England and Wales High Court (Commercial Court) Decisions

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

		Claim No: 2007 Folio 961 Royal Courts of Justice Strand, London, WC2A 2LL Sitting at Sheffield Combined Court Centre
		06/11/2008

Mr Justice Simon:

Introduction

1. On 10 December 2004 Mr Julian Ranger and Mr John Curtis ('the Claimants') entered into a Share Sale Agreement ('the SSA') with the Defendant ('LM'). This involved the sale by the Claimants of the entire issued share capital of Stasys Limited ('Stasys') to LM. In this claim the Claimants sue for the balance of sums due to them under SSA. LM resists that claim on the basis that it has served a contractual notice of a General Warranty Claim which entitles it to withhold the balance of the price; and it counterclaims for breach of various warranties in the SSA.
2. The basis of the Defence and Counterclaim is that, since the date of the SSA, Stasys has been sued in Italy in relation to its involvement in Pubcys. Pubcys (Publishing Refuse Certification System) was a project established under the aegis of the EU to develop a computerised system which would track magazine and newspaper stocks, including their disposal and recycling. In broad terms LM complains that Mr Ranger and Mr Curtis failed to make proper disclosure of allegations by other participants in the Pubcys project that Stasys was in breach of its obligations, of threats of litigation and of the written agreements which underlay such threats.
3. The Claimants' case that they gave proper disclosure of what they knew of the allegations in relation to Pubcys; and that LM knew everything that the Claimants knew about possible claims.

The Issues in Outline

4. There are four main areas of dispute:

i) Issues of fact as to the information that was conveyed by the Claimants to LM before and during the Closing Meeting on 9-10 December 2004. In particular, what was said or not said at a telephone conference on 1 December 2004 and at meetings on 9 and 10 December 2004 shortly before the signing of the SSA.

ii) Issues of law and construction as to what was required of the Claimants for fair disclosure under Clause 6.3 of the SSA, and as to the extent to which fair disclosure was given.

iii) An issue as to whether the breach of warranty claim was sufficiently notified in time. The issue arises from the nature of a time-bar clause in the SSA (Schedule 7, paragraph 4); and turns on the sufficiency of a letter sent to the Claimants by LM on 20 February 2007.

iv) Issues of causation and as to the measure of loss that LM may be entitled to recover.

Summary of the Facts

The position prior to 1 December 2004

5. Stasys was incorporated in September 1987 by the Claimants to provide technical defence consultancy services. It was a successful company. In the 1990s it developed a business in air traffic management ('ATM') and related software. As part of the development of the business, Stasys decided to engage in a project with the intention of gaining experience of European Union funding. The means by which this was done was through involvement in Pubcys; and, since it had no military or aeronautical connection and the project was outside Stasys's core business, Mr Ranger and Mr Curtis left the performance of the contract to others.
6. The Pubcys project was undertaken by means of a Co-operative Research Contract, dated January 2001, which was referred to by Stasys as 'the Development Agreement'. The Development Agreement was governed by Belgian law. The parties to the Development Agreement were the European Commission ('EC') on the one hand, and Stasys, two Italian companies PGS SrL ('PGS') and Adtech International SrL ('Adtech') and a Spanish company Trevenque Sistemas de Informacion ('Trevenque') on the other hand. Each of the four companies was a specialist in its relevant field. Stasys's contribution was to the software; and the overall purpose of the contract, so far as Stasys was concerned, was to develop and evaluate a prototype. The Development Agreement had a two year term and the EC was to provide up to €993,956 of funding towards the project. It appears that, so far as the EC was concerned, the Development Agreement was concluded on 30 June 2004. It generated a loss to Stasys of approximately £179,000.
7. In September 2002, following the signing of the Development Agreement, PGS, Trevenque, Adtech and Stasys had entered into an agreement headed 'Pubcys Project Exploitation' (referred to as 'the Exploitation Agreement'). The Exploitation Agreement was governed by Italian law. It appears that there were two versions of this agreement. The terms of the English language version suggest that it was an agreement to form a new co-owned company, Pubcys International, following the completion of the Development Agreement. The document recites the names of PGS, Adtech, Stasys and Trevenque; and recites that 'the contractors'

… have reached an agreement among themselves, that shall be later finalized into a consortium, given the fact that [the Development Agreement] shall obtain the expected results:

1. The consortium of Companies shall be called Pubcys International and its constitution shall enter into force three months after the work of the project shall have been completed or after the end of the duration of the project.

If any of the contractors shall decide not to participate to the constitution of Pubcys International, he/they will loose (sic) any rights in the project.

8. During the early part of 2004 Mr Ranger and Mr Curtis decided to sell their interest in Stasys; and Mr Ranger, with the assistance of Jeffries Quarterdeck, a firm of investment bankers, created an information pack which was sent to potential purchasers. In June 2004 prospective purchasers were invited to submit indicative offers for the shares of Stasys. In September 2004 Stasys sent out Compact Discs containing scanned documents which were relevant to a sale. Among the interested parties to whom these were sent was LM. The contents of these CDs were referred to as 'the Data Room'.
9. As part of the preparation for the sale a document was drafted by Mr Ranger and Mr Bruce Hopkins. Mr Hopkins was a lawyer retained by Stasys; and he also advised Messrs Curtis and Ranger personally in relation to the sale. In its final form, dated 1 September 2004, this document (referred to as 'the Pubcys Summary') read as follows.

Stasys has been involved in an EC project related to the production of a new tool, to support distribution and returns of magazines. This project involves a number of primarily Italian companies (producing hardware) and Stasys (producing software). This project has resulted in a significant investment by Stasys (over £150k), with little return. The project has now been completed to the satisfaction of the EC. Stasys partners are pressing for further exploitation which will require more investment from Stasys or, in the view of the Italian coordinator, assignment of Stasys's rights. We are not convinced that further investment is worthwhile and will be requesting further information from the Italian partners as to the perceived investment benefits, with an aim of receiving some payback for the investment made to date. The documentation does not make clear what happens after the project has been completed. As it is quite likely Stasys will make no further investment, there is scope for argument as to who owns what, and how the parties who do wish to exploit the project further may be able to do wish to exploit the project further may be able to do so. No intimation of any claim against Stasys has been made.

