 19 separate complaints about potential alleged breaches of warranty, of other provisions of the Agreement and of a related Trading Agreement. The extent to which that letter ("the September Letter") provided adequate particulars of the claims now advanced in these proceedings in compliance with Paragraph 2.4 of Schedule 9 is one of the issues which I have to decide.

vi. Despite the fact that 19 separate complaints were put forward in that letter, RWE eventually chose to bring only nine separate claims arising from alleged breaches of the Agreement and the Trading Agreement. In addition, upon AEAT challenging those claims, RWE subsequently abandoned one of them (a claim relating to a company called Transforce) and substantially modified a number of others.

vii. The Preliminary Issues arise out of certain of the eight claims which remain.

3. AEAT denies the claims being made against it. In particular it denies that it breached the Agreement, any warranties or the Trading Agreement as now alleged by RWE or at all.

Preliminary Issue 1

4. This is in the following terms:

"Are damages recoverable for breach of warranty on the bases pleaded in paragraphs 19, 32, 48, 57 and 70 of the Re-Amended Particulars of Claim or, alternatively, are they irrecoverable for the reasons set out in paragraphs 15(e), 23(a), 37(b), 48(a) and 59(b) of the Amended Defence?"

5. I need spend little time on this issue. The claim made in paragraph 57 was in any event abandoned prior to the hearing and, in the course of argument before me, Mr Richard Wilmot-Smith QC for the claimant rightly conceded that the remaining paragraphs relevant to this issue (other than paragraph 70(1)) were indeed demurrable in the form in which they then stood, largely for the reasons set out in the skeleton argument of Mr Keith Rowley QC for the Defendant. (I should mention that Mr Rowley QC conceded in his skeleton argument that paragraph 70(1) of the Re-Amended Particulars of Claim (which, as renumbered became paragraph 68 of the draft Re-Re-Amended Particulars of Claim) did disclose an arguable claim for damages on the basis there alleged.) These were as follows.

i. As a matter of logic or causation it is not possible that a breach of a warranty contained in the Agreement caused RWE to miss an opportunity to obtain an Agreement on more advantageous terms, which is what is pleaded in the Re-Amended Particulars of Claim. Such a case fundamentally confuses the sequence of events: the Warranties relied upon only become binding and/or capable of founding an action for breach of contract at the moment when the Agreement was made. By definition, however, that is the precise point when any opportunity for making alterations to such an Agreement ceased. In short RWE cannot rely upon a breach of a contract as founding a claim for damages representing the loss of an opportunity to enter into that contract on different terms.

ii. Secondly, it is trite law that damages for breach of a warranty are damages for breach of contract and that such damages are to be assessed on the basis of putting a claimant into the position he would have been in had the contractual promise been fulfilled. They are not to be assessed on the tortious common law basis of putting the claimant in the position he would have been in had the contractual promise not been made; see e.g. McGregor on Damages, 17^th Edition: para. 19-003, pp. 672-673; Chitty on Contracts, 29^th Edition, Vol. I: para. 1-101, pp. 62-63.

iii. RWE's claim in these paragraphs either ignores or confuses this distinction. If RWE is correct and AEAT has broken its warranty as to the accuracy of the information supplied by it, RWE's claim would be for damages to put it into the same position it would have been if the warranty was not broken. The correct manner of calculating such damages is the difference, if any, between the value of the Business as warranted and its actual market value - see for example: McGregor at paras. 24-006 to 24-007 (and in particular the decision of the Privy Council there mentioned Lion Nathan v. CC Bottlers [1996] 1 WLR 1438); The Encyclopaedia of Forms and Precedents (5^th ed.) Vol. 11, paras. 17-19.

iv. However, RWE's claim as originally formulated in these paragraphs, is of a diametrically opposed nature. RWE does not seek damages to put it into the position it would have been in had the warranty been complied with – bound by the Agreement but with a business worth more. Instead it seeks damages on the basis of the position it would have been in had it managed instead to enter into an agreement on fundamentally different terms.That, patently, is not a breach of warranty claim.

6. I indicated in the course of argument that I agreed with those submissions. Mr Wilmot-Smith applied for permission to re-re-amend the Particulars of Claim. Mr Rowley did not in principle oppose these re-amendments, but contended that I should not formally rule on the amendment until I had dealt with the submissions on the remaining issues. I adopted this course.

Preliminary Issue 2

7. This is in the following terms:

"Is the Claimant precluded from bringing claims in respect of the Defendant's alleged breaches of warranty pleaded in the following paragraphs of the Amended Particulars of Claim (now Re-Amended Particulars of Claim), namely paragraphs 15 to 21, 23 to 26 and 28 to 33, and 38 to 40 and 45 to 49 by reason of the Claimant's failures to comply with the requirements of paragraph 2.4 of Schedule 9 to the Agreement as alleged in paragraphs 18(c), 25(c) and 38(c) of the Defence respectively and/or in any Amended Defence served pursuant to the Order of Mr Justice Colman dated 23 July 2004?"

