Rok Plc ((in Administration)) v S Harrison Group Ltd
| Jurisdiction | England & Wales |
| Judge | Mr Richard Siberry QC |
| Judgment Date | 22 February 2011 |
| Neutral Citation | [2011] EWHC 270 (Comm) |
| Court | Queen's Bench Division (Commercial Court) |
| Docket Number | Case No: 2009 Folio No. 1685 |
| Date | 22 February 2011 |
[2011] EWHC 270 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Richard Siberry Qc
Sitting As A Deputy Judge Of The High Court
Case No: 2009 Folio No. 1685
Rebecca Sabben-Clare (instructed by Maclay, Murray & Spens LLP) Counsel for the Claimant
Thomas Grant and Alexander Winter (instructed by Cobbetts LLP), Counsel for the Defendant
Hearing dates: 31 January, 1 and 2 February 2011
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.
Mr Richard Siberry QC, Sitting as a Deputy Judge of the High Court
Mr Richard Siberry QC:
Introduction
In these proceedings the Claimant, ROK PLC ("ROK"), claims damages in respect of losses allegedly sustained as a result of alleged breaches by the Defendant, S Harrison Group Limited ("SHG"), of warranties given by SHG in a share purchase agreement dated 3 September 2007 ("the SPA") between SHG as Vendor and ROK as Purchaser. By the SPA SHG agreed to sell, and ROK agreed to purchase, the entire issued share capital of S Harrison Construction Limited ("the Company") on the terms and conditions set out in the SPA.
This judgment is given following the trial of a preliminary issue ("the Preliminary Issue"), ordered by David Steel J on 30 June 2010, as to whether a letter dated 30 June 2009 ("the Letter") satisfied the notice requirements of the SPA in relation to certain of the warranty claims made by ROK. ROK submits that it did, but SHG, whilst admitting that the Letter satisfied the notice requirements in relation to ROK?s claim under one of the warranties in the SPA, submits that the Letter did not meet those requirements in relation to claims advanced by ROK under warranties which have been referred to (for reasons will become apparent) as "the CVR Warranty" and "the Profit Forecast Warranty."
At the time of the SPA, the Company was carrying on business in the construction industry as a "design and build" construction company. It was engaged in a number of major construction projects. The claim now advanced by ROK relates to five of these projects: Daisysprings, Navigation Road, I-Quarter, Brewery Wharf, and Peninsula, though a sixth, Escrick, was also mentioned in the Letter.
It was the practice of the Company, both before and after its acquisition by ROK, to prepare periodic "cost value reconciliations" ("CVRs") in relation to each project. As explained in para. 9(2)(a) of SHG?s Defence,
"A CVR was an internal costs control mechanism utilised by the Company whereby, at monthly intervals, the Company would estimate the costs required to complete a particular construction contract by breaking each construction contract down into various component parts. Its purpose included but was not limited to the calculation of the estimated gross profit or loss that would be made in respect of the particular contract; it was also used by the Company to calculate an estimated net profit or loss, assuming the Company traded at similar turnover and overhead levels to the current or preceding year."
Copies of the Company?s CVRs for June 2007 ("the June CVRs") were provided by SHG to ROK in the course of the due diligence exercise carried out prior to conclusion of the SPA. These June CVRs were finalised at contract review meetings which took place in July 2007.
Examples of the June CVRs were included in the papers before the Court at the trial of the Preliminary Issue. They were lengthy and complex documents. They included a spreadsheet entitled "CVR and Forecast Report —Summary", which, among other things, gave Tender Budget and Revised Budget figures for the project in question, sub-
divided as between various categories such as "Preliminaries", "Labour", "Materials", "Subcontractors", "Gross Tender Margin", "Cumulative to Date" figures for each of these categories, with comparative figures for, and "Period Movement" from, the previous month, and figures for "Forecast at Completion". The CVRs included, in each case, an "Opportunities/Risk Statement" and a "Project Period Movement Summary", and a series of spreadsheets with detailed figures for each component of the "packages" into which the project was sub-divided.