[Note: This project is not core business to Stasys. It was entered into as a potential area of new business and to gain experience of EC grants]

10. The part of the Pubcys Summary in italics was originally drafted differently. Mr Ranger's first draft which was sent to Mr Hopkins read:

There is a possibility that the other partners may resort to legal action if Stasys does not proceed with further work (not contracted at this time) - our position is that at worse this can be resolved by writing off the investment to date (which has not been fully expensed to date) and potentially passing IPR to Italian partners; however, legal opinion is that we are within our contractual obligations to do no further work, retain IPR and insist on some payment if our partners wish to proceed on their own.

When he read this version, Mr Hopkins responded,

This is a borderline disclosure in my view, particularly as I know that there is a knee-jerk tendency for purchasers to request a (pound) for pound express indemnity from the personal vendors for such matters. But I also know you want to be squeaky clean.

Following this exchange, Mr Hopkins redrafted the Pubcys Summary substituting the words in italics.

11. The Pubcys Summary was included in the documents in the Data Room as was the Development Agreement. However, the annexes to the Development Agreement were not included and nor was the Exploitation Agreement.
12. LM had access to the Data Room by (at latest) 20 September; and its Due Diligence Team made a report prepared on 24 September 2004 which stated,

No significant threatened litigation or other legal proceedings appear to be pending at this time.

In a subsequent report prepared on 30 September 2004, the writer noted:

No show stoppers. [Stasys's] caution: None, though see 'Pubcys' requires further investigation.

13. Mr Jeffrey MacLauchlan was in charge of the commercial negotiations on behalf of LM. The Due Diligence investigations were carried out by various LM teams in September and October; and Mr Michael Fink, under the supervision of Ms Marian Block, was the in-house LM lawyer concerned with the contractual aspects of Stasys's business.
14. On 1 November 2004 LM made a formal offer to acquire Stasys; and, on 19 November 2004, Kerman & Co (solicitors who represented Stasys) sent the first draft of a Disclosure Letter to Allen & Overy (representing LM). On 24 November Allen & Overy prepared a list of Due Diligence items still outstanding for LM. Among the matters raised was the need for

discussion with legal counsel to the company regarding legal matters including litigation, claims, regulatory compliance process.

It was this that led to the telephone conference on 1 December 2004 to which much of the evidence in the trial related.

15. Before this telephone conference took place the position in relation to Pubcys had changed. On 30 September 2004 Mr Armida of Adtech had sent an email to Stasys claiming that Stasys had failed to complete its obligations to produce software under the Development Agreement.

2. The Pubcys System, as it is at the moment, cannot be presented to the Mondadori Group. This is because the Software developed by Stasys is not complete and is totally un-useable and not fit for the purpose it was requested for …

3. Due to what is said in point 2, Adtech has been left with a costly Video Scanner and a Prototype manufactured with the financial support of Dr AS Pacilè who, as the main performer, has also complained of the total failure of Stasys software.

4. No file source of the developed software was ever provided by Stasys, this means that whatever you have provided is un-useable and un-readable.

For the above reasons, I have given authorisation to my lawyer, Mr Matteo Carridi (sic), to start legal procedure against all those partners who may have contributed to the poor result obtained in the project, which has left us an uncompleted product that in no way can be commercialized as it is, even though the EC commission has given its approval but with numerous suggestions for the way forward.

The names of Dr Pacilè and Avv. Caridi were subsequently to appear in further exchanges.

16. Mr Ranger replied in a letter of 11 October, which was copied to the other contractors and Dr Pacilè. The letter set out Stasys's view that it had done what it was required to do under the Development Agreement, that the EC had accepted the project and that Stasys would not make any further commitment to the project without a proper business case. The letter concluded:

If you believe that we have not met our legal obligations in terms of this contract, then please advise us in as much detail as possible, both in terms of legal obligations and technical detail, and we shall be happy to review it constructively. Any talk of legal proceedings in the meantime is quite inappropriate.

17. On 18 October 2004 Mr Armida responded, taking issue with Mr Ranger's letter of 11 October. Mr Armida claimed that further work was still required from Stasys. He also asserted that it was for Stasys to prove that it had done everything required of it, rather than for Adtech to specify what had to be done. On the same day Mr Lavini of PGS wrote asking Stasys to reconsider its position, and

… not let this opportunity go by without providing its final support to the Pubcys consortium, which is indeed a contractual requirement.

18. On 22 November 2004, Avv. Caridi wrote to Mr Ranger, on behalf of PGS and Adtech, asking for a response to his clients' previous emails.

In said messages both have strongly stressed the fact that Stasys has not completed the tasks assigned, nor have they completed the investments foreseen in the contract, with respect to the Pubcys project.

My clients insist in receiving the expected reply within 5 working days; afterwards, they will decide the proper way to legally safeguard their rights in the most opportune offices.

On 26 November 2004 Mr Ranger responded to Avv. Caridi's letter, repeating his earlier position: that Stasys had completed its work, that further work was dependent on a business case being made for it, and that complaints against Stasys should be made by reference to contracted items of work.

The 1 December telephone conference

19. On 1 December a telephone conference took place between representatives of Stasys in England and Ms Block and Mr Fink of LM in the United States. The purpose of the conference was to discuss litigation as a due diligence item.
20. There are issues as to what was said by Mr Ranger and Mr Hopkins about the Pucbcys project. It is common ground that the recent correspondence was discussed. Ms Block and Mr Fink took notes of what they were told, but (unsurprisingly) neither Mr Ranger nor Mr Hopkins took a written note of what they said. Each of these four gave evidence at trial and each were invited to interpret the written notes taken by Ms Block and Mr Fink.
21. It will be necessary later to express my conclusions as to what was said at the meeting in the light of the evidence; but at this stage it is convenient simply to set out the material parts of the notes taken by Mr Fink and Ms Block.
22. Mr Fink noted:

- Pubcys

- EU contract mostly

- publishing

- Consortium [contract] with EU

- nothing in [contract] requires [Stasys] to continue to next phase

- worst case > would have to turn over the [software]

23. Ms Block's notes were more full:

- Contract - Pubcys

contract - EU members to support publishing. They did soft[ware] Finished activities. EU accepted work

told parties - no more work

Letter work isn't completed

Italians. Lead member of consortium. correspondence to continue work.

