In Towergate Financial (Group) Ltd & Others v Hopkinson & Others [2020] EWHC 984 (Comm)the High Court considered the correct interpretation of a contractual time limit for notifying indemnity claims under an Share Purchase Agreement (SPA).

Clear words needed for limiting rights

Contractual limitations periods for notifying warranty or indemnity claims under an SPA are a form of exclusion clause. Clear words are required under English law to exclude or limit rights or remedies which arise by operation of law, including the obligation to give effect to a contractual warranty. The Court of Appeal affirmed this principle for commercial as well as other contracts in Nobahar-Cookson v Hut Group Ltd [2016] EWCA Civ 128.

Facts

In August 2008, the claimants (Towergate Financial and others) purchased a financial services firm from the first six of the defendants on terms agreed within an SPA. By one term in particular, those defendants gave the claimants an indemnity against any losses consequent upon claims or complaints against the business arising from mis-sold financial products.

In 2014, the FCA instituted formal section 166 of the Financial Services and Markets Act 2000 reviews to investigate its concerns in relation to enhanced transfer value (ETV) schemes and unregulated collective investment schemes (UCIS) upon which the firm had advised prior to the SPA. As a result of these reviews, Towergate Financial and others were required to make redress payments to customers and estimated their potential liability in the tens of millions. In July 2015, the claimants served on the relevant defendants a notice of their intention to rely on the said indemnity, as was required by the SPA.

Litigation

The question for the court, to be determined by way of preliminary issue, was whether or not that notice complied with a condition precedent contained within the notice clause in the SPA. In particular, were the claimants bound by a requirement that notice should be served “as soon as possible” upon learning of any “matter or thing” that might give rise to liability?

The case had already been through the High Court and Court of Appeal on the question of whether or not it had been necessary for the notice to specify the details and circumstances, and an estimate in good faith of the value of the potential indemnity claim, in accordance with the notice clause. Those two courts had determined that there was no such requirement on the wording of the clause: the claimants need only give bare notification of the “matter or thing” (in this case, the section 166 reviews).

The clause

The notice clause was as follows:

6.7 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 (specifying the details and circumstances giving rise to the Claim or Claims and an estimate in good faith of the total amount of such Claim or Claims) is given to all the Warrantors as soon as possible and in any event prior to:

6.7.1 the seventh anniversary of the date of this Agreement in the case of any Claim solely in relation to the Taxation Covenant;

6.7.2 the date two years from the Completion Date in the case of any other Claim; and

6.7.3 in relation to a claim under the indemnity in clause 5.9 on or before the seventh anniversary of the date of this Agreement.

Towergate Financial argument

The claimants relied upon the proposition that a condition precedent must be clear and unambiguous if it is to be enforceable, citing Zurich v Maccaferri and Impact Funding v AIG. In this respect, they pointed to a number of problems with the clause:

  • Those parties to the SPA giving the indemnities were not the same as those giving warranties. It follows that the reference to giving notice to “all” the warrantors was illogical for an indemnity claim. Therefore, how could the words “as soon as possible”, which followed that reference, apply to indemnity claims?
  • The words “prior to” at the end of the main clause conflicted with “on or before” in the sub clause, making a “nonsense” of the meaning. This was another pointer that “as soon as possible” could not apply to indemnity claims.
  • The words “as soon as possible” were surplusage and commercially unnecessary, the real limit being seven years (in reliance on AIG Europe v Faraday).
  • The words “as soon as possible” were fundamentally unclear in this context. What was the trigger to start time running? Once it did, how long did it permit?

Towergate Financial Judgment

Mrs Justice Cockerill DBE, in a carefully reasoned and detailed judgment, took a robust approach to Towergate Financial’s objections. She accepted that the clause had its “imperfections” but had “no difficulty in concluding” that there was an enforceable condition precedent requiring notice to be given as soon as possible. She stated, at paragraph 72:

“… while the… clause is not perfect, it is – in real terms – perfectly clear. There are a few issues with it, but they are ones that any sensible reader can resolve without difficulty. It is not ambiguous.”

There was nothing difficult about the concept of the words “as soon as possible”, and the previous High Court and Court of Appeal judges had had no problem identifying the trigger point as any matter or thing that “may give rise to liability”. That was a common concept in insurance contracts and could be understood by taking a practical view. The judge thereby made the point that even if a clause is imperfect, if it has only one sensible meaning then, no matter its flaws, it is tolerably clear.

Having therefore determined that “as soon as possible” meant “as soon as possible” and imposed a condition precedent upon the claimants, the judge had no trouble finding that, as a matter of fact, notice was plainly late, coming 17 months after inception of the section 166 reviews. As a consequence, Towergate Financial’s claim under the indemnity failed.

Buyers beware

This decision emphasises the importance of the provisions that regulate when notice of claims must be given, and the considerable scope for disputes if there is any ambiguity in the drafting of those provisions. The case also highlights the potential pitfalls, particularly for a buyer, associated with notice of claims provisions that take effect as a condition precedent to liability and which operate by reference to a trigger that is subjective, or otherwise open to interpretation, such as a requirement to provide notice “as soon as possible”. In the interests of certainty, and to preserve the usual commercial rationale of a limitation of this type, buyers would be well advised to avoid a limitation of liability that is drafted in such terms.

If you have any questions on limitation periods or on any of the points above for our contract lawyers or our dispute resolution lawyers please contact us.