Scottish Court of Session Decisions

[1] On 4 May 1993 the pursuers, National Express, and the principal shareholders of Saltire Holdings Ltd entered into a minute of agreement for the sale and purchase of the whole issued shares of Saltire for a total consideration exceeding £5M. The defenders are three of the four principal shareholders of Saltire. The National Express group and Saltire and its subsidiaries all provided bus and coach services and were subject to regulation. It was said that in the course of the negotiations leading up to the agreement it emerged that there was official objection to the proposal. A subsidiary of Saltire, Bruce's Coaches Ltd, had to be disposed of to a third party to overcome the objection. On 5 May 1993 National Express and Branksome 174 Ltd entered into an agreement for the sale and purchase of the whole issued shares of Bruce's Coaches for a consideration of £1. Completion of both agreements took place on 5 May 1993.

[2] The agreement between the parties, referred to as the principal agreement, contained a number of warranty provisions. The present dispute relates to warranty B.10 which was in these terms:

The agreement did not make provision for the method of ascertaining net asset value for the purposes of this warranty, in contrast to detailed provisions relating to the net asset value of the Saltire group as a whole. Warranty B. 9 warranted the value of the net assets of the group by reference to the audited accounts of Saltire and its subsidiaries at 27 December 1992 adjusted in a number of specified ways. Neither party suggested that the terms of warranty B. 9 assisted in the construction or application of warranty B. 10. In accordance with usual practice clause 5.4 of the agreement provided that each warranty was to be construed as a separate representation.

[3] The operative provisions of the principal agreement which are material for present purposes are as follows:

[4] In connection with the onward sale of Bruces Coaches, clause 17 provided:

Clause 18 provided that the principal agreement was to be governed by and construed in accordance with Scots law.

[5] The agreement for the onward sale of Bruce's Coaches (referred to as "the Company") between Branksome Ltd and National Express (referred to as "NE") incorporated the warranties from the principal agreement as follows:

The liability of NE was qualified in a number of respects which are not material for present purposes. The onward sale agreement was to be governed by English law.

[6] On 30 March 1995, just within the twenty-three month period allowed, Express Travel (Holdings) Limited, as Branksome 174 Ltd had then become, intimated a claim against National Express under warranty B. 10. On 2 May, National Express' solicitors wrote to the defenders' solicitors giving notice of a "matter" in terms of clause 6.13 of the principal agreement. Appended to the letter was a copy of the claim received from Express Travel. By letter dated 4 May 1995, National Express's solicitors gave notice to the defenders' solicitors of claims under clauses 6.3 and 6.4 of the principal agreement. Parties were in agreement that this letter satisfied the requirements of timeous notice, and that no later communication could satisfy the requirements of clause 6.3.

[7] The document appended to National Express' solicitors' letter of 2 May quoted the terms of warranty B. 10 and stated:

There followed six numbered paragraphs, each containing a brief narrative of circumstances giving rise to an alleged deficiency, and a quantification of the particular claims.

[8] For the defenders, Mr Howlin argued that the notice failed radically and incurably to satisfy the requirements of clauses 6.3 and 6.4. To establish breach of warranty B. 10, National Express had to offer to prove that on 5 May 1993 the net asset value of Bruce's was less than £1. To do that they had to produce a balance sheet for Bruce's showing assets and liabilities respectively and bringing out a balance. Where necessary notes had to be produced to amplify the entries in the balance sheet so that the whole gave an intelligible explanation of the financial position of the company. National Express had failed to do so. There was no statement of assets. There was no statement of liabilities. There were no notes. The notice was a list of proposed adjustments to something that was neither identified not produced. For National Express Mr Williamson contended that, properly construed, the notice was sufficient, and identified factors which, individually and in the aggregate, adversely affected net asset value. The defenders were properly informed of the nature and substance of the claims and of the amounts in question. He provided information on the background to the transactions to explain the stipulation in warranty B. 10.

[9] Warranty B. 10 does not specify any accounting procedures for determining net asset value. In my opinion Mr Howlin's argument that a balance sheet supported by notes was required must be rejected. Warranty clauses frequently use standard accounting statements and techniques as the basis for ascertaining the financial position of a company. Commonly reference is found to accounting conventions and practices to be applied in the preparation of accounts. But it is a matter for parties to determine by agreement whether to adopt such an approach. In this case, for whatever reason, the parties elected to conclude their contract without agreeing the mechanics for ascertaining whether there had been breach. A balance sheet would be one way of ascertaining net assets. But a narrative statement of the nature of the business's assets and liabilities which included a statement of the balance brought out on aggregating the components identified would provide the information required whatever form it took.