Consortium contract - nothing requiring Stasys to go forward.

Worst case - have to give source code for software …

copies > correspondence

claim - nebulous? (continue work, new work?)

no final customer acceptance letter but not required

Mateo Carreedi (sic)

(value - hugely negative 170,000 - paid 25,000 sterling)

(Stasys paid 30% of total)

wanted to get into EU grant

contractual obligations were … between EC & consortium?

no contractual obligation to consortium members?

24. I shall return later to my findings as what was said in so far as it is material.
25. It is common ground that Mr Ranger offered to send the correspondence to Mr Block and that this was done. This bundle of correspondence has been referred to as the First Correspondence Clip ('FCC'). It includes most of the correspondence to which I have referred; but not Mr Armida's email of 30 September.

Developments prior to the Closing Meeting

26. A number of Disclosure Bundles were sent by Kerman & Co to LM over the next few days. The form in which they were sent was later to give rise to an issue which was eventually resolved by a late amendment to the terms of SSA and the addition of the 2^nd and 3^rd sentences of Cl.6.3.
27. The correspondence in relation to the Pubcys project continued after 1 December. On 6 December 2004 Mr Armida replied to Mr Ranger's letter of 26 November addressed to Avv. Caridi. He contended that Stasys still had work to do, had not answered the criticisms which had been made and was under an obligation in relation to the setting up of Pubcys International. The letter concluded:

In any case considering that there is no way to understand each other on the base of mutual loyal relationship I invite you formally to address any your comment (sic) directly to my lawyer, who has been charged to bring you to the Court.

28. Mr Ranger's response was to repeat his request that Mr Armida identify the outstanding work, to ask for a business plan to support a commercial case to go forward and to question the obligation to set up Pubcys International.
29. Mr Ranger also asked Mr Hopkins whether there was any obligation to set up Pubcys International, adding,

… this is news to me and about the only thing … that worries me in the context of legal action and impending LM activities.

30. Mr Hopkins replied at 12.32 on 6 December

There were/are 2 documents as far as I am aware.

One document is the Pubcys Project Exploitation, a very vague document, and subject to Italian law. Apart from being very vague, it contains one very useful sentence I had forgotten about - second part of para 1 –

'If any of the contractors shall decide not to participate to the constitution of Pubcys International, he/they will loose any rights about the project.'

…

I cannot read the document in such a way that Stasys are obliged to finance anything ad infinitem.

Perhaps we can change our tack to say we are happy to renounce 'any rights about the project' if that is what they want? It is inconsistent with you having said we keep the IP, but no harm done, and my fault for forgetting the words.

Just a slight nervousness about the woolly Italian law thing …

Stasys made a decision not to participate further in the Pubcys project and to forfeit its rights in relation to the software.

31. On 7 December 2004 Mr Armida warned Mr Ranger that he would be meeting Avv. Caridi the following week.

…there is evident disagreement on the matter and it's the reason why we will ask the Court to make a final assessment.

32. In emails passing between them, Mr Ranger and Mr Hopkins recognised that the correspondence had now escalated and that the recent exchanges would have to be disclosed to LM. Mr Ranger still adhered to his view that Stasys had done what it was bound to do; but recognised

… there will be great pain if we have to go to court in Italy …

33. Towards the end of 8 December 2004 Mr Ranger, Mr Hopkins and Mr Michael Bennett (of Kerman & Co) considered the issues raised by the most recent communications about the Pubcys project. Mr Hopkins's view was that they should be expressly disclosed rather than just slipped into the Disclosure Bundle. Mr Bennett agreed, suggesting that their contents should be raised before they were provided in the Disclosure Bundle. Mr Hopkins suggested that Mr Ranger call Mr MacLauchlan to raise the matter. Although this suggestion was accepted it was not put into effect. By the time Mr Ranger had received the message, Mr MacLauchlan had gone to bed. It was agreed that Mr Bennett would arrange for copies of the Pubcys emails to be printed so that Mr Ranger could raise them at the Closing Meeting at the offices of Allen & Overy the following day.

