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Scottish Court of Session Decisions
You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> RECLAIMING MOTION BY ARDMAIR BAY HOLDINGS LTD AGAINST JAMES DOUGLAS CRAIG [2020] ScotCS CSIH_21 (12 May 2020)
URL: http://www.bailii.org/scot/cases/ScotCS/2020/2020_CSIH_21.html
Cite as: 2020 GWD 16-230, [2020] ScotCS CSIH_21, [2020] CSIH 21, 2020 SLT 549
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FIRST DIVISION, INNER HOUSE, COURT OF SESSION
Lord President
Lord Menzies
Lord Drummond Young
[2020] CSIH 21
CA107/18
OPINION OF THE COURT
delivered by LORD DRUMMOND YOUNG
in the Reclaiming Motion by
ARDMAIR BAY HOLDINGS LIMITED
Pursuer and Respondent
against
JAMES DOUGLAS CRAIG
Defender and Reclaimer
Pursuer and Respondent: Lord Davidson of Glen Clova QC; CMS Cameron McKenna Nabarro
Olswang LLP
Defender and Reclaimer: Howie QC, McGregor; Brodies LLP
12 May 2020
[1] In October 2017 the parties entered into an agreement for the purchase by the
pursuer from the defender and others of the whole share capital of the Craig Group Ltd
(“the Company”) for a price of £82,570,677. The agreement in question, known as the Sale
and Purchase Agreement (“the SPA”), was executed on 14 October 2017. The Company and
its subsidiaries provide support and supply vessels and emergency response and rescue
services to operators in the North Sea oil industry. The defender was a major shareholder in
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the Company. The pursuer alleges that the defender, together with other shareholders, is
liable for two breaches of warranties contained in the SPA, and is also liable for breach of a
further clause of the contract dealing with matters becoming known between the date of
execution of the SPA and its completion. Before the Commercial Judge the pursuer also
advanced two further cases based on wilful concealment and common law
misrepresentation, but these were rejected by the Commercial Judge and are no longer
maintained.
[2] All of the remaining three grounds of action relate to alleged failures by the defender
and other shareholders to disclose that, immediately prior to the execution of the SPA
Repsol, a major client of the Company, had emailed an invitation to tender (“ITT”) for
services that were at the time provided by a subsidiary of the Company. The pursuer claims
that the terms of the invitation to tender indicated that the Company was likely to lose its
two most valuable contracts, or at best would require to renegotiate those contracts on
markedly less favourable terms. That is said to amount to a breach of two warranties, one
relating to the completeness and accuracy of a document known as the Current Contracts
Summary (“CCS”) and the other relating to the disclosure of negotiations relating to the
Company’s business. In short, the pursuer alleges that the receipt of the ITT was a matter
that should have been included in the CCS but was not, and that the ITT initiated
negotiations that should have been notified prior to signature of the SPA. The pursuer
further alleges that the defender is liable for breach of a clause, clause 8.1.3, which requires
disclosure of certain matters arising during the period between execution and completion of
the SPA. The Company bid for renegotiated contracts with Repsol but was unsuccessful.
The pursuer estimates its loss from the breaches of warranty and breach of contract to be
£16,800,000.
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[3] Before the Commercial Judge the pursuer was successful in arguing that the
defender was liable for breaches of the two contractual warranties and breach of the
notification requirement in clause 8.1.3. The Judge accordingly pronounced declarator that
the defender was in breach of the SPA in respect of the two breaches of warranty and the
further breach of contract relating to non-disclosure. By interlocutor dated 11 September
2019 she allowed a proof before answer restricted to quantum. The defender was granted
leave to reclaim against that interlocutor.
Background
[4] The Company and its subsidiaries owned and operated one of the largest wholly-
owned British shipping fleets engaged in the UK offshore industry. The defender was the
largest single shareholder in the company, holding 46.73% of its shares. He had joined what
was then a family business in about 1977, when it was principally involved in deep sea
trawler fishing in the North Sea. He became managing director but, upon his father’s death
in 2010, he became chairman. Under the provisions of the SPA he received £33.5 million of
the consideration paid for the company’s shares. From 1977 onwards the business had been
developed significantly through the creation of a number of new companies operating in
marine and offshore services and the development of bases in Singapore, Houston and Abu
Dhabi, as well as elsewhere in the UK. By the time when it was sold the group provided
emergency and rescue services, assistance to tankers, supply services to platforms and
rescue boats to about 50 offshore installations.
[5] North Star Shipping (Aberdeen) Ltd (“North Star”) is a subsidiary of the Company.
North Star provided support vessels, known as “emergency response and rescue vessels”
(“ERRVs”), and services to offshore installations. The ERRV business in the UK is a highly
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regulated sector. Among the vessels operated by North Star were two specialist “S-class”
vessels, the Sceptre and the Sovereign. These were purpose built to satisfy certain health
and safety and operational requirements for North Sea oil installations operated by the
company that is now known as Repsol Sinopec Resources UK Ltd (“Repsol”). Each vessel
had a maximum displacement of 5,000 tonnes with an assigned draft of 5.0 metres (“the
displacement requirement”). By comparison with other vessels operating in the same sector,
those represented a relatively low displacement and draft. The S-class vessels were
constructed with a low displacement to meet the requirements of Repsol’s North Sea
installations. Those installations were considered “ageing assets”, and consequently a low
displacement was needed to protect the integrity of the installations and to prevent the risk
of significant damage to them.
[6] The S-Class vessels became operational in 2013. North Star provided them to Repsol
on an exclusive basis, together with associated support services, pursuant to two five-year
charterparties. The charterparties included five successive one-year options whereby Repsol
could extend the charterparties on the same terms. The charterparties were due to expire,
respectively, in May and in October 2018. The options were exercisable on 90 days’ notice,
that is, in about March and August 2018. Generally, an option would be exercised about
four or six weeks before. If that had occurred, the two charterparties would have been
extended until May and October 2023 respectively. In the event, the options were not
exercised.
[7] The S-class vessels’ ability to comply with Repsol’s displacement requirements was
understood by the Company’s management team to be unique among service vessels
operating in the North Sea. Consequently North Star, so long as it retained the vessels that
satisfied those displacement requirements, had a de facto monopoly of ERRVs capable of
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servicing Repsol’s installations. That enabled North Star to charge a premium day rate for
those vessels. In 2013 the rate had been approximately £13,500 for each of the S-class
vessels, which increased to £13,700 in 2015 and dipped to £13,400 in 2016. This was
approximately double the day rate for other vessels. The S-class vessels were accordingly a
major contributor to the value of North Star’s and the Company’s business.
[8] The management of the Company thought that the de facto monopoly enjoyed by
North Star through its ownership of the S-class vessels would ensure that Repsol’s options
would be exercised following the termination of the existing charterparties for those vessels.
That would mean that in practice the contractual arrangements between North Star and
Repsol would continue until 2023, with consequent benefits to the Company’s income
stream. In the course of the negotiations that preceded the SPA the pursuer’s advisers,
Wood MacKenzie (see paragraph [16] below), examined the charterparties entered into by
the Company and its subsidiaries. Their analysis, which was of importance in determining
the pursuer’s approach to the SPA, proceeded on the assumption that the S-class vessels
would continue to be required by Repsol into the option period. They further noted that
North Star made a great deal of money from the S-class vessels, notwithstanding possible
difficulties in Repsol’s long-term position. Overall, therefore, the pursuer proceeded on the
assumption that Repsol would in fact exercise its options. The Commercial Judge states that
there was no doubt that those who represented the Company, including its management,
were well aware of that approach to the valuation of the Company.