[10] On the other hand, it is, in my opinion, clear that a statement which contained no expression of a balance between assets and liabilities could not meet the requirements of the provision. What the warranty requires is the identification of a difference between net asset value and £1. It appears to have been intended that Bruce's had to be minimally solvent at completion. The warranty was to bite if it had no net assets, or a deficiency of assets to meet its liabilities. It is a matter of some importance that the expression "value of the net assets" of the company is used without qualification. In general, in the absence of contrary stipulation, where a balance has to be struck for a purpose which will affect the financial interests of parties, assets have to be stated at their fair value, and liabilities assessed fairly, whatever accounting conventions may have been applied by the parties or one or other of them in other circumstances. Parties are free to take a different approach, and, it may be, to deal with different groups of assets and liabilities in different ways. In the present context, where it appears from the terms of the agreement that the warranty was addressed to Bruce's solvency, one might have found a stipulation for valuation on a break-up basis sought by the ultimate purchaser, and valuation on a going concern basis sought by the vendors. Some specific stipulation might have been expected to have been agreed following negotiation. But that was not done, and it appears to me that in the result the warranty has to be read and applied in its terms. To put themselves in a position to establish breach National Express had to show that the net assets of Bruce's, fairly valued, less the sum of the company's liabilities, fairly stated, was less than £1.

[11] It is necessary to consider the notice against this background. In the first place it does not bring out a balance. National Express' pleadings adopt a balance from a set of management accounts said to have been prepared shortly after completion, and use the entries in the notice to adjust that balance. In its structure, the case in the pleadings underlines the deficiency in the notice. It seeks to bring out a balance between assets and liabilities. But the notice did not.

[12] The deficiencies go much further. The first paragraph of the notice states:

It is clear from the paragraph that the writer of the report was making a comparison between a list of invoices and an entry in an accounting document or book of account. As narrative, the item makes good sense, and one can understand that it relates to the requirement to make an adjustment to some underlying document or record. But it goes no further than to identify an adjustment to a statement of one class of liability which might have been included in a statement of balance.

[13] The second paragraph relates to "depreciation not charged", and sets out sums of depreciation for five classes of assets. The entry does not make sense. It confuses conventional historical accounting principles with value. A statement of net asset value in this case required a valuation of the assets, not an adjustment of book entries brought forward. Mr Williamson suggested that the company's fleet of buses was scrapped and would have had only a nominal value. Whether or not that is correct, it illustrates the difference between a valuation and what has been done in the preparation of this notice.

[14] The third paragraph referred to a bad debt provision. It adopted a convention for identifying bad debts, being debts outstanding for more than 84 days, which may have reflected National Express's customary approach to accounting for trade debtors. But it can have had no general validity. There was no such provision in the parties' agreement. Moreover, the paragraph proceeded to state that the debts would be pursued by a third party company which would retain any proceeds. Whether in a statement of value one would have made such a provision again is irrelevant at this stage. What is clear is that the item does not fulfil the purposes of a statement of value of debtors. The debtors' figure in the company's accounts is not disclosed.

[15] The fourth item related to a credit note which allegedly had to be issued. Subject to proof, it would have provided material for adjusting a balance if related to a statement of assets and liabilities. Item 5 contains an explicit reference to a balance sheet to the end of April without that document being produced. Such a balance sheet might have served to provide a sufficient accounting base when read with notice of adjustments allegedly required, at least so far as sub-paragraph (a) is concerned. The accounting treatment proposed for item (b) would have been questionable. Uninsured claims, item 6, is again readily understood. But as with the other three items, suffers from the fundamental deficiency that it cannot be regarded as a statement of the net assets of the company.

[16] I was provided with a set of accounts made up at 5 May 1993 which demonstrate clearly that the lack of a comprehensive statement of assets and liabilities was no mere formal deficiency. The balance sheet brought out a net assets figure of £37,713. It appears that the notice may have listed adjustments allegedly required to this balance. The sum mentioned in National Express' pleadings is sufficiently close for that to have been the case. However, the contents of the document show that the assets and liabilities of Bruce's included the usual range, from heritable property to trade debtors on the one hand, and various liabilities on the other, all of which would have required to be valued for the purposes of the warranty claim.

