Allied Maples Group Ltd v Simmons & Simmons
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE STUART-SMITH,LORD JUSTICE MILLETT,LORD JUSTICE HOBHOUSE |
| Judgment Date | 12 May 1995 |
| Judgment citation (vLex) | [1995] EWCA Civ J0512-5 |
| Court | Court of Appeal (Civil Division) |
| Docket Number | NO:95/1585/C |
| Date | 12 May 1995 |
[1995] EWCA Civ J0512-5
(Mr Justice Turner)
Before: Lord Justice Stuart-Smith Lord Justice Hobhouse and Lord Justice Millett
NO:95/1585/C
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM: QUEENS BENCH DIVISION
MR R JACKSON QC and MR D HODGE (instructed by Reynolds Porter Chamberlain, Chichester House, 278-282 High Holborn WC1)) appeared on behalf of the Appellant.
MR R MOXON-BROWNE QC and MS S RODWAY (instructed by Evershed Wells & Hind, 10 Newhall Street, Birmingham) appeared on behalf of the Respondent.
Friday, 12th May 1995.
.
This is an appeal by the Defendants from a judgment of Turner J given on 8 June 1993 on the trial of a preliminary issue as to liability.
The Plaintiffs are a subsidiary of Asda Group PLC and are the retailing arm of that Group which is concerned with carpets, furniture and soft furnishings. The Defendants are a well known firm of solicitors in the City of London with extensive experience in the field of company takeovers and mergers. The proceedings arise from the takeover by the Plaintiffs of assets and businesses within the Gillow Group of Companies.
The Plaintiffs brought this action complaining that in the course of the negotiation of the takeover and in the agreement itself they were insufficiently advised in respect of, and protected from, the liabilities that might and did eventuate from leases originally held by one of the companies in the Gillow Group and which had been assigned by it prior to the date of the takeover agreement. This species of liability is referred to as "first tenant liability". The problem arose in this way. The original intention of the Plaintiffs was to acquire only such properties, and the business conducted from them, as they required from the Gillow Group, a process known as "cherry picking". If this intention could have been met, there would have been no problem in relation to previously assigned leases and first tenant liability. Four of the properties which the Plaintiffs wished to acquire could not be conveyed in this manner because there were conditions against alienation or planning consents which were personal to the company, Kingsbury Warehouses Limited ("Kingsbury"), in which those properties were vested. Some other mechanism had to be found whereby the Plaintiffs could acquire the relevant properties. The mechanism which the Defendants devised, and as to which there was no theoretical objection, was for the Plaintiffs to acquire the shares in Kingsbury and to transfer out of it the unwanted properties and liabilities. This solution gives rise to the dispute in the action because some of the properties which had been previously owned by Kingsbury had first tenant liabilities which, subsequent to the acquisition, resulted in claims against Kingsbury, and hence the Plaintiffs, as a consequence of defaults by assignees. These defaults have caused the Plaintiffs to suffer substantial losses which they sought to recover as damages from the Defendants.
Prior to 1989, the Plaintiffs were primarily retailers of carpets and soft furnishings. They decided to expand the nature of their business by the acquisition of a number of furniture shops from the Gillow Group, together with well known brand names such as "Maples", "Gillow" and "Waring and Gillow". The Plaintiffs were keen to make the acquisition and had the requisite funds, while the Gillow Group was in the position of wishing to sell, albeit at a price that they would regard as satisfactory to them. If the transaction was to proceed, it was necessary that it should generate a minimum cash sum for Gillow, which was put at a figure somewhere between £25,000,000 and £26,000,000. The substantial negotiation which the parties entered into lay in the field not so much of price as in the assets which the Plaintiffs would acquire.
Before they made any move, the Plaintiffs carried out an elaborate process of appreciation and evaluation of the target companies. This process was designed to establish what were the possible benefits to the Plaintiffs if the plan was carried into effect, what was the value of the properties and business which they wished to acquire, as well as identifying other companies who might be possible competitors for the acquisition of Gillow as well as their comparative strengths.