The parties’ contract
[9] The SPA is a contract for the sale and purchase of the whole of the issued shares in
the Company. The Sellers, defined in Part 1 of the Schedule, comprise the defender, two
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other persons and two sets of trustees; the defender holds 13,968 of the 29,894 issued shares.
The Buyer is defined as the pursuer. Clause 2 provides that the Sale Shares (a defined term)
are to be sold with effect from Completion of the sale and purchase; the Completion Date is
defined as 6 November 2017, although the Commercial Judge found that Completion in fact
occurred on 2 November 2017 (opinion, paragraph [5](4)). Clause 3 defines the manner in
which the Purchase Price is calculated. This involves basic price of £101,500,000 with a
range of adjustments. The Provisional Purchase Price was set at £82,300,296.
[10] The parties’ dispute turns principally on three particular provisions of the contract:
first, clause 8.1.3; secondly paragraph 11.3 of the warranties in Part 4 of the Schedule; and
thirdly paragraph 26 of the warranties in Part 4 of the Schedule, and in particular
paragraph 26.6 thereof. We will set out these provisions in turn.
[11] Clause 8 of the SPA deals with the period before completion. It imposes obligations
on the Warrantor, a term defined as being the defender. So far as material, the clause
provides as follows:
“8.1 The Warrantor shall ensure that during the period beginning on the signing
of this Agreement and ending at Completion: […]
8.1.3 the Warrantor shall, as soon as reasonably practicable, notify the
Buyer in writing of any matter which becomes known to him after the date of
this Agreement and before Completion which constitutes, or might
reasonably be expected to constitute, a material event in respect of the
Business”.
The term “material event” is not expressly defined. Clause 9 deals with Completion.
Clause 9.3 provides that Completion is conditional on compliance by the Warrantor with its
obligations under clause 8.3.
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Warranties
[12] Clause 10 of the SPA deals with the contractual warranties. So far as material, it
provides as follows:
“10.2 The Warrantor warrants to the Buyer that each Warranty (other than the Title
Warranties and the Warranties set out in paragraph 27 of Section B of Part 4 of the
Schedule) is true and accurate as at the date of this Agreement”.
[13] Part 4 of the Schedule to the SPA contains extensive warranties. Those that are
relevant to the present proceedings are found in paragraphs 11 and 26. First, paragraph 11,
headed “Contracts”, provides:
“11.2 Complete and accurate copies of all Material Contracts have been Disclosed.
11.3 There are no outstanding or ongoing negotiations of material importance to
the business, profits or assets of the Company or any of the Subsidiaries, or any
outstanding quotations or tenders for a contract that, if accepted, would give rise to a
material Contract”.
“Material Contract”, as used in the two foregoing provisions, is defined as:
“(i) all charter agreements to which the Company or any of the Subsidiaries is
party; and/or (ii) all other agreements to which the Company or any of the
Subsidiaries is party which are of material or fundamental importance to the operation
of the Business”.
[14] Paragraph 26, headed “Vessels” provides:
“26.6 Document 6.1.1 of the Disclosure Bundle (“Current Contracts Summary”) sets
out complete and accurate details of all the charter arrangements that are in place as at
the date of this Agreement in relation to all of the Vessels”.
The Current Contracts Summary referred to in the foregoing warranty (“CCS”) had
emerged during earlier sale negotiations between Basalt Infrastructure Partners (“Basalt”), a
midmarket infrastructure fund focusing on equity investment in Europe and North
America, and the Company in 2016. It was a detailed document, incorporating, in respect of
each vessel owned by the sellers, utilisation figures for each vessel, average day rates,
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estimated cessation of production (“CoP”) for the platforms serviced, assumed scrap
weights and a comments section relative to each vessel which contained information not
falling under any other headings but which was important for the buyers of the business to
know and track. The CCS disclosed that the Sceptre/Sovereign contracts with Repsol were
due to end in October/May 2018, but that the option end dates were October/May 2023.
Thus the option arrangements were clearly referred to in the CCS. This appears to us to be a
matter of some importance.
The chronology of the transaction
[15] It is convenient to refer, as the Commercial Judge did, to the two sides of the
transaction as the buy side and the sell side, the former being the pursuer and the latter
being the existing shareholders of the Company. Those operating on the sell side were as
follows. The managing director of the Company was Callum Bruce; he was retained after its
sale as chief executive. He was also a director of North Star. The group finance director was
Graham Payton. He was the prime conduit of information from the Company management
team to the sellers’ agents, Simmons and Company (“Simmons”); Simmons provides
advisory services for mergers and acquisitions. The commercial director of North Star was
Gordon Wallace; he was kept on as chief operating officer after the sale of the company.
Messrs Bruce, Payton and Wallace, and Alan Holden, were defined as the company’s
“Managers” in the SPA. The defender was not actively involved in the exchange of
information between the pursuer and the sellers in the period prior to the signing date. The
advisers primarily involved were Ross Atkinson and Fraser Dobbie of Simmons, who both
gave evidence, and Douglas Crawford of Brodies LLP, who was the defender’s solicitor in
connection with the SPA.
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[16] Those operating on the buy side of the transaction were as follows. The entity which
funded the pursuers’ acquisition of the company was Basalt. Steven Lowry was one of
Basalt’s founders and played a major role in the acquisition of the Company. Wood
MacKenzie was responsible for carrying out due diligence on behalf of Basaalt in connection
with the SPA, but this did not extend to legal diligence. Wood MacKenzie assisted in the
analysis of commercial data provided in relation to the Company. Wil Jones was a project
manager for Wood MacKenzie, reporting to Malcolm Forbes-Cable, a vice president of that
business. Wei Lui worked on financial modelling for Wood MacKenzie.
[17] Mr Lowry had become aware in 2016 of an Aberdeen based business (the Company)
whose owners were interested in selling it and which, compatibly with Basalt’s investment
model, was subject to regulatory oversight, operated in a market with high barriers to entry,
was driven by health and safety regulation, and had tangible assets and fixed term contracts.
Simmons sent an information pack about the company to Mr Lowry. He delegated the day
to day management of the potential deal to Wil Jones. Basalt made an indicative offer for
the Company of £152 million on 28 September 2016, subject to due diligence. As a
consequence of due diligence undertaken by Wood MacKenzie, this valuation could not be
supported. The offer was withdrawn on 3 November by a letter indicating concern about
uncertainty in the market and, in particular, whether the contract or day rates had
“bottomed out”.
[18] A second approach to buy the company was made in 2017, after Simmons had
produced an updated business plan and forecasts. On 13 June 2017, Basalt submitted a new
offer of £110.5 million. £10 million was deferred against future performance, reflecting the
buy side’s view that the decline in day rates had abated or reached an acceptable level. A
further exchange of information on 16 June led to the offer being amended to £105 million
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without deferral. On 21 August, the North Star management team, via Simmons, provided
a market update, reflecting a reduction in the day rate for several vessels. This was the day
before Mr Lowry was to meet North Star’s managing director. A final offer of £101.5 million
was made on 29 August and was accepted.
[19] Mr Lowry had explained in evidence that prior to each offer being made, the pursuer
had spent time with the management team of North Star going through “contract by
contract, vessel by vessel” to understand the status of each. The current and future
contracts, including those for the deployment of the S-class vessels and associated services
to Repsol, were integral to the pursuer’s valuation of the Company, and the Company’s
contracts, present and future, were “crucial to understanding the value of the business”.
The Company’s management team described the S-class vessels as “specialist” and
“purpose-built” for Repsol and on long-term contracts. The sellers’ forecast of the day rates
for the S-class vessels was not affected by general concerns about a fall in day rates, because
it was only the Company that was in a position to meet Repsol’s specific needs. Thus the
Company was not concerned about competition for Repsol’s business, and proceeded on the
assumption that the existing contracts for the S-class vessels would be extended for the
duration of the options.