8. The issue for determination here is, shortly stated, whether the September Letter contained adequate written particulars of the claim for breach of warranty now made by RWE in its current draft Re-Re-Amended Particulars of Claim ("RRAPC"), including "details of the specific matter as are available to the Purchaser in respect of which such Claim is made", as provided in paragraph 2.4 of Schedule 9.
9. The law was in all material respects common ground between the parties. I was referred to the following cases, which dealt with similar (though in some respects materially different) clauses:

Senate Electrical –v- STC [1999] 2 Lloyds Rep 423;

Laminates Acquisition Co –v- BTR Australia Ltd [2003] EWHC 2540 and

Bottin (International) Investments Ltd –v- Venson Group Plc and others [2004] EWCA Civ 1368).

10. From these cases the following propositions can be distilled.

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

ii. In particular due regard must be had to the fact that where such notification clauses operate as a condition precedent to liability (as in this case) it is for the party bringing a claim to demonstrate that it has complied with the notification requirement in that it gave proper particulars of its claims and did give those specific details as were available to it (see paragraph 30 of the judgment in the Laminates Acquisition case).

iii. That wording must, however, be interpreted by reference to the commercial intent of the parties; that is to say, the commercial purpose that the clause was to serve. In a case such as this "the clear commercial purpose of the clause includes that the vendor should know at the earliest practical date in sufficiently formal written terms that a particularised claim for breach of warranty is to be made so that they may take such steps as are available to them to deal with it"; in other words "that the notice should be informative"; see per Stuart-Smith L.J. in Senate Electrical at paragraph 90, citing with approval (and with his emphasis) from the decision of May J at first instance.

iv. Where the clause stipulates that particulars "of the grounds on which a claim is based" are to be provided:

"Certainty is a crucial foundation for commercial activity. Certainty is only achieved when the vendor is left in no reasonable doubt not only that a claim may be brought but of the particulars of the ground upon which the claim is to be based. The clause contemplates that the notice will be couched in terms which are sufficiently clear and unambiguous as to leave no such doubt and to leave no room for argument about the particulars of the claim"

(per Stuart-Smith LJ in Senate Electrical at paragraph 91)

v. In all cases it is important to consider the detailed claim being made in terms of both the breach complained of and the remedy being sought, to ensure that it was a claim which was properly notified.

11. In this case the language of the notification clause is slightly different from that in the clauses dealt with in both the Senate Electrical and Bottin cases in that the particulars required by paragraph 2.4 of Schedule 9 of the Agreement are not particulars of the matters giving rise to the claim relied upon but, rather, particulars of those claims themselves, including "details of the specific matter as are available to the Purchaser in respect of which such Claim is made". In my judgment what has to be notified in relation to any particular claim in the present case will largely depend on the nature of the Claim, the facts known to the vendor at the date of the notice, and whether it is realistic to put any monetary quantification on the amount claimed. I do not think one can lay down too rigid a formula for ascertaining what precise particulars or details have to be notified; the answer is that it will all depend. However, consistent with Mr. Rowley's submissions, I would expect that a compliant notice would identify the particular warranty that was alleged to have been breached; I would expect that, at least in general terms, the notice would explain why it had been breached, with at least some sort of particularisation of the facts upon which such an allegation was based, and would give at least some sort of indication of what loss had been suffered as a result of the breach of warranty, or, in other words, in the language of paragraph 1 of Schedule 9, some sort of description of the "liability for breach of the Warranties" that it was alleged that AEAT had incurred .
12. I turn now to consider whether adequate notice was given of the various different claims made in the RRAPC. The particulars provided in the September Letter vary from claim to claim. Accordingly, it is necessary to deal with each of the claims in turn.

Paragraph 15 to 21: the Pensions claims.

13. Paragraph 13.1 of Schedule 6 provides a specific warranty that "Full Particulars of the Pension Scheme have been disclosed …. and all information which has been made available to the Purchaser or its advisers on or before the date of this Agreement is true, complete, accurate in all material respects and is fairly presented." The September Letter expressly referred in paragraph 7 thereof to the Warranties set out in that paragraph.
14. Paragraph 7 of the September Letter states "You failed to disclose your scheme membership of the Public Sector Transfer Club in breach of the Agreement." Mr Wilmot-Smith submitted that this is sufficient notice of the pleaded breach of warranty claim.
15. On the other hand, Mr Rowley submitted that the claim as now pleaded in the RRAPC was not sufficiently notified in the September Letter. His submissions in this respect may be summarised as follows:

i. The claim now made has changed markedly from that made in the original Particulars of Claim. As originally formulated the claim advanced by RWE in this regard was that (emphasis added by Mr Rowley):

"In breach of Schedule 6 paragraph 13.1 of the Agreement AEAT failed to provide full particulars of the fact that its pension scheme was part of PSTC in that:

(1)it failed to disclose any of the documentation emanating from the Cabinet Office when AEAT's Pension Scheme joined PSTC;

(2)it failed to disclose announcements to or correspondence with members relating to rights under PSTC; and

(3)it failed to disclose any documentation at all relating to its membership of PSTC save for references in the 1999 and 2000 reports and accounts of its pension scheme." (emphasis added by Mr Rowley).

