Written by Barri Mendelsohn
Towergate Financial (Group) Ltd v Hopkinson  EWHC 984 (Comm)
Interestingly, this was one of the first “remote” High Court trials held during the COVID pandemic.
The preliminary issue before the court concerned the construction of a notice clause as it applied to an indemnity under the terms of a share sale agreement (SPA).
Towergate (the Buyer) sought to rely on an indemnity negotiated to carve-out certain liabilities arising from historic mis-selling claims arising prior to completion, and in doing so, served notice on the sellers under the SPA. What transpired was a dispute over the timing requirements prescribed pursuant to the notice clause.
As will be made clear below, the High Court found in favour of the sellers holding that an obligation to give notice “as soon as possible and in any event prior to… the seventh anniversary of the date of… [the] Agreement” constituted a dual condition precedent, and on the facts of the case, dismissed the Buyer’s claim. A dual condition precedent of this nature could give two layers of protection against claims, being sellers early notice to collate information and prepare a defence, as well as a long-stop-date. Failure by parties to adhere to both aspects of the condition may invalidate a claim.
Fundamentally, this case serves as yet another remined that clear and precise drafting is critical to giving effect to the commercial (and practical) purpose of notice requirements for warranty and indemnity claims.
On 5 August 2008, the Buyer acquired the entire issued share capital of financial advisory firm M2 Holdings Limited (the “Target”) from trustees Mr Mitchel Hopkinson and Mr Mark Howard (the “Sellers”) pursuant to the terms of a SPA.
Under the SPA, one indemnity (amongst others) given by the Sellers in favour of the Buyer for up to £9.9 million related specifically to certain liabilities for professional negligence concerning historic mis-selling of financial products during the Sellers’ ownership. It was estimated that the resultant liabilities and costs to which the Buyer was exposed were “potentially in excess of £50 million”.
An abridged form of the notice provisions under the indemnity reads as follows:
“The Purchaser shall not make any Claims against the Warrantors nor shall the Warrantors have any liability in respect of any matter or thing unless notice in writing of the relevant matter or thing […] is given to all the Warrantors as soon as possible and in any event prior to…….. the seventh anniversary of the date of this Agreement.”
By way of background, from mid-2012, the Financial Conduct Authority (FCA) had been in contact with the Buyer with regards to undertaking reviews of certain historic transactions. By early 2013, the FCA had flagged “a number of major issues” in relation to advice to customers given by the Target, and on March 5th, 2013, an internal report, identifying potential claims, was prepared by the Buyer and issued to its insurers (the “2013 Notice”).
By 2014, the FCA reviews had resulted in discovery of a number of instances where the Target’s advice to customers was not suitable and likely to result in a payment of redress. And finally, on July 29th, 2015, notice of possible indemnity claims under the terms of the SPA was served on the Sellers (the “2015 Notice”).
The Buyer asserted that the 2015 Notice was valid because it only had to be served upon the Sellers before the “seventh anniversary”, and not “as soon as possible”. As a secondary case, the obligation to serve notice “as soon as possible” was insufficiently certain and therefore of no legal effect, or, in the alternative, the 2015 Notice was indeed served “as soon as possible”.
The Sellers contended that for notice to be valid it must satisfy both parts of the relevant clause i.e. the provision was structured as a dual condition precedent. Later described as being “deliciously ironic”, it is worth adding that the Sellers’ argument represents a complete about-turn from its earlier, unsuccessfully application for reverse summary judgment on the grounds that the 2015 Notice was both premature and insufficiently particularised.
In delivering judgment the High Court took a semantic approach to interpreting the relevant provisions and found that the notice clause imposed two distinct purposes, being that notice was given (a) as soon as possible; and (b) within seven years.
The High Court held that
- the wording “as soon as possible” facilitated the Sellers to have early notice of a potential claim to enable a defence to be undertaken promptly. This included allowing the Sellers to obtain all information relating to a claim and also take conduct of such claim. Consequently, the usefulness of this provision was directly related to the Sellers receiving early notice.
- the wording “on or before seven years from the date of the agreement” provided the Sellers with a longstop, or limitation period to the indemnity itself – indeed creating a dual conditional precedent.
The High Court further considered whether the 2015 Notice was served “as soon as possible” holding that by mere virtue of the fact that the Buyer had notified its insurers in light of the FCA’s reviews, it plainly had meaningful and useful information to make a determination as to a “matter or thing” giving rise to the claim.
Consequently, stymied by its own action and coupled by its inability to justify away the delay between the 2013 Notice and the 2015 Notice, the Court concluded that the Buyer had not served notice “as soon as possible”, forfeiting the Buyer’s right to rely on the indemnity provision in the SPA, and accordingly dismissed the claim against the Sellers.
A dual condition precedent may be interpreted in favour of sellers, giving two layers of protection against claims, being early notice to collate information and prepare a defence, as well as a long-stop-date. Failure by parties to adhere to both aspects of the condition may invalidate a claim.
However, parties must be aware that the Court’s position on cases like this remains uncertain. In Damoco (Bermuda) Limited v Atlanta Bidco Limited earlier this year, the Court held that the wording “in any case no later than 30 June 2019” was sufficiently ambiguous to enable it to consider the commercial background and held that an obligation to deliver completion accounts was once they had been audited, rather than an earlier date.
Going forward contracting parties should consider the following:
- The use of phrases such as “as soon as possible” can inadvertently impose a rolling time limit within a more definitive limitation period (a dual condition precedent).
- Buyers should include drafting to alleviate any subjectivity associated with giving notice “as soon as possible” or similar, such as any failure to do so will not invalidate notice.