The Closing Meeting on 9-10 December 2004

34. The evidence of Mr Bennett and Mr Hopkins is that Mr Bennett arranged for the printing of the recent Pubcys emails. These were referred to at trial as the Second Correspondence Clip ('SCC'). This correspondence was then put in a blue ring binder.
35. The Closing Meeting began on the morning of 9 December with most of the time being taken up with lengthy negotiations over matter which are not relevant to the present proceedings. As some stage Mr MacLaughlan asked about the Pubcys project. Mr Ranger explained that the intention had been to acquire experience of EU grants. It is common ground that Mr Ranger did not give Mr MacLaughlan the blue folder with the SCC, and that he did not give an explanation about the recent escalated risk of litigation revealed in the correspondence.
36. It is clear that, at some stage in the afternoon, Mr Ranger handed to Ms Block the blue ring binder containing the SCC; and that Ms Block asked that the contents be sent to Mr Fink in the US.
37. Neither Mr Ranger or Ms Block had a clear recollection of what was said or how the request to have the emails sent to Mr Fink came to be made. Mr Ranger says that it would have been uncharacteristic of him not to have said anything about the contents. Ms Block and Mr Fink were the people who knew most about the Pubcys contract; and it may be that Mr Ranger handed them to her because she would need less explanation than would Mr MacLauchlan. He may have also have had in mind that Mr MacLauchlan might ask for an indemnity in relation to a matter which so far as he was concerned had blown up at the last moment. Mr Bennett recalls being told by Mr Ranger that he had spoken to Ms Block about the emails; and that the issue of an indemnity had not arisen.
38. It appears that Mr Ranger tried to email the SCC to Mr Fink immediately, but was unable to do so. Mr Bennett recalls being asked by Ms Block to send the emails to Mr Fink, who had explained that he had not received the emails which Mr Ranger had tried to send. Mr Bennett sent the SCC emails at 0014 hours on 10 December London time (1914 hours US Eastern Standard time). By the time they arrived Mr Fink had left his office and he did not see them until the following morning US Eastern Standard time.
39. Between 0200 and 0400 hours the definition of Fair Disclosure in the SSA was amended to its final form by the addition of the 2nd and 3rd sentences of Cl.6.3. These were intended to deal with a problem caused by the number of documents which had been disclosed without a proper index. LM was uneasy with the form of the disclosure bundles; and Allen & Overy suggested that the index to the bundles should link the documents to warranties in the SSA. This was not a task that could be undertaken in the short time available, and so there was provision for an extended period to finalise the Disclosure Bundles. The SSA and the Disclosure Letter were signed at around 0700 on 10 December 2004. It was after this that Mr Fink saw the SCC emails for the first time.
40. The broad structure of the SSA was that Mr Ranger and Mr Curtis, among others, agreed to sell and LM agreed to purchase the entire issued share capital in Stasys (clause 2.1). A proportion of the consideration was paid on the day of completion, and the balance was paid into a Holdback Account (clause 3.2). On the first anniversary of completion the first £2 million in the Holdback Account was to be released to Mr Ranger and Mr Curtis, unless a 'Relevant Claim' was outstanding at that date. A Relevant Claim included a General Warranty Claim. If a Relevant Claim were outstanding, a sum equal to the amount of the Claim was to be retained in the Holdback Account and deducted from any payment that would otherwise be due at that time. On the second anniversary of completion the balance of the Holdback Account was to be released, subject to the continued retention of anything withheld at the first anniversary and the retention of a sum equal to the amount of any Relevant Claim (clause 9). M. Ranger and Mr Curtis provided warranties to LM which were set out in Schedule 1 to the SSA (Cl 6.1); and Paragraph 4 of Schedule 7 to the SSA contained a provision prescribing a form of notification of a General Warranty Claim before liability would arise.
41. It is the operation of these provisions which has given rise to the present claim; and the detailed provisions (insofar as material) are set out later in the judgment.

The period from 10 December 2004 to the Completion Date (28 February 2005)

42. Mr Fink reviewed the SCC when he came into his office in the morning of 10 December US East Coast time.
43. The final versions of the Disclosure Bundles were provided to Allen & Overy on 22 December 2004. In addition to the Pubcys Summary, these contained the contents of the SCC.
44. On 7 January 2005 Mr Steve Ross of LM emailed various LM personnel asking them, as part of their review of the bundles, to identify any documents which had not been previously disclosed and to formulate any requests for further information whether for documents in the bundles or otherwise.
45. On 12 January 2005 Ms Block emailed various LM personnel, including Mr Fink, asking them to identify any documents that they had not previously seen by the next day. Mr Fink did not identify any documents in response to this request. On the following day Ms Block requested a number of documents from Mr Bennett, including the annexes to the Development Agreement, which were provided in early February 2005. The Completion Date for the SSA was 28 February 2005.

The Period from 1 March 2005 to 19 February 2007.

46. In late March or early April 2005 Stasys received a letter from a firm of lawyers acting for Dr Pacilè which had been sent to all the Contractors. The letter (dated 18 February 2005, but apparently not posted until 29 March) was titled 'Notice to Fulfil.' It set out a number of factual assertions, including that the Contractors were 'to commit moreover to constitute Pubcys International,' that Dr Pacilè was to have had certain interests in that company, that the development of Pubcys was 'closed officially on 30 June 2004', and that the software supplied by Stasys was incomplete and inoperable. The letter concluded with a notification, under provisions of the Italian Civil Code, to 'fulfil all obligations assumed towards my client' within 15 days, failing which 'we will be obliged to defend the rights of Eng. Pacilè with the appropriate authorities.'
47. Mr Hopkins drafted a response for LM making (among others) the point that Dr Pacilè was not party to the Exploitation Agreement, and referring to the provision of the Exploitation Agreement that allowed a Contractor not to participate in the incorporation of Pubcys International. At this point Mr Fink asked for a copy of the Exploitation Agreement, which was provided on 20 April 2004.
48. On 28 February 2006 the first tranche of monies due to the Claimants under the Holdback Account was due. It was not paid: although not for reasons relating to the Pubcys issue.
49. On 19 July Stasys was served with a Writ of Summons in the Turin Civil Court. The Writ contained a claim by Dr Pacilè that Stasys had failed to develop and exploit Pubcys. Although the amount which is claimed is set out (damages in excess €36 million), the basis on which it is claimed is not clear. The Claimants and LM agree that Dr Pacilé does not have a valid claim, not least because he was not a party to either the Development Agreement or the Exploitation Agreement.
50. In the Turin Proceedings the other Contractors also deny the existence of any contract upon which Dr Pacilè relies. However, they claim in excess of €81 million against Stasys on the basis of alleged breaches of the Development Agreement. The extent to which Dr Pacilè and the other Contractors rely on the Exploitation Agreement is unclear.
51. On 12 October 2006 Dr Pacilè's lawyer indicated on a without prejudice basis that he would accept €2 million in settlement of his claim. LM rejected that offer; and on 16 October 2006 the first £2 million in the Holdback Account was released, after LM had abandoned its earlier objections.

The period since 20 February 2007

52. On 20 February 2007 (7 days before the second anniversary of the completion date) LM served a Notification Letter pursuant to the terms of the SSA.
53. On 28 February 2007 LM sent a further letter. This letter, which is not relied on by LM as a contractual notification since it was out of time for such purpose, specified a failure to disclose the Exploitation Agreement, which was said to form the basis of some or all of the claims in Turin. LM relied upon the existence of this claim under the SSA to withhold payment of the balance of the Holdback Account.
54. On 4 June 2007 the present proceedings were begun by the Claimants.

The terms of the SSA relevant to the warranty issue

55. The Warranties and Indemnities are set out in Clause 6 of the SSA as follows.

6.1 The Warrantors (the Claimants):

6.1.1 warrant to the Purchaser (LM) that the statements set out in Schedule 1 are at the date of this Agreement and will at Completion be true and accurate; and

6.1.2 undertake to disclose to the Purchaser as at the date of this Agreement in the Disclosure Letter anything which is inconsistent with any of the Warranties and to give notice to the Purchaser at anytime after the date of this Agreement of any such thing which comes to the attention of any of them.