ii. Thus the claim advanced by this paragraph was not that AEAT failed to disclose the fact that its pension scheme was a part of PSTC – indeed the last words of the original paragraph 17(3) made it clear that RWE accept that AEAT did disclose that fact. Rather the claim advanced was that such disclosure was not enough and that some entirely undefined "full particulars" were required.

iii. After service of AEAT's Defence, RWE decided to change its case by introducing a new paragraph and changing paragraph 17 as follows:

"16A.For the avoidance of doubt RWE's case is that on the true construction of Schedule 6 paragraph 13.1 of the Agreement, the warranty that AEAT had provided "full particulars" of the pension scheme required that it had produced all documentation within the possession power or control of AEAT or the trustees of the pension scheme relating to the terms and operation of the scheme including but not limited to the documentation set out in paragraphs 13.1.1 to 13.1.13 thereof and that such documentation ought to have included all documentation relating to the scheme's membership of PSTC.

17.In breach of Schedule 6 paragraph 13.1 of the Agreement AEAT failed to provide full particulars of the fact that its pension scheme was part of PSTC in that: …."

iv. This change reinforced the point that the claim being advanced by this paragraph was not that AEAT failed to disclose the fact that its pension scheme was a part of PSTC (not least by means of the deletion of that allegation from paragraph 17); and made clear that the basis of the claim was not one of non-disclosure but, rather, failure to disclose specific documentation in addition to such disclosure. (I interpose in this summary of Mr Rowley's submissions to emphasise that this way of formulating the claim remains in the current version of the pleading.)

v. This claim of non-disclosure of documents was never advanced before, at the earliest, the Particulars of Claim. The September Letter advanced an entirely different claim. That letter makes various allegations concerning the pensions scheme. The majority of them were and are not pursued by RWE. The only part of the letter which is relevant to the present claim, however, is paragraph 7. That paragraph alleges only that the Defendant "…failed to disclose [its] scheme membership of the Public Sector Transfer Club in breach of the Agreement …" That suggestion – that AEAT failed to disclose its membership of the PSTC is now acknowledged to be incorrect. The claim now advanced – that whilst the membership was disclosed various documents concerning the membership were not – is not only unmentioned in the September Letter but is directly inconsistent with it.

vi. The obligation upon RWE was to disclose those details 'available to it' of its claim. There is and can be no suggestion that the particulars now relied upon by RWE were not available to it as at 29 September 2003. Given that fact (and in any event) it cannot be maintained that RWE provided particulars of the claim now being made. A claim that AEAT failed to disclose its membership of the PSTC and a claim that it did disclose that membership but did not provide all documents relating to that membership are obviously materially and substantially different. That difference is most obvious when one considers the causation arguments which arise in relation to each such claim. It is to be noted (as the Defendant will rely upon) that the letter of 29 September 2003 made no allegations at all regarding the consequences of the alleged breach of warranty in respect of PSTC. No allegations at all were made as to what damage has been suffered in respect of that alleged breach and the letter does not identify the cause of action relied upon.

vii. Accordingly, Mr Rowley submitted that the Court should hold that:

a. the particulars of the Pensions claim now advanced by RWE which were available to them were not provided to AEAT within 24 months of 1 October 2001; and, accordingly

b. AEAT cannot be liable in respect of that claim by reason of Paragraph 2.4 of Schedule 9 to the Agreement.

16. In my judgment there is much force in Mr Rowley's submissions. I do not consider that this claim was adequately notified in the September Letter, largely for the reasons he suggests. A claim that there was an absolute failure to disclose that the scheme was a member of the Public Sector Transfer Club is materially different from a claim that AEAT did disclose that membership, but did not provide all documents relating to that membership.
17. Nor is there any indication in the September Letter even in the most general of terms as to the nature of the liability allegedly incurred by AEAT as a result of the failure to disclose all relevant documents. The real nub of RWE's case is that, had there been such disclosure, it would have spotted that the Pension Scheme was part of the Public Sector Transfer Club, which is something that it failed to do simply from the mention of the fact in the AEAT's pension scheme's reports and accounts for 1999 and 2000. But in my judgment it is impossible to see why the alleged breach of the disclosure obligations resulted in causation terms in the value of AEAT's assets acquired by RWE being less than the value warranted. It is impossible to glean from the letter, and indeed from the revised pleading, why it is said that the breach resulted in the claimed loss in paragraph 20, namely "If the warranties had been accurate, the amount transferred to the RWE pension scheme as at 23 November 2003 would have amounted to £20,278,000 … etc rather than £15,656,000 which was actually the case".
18. Accordingly, in my judgment AEAT cannot be liable in respect of that claim by reason of Paragraph 2.4 of Schedule 9 to the Agreement. In addition, I do not consider that the pleaded claim in its current revised form is maintainable in any event, since causally it was not the alleged failure to provide all the relevant documentation that resulted in the scheme's liabilities as a member of PSTC, but rather its actual membership, which was disclosed. I would strike out the claim for this reason also.

Paragraphs 23 to 26 and 28 to 33: the KFK Sodium contract claims.