The email exchange of 5 October 2017
[20] The buyers’ and sellers’ sides exchanged emails on 5 October 2017. One of the Basalt
team emailed Simmons at 9.37am with a query about the S-class vessels:
“… we are not clear on the circumstances of the previous rate reductions for these
vessels. If management could provide their expectation and rationale for the day
rate for these assets in the option period that would be helpful”.
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Fraser Dobbie forwarded the query to Messrs Bruce and Wallace asking for a response.
Mr Wallace replied, copying in Messrs Paton and Bruce, by asking Mr Dobbie whether the
rate level he had projected for both of the S-class vessels was £10,000 or £12,000. At 12.56
Ross Atkinson of Simmons responded, copying in Messrs Wallace, Bruce, Payton and Fraser
Dobbie, stating:
“The Sceptre and Sovereign are currently in the financial model on rates of £13.4k on
contracts, we have assumed the option period to go out to 2023 at these rates and the
rate then basically stays the same at £13.4k under our market assumptions.
Not sure where the £10k/£12K comes from?”
At 13.31 Fraser Dobbie responded to Messrs Bruce, Wallace and Payton:
“…these are essentially carried through at the contract rate throughout the forecast.
[It] has been decided the best thing was to keep the external view that the vessels are
unique and Repsol have nowhere else to go, as such why would the rate move”.
[21] At 15.23 Gordon Wallace replied to an earlier email from Fraser Dobbie with a
proposed reply to Basalt:
“The Grampian S class vessels were purpose-built to satisfy HSE requirements whilst
working alongside certain ageing North Sea assets. This followed a Global Tender
exercise to identify the specific tonnage capable of meeting the charterers [sic] requirements,
consequently, we believe that the Grampian S class vessels are the only vessels capable of
meeting this specific requirement. As far as we are aware these are currently the only
vessels in the North Sea that can satisfy these requirements. As such the rate
expectations would be in line with projected expectations. The current time we have
no information on Repsols [sic] Marine strategy going forward, as such we have based
assumptions on current operating practice by the charterer.
The rates were reduced by a token amount in 2016 as a strategic move to resecure
multiple ERRV Contracts”.
Fraser Dobbie proposed deleting the sentence underlined. He gave two reasons for this in
evidence: first, that Mr Wallace could not have a valid opinion on the subject matter, but
secondly, after it was noted in cross examination that the deleted sentence was a statement
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of fact, that it was best to keep diligence responses “concise”. Mr Wallace emailed a further
amendment adding the italicised text and deleting the text struck through.
[22] Fraser Dobbie responded to Basalt at 16:11:
“1)
The rates were reduced by a token amount in 2016 as a strategic move to re-
secure multiple ERRV Contracts.
The Grampian S class vessels were purpose built to satisfy HSE requirements whilst
working alongside certain age-ing North Sea assets. This followed a Global Tender
exercise to identify the specific tonnage capable of meeting the charterers [sic]
requirements, consequently, we believe that the Grampian S class vessels are the only
vessels capable of meeting this specific requirement. As such the rate expectations
would be in line with projected expectations” (emphasis added).
Wood MacKenzie gave advice to Basalt on the basis of this response, in the following terms:
“For the S-Class vessels the minimum day rate reduction in the 2016 as part of a
larger contract deal highlights to us the specific nature of the Sceptre and Sovereign
vessels. In light of this it is fair to assume that the options will be exercised at the
current rate. Post the option period we will take into consideration the reduced
operational base of platforms of Repsol Sinopec at that time and assume a utilisation
of 90% for the vessels at management day rate”.
[23] Prior to receipt of this email, Wood MacKenzie’s analysis had been that the options
would be exercised by Repsol but that the rates would drop by approximately 35%. That
assumption changed because North Star confirmed that, because of the bespoke nature of
the S-class vessels, these were the only vessels capable of meeting Repsol’s needs. In his
evidence Mr Forbes-Cable explained that he would have found it helpful to see the sentence
which had been deleted before the final draft of the 15.23 email was sent out (see
paragraph [21] above). He stated that if Wood MacKenzie had not received confirmation
from North Star that the day rates would be maintained at current levels during the option
period, they would not have revised their original analysis. Mr Forbes-Cable stressed the
significance of the S-class vessels to the overall valuation of the company; their day rates
were the highest of all the vessels, and thus had a disproportionate impact on the valuation.
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Repsol’s email of 13 October 2017
[24] Late in the afternoon of 13 October 2017 the Company received an email from
Repsol; the email was timed at 16.23. A covering letter and an ITT were attached. The email
did not refer specifically to the S-class vessels, but details in it made it clear that it referred to
the services currently provided by those vessels, in particular the commencement dates
specified (May and October 2018). The Commercial Judge notes (paragraph [62]) that the
sell side management team knew that it referred to those vessels. In the email Repsol noted
a requirement for two Platform Supply Vessels (PSVs) starting in late May and late October
2018 for one, two or three years plus options. The letter further stated that a methanol
capability was mandatory on the vessel delivering in May. Tenders were required by close
of business on 31 October 2017. The covering letter requested competitive “tenders” for PSV
services beginning in late May for the first vessel and late October for the second. Bids were
invited for contracts of one and three years, each with two one-year options, and for two
years, with three one-year options. A methanol capacity was required for the vessels sought
from May 2018, although it was indicated that alternative tenders would be considered if
they provided a robust and cost effective solution. The letter stated that Repsol reserve the
right to award a contract to none or one or more tenderers.
[25] Accompanying the email was an ITT. The technical specifications for the PSVs in the
ITT did not stipulate any requirement for displacement or deadweight tonnage. That meant
that there was no maximum requirement for either displacement or deadweight tonnage.
The ITT also referred to the possibility that a vessel might be tendered with a methanol
capability. The Commercial Judge notes (paragraph [63]) that the most significant feature of
the ITT was the absence of any displacement requirement, because that meant that the S-
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class vessels lost their advantage of being the only vessels capable of meeting Repsol’s
requirements. Also significant was the new stipulation regarding methanol capacity for
vessels serving the Repsol platforms, as the S-class vessels did not have that capacity.
Retrofitting them to provide methanol capacity would cost approximately £500,000 per
vessel. It was also significant that the date of commencement of any successful tenderer was
the date when the first option under the existing charterparties became operative. Thus the
granting of a charter in accordance with the ITT would be inconsistent with the exercise of
the options in respect of the S-class vessels.
The sell side’s reaction to Repsol’s email and accompanying documents
[26] As already noted, Repsol’s email was sent late in the afternoon of 13 October 2017.
That evening the completion meeting was scheduled to take place at Brodies’ office. The
timing accordingly caused difficulties. Evidence was led about the reaction of the
Company’s employees to receipt of Repsol’s email on 13 October 2017. Callum Bruce, the
Company’s managing director, received the email and ITT at 17.23. He gave evidence that it
was clear from the email that it related to the S-class vessels. Shortly afterwards Gordon
Wallace, the Company’s chief operating officer, had also received the email, and contacted
Mr Bruce with a comment that the timing was bad. Mr Bruce forwarded the email to
Simmons, but they did not ask to see the ITT. It appears that no individual on the sell side
opened up the ITT on the date when it was received; that did not occur until four days later,
on Tuesday 17 October.