…

6.3 The liability of the Warrantors to the Purchaser in relation to any claim that any matter, fact or circumstance renders any of the Warranties untrue or misleading or causes them to be breached shall be reduced to the extent that such matter, fact or circumstance has been fairly disclosed to the Purchaser in the Disclosure Letter as at the date of this Agreement. ¦ Such disclosure shall only be deemed fair in the event that the document index attached to the Disclosure Letter, or delivered to the Purchaser at the address given in Clause 16.2 within fourteen days of signing, makes accurate reference to a Document Reference Number in the attached disclosure files and such disclosure files include only documents disclosed to the Purchaser prior to the date hereof. ¦ The Purchaser shall have the right, within 21 days of delivery as aforesaid, to indicate to the Warrantors any documents which have not been so previously disclosed, whereupon such documents shall be excluded from the Disclosure Bundle.

I have inserted vertical lines so as to divide the 3 sentences of Clause 6.3.

56. Schedule 1, to which Cl.6.1 makes reference, contained the following Warranties:

7 Accuracy and Adequacy of Information

7.1 … so far as the Warrantors are aware the factual information in the text of the Disclosure Letter is true and accurate in all material respects and is not misleading because of any omission or ambiguity or for any other reason.

…

7.5 There is no material agreement or document, nor so far as the Warrantors are aware, fact or matter in connection with which the Company or either Subsidiary has suffered or incurred or would be likely to suffer or incur any material liability, obligation or loss, contingent or otherwise, which has not been fully and fairly disclosed in the Disclosure Letter.

19 Litigation

No member of the Group is engaged in any litigation … and no litigation … is pending, threatened or expected and so far as the Warrantors are aware there is no fact or circumstance likely to give rise to any such litigation …

57. It is convenient to set out the terms of the notification provisions in paragraph 4 of schedule 7 (headed 'Limitations on Liability') when considering the Notification Issue

The Arguments in outline

LM's submissions

58. Mr Brindle QC submitted that the Pubcys Summary produced on 1 September 2004 gave the impression that there was no prospect of a damages claim against Stasys. This summary was never withdrawn or corrected; and was the only disclosure about Pubcys given by the Claimants in the Disclosure Letter. Mr Ranger's original draft had been changed, as Mr Hopkins rightly feared that a purchaser would be likely to ask for a pound-for-pound indemnity if Mr Ranger's wording were followed. The threats of litigation grew in intensity and, by the time the SSA was signed in December 2004, there were clear threats to sue.
59. At the Due Diligence telephone conference on 1 December 2004 Mr Ranger told LM that the worst that would happen would be that Stasys would have to hand over software relating to the Pubcys project.
60. The FCC produced following this conference did not contain all the relevant correspondence: significantly, it omitted Mr Armida's email of 30 September 2004.
61. LM received a draft Disclosure Bundle on 6 December 2004. This included the Pubcys Summary and a copy of the Development Agreement, which was incomplete since it omitted the annexes (in particular, Annex 1 setting out the scope of the project work). The Claimants also failed to disclose the Exploitation Agreement. This latter was a significant omission since LM would have needed to see this agreement to understand and evaluate the complaints that Stasys was contractually obliged to engage in the exploitation of Pubcys.
62. The subsequent escalation in the intensity of the correspondence between the Pubcys participants was recognised by the Claimants as requiring disclosure and raised the possibility that LM would require an indemnity.
63. Mr Ranger failed to raise these developments with Mr MacLauchlan on 9-10 December; and such discussion as there was with Ms Block in relation to the SCC did not constitute fair disclosure. The SCC sent to Mr Fink was not seen by him until after the signing of the SSA in London; and, in the absence of any explanation, was neither fair nor otherwise contractually compliant disclosure.
64. The Disclosure Letter stated against Warranty 19 that the Pubcys Summary was 'a summary of the status of the Pubcys contract'; and thereby indicated that it was still an accurate summary as at 10 December 2004, and not merely that it had been an accurate summary when first posted in September 2004.
65. The Disclosure Bundle, which arrived at LM's offices on 28 December 2004, included a copy of the Development Agreement (without annexes), the Pubcys Summary (without qualification as to recent developments) and the SCC. The omission of the annexes, the Exploitation Agreement and the FCC rendered the disclosure incomplete; and, in any event, the disclosure was not fair disclosure within the meaning of Cl.6.3 of the SSA.

The Claimant's submissions

66. For the Claimants. Ms Newman QC submitted (in summary) that the Claimants had fairly disclosed everything they knew about the Pubcys project and potential claims. The Pubcys Summary was sufficient and accurate at the time it was made in September 2004. Subsequently the Claimants disclosed all relevant material by means of the FCC and the SCC. The information given at the 1 December 2004 telephone conference represented Mr Ranger's genuinely held views that the worst that could follow from any potential claim would be that Stasys might have to hand-over the software.
67. The omission from the FCC of Mr Armida's email of 30 September 2004 was immaterial since the FCC included Avv. Caridi's letter dated 20 November which carried the implicit threat of legal proceedings. The omission of Annexe 1 of the Development Agreement was immaterial, since it did not found any claim; and the omission of the Exploitation Agreement was immaterial, since its relevant provisions (that a decision not to participate in the Pubcys project would result in loss of rights in the project) had been disclosed in the 1 December telephone conference.
68. Ms Newman accepted that Mr Ranger had failed to mention the developing situation with Mr MacLauchlan at the Closing Meeting; but submitted that this was inadvertent and not deliberate. In any event the blue file containing the SCC had been handed over to Ms Block, who was plainly the most appropriate person to consider it on behalf of LM.
69. The Disclosure Letter and the Disclosure Bundle, in their proper context and as a matter of analysis, qualified the Pubcys Summary and made clear that it did not constitute the entirety of the contractual disclosure in relation to the Pucbys project as at 10 December 2004. There had therefore been fair disclosure within the meaning of Cl.6.3 of the SSA.