19. Here the issue is likewise whether or not RWE provided adequate written particulars of the claims made in relation to the KFK Sodium contract, giving specific details of this matter as were known to it by the 29 September 2003.
20. RWE accepts that it was obliged to do so and contends, at paragraph 13 of its Amended Reply, that such particulars were provided by paragraph 16 of the September Letter.
21. Paragraph 16 of that letter states as follows:

"The CoMon report in relation to this contract is inaccurate in breach of the warranty at 15.2 of Schedule 6. In particular, the forecasted costs to complete were wholly inaccurate and were calculated on a basis which was inconsistent for accounting purposes. We understand that the figure which you included in respect of the "Work in Kind" for UKAEA (£318K) did not include overheads, however, these should have been taken into account. The actual cost of this work for UKAEA is £640k (which does not include any profit, none being claimed in respect of this aspect). Furthermore, it was stated that there was additional work under the scheme valued at £224,000. We understand that additional work does not exist. The estimate of the cost to complete the project is £2.76 million not including the work to be carried out for UKAEA. Additionally, our client will be pursuing an indemnity claim in respect of this contract pursuant to Schedule 19 of the Agreement in due course".

22. Mr Wilmot-Smith submitted that the claim relies upon clause 5.1 of the Agreement and specifically paragraph 15.1 and 15.2 of Schedule 6 and paragraph 4.1 of Schedule 6; that these claims relate to provisions for the accurate disclosure in the Disclosure Letter and for accuracy in the contract report ("CoMon") for each contract and proper compliance with accounting practices; that the claim letter sets out the position in paragraph 16 on page 9; that the particular complaint is that the CoMon report was in breach of paragraph 15.2 of Schedule 6 of the agreement in that the forecasted costs to complete were inaccurate. Accordingly, he says, sufficient notice was given.
23. Mr Rowley accepted that paragraph 6 of the September Letter raises complaints on the part of RWE in respect of "[t]he CoMon report [i.e., in the singular and unidentified] in relation to this contract" and then purports to give some particulars. But, he submitted, it does not, however, make any mention of (let alone provide particulars of) the claim now made in respect of that contract. In particular he complained:

i. The claims now made are made in respect of alleged breaches of the warranties set out at paragraphs 4.1, 15.1 and 15.2 of Schedule 6 to the Agreement. The letter of the 29^th September 2003 makes no allegation at all of breaches of the warranties arising from paragraphs 4.1 and 15.1.

ii. The claims made are made (in part) on the basis of alleged misstating of additional revenue, future claims and revenue (see paragraph 29 of the RRAPC). None of these alleged breaches of the warranties are mentioned at all in the letter of the 29^th September 2003: indeed it appears to be RWE's case that it was not even aware of the misstating of revenue until some time after this letter: it cannot, therefore suggest that the letter was intended to or does refer to it.

iii. Paragraphs 28 to 34 of the RRAPC allege inaccuracies in four identified CoMons: the September Letter alleges a single breach of the warranty at paragraph 15.2 in relation to a single CoMon; it makes no allegation at all of breaches of the warranties at paragraphs 4.1 and 15.1. Further, he submits, there can be no suggestion that RWE did not have these details at the time it sent the letter: this is effectively admitted in its first set of Further Information, Reply 27.

iv. None of the figures appearing in paragraph 16 of the letter of 29 September 2003 are pleaded anywhere in the RRAPC.

v. Thus, he submits, no allegation of breach of two of the three warranties now relied upon is mentioned. No inaccuracy in relation to at least three of the four CoMons now relied upon is alleged. The figures set out in the September Letter do not appear in the RRAPC. No cause of action arising from any such breach is identified. The relief sought as a remedy in respect of that cause of action is not identified.

24. I accept Mr Rowley's submission that paragraph 16 of the September Letter cannot realistically be said to have provided adequate particulars of the claim identified above and now made under this head or details of the specific matters in respect of which the claim were made. In particular, amongst other matters, the Letter failed to state the following four central facts:

i. the fact that the individual CoMons now relied upon were inaccurate; and

ii. the fact that those inaccuracies constituted a breach of the warranty provided at paragraph 4.1 of Schedule 6 to the Agreement; and

iii. the fact that those inaccuracies constitute a breach of the warranty provided at paragraph 15.1 of Schedule 6 to the Agreement.

iv. The quantum of the claim for breach of warranty.

25. In my judgment, when one reads paragraph 16 of the September Letter, a reader in the commercial position of AEAT would have had no appreciation that a claim of the type now being made in paragraphs 28 to 34 of the RRAPC was being notified. RWE's obligation was to provide particulars of the claim which it wished to make in "terms which are sufficiently clear and unambiguous as to leave no such doubt and to leave no room for argument about the particulars of the claim" (cf Senate Electrical). I do not consider that this threshold test was passed in relation to these claim. It is impossible to reconcile the claim now made in the RRAPC with the September Letter.