The Plaintiff company made its formal bid by letter dated 20 February 1989. The offer was made in the alternative; the Plaintiffs would purchase either the whole of the issued share capital of Gillow PLC or the premises listed on the schedule and the business carried on from them as going concerns together with stock and the use of the trading names. Following discussions, a revised formal offer was made by letter dated 8 March 1989.
On 22 March Gillow replied. Amongst other things, they undertook until 6 pm on 14 April not to negotiate the sale or agree to sell to any other person. But they added that the Plaintiffs should not take that as indicating that the draft purchase agreement in its present form was acceptable. The draft purchase agreement had been prepared by Mr Buckley, a partner in the Defendants' firm.
The first hint of a problem that resulted in this litigation emerged on 6 April. Next day Mr Heald, the conveyancing partner of the Defendants who was handling the matter, discovered the problems that might arise on alienation of the premises leased to Kingsbury and suggested to the Plaintiffs that the solution might be to purchase the shares in Kingsbury, with the assets, other than the four stores they required, and the other liabilities of Kingsbury hived off to another company. This solution was further discussed at a meeting on 10 April attended by Mr Harker, who was the Plaintiffs' senior director in charge of negotiations, Mr Moore, the Plaintiffs' Finance Director and Mr Buckley.
On the same day, Mr Buckley wrote to Theodore Goddard, Gillow's solicitors, as follows:
"I understand that our…..clients agreed…..that…..(Allied) should acquire the whole of the issued share capital of Kingsbury…..the acquisition to be on the basis that all other assets and liabilities would have been removed so as to leave the company 'clean'….. confirm….. your instructions are the same as mine and let me know what will have to be taken out of Kingsbury…..and the mechanics to achieve this."
Theodore Goddard replied:
"It is also my understanding that the proposal is now that (Allied) should acquire the whole of the issued share capital of Kingsbury….. We are investigating as a matter of urgency what is involved in extracting other assets and in particular…..whether there are any problematical restrictions on alienation of the five properties which I understand will have to be taken out of that company. …..I would just say that I understand my clients made to yours the point that if this was done in the time-scale, it would not be possible for full warranty and indemnity protection to be sought. I would be grateful if you would bear this in mind in drafting the agreement which you will no doubt be preparing."
This letter elicited a response from Mr Buckley on 11 April. On 15 April the Defendants sent to Theodore Goddard a draft of Schedule 12 to the agreement, which dealt with the sale of the Kingsbury shares. The draft contained a number of warranties to be given by the vendor, Gillow, including warranty No. 29, which was in these words:
"The Company has no existing or contingent liabilities in respect of any properties previously occupied by it or in which it owned or held any interest, including, without limitation, leasehold premises, assigned or otherwise disposed of."
It is common ground that warranty No. 29 would have provided the Plaintiffs protection against the claims that eventuated.
However, on 19 April, Theodore Goddard returned the draft of Schedule 12 to the Defendants with a considerable number of the warranties deleted, including warranty No. 29. The amended draft was received at the Defendants' office on the afternoon of 19 April; the deal as a whole was discussed at a meeting between Mr Buckley, Mr Harker and Mr Moore that evening; but the discussion did not include the amendments to Schedule 12.
On 20 April there was a meeting at the offices of Theodore Goddard attended by representatives of Gillow, Mr Moore from the Plaintiffs and their professional advisers, including Mr Buckley, and Mr Hale, another solicitor from the Defendants who handled the tax aspects. The draft amendments to Schedule 12 were discussed. In place of warranty No. 29, there had been provided a mechanism for adjusting the purchase price of the Kingsbury shares by reference to the completion accounts. Paragraph 8 of that Schedule provided:
"In the event that it is subsequently discovered that there was at the date to which the completion accounts were made up any liability of the company which if known at the time should have been provided for in the completion balance sheet, then subject as provided in the sub-paragraph below the Vendor shall pay such amount to the Purchaser in accordance with the provisions of sub-paragraph (10) below."
It is common ground that clause did not in fact protect the Plaintiffs against Kingsbury's first tenant liability, because, as a matter of accountancy practice, the contingent liabilities were not such as should have been provided for.
At the meeting on 20 April, Mr Buckley told Mr Moore that the protection afforded by paragraph 8 was less than perfect. But he did not alert him to the risk that there might be...
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