Completion of the contract for the sale of the shares in the Company
[27] The Commercial Judge notes (paragraph [67]) that she heard a considerable amount
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of evidence about the meeting for completion of the contract that had been fixed for Brodies’
office during the evening of 13 October 2017, including the advice that was tendered
(principally by Douglas Crawford of Brodies) and the defender’s participation for part of the
meeting; he made a call from on board a cruise ship. It was not controversial that none of
the North Star management team had opened the ITT attached to the Repsol email. The
meeting was attended by Douglas Crawford, but he was not told about the reference in the
email to a requirement for methanol capacity, or the anticipated cost, in the region of
£500,000 per vessel, of adapting the S-class vessels to provide such a capability. As to the
timing and significance of the Repsol email, this was represented to Mr Crawford as a
normal business event. The Commercial Judge notes that this was significant; Mr Crawford
had considered the warranties that were to be granted and advised the defender that he did
not require to disclose the ITT. No reference was made at the meeting to the representation
in the Simmons email of 5 October 2017 (paragraph [20] above), to the effect that it had been
assumed that the option period on the two S-class vessels would continue until 2023 at
existing rates. Nor, therefore, was any reference made to the need to correct that email.
[28] The agreement between the parties was signed on 14 October 2017. Consequently it
seems clear that the understanding of the representatives of both the buyers’ and the sellers’
sides following the meeting the previous evening was of fundamental importance to that
agreement. Evidence was led regarding the significance of the receipt of an ITT. Gordon
Wallace stated that ITTs were used as a means of generating competition. Mr Wallace and
Callum Bruce were both surprised that the ITT had been issued so early, well before the
options in respect of the S-class vessels fell to be exercised. The Commercial Judge observes
that the receipt of an ITT was “not a neutral factor”. Mr Wallace had accepted in evidence
that the ITT had the potential to “make Basalt think again”. The defender had given
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evidence to the contrary, that the ITT was not a surprise to him or even the management
team, but the Commercial Judge described that evidence as not credible and inconsistent
with the other witnesses.
[29] Evidence from Mr Wallace indicated that the market for PSVs in October 2017 was
“soft”, and that charter rates were subject to downward pressure. That would apply to
Repsol. Mr Wallace considered the ITT to be important, because of the significance of the
charterparties for the S-class vessels. Consequently it was a matter about which the sell
side's lawyers should be informed. The evidence of Callum Bruce was broadly to the same
effect. He accepted in hindsight that the receipt of the ITT indicated that continuation of the
charters for the S-class vessels would not be automatic, and Repsol were probably
attempting to obtain a reduction in charter rates. The reaction of the representatives from
Simmons was limited by the information that they had been given at the meeting about the
ITT. Fraser Dobbie of Simmons had limited recollection of what was said, but he recalled
that the North Star management team regarded the ITT as an ordinary business event. He
stated that had he been acting for the buyer he would have asked further questions about
the ITT. Ross Atkinson, the other Simmons representative, also accepted that the buy side
would have an interest in knowing about the ITT because of its impact on the risk in respect
of the S-class vessels.
[30] The Commercial Judge comments that the sell side management were well aware of
the significance of the S-class vessels for the value of the business, the softening of the PSV
market in the North Sea, and the buy side’s focus on factors such as day rates to forecast
future profitability. The latter factor had been demonstrated by Basalt’s withdrawal of an
offer for the Company in 2016, and the buy side’s interest in day rates during the 2017
negotiations. The Commercial Judge comments (paragraph 91):
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“It is difficult to reconcile the sell side’s collective quiescence on receipt of the ITT
with their knowledge of these matters. All of the witnesses on the sell side accepted
in one form or another that the buy side would have wanted to know about the
receipt of the ITT, and that it introduced a risk of the S-Class Vessels charters not
being rolled over”.
She further notes that the witnesses on the sell side did not individually regard the ITT as
within their managerial responsibility; significant downsides would only occur if the sale
did not complete.
[31] The Commercial Judge records the evidence led about a telephone call that was
made to the defender during the meeting in Brodies’ office. For present purposes it is
sufficient to note that she did not regard the defender’s evidence as credible and reliable. In
particular, his evidence that the ITT was not a surprise to him or others on the sell side was
not credible. Otherwise the defender’s evidence did not assist in assessing the materiality of
the receipt of the ITT from Repsol. The Judge concluded, however, that she considered it
more likely than not that the defender knew of the principal features of the ITT and Repsol
email during the window between the meeting of 13 October and completion.
[32] Legal advice was given at the meeting in Brodies’ office by Douglas Crawford, of
that firm, to the effect that there was no requirement to disclose the email and the ITT. The
Commercial Judge observes that Mr Crawford could only give advice on the receipt of the
ITT based on the way in which that event was presented to him by the sell side management
team. On that, she considered that the significance of the ITT was significantly downplayed;
it was presented as an unremarkable, normal business event.
The consequences of the ITT and the failure to disclose it prior to completion
[33] As we have noted, the parties contract was signed on 14 October 2017. The receipt of
the ITT had not been disclosed to the buy side at that time. Douglas Crawford
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recommended that the ITT should be disclosed by the sell side, although not against the
contractual warranties. In an email to the sell side, sent on 22 October 2017, Callum Bruce
dealt with seven distinct matters, the fifth of which was the relationship with Repsol. That
paragraph stated:
“Repsol have issued an RFQ looking for a tender to be submitted mid-November,
awarded likely in Q 1 next year, for the two ‘S’ Class vessels commencing on expiry
of the current contracts in May and October next year. As per our normal approach
as the incumbent but particularly as these are specialist vessels we will wait until
near the submission date to come to a firm decision on the rate to be offered”.
On receipt of this email, Steven Lowry circulated it to others within Basalt, with the
comment “S class gets a mention but things look relatively solid”. It was accepted that an
RFQ (request for quotation) was not the same thing as an ITT, although in evidence Callum
Bruce attempted to minimize the difference. A further meeting between the North Star
management team and the buy side was held on 7 November 2017, and Callum Bruce
telephoned Wil Jones of Basalt on 9 November, but no mention was made of the ITT on
either occasion. Information about it was only provided on 30 November 2017, in reply to a
direct question by the buy side. Steven Lowry stated in evidence that the buy side had been
very surprised and believed that the ITT should have been disclosed before the signing date.
In evidence both Steven Lowry and Ross Atkinson accepted that the ITT and the potential
loss of the Repsol contracts was a serious matter. The Commercial Judge concluded that the
buy side had been not been aware of the ITT prior to completion (paragraph [120]); it had
been mischaracterised as a lesser “RFQ”, the date on which it was received was withheld,
and the abandonment of the displacement requirement and the requirement for methanol
capacity were both omitted. That, she held, was misleading.
[34] Steven Lowry stated in evidence that if he had known about the ITT the buy side
would have been “concerned” about other competitors for the Repsol contract. If he had
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known of the ITT, the buy side would have paused and investigated it. The Commercial
Judge states that he was “clear” that the buy side would not have signed the agreement until
it understood the risk around the S-class vessels. The foregoing features, Mr Lowry stated,
would have pushed the transaction “outside the parameters” that had been approved by
Basalt’s investment committee. Even in respect of methanol capacity, the buy side would
have compared the specification appended to the ITT with the existing contract
specifications, to seek comfort that the S-class vessels were still unique so far as Repsol’s
requirements were concerned. In addition, Mr Lowry stated that knowledge of the ITT prior
to signing of the agreement would have led to adjustment of the price by a substantial
margin, in view of the importance of the S-class vessels, which comprised between 20 and
25% of the Company’s EBITDA (earnings before interest, taxation, depreciation and
amortisation – in effect, gross earnings).