Paragraphs 38-40 and 45 -49; the PFR LMD Contract Claims

26. These claims relate to the PFR LMD contract. Mr Wilmot-Smith submits that paragraph 17 of the September Letter adequately and accurately notifies this claim and that therefore there is no failure to comply with paragraph 2.4 of Schedule 9 of the Agreement.
27. Paragraph 17 of the September Letter states as follows:

"As you are aware, NNC has asserted substantial claims in connection with the LMD contract. We understand that these have been submitted to you on the basis that this contact has not been novated, and that our client is liaising with you in relation to NNC's claims. On the CoMon you stated "NNC have now submitted counterclaims of £929K. All have been addressed and rejected by AEAT". In fact, we understand that NNC wrote to you in April 2001 stating that they were preparing a claim for breach of contract. On 25 September 2001, before Completion, NNC wrote to you referring to claim issues for which a significant sum was due to NNC. We understand that there is a dispute as to who was responsible for design co-ordination and that you were aware of this at the date of Completion. In the circumstances, it seems that the CoMon was not accurate in that it stated that these claims had been addressed and rejected by yourselves, which appears not to have been the case. Furthermore, as you were aware of the issue concerning disputed liability for design, and had taken advice on this aspect from your lawyers, it seems to us that these were facts which might be likely to give rise to proceedings and as such, ought to have been disclosed. In addition to the breaches of the warranties at paragraphs 15.2, 15.5 and 20.1 of Schedule 6 to the Agreement, our client's position regarding any claim it may have pursuant to Schedule 19 is fully and absolutely reserved.".

28. Mr Rowley submits for similar reasons as those developed above in relation to the earlier claims, that this paragraph does not make mention of, let alone provide, particulars of the claims now made in paragraphs 38-40 and 45-49 of the Re-Amended Particulars of Claim (corresponding to paragraphs 37– 39 and 44-47 of the RRAPC). He submits:

i. In relation to each of the claims now made the facts necessary to give rise to a cause of action would include, inter alia: the fact that AEAT breached the warranties arising from paragraphs 15.1 and 16.1 of Schedule 6 to the Agreement (see paragraph 48 of the RAPC); and

ii. the fact that these breaches were caused by a failure on the part of AEAT to make provision for the Counterclaims of NNC not withstanding that "AEAT was aware that [NNC's counterclaim] was likely to be pursued in proceedings and that such a counterclaim had a real prospect of success at least in part" (paragraph 45 of the RAPC).

29. He submits that neither of these facts are mentioned and that in fact no allegation of breach of the warranties arising from paragraphs 15.1 and 16.1 of Schedule 6 to the Agreement is made in the September Letter at all. He also submits that in relation to the possible claim for damages at paragraph 48(1) arising from a withheld payment by NNC: the facts necessary to give rise to a cause of action would include, inter alia, the fact that such payment was otherwise properly due and the fact that such payment had been withheld and that neither fact is alleged in the September Letter.
30. In my judgment, this claim is adequately notified. The absence of a reference to paragraphs 15.1 and 16.1 of Schedule 6 to the Agreement is not in my view fatal. The nature of the claim is, in my judgment, adequately summarised in paragraph 17 of the September Letter, although, it is fair to say, not in an entirely satisfactory fashion. I think that it is implicit in the paragraph that such payment was otherwise properly due and had been withheld.
31. Accordingly, I hold that the claimant is not precluded from bringing the claim in respect of the Defendant's alleged breach of warranty pleaded in the following paragraphs 38 to 40 and 45 to 49 of the Re-Amended Particulars of Claim by reason of the Claimant's failures to comply with the requirements of paragraph 2.4 of Schedule 9 to the Agreement in respect of those claim.

Preliminary Issue 3

32. This issue is in the following terms:

"On the true construction of paragraphs 2, 7 and 9 of Schedule 19 to the Agreement, does the Defendant's liability to indemnify the Claimant in respect of the PFR LMD Contract pursuant to paragraph 2 of that Schedule arise only upon that contract being completed as defined in paragraph 9.1 of that Schedule as alleged in paragraph 33(b) of the Defence?"

33. It was common ground that a commercial reality underlying the Agreement was that there was a risk that after Completion some contracts would proceed smoothly forward in line with expectations and some would not and that the purpose of Schedule 19 to the Agreement was to split the risk of contracts not completing in line with expectations in a commercial and agreed way.
34. The issue between the parties under this Issue is as follows:

i. Paragraph 2 provides that AEAT will indemnify RWE "promptly and in full" against RWE failing to receive any of the Recovery of Claims (a defined term) in relation to the PFR LMD contract.

ii. The definition section provides that "Recovery of Claims" means the "amount(s) recovered under any claims made for unagreed claims and variations in respect of or pursuant to…. the PFR LMD Contract".

iii. Neither paragraph 2 nor the definition section state, however, when RWE will be regarded as having failed to recover the said claims: is it a week after the claims are submitted but not paid? Is it a week after such submission? Is it only when the claims are actually rejected?

35. Mr Wilmot-Smith on behalf of RWE submits that the position is as follows.

"(a)Paragraph 9.1 does not circumscribe the timing under which a claim can be brought. The indemnity is clear and un-fettered. Paragraph 9.1 deals with a different topic altogether, namely the obligation of the parties to complete the contracts so that all profits, liabilities or losses could be finally agreed or determined as soon as reasonably practicable following completion.