The Law

70. In New Hearts Ltd v. Cosmopolitan Investments [1997] 2 BCLC 249 Lord Pensrose considered the meaning of the phrase 'fairly disclosed' in the context of a warranty in a share sale agreement . At p.259C the Lord Ordinary said,

Mere reference to a source of information, which is in itself a complex document, within which the diligent enquirer might find relevant information will not satisfy the requirements of a clause providing for fair disclosure …

Fairness, in this context, requires more than clues which enable a purchaser to start a paper chase for matters which should be fairly disclosed.

71. In Infiniteland Ltd v. Artisan Contracting Ltd [2006] 1 BCLC 632, Chadwick LJ giving the leading judgment of the Court of Appeal, while reiterating the importance of the particular words of the clause under consideration, observed at §72

The test which, as it seems to me, must be satisfied … is an objective test.

In that case the Court held that the warranty was qualified by disclosure which had been made in the disclosure letter, read with the disclosure bundle and the accompanying documents.

The witnesses

72. LM called Mr MacLauchlan, Ms Block and Mr Fink; and the Claimants called Messrs Ranger, Hopkins and Bennett. I found that each of the witnesses gave truthful evidence; although, perhaps inevitably, their memories of the events which were the subject of forensic enquiry were weakened by the passing of time and the lack of clear contemporary documentation. There are however two observations about the oral evidence which I should make.
73. First, Mr MacLauchlan was plainly a forceful and experienced acquisition negotiator. As such, he decided to place the Claimants under legitimate time pressure to achieve the sale. Inevitably it also placed his own team under some pressure.
74. Secondly, Mr Ranger is a loquacious man. This is relevant to the issue of what was or was not said by him about the blue file containing the SCC. I was also satisfied that Mr Ranger, Mr Hopkins and Mr Bennett all intended that there should be full and fair disclosure of the current Pubcys correspondence.

Discussion and conclusion on the Warranty Issues

Preliminary Observations

75. It is convenient to note a number of points before considering the main matters in issue.
76. The scheme of the SSA was that the Claimants gave warranties which might give rise to liability, unless the facts or circumstances which rendered them untrue and gave rise to liability had been fairly disclosed to LM. At the trial, subject to one point in relation to the warranties, the focus of the enquiry was largely on whether the disclosure was fair.
77. The issue of whether disclosure is fair is to be tested objectively, see the Infiniteland Ltd case (above). It follows that some of the questions asked during the course of the trial as to the state of mind of the witnesses, and as to what should have been said or done, were of marginal relevance.
78. The context of the disclosure is important: disclosure without an appropriate context, even if not deceitful, may be unfair, see for example, the New Hearts Ltd case (above).
79. In my judgment Cl.6.3 provided an overriding obligation of fair disclosure, which was not limited by 2nd and 3rd sentences of the Clause. The use of the word 'only' in the 2nd sentence makes it clear the disclosure by the means described is a minimum requirement and not a requirement which disposed of the need for the disclosure to be otherwise fair.
80. As a matter of principle, the obligation under Cl.6.3 must be viewed in the light of the situation as it then appeared and not as it has now developed. It is important to bear in mind that both side's witnesses gave evidence that the size (if not the nature) of the claim as presently constituted before the Italian Court could not have been imagined. It was also common ground that the claim was utterly baseless.

The present case

81. There are 3 areas covered by warranties which are relevant to the current dispute.

i) The factual information in the text of the Disclosure Letter was true and accurate in all material respects and not misleading because of any omission or ambiguity or other reason (Warranty 7.1).

ii) There were no 'material agreements or documents'; and, 'so far as the Claimants were aware, no facts or matters in connection with which Stasys would be likely to suffer or incur any material liability … or loss,' which had not been fully and fairly disclosed (Warranty 7.5).

iii) In relation to litigation there was 'no pending or threatened litigation nor, so far as the Claimants were aware, any facts or circumstances likely to give rise to any litigation' (Warranty 19).

82. The potential for litigation was clear from the Pubcys Summary dated 1 September 2004. This was a document prepared for the purpose of disclosure and was expressly disclosed under Warranty 19.
83. From this point LM was provided with correspondence which showed the developing situation and, at the 1 December telephone conference, were provided with an explanation of the background which put the correspondence in its proper context.
84. In particular, Mr Ranger explained during the 1 December telephone conference the nature of the Development Agreement, that the contractual obligations had concluded and that the EU had accepted the work. He also explained that there was correspondence with other members of the consortium in which they contended that Stasys's work had not been completed. I find (on the basis of the evidence of Mr Ranger and Mr Hopkins) that Mr Ranger referred to the Exploitation Agreement (although he referred to is as the 'Consortium Agreement'); and explained that it did not require Stasys to continue. He mentioned that the 'worst case' was that Stasys might have to hand over the source code of the software. Although Ms Block and Mr Fink were reassured by this explanation, Ms Block did not accept it entirely at face value and asked for copies of the correspondence.
85. The FCC (which was reviewed by Mr Fink in the light of what had been said in the telephone conference) contained the up-to-date correspondence and revealed a picture of unparticularised complaints in response to requests for clarity. The possibility of legal action was raised by Adtech and PGS in general terms. The threatened action was for the enforcement of contractual obligations rather than a money claim (see for example, Mr Armida's letter of 6 December). This, in my view constituted full and fair disclosure of the current legal position with regard to the Pubcys project.
86. The omission of Mr Armidi's email of 30 September was not a significant or material omission in the light of the inclusion of the other correspondence; and, in particular, the express threat contained on Avv. Caridi's letter of 22 November 2004.
87. In my judgment the most likely course of events in relation to the SCC was as follows. The documents were placed in a blue file on the 9 December and were handed by Mr Ranger to Ms Block in a side room at Allen & Overy's offices sometime between 1200 and 1700 hours on 9 December. This view of the facts is supported by the evidence of Mr Bennett. It would have been both risky and uncharacteristic of Mr Ranger to have said nothing about the contents of the file. He probably said words to the effect that the contents of the file were the most recent exchange about Pubcys issue. Ms Block looked at the bundle so as to check that they were as Mr Ranger described them. Since it was correspondence relating to the Pubcys Due Diligence issue, she concluded that it should be sent on to Mr Fink as the person dealing with this issue. Mr Ranger then tried to send copies of the SCC to Mr Fink. This transmission failed. It was knowledge of this initial failure of transmission that caused Ms Block to ask Mr Bennett to resend the SCC. This he did at 0014 London time. Mr Fink was not in his office when Mr Bennett's email enclosing the SCC arrived in his mailbox at 0714 US Eastern Standard time.
88. The SCC contained a further update on the developing position with regard to Pubcys and was representative of what was being argued against Stasys. It included the threat to go to court set out in Mr Armida's communication of 7 December.
89. I recognise the argument that the failure to raise the contents of the SCC with Mr MacLauchlan was, at the least, 'a missed opportunity' directly to inform him of recent developments. However, the omission was not deliberate and does not, of itself, make the disclosure which was given unfair. Subject to one point with which I shall deal later, there was no current information or background material which Mr Ranger and Mr Hopkins had beyond the contents of the SCC; and in my view the way in which disclosure was given cannot properly be characterised as unfair.
90. In the Disclosure Letter the disclosures were expressed to consist of