[35] Malcolm Forbes-Cable gave evidence that Wood MacKenzie had initially intended to
discount the day rates for the S-class vessels by about 35% but changed that approach upon
receipt of the Simmons email of 5 October 2017 (quoted at paragraph [22] above) to the effect
that the S-class vessels were the only vessels capable of satisfying Repsol’s precise
requirements. Mr Forbes-Cable gave evidence, however, that the receipt of the ITT implied
that Repsol were looking to revise the agreement, which affected the risk; it meant that
Repsol were wanting to renegotiate the agreement, at a lower rate. Non-exercise of the
options would result in a price impact of about £25 million. Evidence to broadly similar
effect was given by Wil Jones, a more junior member of the buy side team. He stated that if
he had known of the ITT that would have been “a major red flag”.
[36] The Commercial Judge stated (paragraph [129]) that she had no hesitation in
accepting the evidence of the buy side witnesses on the foregoing matters. The buy side was
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intensely interested in the vessel contracts, day rates and other factors relied on to forecast
the future profitability of the business. Basalt’s 2016 offer had been withdrawn because of
concern about day rates. We would observe that that conclusion appears to us to be a
matter of clear commercial common sense. The day rates represent gross income, and as a
matter of elementary economics gross income feeds directly through into earnings.
[37] Finally, on the issue of the consequences of the ITT, North Star submitted a tender to
Repsol on 14 November 2017, in which day rates were cut by half, but the tender was
unsuccessful.
The Commercial Judge’s decision
[38] The Commercial Judge’s decision proceeded on the evidence summarized in the last
part of this opinion. She concluded that the defender was in breach of the SPA, in respect
that the defender breached (i) warranties provided at paragraphs 11.3 and 26.6 of Section B
of Part 4 of the Schedule to the agreement, consequent on clause 10.2 of the agreement; and
(ii) the stipulation in clause 8.1.3 of the SPA. She accordingly allowed the parties a proof
before answer on quantum. Her reasoning may be summarized as follows.
Breach of warranty in paragraph 26.6
[39] The defender’s failure to include in the CCS any reference to the receipt of the ITT
was a breach of warranty 26.6 (paragraphs [151]–[172] ). That warranty used the term
“charter arrangements”, which required to be construed in the context of the SPA as a
whole. So construed, the warranty covered something broader than the warranties in
paragraphs 11.2 and 11.3. The existing options for the specialist vessels were details of
charter arrangements in place; consequently “the receipt of the ITT clearly had the potential
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to affect the charter arrangements” (paragraph [171] ). Information raising a serious doubt
about the exercise of the options was within the scope of the term “charter arrangements”.
Moreover, the data contained in the CCS included options that were exercisable for the
period after the primary charter had expired. The foregoing construction was supported by
the factual context. It was apparent that the commercial rationale of the transaction
depended in large measure upon the value to be ascribed to the Company’s future activities.
The S-class vessels made a major contribution to its income, and it was likely that that would
remain so in the future as long as Repsol retained the existing displacement requirement.
The ITT, however, indicated that the existing arrangements might come to an end on the
expiry of the existing contract, as there was a doubt about the exercise of the option. The
ITT was therefore a detail of the charter arrangements in place for the S-class vessels.
Breach of warranty in paragraph 11.3
[40] The failure to disclose the ITT was a breach of warranty 11.3 (paragraphs [195]–
[202] ). Repsol, through the ITT, were saying that they were “considering not exercising the
option but, rather, [were] renewing negotiations for vessels currently subject to a
charterparty between us, but on terms other than those contained in the charter agreement
and which exercise of the option would have continued”. The ITT thus “signalled Repsol’s
clear intention to re-negotiate the options on offer” (Commercial Judge’s emphasis). The “re-
opening of negotiations” could be considered to be “outstanding or ongoing”, particularly
in the light of the evidence regarding the significance of the specialist vessels and the
existing charterparties. Warranty 11.3 was particularly fact-sensitive; it was necessary to
construe it against the evidence about the use of ITTs in this sector and the de facto monopoly
the company had to satisfy Repsol’s requirements. It was thus not helpful to consider
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discussions of the word “negotiations” in other, very different, cases (eg Harvela Investments
(Cartwright, Contract Law, (3rd edn; 2016), p 110; MacQueen and Thomson, Contract Law in
Scotland (4th edn; 2016), para 2.17; Stair Memorial Encyclopaedia, Volume 15, s 626;
MacNeil, Scots Commercial Law (2014), para 2.25). In this context in particular, the
description of the ITT as a “unilateral” negotiation was inapposite, where North Star had no
option but to respond if it wanted to retain Repsol’s business.
Breach of clause 8.1.3
[41] There was a breach of clause 8.1.3 (paragraphs [214]–[221]). The email of 22 October
2017 did not meet the requirements of that clause because it had not been sent as soon as
reasonably practicable, and it downplayed the significance of the ITT in terms of risk.
Moreover, it did not expressly refer to the clause. The ITT was significant in that it signalled
a disinclination on Repsol’s part to secure the use of the S-class vessels without further
negotiation. Consequently, against the whole evidence, background and context, the ITT
was important to the future of the business. Thus it constituted a material event falling
within the terms of clause 8.1.3, and the sell side were in breach of their obligation to give
notice of that event.
Misrepresentation
[42] The pursuer also advanced a case based on misrepresentation. This was rejected by
the Commercial Judge. She held that the communications alleged to be a misrepresentation
did not have the requisite quality of a statement or representation of fact (paragraphs [247]–
[249] ). They amounted to no more than a statement of opinion by the defender of his
expectation that the day rates charged for the vessels would continue because the options
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would be exercised. Given that conclusion on misrepresentation, a further case based on
wilful concealment was bound to fail (paragraph [255]). The matter of wilful concealment
was closely related to, if not dependent on, the matter of misrepresentation. The
Commercial Judge did, however, observe (paragraph [250]) that the law recognized a duty
to correct a pre-contractual representation if by reason of events it subsequently became a
misrepresentation by the point when the representee and representor entered into a
contract.
The reclaiming motion
[43] The reclaiming motion proceeds on the following grounds. First, in relation to the
warranty in paragraph 26.6 of Part 4 of the Schedule to the SPA, it was submitted that a
proper construction of the warranty only required disclosure of charters that were in place
as at the date of the SPA, 14 October 2017. There was no requirement for the defender, or
the sell side generally, to mention the existence of any ITT. The Commercial Judge, it was
said, was in error in having regard to commercial common sense rather than the “clear”
language of the warranty. Furthermore, it was submitted that the ITT was not a “detail” of a
charter arrangement in place as at 14 October 2017. Nor was the ITT a detail that required to
be disclosed in the CCS. While it possibly had the potential to affect the existing charter
arrangements, it did not affect those arrangements themselves.
[44] It is further submitted that the Commercial Judge was in error in failing to hold that
the language used in the warranty did not extend to contract opportunities or potential
future charters. The ITT was a unilateral document, whereas “arrangements” must be
bilateral or multilateral. Furthermore, it was not “in place” as at 14 October 2017.
Moreover, it was submitted that the Commercial Judge was in error in holding that
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information raising a serious doubt about the exercise of the options swap was within the
scope of the expression “charter arrangements”; it could only be concerned with future
charter arrangements. The Commercial Judge had, in addition, conflated the words
“agreements” and “arrangements”. Nothing could qualify as a charter unless it were the
product of agreement, and no arrangement or agreement had been occasioned by the receipt
of the ITT. The terms of the existing charterparties were not impacted by the ITT or any
other potential new contract or charter.
