Decision Inc. Holdings Proprietary Ltd v Stephen Garbett
| Jurisdiction | England & Wales |
| Judge | Mr Simon Gleeson |
| Judgment Date | 16 March 2023 |
| Neutral Citation | [2023] EWHC 588 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: BL-2020-0016121 |
[2023] EWHC 588 (Ch)
Mr Simon Gleeson
Sitting as a Deputy High Court Judge
Case No: BL-2020-0016121
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
COMPANIES COURT
Royal Courts of Justice, Rolls Building
Fetter Lane, London, EC4A 1NL
Mark Warwick K.C. (instructed by Ince Gordon Dadds) for the Claimants
David Lowe (instructed by Wallace LLP) for the Defendants
Hearing dates: 17–20, 23–25 and 27 January 2022
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
This case involves the cramming of a factually square peg into a legally round hole. The issue between the parties is relatively straightforward – the Defendants sold a company to the Claimants, the company performed very substantially worse than expected in the months after the acquisition, and the Claimants feel that they were misled. Ordinarily this would give rise to a straightforward case in misrepresentation, in which the court would examine who had actually said what to whom when and consider whether the statements made were sufficiently incorrect to merit an award of damages.
However that is not the approach to be adopted in this case. The reason for this is that the parties entered into an agreement in respect of the sale (conventionally tautologously described as a “sale and purchase agreement”, or SPA) in relatively usual form for a transaction of this kind. One of the aims of an SPA in a corporate transaction is to severely limit the scope for subsequent litigation between the parties to the transaction. This is achieved by a variety of techniques – limiting the period in which litigation can be commenced, requiring formal notification of any such litigation in prescribed form, and, most importantly, limiting the types of actions which can be brought. As a result of this, the action which the Claimants have brought is based on allegations of breach of specific contractual warranties.
These contractual warranties are two – one being the warranty that there had been no material adverse change in the turnover or prospects of the company at the time the contract became effective, the other being that the records of the company were accurate.
The fact that the Claimants are obliged to proceed in this way has consequences for the conduct of this action, and for the issues considered in this judgement. During the hearing it proved hard at times for all those involve to avoid lapsing into what I might call a “misrepresentation mindset”, in which the debate turned on who said what when, and whether what was said was justifiable in the circumstances. However, that issue was not before me. The issue that is before me is simply as to whether either or both of the alleged warranties had been breached, and in neither case was the truth or otherwise of what was said during the negotiations for the sale of the company in issue. It was necessary to consider the content of some of the negotiations in the course of deciding whether or not there had been a breach of warranty, but the only relevance of that consideration was evidential.
The Claimants' pleadings state that the First Claimant has assigned the benefit of its claims in this litigation to the Second Claimant, who therefore also appears as a party. However, at all material times the entity engaged in the transaction was the First Claimant. Clause 16 of the Agreement explicitly permits such an assignment. and its validity was not challenged during the hearing. Consequently I proceed on the basis that the claim has been validly assigned to the Second Claimant.
Background
On the 8 th October 2018 the First Claimant (“Decision”), and the First and Second Defendants, executed an SPA (the “Agreement”) under which Decision agreed to acquire from the Defendants all the shares in Copperman Consulting Limited (“the Company”). The Agreement took effect on the 12th October (the “Effective Date”).
Decision is established in South Africa, the Company in the UK. Both are I.T. consultancies specialising in the design of enterprise performance management (“EPM”) software. EPM software helps the finance departments of very large businesses manage and control financial flows across the business, and facilitates planning, modelling, consolidation and reporting of data across multiple systems within an organisation. In general a business will come to an EPM specialist when they want a new system designed and built for them. This means that the revenues of that specialist arise in what I would describe as “large lumps” – at any given time, such a business will have a relatively small number of relatively large projects ongoing, and there is relatively little “flow” work. In summary, the continual winning of a few large mandates is essential to the business.
The conventional industry approach to assessing the future of a business of this kind is to compile what is known as a “pipeline” – a list of new business prospects which may, over time, mature into mandates. A pipeline document can include everything from a remote prospect to a concluded agreement – it simply lists all of the identified possibilities. It is conventional to analyse pipelines by allocating percentage probabilities to each possibility, and thereby arriving at a probable future revenue calculation. However, on the basis of the evidence before me here I do not think that it could be said that a pipeline document which was not prepared in this way could be described as inaccurate or defective on that ground alone.
I should also mention at this point that the nature of the EPM consultancy business is such that its operational gearing is very high. The design and implementation of EPM systems is difficult and complex work, and in order to be successful a firm needs a strong bench of full-time employed specialist consultants. The vast majority of such a firm's costs are therefore fixed. This means that when the firm is fully employed the profits may be very high, but a relatively small downturn in turnover may have a significant negative impact on profits.
Because of this, it is common ground between the parties that in assessing the value of the Company, the focus of both sides in the sale negotiations was on the Company's ability to consistently generate future revenues. It is common ground that the Claimants were not buying a particular set of existing or future contracts. What they wanted to buy was twofold – the ability to execute mandates of this kind, and the ability to generate such mandates. It should be emphasised that Decision, at the time of the contract, had no business in Europe, and the business of the Company was more or less exclusively in the UK and Ireland. Decision therefore had no ability to generate business for the Company, or to refer business to it – the future profitability of the Company was entirely dependent on the Company's own ability to generate new business.
The discussions between Decision and the Defendants in the course of negotiating the deal therefore turned significantly on the future business that the Company might be expected to win. In order to provide comfort to Decision as to the future potential the Company, information was provided at various points as to the future “Pipeline” of work. This was a list of potential assignments which the Defendants believed that the Company might win. The most significant elements of this pipeline in terms of their size were potential mandates for four clients; The BBC, TfL, Kerry and Nidec (the “Four Contracts”).
The Terms of the Sale and Purchase Agreement
The relevant provisions of the Agreement are set out below:-
10 WARRANTIES
10.1 The Sellers acknowledge that the Buyer is entering into this Agreement on the basis of, and in reliance on, the Warranties.
10.2 The Sellers warrant to the Buyer that except as Disclosed, each Warranty is true, accurate and not misleading on the date of this Agreement and the First Completion Date if this date is later than the date of this Agreement.
10.3 Except where otherwise specifically provided for in this agreement and without prejudice to the Buyer's right to claim on any other basis, or to take advantage of any other remedies available to it, if any Warranty is breached or proves to be untrue, inaccurate or misleading, the Sellers shall pay to the Buyer on demand:
10.3.1 the amount necessary to put the Company into the position they would have been in if the Warranty had not been breached or had not been untrue, inaccurate or misleading;
10.3.2 all costs and expenses (including, without limitation, damages, legal and other professional fees and costs, penalties, expenses and consequential losses whether arising directly or indirectly) reasonably incurred by the Buyer, the Company as a result of such breach, or of the Warranty being untrue, inaccurate or misleading; and
………………
10.5 Each of the Warranties is separate and, unless otherwise specifically provided, is not limited by reference to any other Warranty or any other provision in this Agreement.
10.6 Except for the matters Disclosed, no information of which the Buyer (or any of its agents or its advisers) has knowledge (in each case whether actual, constructive or imputed), or which could have been discovered (whether by investigation made by the Buyer or on its behalf), shall prejudice or prevent any Claim or reduce the amount recoverable under any Claim.
10.7 The Buyer warrants that it has no actual knowledge at the date of this Agreement of...
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