this letter or any of the documents listed in the index attached to this letter (such documents being the 'Disclosure Bundle') [emphasis added]

91. LM rely on the words of paragraph 3 of the Disclosure Letter,

where any conflict arises between the contents of any document in the Disclosure Bundle … and the information contained in this letter, the information contained in this letter shall prevail.

The letter enclosed a schedule of enclosures which included the disclosure against Warranty 19,

Enclosed in the Disclosure Bundle is a summary of the status of the Pubcys contract.

92. In the Disclosure Bundle Index, under the general heading 'Banking Information, Hire Purchase Agreements, Guarantees and Litigation,' were two items:

37.	1 September	Summary of Stasys Limited disputes in connection with Pubcys Contract
38.	various	E-mail correspondence between Stasys Limited and Pubcys detailing the position as at 8 December 2004.

Item 38 was the SCC.

93. LM argues that, since there is no reference in the schedule to the Disclosure Letter to the email correspondence, there is a conflict; and the information in the schedule, which refers only to the Pubcys Summary must be treated as the only information disclosed in contractual compliance with Cl.6.1.2 and 6.3 of the SSA. I reject that submission. In view of the terms of paragraph 3 of the Disclosure Letter, the word 'or' in the definition section must be read conjunctively in order to give the sentence business sense, In any event, I do not accept that there is a conflict between the contents of documents disclosed in the schedule to the Disclosure Bundle. The Pubcys Summary is plainly and on its face a document dated 1 September. Item 38 is plainly and on its face detailing the position as at 8 December 2004. LM were entitled to exclude documents which had not previously been disclosed under the terms of the third sentence of Cl.6.3.
94. I find that there was no breach of warranty 7.1 and warranty 19; and that, to the extent that there was, the Claimants are protected from liability by fair disclosure within the meaning of Cl.6.3.
95. There were no material agreements or documents which were not disclosed apart from the Exploitation Agreement. The omission of Annexe 1 was not material. However the Exploitation Agreement was a material document; and should have been disclosed.
96. LM are entitled to say that this was a crucial agreement which appears to lie at the heart of the present Italian proceedings. They are also entitled to point out that they were unaware that it was subject to Italian Law; and that consequently the assurances of Mr Ranger and Mr Hopkins as to its effect were of less weight than if it had been subject to English law. It seems to me that it is no sufficient answer for Ms Newman to submit that it was referred to in the telephone conference of 1 December or that, in the absence of evidence, Italian law is deemed to be the same as English law.
97. I therefore conclude that the only breach of warranty which LM can rely on is the breach of warranty 7.5, the failure fully and fairly to disclose the Exploitation Agreement.

The Notification Issue

The contractual provision and the notification relied on

98. Paragraph 4 of Schedule 7 provides (in effect):

4 None of [Mr. Ranger or Mr. Curtis] shall be liable for any General Warranty Claim … unless [they] shall have received from [LM] written notice containing details of the General Warranty Claim … (setting out in reasonable detail the specific matter or claim in respect of which such General Warranty Claim is made so far as then known to [LM]) including the amount of such General Warranty Claim …

4.1 on or before the second anniversary of Completion in the case of a General Warranty Claim…

99. The date of the second anniversary was 27 February 2007.
100. The letter of 20 February 2007 (upon which LM rely as a contractual notification) was in the following terms:

…As you may be aware, an issue has arisen in relation to certain costs potentially to be incurred by the Company, since renamed Lockheed Martin UK Integrated Systems & Solutions Limited, and we are writing to you formally in that connection.

As you are aware, on 19 July 2006, the Company was served with a writ of summons to the Turin Civil Court (the Writ). This is in respect of alleged breaches of an agreement between: (i) Eng Antonio Salvatore Pacilè; (ii) PGS s.r.l; (iii) Adtech International s.r.l; (iv) the Company; and (v) Trevenque Sistemas de Informacion S.L. in relation to the Pubcys project. Mr Pacilè has served notice of proceedings on each of the other parties and asked the Turin court (amongst other things) to award him damages of Euro 36,170,923 in respect of the parties' alleged serious breach of the Pubcys agreement.

In addition, each of the other parties has made counterclaims against the Company in their answer to the Writ, currently amounting to approximately Euro 81 million, which may seek to impose further substantial liabilities on the Company.

We believe that these matters constitute breaches of the Warranties (including without limitation Warranties 7.1, 7.5, 10.1, 10.2, 10.3 and 19) entitling us to pursue a General Warranty Claim. In accordance with Paragraph 4 of Schedule 7 to the SSA we formally notify you of our claim for breach of warranty.

At present it is not possible to state exactly what the amount of our loss will be, but it will include the loss suffered by the Company as the result of the claim against the Company by Mr. Pacilè and the counterclaims, together with the associated legal and other costs and expenses incurred.

In accordance with Clause 9.4 of the SSA, we also notify you that we anticipate that the amount which would otherwise be released from the Holdback Account to the [Claimants] on the [28 February 2007] will be retained in the Holdback Account pending further information on this matter and its resolution.