[45] Secondly, in relation to the warranty in paragraph 11.3 of Part 4 of the Schedule to
the SPA, it was submitted that the Commercial Judge’s reasoning summarized at
paragraph [40] above was in error because it failed to recognize that negotiations must
necessarily be bilateral or multilateral. An invitation to tender is an invitation to negotiate,
rather than part of the negotiation itself, and consequently the receipt of the ITT did not give
rise to any “ongoing” or “outstanding” negotiations; those required to be bilateral or
multilateral. Furthermore, it was said that the Commercial Judge was in error in treating the
concept of a “negotiation” as fact-sensitive. The established law on offers to negotiate was
relevant. Nothing was said in the pursuer’s pleadings to suggest that “negotiations” have
anything other than its ordinary meaning. The ITT was a unilateral document, and thus
could not form part of any negotiation. Nor can it be said that any negotiation was
“outstanding” as at 14 October 2017. The wording of the ITT envisaged that it might not be
taken up by the recipient, and it is stated that negotiations would follow a response to the
invitation. Finally, on this issue, it was submitted that the Commercial Judge was in error in
holding that the ITT signalled Repsol’s clear intention to renegotiate the options on offer. If
it did in fact signal an intention to renegotiate, it would not be part of any outstanding or
ongoing negotiation.
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[46] Thirdly, in relation to clause 8.1.3 of the SPA, it was submitted that the Commercial
Judge failed to apply well-established principles of contractual interpretation. These, it was
said, required the court to uphold the ordinary and natural meaning of words used. In
clause 8.1.3 the words “any matter” are cut down by the qualification that such matter
“constitutes, or might reasonably be expected to constitute” a material event in respect of the
business. The word “constitutes” meant that something, of itself, amounted to something.
It was not the initial step in a chain of events that might ultimately lead to a material event.
Consequently the ITT did not trigger clause 8.1.3, and there was no breach of that clause.
Clause 8.1.3 related to new events that took place after the parties had concluded the SPA,
and the Commercial Judge had held that the defender was aware of the ITT before the SPA
was concluded. In these circumstances, it was said, there was no scope for clause 8.1.3 to be
engaged.
Contractual interpretation
[47] The general principles of contractual interpretation are now well established; they
have been discussed at some length in cases such as Rainy Sky SA v Kookmin Bank Co Ltd,
1619, at paragraphs 15 and 76-77, HOE International Ltd v Andersen, 2017 SC 313, at
Fisher MFE Ltd, 2019 SLT 295, at paragraph 47. From these cases, a number of basic
principles emerge. Four of these are important for present purposes.
[48] First, a contract must be construed objectively. The meaning of any particular
provision is what a reasonable person in the position of the parties would have understood
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it to be. Indeed, no other approach would be possible; a contract will have two or more
parties, and it is obvious that its meaning cannot depend upon the subjective intention or
understanding of any one of those parties. Unsurprisingly, therefore, the objective approach
to contractual construction is supported by numerous authorities extending back over many
years: see, for example, Muirhead & Turnbull v Dickson, 1905, 7 F 686, at 694. Secondly, the
words of a contract must be construed contextually. Language is inherently ambiguous, and
in no serious intellectual field is it possible to reach a sensible view on the meaning of a
passage of text without placing that passage in context.
“... [T]he relevant reasonable person is one who has all the background knowledge
which would reasonably have been available to the parties in the situation in which
they were at the time of the contract”: Rainy Sky SA v Kookmin Bank Co Ltd, supra, at
paragraph 14.
The relevant context takes in the contract itself, construed as a whole, and the surrounding
circumstances that ought objectively to be known to the parties. It includes not merely the
surrounding factual situation but also the legal context; that legal context comprises both the
surrounding contractual and other legal arrangements and the general law. The
Commercial Judge, correctly in our opinion, attached great importance to the specific
context of the contracts construed as a whole.
[49] Thirdly, the provisions of a contract must be construed purposively, that is, in such a
way as to give effect to the fundamental purposes of the contract; points of detail or niceties
of wording should not stand in the way of achieving the contract’s basic purposes. What the
basic purposes are must obviously be determined on an objective basis, and the context is
relevant. Fourthly, in construing a contract, commercial, or business, common sense may be
important. Such an approach is supported by the recent case law: see, for example, Rainy
Sky SA v Kookmin Bank Co Ltd, supra, at paragraphs 20 and 21, and Arnold v Britton (supra), at
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27
paragraph 76. The application of commercial common sense is a relatively straightforward
process, despite suggestions to the contrary in some academic literature. It obviously
involves elements of general common sense as an aid to practical reasoning, such as
considering whether a view is widely held by those with knowledge of the particular field in
question, and testing a proposition against its converse, to discover whether the converse
makes sense; if it does not, that will usually support the proposition. At a commercial level,
the most important factor is probably the use of elementary microeconomics (the branch of
economics that covers the behaviour of individuals and businesses in their commercial
dealings with other persons). That will normally involve consideration of the practice
followed in a particular trade, and the understanding held by people operating in that trade,
for example as to what is commercially important or what would be regarded as
commercially undesirable.
Application to the parties’ contract
[50] The Commercial Judge held that the defender, and others on the buy side, was in
breach of each of the warranties provided at paragraphs 11.3 and 26.6 of Part 4 of the
Schedule, and was further in breach of clause 8.1.3 of the contract. We agree with her
conclusions on all of these matters.
Warranty at paragraph 26.6
[51] This warranty is to the effect that the Current Contracts Summary provided by the
sell side to the buy side “sets out complete and accurate details of all of the charter
arrangements that are in place as at the date of this Agreement in relation to all of the
Vessels”. The context of this warranty and its commercial function appear clearly from the
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evidence as narrated by the Commercial Judge: see paragraph [14] above as to its
commercial function and paragraphs [5]-[7], [19] and [20]-[23] as to its context. The
Company’s business, partly through its subsidiary North Star, consisted of the chartering of
specialist vessels to the operators of North Sea oil fields in order to meet a range of
specialized requirements. The Company’s income came from the charterparties. The value
of the business therefore depended on the amount of such income together with the level
that that income was likely to achieve in the future. That is an elementary exercise for the
valuation of a business, and it emerged clearly from the evidence led at proof. It follows
that the value of the business, and accordingly the price that it might reasonably command,
depended fundamentally on the likely future income from vessel charters. That is why the
Current Contracts Summary was prepared, and why its completeness and accuracy were of
fundamental importance to valuing the business. That view is based on an objective
analysis of the contract, construed in context and in the light of commercial common sense.
Such a view is, moreover, supported by the evidence regarding the significance of the
Repsol email of 13 October 2017 and the accompanying ITT: see paragraphs [24]-[26] and
[29] -[30] above.
[52] The warranty in paragraph 26.6 must be construed in the light of these
considerations. Objectively, reasonable persons in the position of the parties must have
intended that everything in the charter arrangements that might affect the Company’s future
income stream should be disclosed in the CCS; the contrary view would make no sense, as it
is the future income stream that will determine the value of the business. The ITT was
plainly a development that could have an important effect on North Star, and hence the
Company’s, future income. Until it was received, it was assumed that North Star had for
practical purposes a monopoly on Repsol’s business, as the S-class vessels were understood
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to be the only vessels operating in the North Sea that were capable of servicing Repsol’s
facilities, owing to their displacement and draft. The ITT made it clear that that was no
longer the case. According to its terms, Repsol intended to abandon the displacement and
draft requirements, and further intended to introduce a methanol requirement for one of the
vessels. That would destroy North Star’s monopoly. There was accordingly a serious risk
that the Company’s most profitable contracts, those with the two S-class vessels, would be
lost. The foregoing reasoning proceeds on an objective analysis of the contract, taken in its
commercial context, but it is supported by the evidence of the buy side’s witnesses as noted
by the Commercial Judge; they regarded the information that they had been given as
misleading: see paragraphs [33]-[36] above.
