Factual and Procedural Background
This case concerns an appeal by the purchaser of a group of companies against the rejection of its claim for damages for breach of warranty under a sale and purchase agreement ("SPA"). The purchaser, referred to as Plaintiff, bought a holding company, referred to as Company A, and its subsidiaries (collectively "the Group") from three sellers, one of which alone gave warranties ("Defendant").
Prior to the sale, Company A and its subsidiaries operated in the UK gas supply industry, delivering gas to the national transmission system via shippers and gas transporters. An error was made by a third party company, Company B, in October 2005 in their computer system, which resulted in an unrecorded liability (the "missed meters charge") of approximately £2.4 million owed by one subsidiary of Company A (Corona 2) to Company B. This liability was unknown and undisclosed at the time of sale and was not reflected in the draft audited accounts for the year ending 31 December 2005 or in the management accounts as at 30 June 2006.
On 31 July 2006, the sellers entered into the SPA to sell the entire issued share capital of Company A to Plaintiff. The SPA included warranties given solely by Defendant regarding the accuracy and preparation of accounts and management accounts. The purchase price was calculated by reference to net asset values shown in the management accounts and exchange accounts, both prepared without knowledge of the missed meters charge.
After completion in September 2006 and payment of the purchase price, Plaintiff was informed in November 2006 of the missed meters charge and subsequently paid the invoice. Plaintiff then commenced proceedings in July 2007 claiming damages for breach of the warranties in the SPA, principally those concerning the accounts and management accounts warranties in schedule 3, paragraphs 4.1 and 4.2.
The trial before the Commercial Court judge lasted six days, culminating in a judgment dismissing Plaintiff's claim on the basis that the accounts and management accounts were prepared in accordance with relevant accounting standards, and that the missed meters charge was an unknown liability properly omitted from the accounts. Plaintiff appealed the decision.
Legal Issues Presented
- Whether the warranties given by Defendant in the SPA regarding the accounts and management accounts were breached by the omission of the missed meters charge.
- The proper construction of the phrase "true and fair view" in the context of the SPA warranties, particularly in relation to compliance with accounting standards and the treatment of unknown liabilities.
- The interpretation and scope of the management accounts warranty, including whether the accounts were "misleading in any material respect" from the purchaser's perspective or by reference to accounting standards.
Arguments of the Parties
Appellant's Arguments
- The accounts warranty, although prepared in accordance with accounting standards, did not present a true and fair view of the Group's assets and liabilities because it omitted the significant missed meters charge.
- The management accounts warranty should be construed from the purchaser's perspective, meaning the omission of the missed meters charge rendered the accounts materially misleading.
- The second sentence of paragraph 4.2 of schedule 3 should be interpreted as a warranty that the management accounts fairly reflect the actual financial position, including all liabilities whether known or unknown.
- The discrepancy caused by the missed meters charge was highly material to the purchaser as it affected the purchase price by approximately 79%.
Respondent's Arguments
- Compliance with relevant accounting standards is prima facie evidence that accounts present a true and fair view, absent exceptional circumstances.
- The missed meters charge was an unknown liability at the time the accounts were prepared and thus properly omitted in accordance with accounting standards.
- The warranties in the SPA, including the management accounts warranty, must be interpreted in their contractual and accounting context, not from the purchaser's hindsight perspective.
- The second sentence of paragraph 4.2 is a warranty about the manner of preparation and degree of accuracy of the management accounts, not a guarantee of actual financial position including unknown liabilities.
- There were no exceptional circumstances to override the true and fair view provided by compliance with accounting standards.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Lloyd Cheyman & Co Ltd v Littlejohn & Co [1987] BCLC 303 |
Compliance with published accounting standards is strong evidence that accounts present a true and fair view. |
Relied upon to support the proposition that adherence to accounting standards generally establishes the true and fair view of accounts. |
| Senate Electrical Wholesalers Ltd v STC Submarine Systems Ltd (1996, unreported) |
Same as above. |
Used to reinforce the principle that compliance with accounting standards is prima facie evidence of a true and fair view. |
| Bairstow v Queen's Moat Houses plc (1999, unreported) |
Same as above. |
Further judicial support for the primacy of accounting standards in determining true and fair view. |
| Revenue and Customs Commissioners v William Grant & Sons Distillers Ltd [2007] UKHL 15 |
Compliance with accounting standards and the meaning of "true and fair view". |
Confirmed that compliance with accounting standards is strong evidence of true and fair view. |
| Smith New Court Securities Ltd v Citibank N.A [1997] AC 254 |
Addressed whether properly prepared accounts may subsequently turn out not to have presented a true and fair view. |
The court found this authority did not support the appellant’s proposition as it was not an issue in that case. |
| Arbuthnot v Fagan [1995] CLC 1396 |
On redundancy of contractual language. |
Applied to reject arguments that contractual provisions were surplusage or redundant. |
| Beaufort Developments (N.I.) Ltd v Gilbert Ash N.I. Ltd [1999] AC 266 |
On redundancy and the drafting of contracts. |
Used to support the view that some redundancy in contracts is common and not fatal to interpretation. |
| Norwich Union Life Insurance Society v British Railways Board [1987] 2 EGLR 137 |
On "torrential drafting" and redundancy in contracts. |
Referenced to support the acceptance of expansive and repetitive drafting in contracts. |
Court's Reasoning and Analysis
The court undertook a detailed construction of the warranties contained in paragraphs 4.1 and 4.2 of schedule 3 to the SPA. It emphasized that the phrase "true and fair view" in the SPA should be interpreted consistently with its meaning under the Companies Act 1985 and relevant accounting standards.
The court accepted that compliance with published accounting standards is prima facie evidence that accounts present a true and fair view. The missed meters charge was an unknown liability at the time the accounts and management accounts were prepared and could not reasonably have been included. Therefore, the omission did not constitute a breach of the accounts warranty.
Regarding the management accounts warranty, the court distinguished between the first sentence, which requires preparation in accordance with accounting standards, and the second sentence, which warrants that the accounts fairly reflect the financial position and are not materially misleading. The court held that these warranties should be interpreted from the perspective of accounting principles and the purpose for which management accounts are prepared (internal management use), not from the purchaser's hindsight perspective.
The court rejected the appellant's argument that the management accounts warranty required inclusion of all liabilities known or unknown, holding instead that the warranty relates to the accounts prepared on the basis of the accounting policies and practices used, and that "materiality" is to be judged by reference to accounting standards.
The court further held that the warranties in paragraphs 6 and 7 of schedule 3, which concern actual assets and liabilities, rather than accounts, were the appropriate place for any warranty regarding undisclosed liabilities, and no breach was alleged there.
The court also addressed the appellant’s surplusage argument, concluding that the inclusion of apparently overlapping or repetitive warranties is common in commercial contracts and does not justify a strained interpretation.
In sum, the court found no breach of warranty by Defendant as the accounts and management accounts were prepared in accordance with relevant accounting standards and fairly reflected the financial position given the information available at the time.
Holding and Implications
The Court upheld the dismissal of the Plaintiff’s claim and dismissed the appeal.
The court held that there was no breach of the warranties contained in paragraphs 4.1 and 4.2 of schedule 3 to the SPA because the accounts and management accounts were prepared in accordance with relevant accounting standards and fairly represented the financial position based on the information reasonably available at the time.
The direct effect is that Defendant is not liable for damages for the missed meters charge under the warranties in the SPA. The decision does not set new precedent but reaffirms established principles regarding the interpretation of "true and fair view" warranties in commercial sale agreements and their relationship with accounting standards.