(b)It may be that as a matter of fact some specific losses cannot be ascertained or determined until the physical work is all complete. But that is not as a matter of law and, in this case, it is not true at all.

(c)Moreover, paragraph 2 provides for a prompt indemnity against RWE failing to receive any of the Recovery of Claims as set out in the CoMon annexed to the Disclosure Letter. The term prompt cannot mean that the indemnity must wait until completion of the physical works.

(d)Since there is no express bar against recovery of the indemnity prior to completion of the physical work, there cannot be one implied.

(e)Furthermore Completion under paragraph 9.1.2 requires that "any and all claims thereunder have been finally settled or arbitrated". The AEAT interpretation would mean that a perfectly good indemnity would not arise in respect of Claim A so long as Claim B is not finally settled. In some arbitrations, that might be a very long time. The requirement of such a delay does not bespeak a sensible and commercial interpretation of paragraph 9.1, which provides for the definition of Completion within the Agreement. Such a definition does not impinge on the timing of when an indemnity arises.

(f)If the indemnities under paragraphs 2 and 6 were to be limited as alleged, then express words would have been used within paragraphs 2 and 6. No such words have been used. None fall to be inferred or implied."

36. In other words, RWE's position appears to be that it should be regarded as having failed to recover the claims under the PFR LMD contract whenever it finishes the works under the said contract: see paragraph 14(2) of its Amended Reply.
37. AEAT, on the other hand, submits that the answer to the question can be found at paragraphs 9.1 to 9.3 of Schedule 19 which, it is said, set out the following scheme. Both parties are to use their respective reasonable endeavours to procure the completion of, inter alia, the PFR LMD contract: as is made clear by paragraphs 9.1.1 and 9.1.2, such completion occurs only when all work is completed and any and all claims thereunder have been finally settled or determined. If, however, the PFR LMD contract is not completed by the 1 June 2003 (2 years after the date of the Agreement) the parties become obliged to engage in a two stage dispute resolution process. The first stage is to discuss the PFR LMD contract in good faith with a view to agreeing whether or not it is "objectively certain" that sums will be due from AEAT to RWE even if final quantum cannot yet be established. The second stage of the dispute resolution process arises only if such talks fail to produce an agreement. In the absence of such agreement the parties agree to refer the dispute to binding Arbitration.
38. Mr Rowley submits that, given this structure it is clear that RWE cannot be said to have "failed to recover" claims giving rise to a liability on AEAT to indemnify RWE until either Completion of the contract has occurred in accordance with paragraph 9.1.1 and 9.1.2 (i.e. the work under the contract has been finished and all claims under it have been finally settled or arbitrated), or, in a case where the contract is not in fact completed by 1 June 2003, the dispute resolution process as between RWE and AEAT has been completed. That is because:

i. The last words of paragraph 9.1 make clear that that sub-clause is concerned with the crystallisation of AEAT's liability to indemnify; and

ii. In relation to the combination of paragraphs 9.1 to 9.3 no other construction makes sense: the liability to indemnify cannot arise prior to the dispute resolution process because it is directly contrary to the express – and unusual - contractual obligation on AEAT to discuss the contract with RWE in good faith in order to seek an agreement to pay what may well be a completely different sum – that which is "objectively certain".

39. In my judgment the position is clear. There can be no liability on AEAT to indemnify RWE in respect of it failing to receive any of the Recovery of Claims until the relevant contract has "completed" in accordance with the definition of that term in paragraphs 9.1.1 and 9.1.2. In relation to the PFR LMD Contract, there is a relaxation of that provision, enabling recovery under the indemnity, even though there has been no actual completion. In my judgment, the clear sense of paragraphs 9.2 and 9.3 is the obligation to pay arises under paragraphs 9.2 and 9.3 as from the date, after the 2 year period, when "it is [or becomes] objectively clear …that certain sums will become payable" by AEAT to RWE under the indemnity. Practically speaking, until the parties have discussed, and agreed, the matter or (in the case of disagreement) arbitrated the matter, the sum will not be payable by AEAT; but, as and when ascertained by that resolution process, the "certain sum" will be payable as from the date that it is "objectively clear" that AEAT would have to pay a "certain" sum. It might well be, for example, that an arbitrator might find that it had become objectively clear at a date earlier than he had determined the dispute, in which case no doubt interest would be payable from that earlier date.
40. In the light of my ruling on this point, I will hear argument from counsel as to the precise form of the declaration, as the formulation of the Preliminary Issue does not in my view correctly reflect what I have held to be the correct construction.