[53] In view of the importance of Repsol’s business to the Company, it would be
remarkable if a serious threat to deprive the Company of that business were not covered by
the warranty in paragraph 26.6. In our opinion the existence of the ITT, and the documents
that accompanied it, clearly fell within the terms of that warranty. The warranty refers to
“charter arrangements”. “Arrangements” is normally a less precise, and consequently
wider, expression than “agreements” or “contracts”; in our opinion in its normal meaning it
signifies both contracts and the framework in which those contracts operate, including such
matters as subsidiary and ancillary contracts, option rights and rights to terminate contracts.
In the context of the SPA there are particularly strong reasons for giving the word
“agreements” such a meaning, because if we are exercising rights of that nature they are
capable of bringing the existing arrangements to an end, with serious financial consequences
for the Company and a purchaser of its shares.
[54] The warranty requires that the CCS should set out “complete and accurate” details of
the charter arrangements. Those words are important. Construed in context, they indicate
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that every element in the charter arrangements, including option rights and rights to
terminate contracts, must be disclosed. The word “details” is also important, in that it
signifies that all rights of that nature must be stated in a precise and intelligible form.
[55] When the warranty in paragraph 26.6 is construed in the manner that we have
indicated, we are of opinion that the sell side’s failure to disclose Repsol’s email of
13 October 2017 and the accompanying ITT had the result that complete and accurate details
of all of the charter arrangements in place at the date of the Agreement were not disclosed.
That amounts to a breach of the warranty, with the consequence that the sell side, including
the defender, are liable to the pursuer in damages.
Defender’s arguments on paragraph 26.6
[56] Counsel for the defender presented a range of arguments to the effect that there had
been no breach of warranty. In large measure these were based on a strongly literal
approach to contractual construction. In supporting such an approach counsel placed
considerable reliance on Arnold v Britton, supra, at paragraphs 17-20. In interpreting those
paragraphs, however, it is important to bear in mind that they are directed at the particular
facts of that case, which were highly unusual in that they turned on a clause that contained a
precise mathematical formula based on the compounding of an annual payment. The
consequences of that formula were entirely foreseeable. The most extreme problem with a
totally literal approach to construction occurs in cases where supervening events are not
readily foreseeable, especially the sort of events that are sometimes described as “unknown
unknowns”. In such cases it cannot be said that “the parties must have been specifically
focusing on the issue covered by the provision when agreeing the wording of that
provision”; and it is unrealistic to emphasize the parties’ control over the language that they
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use in a contract. In cases of that nature, an emphasis on a strictly literal approach may
produce a result that is arbitrary or disproportionate, which is plainly undesirable as a
matter of commercial common sense. Alternatively, a highly literal construction may lead to
significantly longer contracts, a practice that is likely to impose greater transaction costs on
the parties than occurs at present. Overall, we are of opinion that construing contracts
according to the standards of a reasonable commercial person, as laid down in the cases
cited at paragraph [49] above, is likely to produce greater predictability than an over-literal
approach to construction.
[57] On the evidence accepted by the Commercial Judge it is apparent that Repsol’s email
of 13 October 2017 and the accompanying ITT were not foreseen by the parties: see
paragraphs [19] and [21]-[23] above. Consequently a standard approach to contractual
interpretation should be adopted, with proper reliance on the purpose of a contractual
provision and commercial common sense. Counsel for the defender submitted that the
wording of the warranty in paragraph 26.6 indicated that what required to be disclosed
were charters in place as at the date of the agreement, on 14 October 2017, and that those
were set out in the CCS. In our opinion that ignores the wording of the warranty, properly
construed. The warranty requires that “charter arrangements” should be disclosed, and that
“complete and accurate details” should be given of those arrangements. For reasons that we
have already considered at paragraphs [52] and [53], we are of opinion that the existence of
the Repsol email and the ITT fell clearly within those expressions, and should accordingly
have been disclosed. No rewriting of the parties’ agreement is involved. The ITT had not
been fully implemented at the time that the SPA was concluded, but in that respect it was
similar to an option or other contingent obligation or liability affecting a contract; it was a
“detail” of the “charter arrangements” in force at that date.
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[58] Counsel further submitted that the expression “charter arrangements” signified
arrangements that were bilateral or multilateral. The ITT, by contrast, was a unilateral
document. In our opinion that involves a mischaracterisation of the ITT. While it was
exercisable by one party, it formed an important element in the overall arrangements
governing the chartering of the two S-class vessels. This is not affected by the fact that the
ITT would take effect at the point where the existing charter came to an end. For reasons
already discussed, the parties clearly contemplated that the option to continue the charter
party, which formed part of the existing chartering arrangements, would be exercised. For
that reason we consider that the foregoing arguments must be rejected.
Warranty at paragraph 11.3
[59] So far as material to the parties’ dispute, the warranty in paragraph 11.3 provides
that “There are no outstanding or ongoing negotiations of material importance to the
business, profits or assets of the Company or any of the Subsidiaries”. This must be read in
the context of warranty 11.2, which provides that complete and accurate copies of all
Material Contracts have been disclosed. The expression “Material Contracts” is defined as
covering all charter agreements to which the Company or its subsidiaries is party which are
of “material or fundamental importance to the operation of the Business”; there can be no
doubt that the charterparties for the two S-class vessels were material contracts in that sense;
it was a matter of agreement that they were by some margin the Company’s two most
profitable charterparties, with charter rates well above the industry norm. The Commercial
Judge held that the warranty required to be construed in context, against the evidence about
the use of ITTs in this sector and the de facto monopoly that the Company had to satisfy
Repsol’s special displacement requirement by using the S-class vessels. The existence of an
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option meant that the party who held the option could obtain the vessel without further
negotiation, simply by exercising an existing right. The ITT meant that Repsol was
considering not exercising the option but would rather renew negotiations for the S-class
vessels that were currently subject to a charter party, but on terms that were different from
those in the existing charterparties.
[60] In our opinion the Commercial Judge’s reasoning is correct. The ITT was an
invitation to a number of persons, including North Star, to tender for a charter party serving
the Repsol oil installations but on terms that were materially different from those in the
existing charterparties for the S-class vessels. In particular, the displacement requirements
were to be changed, and for one of the two vessels a methanol facility was required.
Moreover, it was apparent that the change in requirements removed North Star’s de facto
monopoly, and was thus likely to result in a substantial reduction in charter rates. In our
opinion all of these features indicate that the ITT has to be considered as the first stage in a
negotiation; that was the inevitable consequence of it, and indeed was clearly its
fundamental purpose. That brings the service of the ITT and accompanying email within
the wording of the warranty in paragraph 11.3.
Defender’s arguments on paragraph 11.3
[61] The defender founded particularly on the expression “outstanding or ongoing
negotiations”, and submitted that negotiations must be bilateral or multilateral. In the
present case, however, the ITT was no more than a unilateral invitation. In our opinion this
ignores the fact that the purpose of the ITT is to initiate negotiations for alternative tender
arrangements for the installations served by the S-class vessels. It was further suggested
that the negotiations could not be “outstanding” or “ongoing” until two or more parties had
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begun to negotiate. Once again in our opinion this ignores the fundamental point that the
ITT is intended as the opening stage of a negotiation process. Once it had been served, it can
properly be said that there is an “outstanding” negotiation, for the simple reason that Repsol
are attempting to renegotiate their charter arrangements, with effect from the moment of
service. Indeed, if the defender’s construction were correct, the warranty would seem to
have effect from the point when another party responded to the ITT rather than the point
when the ITT was served. There is no commercial sense in delaying the effect of the
warranty in this way, however; once the ITT has been issued, on any objectively reasonable
interpretation of the expression “outstanding or ongoing negotiation” a negotiation process
is under way.