[17] I was referred to a number of authorities, and two in particular: Thomas Witter Ltd v TBP Industries Ltd [1996] 2 All E.R. 573, and Senate Electrical Wholesalers Ltd v Alcatel Submarine Networks Ltd [1999] 2 LL R 423. These cases provide guidance on what may be required to meet stipulations for adequate or sufficient notice of claims under warranty provisions. But I do not think it necessary to discuss the opinions in them. In my view the notice in the present case was fundamentally defective. It did not do what was required on any view of warranty B 10. It cannot now be remedied. It was agreed that in that event I should assoilzie the defenders.

THE RELEVANCE ARGUMENT

[18] I was asked to deal with the defenders' second argument in any event. It turns on clause 17. The background to the present litigation is the claim made in England by Express Travel against the present pursuers. In the present action National Express aver that they have suffered loss and damage as a result of the defenders' breach of warranty B. 10. They had incurred liability to Express Travel, having repeated the warranty in the onward sale agreement. They aver that there is a liability to Express Travel in respect of the over statement of the net assets of Bruce's. They state that their loss: "is reasonably estimated at the sum sued for which represents the difference between the true financial position of Bruce's at the date of its acquisition by the (pursuers) and the financial position incorrectly warranted by the defenders".

[19] Express Travel raised proceedings in the High Court of Justice. The statement of claim in that action narrates the onward sale agreement of 5 May 1993. It narrates warranty B. 10, and refers to the schedule to the statement of claim as containing a list of those facts and matters adversely affecting the net assets of Bruce's. The particulars of the loss and damage allegedly suffered state that:

[20] Mr Howlin was critical of the statements in the English litigation. The acquisition of a company did not impose on the acquiring group any liability for the company's debts. If Express Travel had indeed discharged debts of its newly acquired subsidiary, that must have been a voluntary act related to its own acquisition, and could not be ascribed to any default on the part of the defenders. It would be inappropriate to comment on the content of the English writ without evidence. The practice of a foreign court is a matter of fact, and there may be rational explanations for what appears to be said. On the face of it the description of the schedule as a statement of liabilities has little to commend it, and the notion that Express Travel discharged the liabilities of its new subsidiary at least requires explanation. But the proceedings have been stayed pending the outcome of this action, and the pleadings may is due course be amended.

[21] Of more fundamental importance is the relationship between the claims. Clause 17 of the principal agreement entitles National Express to seek a remedy against the defenders where a number of conditions are satisfied. Firstly, there must be facts and circumstances which would have given rise to a breach of warranty by the defenders had Bruce's not been sold on. National Express must therefore plead relevant facts and circumstances showing breach and bringing out the amount of the claim they would have had if there had not been an onward sale. There are then two limitations on their right to recover. In the first place, the sum they are entitled to claim is an amount equal to the amount of the third party purchaser's claim against them. In the second place the claim can be no greater than it would have been if Bruce's had not been sold on. It is the first of these limitations that causes the immediate problem. The expression "claim .. under the Warranties" is an obvious reference back to clause 6 of the principal agreement, and refers to the defenders' liability under the warranty provisions. In my opinion clause 17 is triggered by the emergence of a liability to Express Travel. The clause is not concerned solely with the mechanics of intimation of claim. It creates a contractual right to recover from the defenders where National Express's liability to Express Travel has been established.

[22] The combined effect of clauses 8.1.1 and 8.2 of the onward sale agreement is a matter for English law. There are no averments that English law has any different effect in this context from Scots law. As a matter of straightforward construction these clauses appear to limit National Express' liability to Express Travel to the amount recoverable from the present defenders under the principal agreement. I accept the submissions of Mr Howlin that on the face of it, National Express have contrived to create a completely circular situation in which liability under each contract is dependent on liability under the other. I do not accept Mr Williamson's argument that the principal agreement can be construed by reference to the onward sale agreement. That did not concern the defenders, and in a question with them is res inter alios acta. Nor is this purely a matter of form. The onward sale agreement contains provisions relating to Bruce's which differ in substance from the principal agreement. Clause 10 of the onward sale agreement alters the relationships between Bruce's and its owner which might have a bearing on whether liabilities might be paid off by Express Travel, for example.

[22] The pursuers' present averments do not show how matters are to be resolved. Mr Williamson asked that if I took this view, I should allow him an opportunity to consider amendment after consultation with English lawyers. I would have done so. But the question is not relevant given the view I have formed on the major argument.