Preliminary Issue 4

41. This issue is stated in the following form:

"On the true construction of Paragraphs 2, 3, 4, 5 and 7 of Schedule 19 to the Agreement, do the sums specified in paragraphs 7.3.2, 7.3.3, 7.3.4 and 7.3.5 respectively of that Schedule operate:"

(a)as an offset, so as to reduce the amounts payable by the Defendant to the Claimant under the indemnities referred to in the said paragraphs 2, 3, 4 and 5 by the sums specified in the said paragraphs 7.3.2, 7.3.3, 7.3.4 and 7.3.5 respectively as alleged in paragraphs 33(c) and 63(c) of the Defence; or

(b)as a threshold, such that if any recoveries or reductions in respect of unagreed claims/variations under the contracts referred to in the said paragraphs 2, 3, 4 and 5 exceed the sums specified in the said paragraphs 7.3.2, 7.3.3, 7.3.4 and 7.3.5 respectively then such sums are to be disregarded in calculating the amounts payable by the Defendant to the Claimant under the indemnities referred to in the former paragraphs as alleged in paragraphs 15 and 30 of the Reply?

42. Mr Wilmot-Smith submits that there are two possible interpretations of the effect of paragraphs 7.3.2-5 of Schedule 19 of the Agreement. The first, put forward by AEAT, is that the sums specified therein are to be off set against the sums payable by AEAT under the indemnities set out in paragraphs 2, 3, 4 and 5. RWE's construction, in support of which he contends, is that the sums specified in paragraphs 7.3.2-5 are a threshold figure of deemed recovery for the purposes of the calculation of loss in respect of the indemnities given in Schedule 19 paragraphs 1-6. In support of this contention he submits as follows:

i. Schedule 6 of the Agreement is the section of the contract which provides for the warranties. Clause 15.2 provides:-

"A Contract report at 31 March 2001 is attached to the Disclosure Letter ("Comon(s)") for each Customer Contract with a value in excess of £100,000 or any Customer Contract entered into outside the ordinary course of business of the Business and accurately states the historical financial position in relation to such contract and, so far as the Vendor is aware, represents a reasonable judgment of the future financial position in relation to such contract having regard to the information available at the time of preparation of the relevant Comon. Since their date of preparation the Vendor is not aware of the requirement for any material amendments to any Comons."

ii. Clause 5.6 of the contract also provides in its final sentence:

"It is further agreed that for the purposes of the repetition of the warranties, the Warranty at paragraph 15.2 of Schedule 6 shall be deemed to refer to the Comons used for the purposes of the Completion Statement."

iii. By way of example, in relation to the PFR LMD Contract, Paragraph 7.3.2 provides:

"in respect of the PFR LMD Contract the Purchaser shall be deemed to have recovered or reduced unagreed claims/variations under such contract in the sum of £300,000."

iv. He submits that this provision is better understood when reference is made to the CoMons and developed his submission by reference to worked examples and by reference to paragraph 2 of Schedule 19 which states:-

"Subject to paragraph 7 the Vendor will indemnify the Purchaser promptly and in full against the Purchaser failing to receive any of the Recovery of Claims set out current claim in the Comon annexed to the Disclosure Letter at AA/ADD/F61 in respect of the PFR LMD Contract."

43. He submitted that Paragraph 7.3.2 therefore modifies that indemnity.
44. I do not accept these submissions. In my judgment the sums specified in paragraphs 7.3.2, 7.3.3, 7.3.4 and 7.3.5 respectively of that Schedule clearly operate as an offset, so as to reduce the amounts payable by the Defendant to the Claimant under the indemnities referred to in the said paragraphs 2, 3, 4 and 5 by the sums specified in the said paragraphs 7.3.2, 7.3.3, 7.3.4 and 7.3.5 respectively, as alleged in paragraphs 33(c) and 63(c) of the Defence.
45. My reasoning, which I gratefully adopt from Mr Rowley's skeleton argument, is as follows:

i. Paragraphs 2 to 5 of Schedule 19 to the Agreement impose upon AEAT obligations to indemnify RWE promptly and in full: (a) in respect of the PFR LMD contract, against RWE failing to receive any of the Recovery of Claims set out as current claims in the CoMon annexed to the Disclosure Letter; (b) in respect of the Southern Storage Area, MAC and FED contracts, against any Losses RWE incurs under or pursuant to those contracts; (c) in respect of the KFK Sodium contract, against any expenses properly incurred by RWE in excess of those provided for in that contract.

ii. These contracts, and the matters against which RWE is entitled to be indemnified in relation to (a) and (b) above (Recovery of Claims and Losses, as the case may be) are defined at the beginning of Schedule 19.

iii. But, as each of those paragraphs makes clear, however, the indemnities are each "subject to" paragraph 7 of that same Schedule. The introductory part of paragraph 7 clearly states that "The liability of the Vendor under the provisions of paragraph 1 to 6 above shall be limited as follows". Paragraph 7 then proceeds to set out three separate and wholly distinct forms of limitation on the ambit of the indemnity: namely, in paragraph 7.1 a general limit to the effect that the warranty is for 90% only of the sums which would otherwise be due under Paragraphs 1 to 6; in paragraph 7.2 two limits, one precluding double recovery under the warranties and other causes of action; and the other a limit on the aggregate liability of AEAT in the sum of £6,660,000; and, in paragraph 7.3 further limits, which has given rise to this fourth preliminary issue.

iv. Paragraph 7.3 states as follows:

"7.3in calculating any of the Losses, Recovery of Claims or (in the case of paragraph 6) relevant expenses under paragraphs 1 to 6 above the following adjustments shall be made…