[62] Counsel also relied on the legal principles established in cases such as Spencer v
submitted that on the basis of those principles the ITT should be regarded as no more than
an offer to negotiate, without any intention to begin the process of contract formation. The
cases cited, however, deal with situations that are very different from that in the present
case. They deal with the question of whether a document is intended as a contractual offer
rather than a mere invitation to treat. For the purpose of the warranty in paragraph 11.3,
however, the critical question is whether there is a “negotiation”. Whether there is must be
determined in the context of Repsol’s requirements for a charter party and the existing
charter arrangements that it had with North Star. In our opinion the issue of the ITT had the
clear purpose of signifying that Repsol wished to renegotiate its contractual arrangements
for servicing its North Sea facilities. The context is crucial. In the light of that context, what
was started must be a negotiation. No formal response is required to reach that conclusion.
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Furthermore, the ITT expressly offered a change in the contractual relationship between
North Star and Repsol, which by itself appears sufficient to begin a “negotiation”.
[63] Finally, on the warranty in paragraph 11.3, counsel for the defender submitted that
the wording of the ITT, properly construed, did not evidence either the start or the
continuance of negotiations. He submitted that the ITT was a unilateral request for a
“tender”. Consequently even if a tender were accepted by Repsol a formal contract would
have to be agreed. This part of the argument was based on a very minute analysis of some
of the terms used in the ITT. In our opinion an analysis of this nature is not appropriate in
considering whether the ITT was sufficient to initiate a “negotiation”. When regard is had
to the fundamental purpose of the ITT, it is obvious that once a response has been received
negotiation may begin on the basis of that response. The fact that no formal contract has
been agreed at that stage is irrelevant; indeed, if a negotiation is proceeding one thing that is
certain is that no formal contract has been concluded. For all of the foregoing reasons we
reject the defender’s challenge to the Commercial Judge’s reasoning.
Clause 8.1.3
[64] Clause 8.1.3 applies during the period between the signing of the SPA and the time
of Completion. The Completion Date was defined in clause 1.1 as 6 November 2017, but in
fact occurred on 2 November 2017: paragraph [5] of the Commercial Judge’s opinion.
Clause 8.1 obliges the defender (referred to as the Warrantor, a defined term) to achieve
certain results during that period. Clause 8.1.3 obliges him, as soon as reasonably
practicable, to notify the Buyer (the pursuer) in writing of any matter which becomes known
to him during the period between signature and completion “which constitutes, or might
reasonably be expected to constitute, a material event in respect of the Business”. The
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Business is that of the Company and its subsidiaries, including offshore support operations
and emergency response and rescue services. The expression “material event” is not
defined. Nevertheless, read in context the expression appears to us to signify a happening
that was likely to have a significant effect on the value of the business of the Company and
its subsidiaries. That effect on value would in turn have an impact on the equivalence
between the price paid by the buy side and the consideration provided in return by the sell
side. Generally speaking the equivalence of consideration is an important aspect of
commercial common sense, for obvious reasons. In the context of the sale of a business,
during the period between concluding of the contract of sale and completion, anything that
might have a significant effect on the adequacy of consideration is likely to be regarded as
important.
[65] In our opinion the receipt of the ITT, and Repsol’s accompanying email, was an
“event” that triggered the obligation in clause 8.1.3. The receipt of the ITT and email was
plainly a happening. The terms of the ITT made it clear that the presumed de facto
monopoly that North Star had enjoyed in respect of Repsol’s business was liable to come to
an end, in part because of the expressed intention to abandon the displacement requirement
and in part because of the new requirement for methanol capacity. The loss of the de facto
monopoly would inevitably have an impact on the equivalence between the consideration
provided by the sell side and the price payable by the buy side. As a matter of elementary
economics, a monopolist can charge a higher price than a person operating in a competitive
market. Consequently it was obvious that the buy side, in the form of the pursuer, would
receive less than it had bargained for at the time of the SPA in consequence of the ITT.
[66] The Commercial Judge held (paragraphs [215] et seq) that clause 8.1.3 must be
construed in the context of the SPA as a whole and the surrounding circumstances as
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disclosed in evidence. The purpose of a clause covering the gap between the signing of an
agreement and payment of the final sum due at completion was to ensure that by
completion the sell side should have all the information that ought to have been provided
under the warranties already discussed (those in paragraphs 26.6 and 11.3). The commercial
purpose of the clause was therefore obvious: to oblige the defender to bring to the pursuer’s
notice any matter becoming known to him which constituted, or might reasonably be
expected to constitute, a material event in respect of the Business. The Commercial Judge
notes that the scope of the clause was very broad; it covered matters that might reasonably
be expected to constitute a material event. We agree entirely with that view. Consequently
she held that the terms of the ITT were not mere words, but conveyed in words an intention
to bring into existence a state of affairs that would have legal effect, in the form of a contract
for the services of PSVs that would differ from the existing contract. If North Star did not
manage to obtain that contract, that would have an adverse effect on their profitability. We
should add that, in view of the loss of the de facto monopoly, even if they obtained the
contract it would in all probability be on markedly less favourable terms.
[67] It was a requirement of clause 8.1.3 that the matter to be notified should come to the
defender’s attention. The Commercial Judge addresses this issue on the evidence (at
paragraphs [118]-[119]). She clearly formed an adverse view of the credibility and reliability
of the defender’s evidence. In particular she did not find credible evidence to the effect that
the defender had never opened the ITT and had never been told of its terms until the present
dispute emerged. She considered on a balance of probabilities that he knew of the principal
features of the ITT and Repsol email during the pre-Completion window. That conclusion is
not challenged, and we have no hesitation in accepting it. On that basis it cannot be argued
that the defender was unaware of the terms of the ITT and email during that window.
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Defender’s arguments on clause 8.1.3
[68] For the defender it was submitted that clause 8.1.3 should be construed in
accordance with the ordinary and natural meaning of the words used. The critical question
was whether the “matter” referred to in the clause “constitutes” a material event. It was not
enough that the matter should be an initial step in a chain of events that might lead to a
material event. On that basis the ITT was not a material event in relation to the Business; the
word “event” was not an apt description of the terms of a document. In our opinion this
argument must be rejected. A document may obviously have legal effect. The ITT clearly
had potential legal effect, in that it disclosed an intention to invite new tenders for the
services rendered to Repsol, on a basis that was inconsistent with a continuance of the
existing arrangements by exercise of the contractual options. The event is not the “terms” of
the ITT, but rather the practical effect that the ITT had in the real commercial world.
[69] The defender further submitted that in so far as the ITT might constitute an “event”,
that event took place before the conclusion of the SPA. Thus the warranty in clause 8.1.3
was not engaged. This argument too must be rejected. The Commercial Judge held
specifically that it was more likely than not that the defender knew of the principal features
of the ITT and Repsol email during the pre-Completion window (paragraph [119]). She
further rejected a suggestion by the defender that the buy side were aware of the ITT prior
to Completion. The first mention of the ITT was, in her view, “intended materially to
underplay its terms and effect and, in that respect, was disingenuous and misleading”
(paragraph [120]; see paragraph [33] above). On those findings in fact, which were not the
subject of any direct challenge, the defender knew of the ITT and at least its principal
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features during the pre-Completion window, when clause 8.1.3 applied. That directly
triggers the application of the clause.
Conclusion
[70] For the foregoing reasons we are of opinion that the Commercial Judge reached the
correct decision on the defender’s breaches of contract. We will accordingly refuse the
reclaiming motion against her interlocutor. Thereafter we will remit the action to the
Commercial Court for further procedure in accordance with the Commercial Judge’s
interlocutor of 11 September 2019; this will take the form of a proof before answer on
quantum.