The law

101. Although the issue primarily concerns the proper construction of the SSA and an interpretation of the 20 February 2007 letter, each party cited authority in support of its submissions.
102. For LM, Mr Brindle relied on Mannai Investment Co. Ltd v. Eagle Star Life Assurance Co. Ltd [1997] AC 749. That case makes clear that construction of a notice has to be viewed objectively, per Lord Steyn at 767G,

The issue is how a reasonable recipient would have understood the notice(s). And in considering this question the notice(s) must be construed taking into account the relevant contextual scene.

103. Ms Newman referred to an unreported decision of Gloster J in RWE Nukem Ltd v. AEA technology Plc [2005] EWHC 78 (Comm). The issue in that case, as in the present case, was whether adequate written particulars of the claim for breach of warranty had been given. At §10 of the judgment Gloster J set out a number of propositions distilled from earlier authorities, two of which are particularly relevant to the present case.

i) Where a notification clause operates as a condition precedent to liability, it is for the party bringing the claim to demonstrate that it has complied with the provision.

ii) The wording of the notification clause must be interpreted by reference to the commercial purpose that the clause was to serve.

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 takes such steps as are available to them to deal with it … the notice should be informative.

per Stuart-Smith LJ giving the judgment of the Court of Appeal in Senate Electrical Wholesalers Ltd v. Alcatel Submarine Networks Ltd [1999] 2 Lloyds Rep 423 at §90.

The arguments of the parties

104. For LM Mr Brindle submitted that the Notification provision required the matters in respect of which the claim was made to be identified in reasonable detail. This meant identifying what 'happened to cause the claim to be made,' see Bottin v Venson Group Plc (CA 22 October 2004), see Gibson LJ at §51. The letter constituted an unequivocal notice of breaches of specific warranties in relation to proceedings concerning the Pubcys project; and the reference to warranties 7.1 and 19 made it clear that LM was alleging that the Disclosure letter was deficient about Pubcys and that the threats of litigation about Pubcys had not been disclosed.
105. For the Claimants Ms Newman submitted that what was required was an explanation from LM of how, notwithstanding that disclosure had been made against the cited warranties, it was contended that the warranties had been breached. It was bound to identify facts known to the Claimants at the date of the SSA which were said not to have been disclosed and how the facts led to the breach of the particular warranties relied on.

Conclusion on the Notification Issue

106. I approach this question first on the basis that there was a breach of warranty 7.5 in relation to the Exploitation Agreement. On this basis, even a reasonable recipient who was aware of the relevant background would not have been informed by the terms of the letter of 20 February 2007. The claim before the Turin Civil Court is referred to; but in terms of an obligation 'in respect of the parties' alleged breach of the Pubcys agreement.' The agreement is not identified. When it comes to the nature of LM's claim against the Claimants the matter is even more imprecise, 'an issue has arisen in relation to certain costs potentially to be incurred' and 'we believe that these matters constitute beaches of warranties'. LM may have been unclear as to the nature of the claim against Stasys; but it was contractually required to provide reasonable detail of the basis on which it sought to make a warranty claim. No attempt is made to link the breach of warranty 7.5 to the Exploitation Agreement, or to set out 'a particularised claim for breach of warranty'. It is not as if such a notification would have been difficult to frame, since it is common ground that the letter sent 8 days later, on 28 February 2007, constituted sufficient notification.
107. It seems to me that in circumstances where the claim was regarded by LM as extravagant and without proper foundation, even though Mr Ranger knew of the names of the parties to the Italian proceedings and was aware in broad terms of the claim, it was incumbent to focus on the nature of LM's warranty claim against the Claimants.
108. Nor, if it were necessary, would I have been satisfied that the letter was sufficient notification of a claim in relation to warranties 7.1 and 19. There was no attempt to link the breach of warranty to the factual information in the text of the Disclosure Letter or to identify how Dr Pacilè's litigation gave rise to a breach of warranty 19.
109. For these reasons I find that LM failed to show compliance with the notification provisions within the time limited for making such claims. It follows that the Claimants are not liable in respect of the warranty claim.

Causation and damages Issue

110. It is LM's case that that it 'is entitled to be put in the position as if Warranties 7.1, 7.5 and 19 (or any of them) were true'. Mr Brindle submits that the calculation should proceed on the basis that the amount of damages is the amount which is recoverable in the Turin claim. As an alternative Mr Brindle submits that the damages should be assessed on the likelihood that LM would, if it had been aware of the Exploitation Agreement, have required an indemnity.
111. Both sides referred to the Privy Council case of Lion Nathan Ltd and others v. C.C Bottlers Ltd and others [1996] 1 WLR 1438; and each side submitted with confidence that it supported its case.
112. The decision makes clear the importance of identifying the nature of the warranty. If the warranty is of the quality of the shares, the proper measure of the loss will be the difference between the actual value and the value of the shares had the warranty been complied with. In other cases the general rule for the calculation of damages will apply: the measure of damages will be designed to put a claimant in the position it would have been if the defendant had complied with the terms of the contract.
113. None of warranties 7.1, 7.5 and 19 is the equivalent of a warranty as to the quality of the shares in Stasys. So far as 7.5 is concerned, the failure was in relation to a material agreement.
114. It is difficult to say that the existence of the Turin proceedings can properly be said to render the shares valueless or to reduce the value to any particular level. Any expert valuation (of which there is none) would be likely to take into account the strength of the claim, which both sides agree is without merit.
115. Nor does it assist LM to contend that it would have obtained indemnities. Although the Claimants were aware that they might be asked to give indemnities, it is unlikely that the production of the Exploitation Agreement in the context of an unparticularised claim the Development Agreement would have led to the provision of Indemnities in the face of a threat to withdraw from the transactions, however Mr MacLauchlan may view the matter in retrospect. I also accept Ms Newman's submission that it is unlikely that LM would have obtained an indemnity against Dr Pacilè's claim: no such claim had been envisaged by anyone on 10 December 2004. The greater likelihood is that an indemnity would have been framed in terms of the costs relating to handing over the software for the Pubcys project.

Summary

116. For the above reasons I find that the Claim succeeds and the Counterclaim fails. Accordingly there will be judgment for the Claimants.