7.3.2in respect of the PFR LMD Contract the Purchaser shall be deemed to have recovered or reduced unagreed claims/variations under such contract in the sum of £300,000;

7.3.3in respect of the Southern Storage Area Contract the Purchaser shall be deemed to have recovered or reduced unagreed claims/variations under such contract in the sum of £500,000;

7.3.4in respect of the MAC Contract the Purchaser shall be deemed to have recovered or reduced unagreed claims/variations under such contract in the sum of £500,000;

7.3.5in respect of the FED contract the purchaser shall be deemed to have recovered or reduced unagreed claims/variations under such contract in the sum of £1,500,000…."

v. These provisions are in my judgment clear and unambiguous. They set out a mandatory adjustment which must be made in relation to any calculation of a sum due under any of the paragraph 1 to 6 indemnities. The mandatory nature of the adjustment in all cases is clear from the terms of the paragraph "in calculating any of the Losses, Recovery of Claims or… relevant expenses under paragraphs 1 to 6 above the following adjustments shall be made… the Purchaser shall be deemed….". In addition the nature of that adjustment is simple: in all such calculations the Purchaser is deemed to have recovered the various sums set out in relation to each contract.

vi. RWE contends that this simple interpretation is incorrect. It contends that the said adjustment does not have to be made when calculating any of the Losses, Recoveries or expenses but, rather, only when calculating some of them. In particular it contends that in any case where RWE actually recovers more than the sums set out in paragraphs 7.3.2 to 7.3.5 the Adjustment should not, as a matter of contractual construction, be made.

vii. In my judgment such a construction cannot be reconciled with the terms of the Agreement. Paragraph 7.3 does not suggest that the adjustment is to be made in some situations but not in others: the language of that paragraph is consistent only with an agreement that the adjustment shall be made wherever any Loss, Recovery of Claim or relevant expenses are calculated. The Agreement is not susceptible to being re-written so that it should effectively be read as saying that "in calculating some of the Losses, Recovery of Claims or… relevant expenses under paragraphs 1 to 6 above the following adjustments may be made… depending on whether the purchaser recovers a certain sum he may be deemed….".

viii. Moreover, such a construction is entirely unnecessary. The Agreement as it stands, without such rewriting makes obvious commercial sense. It splits and allocates the risk of non-recovery of claims between the parties in an understandable and sensible way by providing that Losses/failure to recover claims will be reduced by the figures set out in paragraphs 7.3.2 - 7.3.5 of Schedule 19. The result is to ensure that RWE continue to have an incentive to recover monies from the customer so as to reduce losses throughout the Contract, rather than recovering up to a limited level (which has to be seen in light of the overall value of each of the Contracts) and facing only a 10% risk thereafter. Accordingly, RWE takes the risk of, and responsibility for, all non-recovery up to a set amount for each contract and thereafter AEAT is responsible for 90% of the sum which is not recovered and RWE will be responsible for 10% (this 90%/10% split arising by reason of Paragraph 7.1 of Schedule 19). In relation to the PFR LMD contract for example, the effect of paragraph 7 is that RWE agrees to take the first "hit" of non-recovery of claims up to £300,000 non-recovery and thereafter all further non-recovery is split between the parties on the 90%/10% basis.

ix. By contrast the analysis proposed by RWE makes little, if no, sense at all. It disregards the intent of Schedule 19 (and paragraph 7 in particular) which is to deal with and allocate the risk of Losses or failure to recover claims. The key point is not how much is recovered from the customer but what Losses are incurred or what claims are not recovered.

46. Accordingly, on this issue, I rule that, on the true construction of Paragraphs 2, 3, 4, 5 and 7 of Schedule 19 to the Agreement, the sums specified in paragraphs 7.3.2, 7.3.3, 7.3.4 and 7.3.5 respectively of that Schedule operate as an offset, so as to reduce the amounts payable by the Defendant to the Claimant under the indemnities referred to in the said paragraphs 2, 3, 4 and 5 by the sums specified in the said paragraphs 7.3.2, 7.3.3, 7.3.4 and 7.3.5 respectively as alleged in paragraphs 33(c) and 63(c) of the Amended Defence.
47. As I said, I will hear submissions from Counsel as to the form of the Order.
48. Finally, I thank both leading and junior Counsel for their extremely helpful written submissions and oral presentation in this case.

Postscript

49. In relation to my ruling on the PFR LMD Control Claims dealt with at paragraphs 26-31 above, it should be noted that after delivery of this judgment in draft, Mr Rowley provided me with further written submissions in relation to this issue insofar as it related to those claims, and asked me to reconsider my draft judgment. I gave Mr Wilmot-Smith the opportunity of responding in writing. I then directed that I would hear further oral argument on the point at the restored case management conference.
50. However, shortly before that hearing RWE abandoned its claim under this head in its entirety, as appeared in the latest draft of the Re-Re-Re-Amended Particulars of Claim. In the circumstances, it would have been academic for me to have spent further time reconsidering the judgment on this point, since the issue was moot. Accordingly, with the agreement of counsel, I declined to do so.