It is ROK?s case that the forecast costs to complete the five projects in question, as shown in the June CVRs, were not calculated based on all material information known to SHG at the time they were prepared, and that SHG was thereby in breach of both the CVR Warranty and the Profit Forecast Warranty. SHG denies breach, but in any event submits that ROK?s claims for breaches of these Warranties should be struck out, because the Letter did not give adequate written notice of these claims in accordance with the requirements of the SPA.
The material provisions of the SPA
The SPA, to which Mr Martyn Harrison, a principal shareholder of SHG, was also a party, contains a single recital, as follows:
"WHEREAS
(A) The Vendor has agreed to sell and the Purchaser has agreed to purchase the Shares (as hereinafter defined) in reliance, inter alia, upon the warranties in this agreement (the "Agreement") for the Consideration (as hereinafter defined) and otherwise upon the terms and subject to the conditions of this Agreement."
Clause 1.1 of the SPA contains the following material definitions:
"Claim" any claim by the Purchaser in connection with the Warranties;
"CVR" the monthly cost valuation reconciliations for each construction contract entered into by the Company;
"Profit Forecast" the forecast of profits on the ordinary activities of the Company before taxation for the year ended 31 December 2007 (as set out in Section C of Schedule Four);
"Warranties" the warranties set out in Paragraph 6.1 of this Agreement and Schedule Three."
In addition, clause 1.2 contains a standard provision to the effect that "Unless the context otherwise requires, words denoting the singular should include the plural, and vice versa …."
Clause 2.1 provides that:
"Subject to the terms of this Agreement, the Vendor shall sell and the Purchaser, relying on the Warranties set out in this Agreement, shall purchase the Shares, free of all Encumbrances and together with all rights attaching thereto at the date of this Agreement."
Clause 6 is the provision whereby SHG warranted the truth and accuracy of the Warranties. It provides, so far as material, as follows:
"6. WARRANTIES
Extent of Warranties
1 In consideration of the Purchaser agreeing to purchase the Shares on the terms contained in this Agreement, the Vendor hereby warrants to the Purchaser that the Warranties are true and accurate and not misleading in all respects.
2 The Vendor accepts and acknowledges that the Purchaser has calculated and agreed to pay the amount of Consideration expressed to be payable in this Agreement primarily on the basis of applying a multiple to the underlying profitability of the Company.
….
Separate and independent Warranties
Each of the Warranties set out in Schedule Three shall be separate and independent and, save as expressly provided otherwise, shall not be limited by reference to any other such Warranty.
Reliance
The Purchaser has entered into this Agreement upon the basis of and in reliance upon the Warranties, Indemnities and the Tax Undertaking.
….
Warranty security
Martyn Harrison hereby undertakes to at all times maintain tangible assets to the value of the Cash Consideration plus the mid-market sale price of the Consideration Shares on any given day ("the "Tangible Assets") in the Vendor?s group (with the Vendor at all times remaining the holder of the entire issued share capital of the member of its group which holds the Tangible Assets) until any and all claims which have been brought before 30 June 2009 have been fully and finally settled."
The Warranties are set out in Schedule 3 to the SPA, which runs to 42 pages. They include, in Section A, the following "General Warranties":
"4.2 Management Accounts and CVRs
1 The Management Accounts:
(a) have been prepared in accordance with normal monthly management procedure adopted by the Company, which procedure is in all material respects consistent with and uses the accounting policies, bases and practices used in preparing the Accounts during the last three financial years save in so far as would not reasonably be regarded necessary for unaudited management accounts and full details of all material discrepancies or departure from such practice or procedure have been Disclosed;
(b) disclose in all material respects the trading position of the Company as at the date(s) and for the period(s) to which they relate;
(c) are not affected by any unusual or non-recurring item as those terms are understood in accordance with generally accepted accounting principles and practices in the United Kingdom or by any other factor rendering the results for the period(s) to which they relate unusually high or low;
(d) have been prepared based in all material respects on the CVRs and any material management adjustments between the CVRs and the Management Accounts are fully set out in the Disclosure Letter; and
(e) exclude any recharges for administrative/non-trading costs incurred and paid by the Vendor or any of its Affiliates rightfully rechargeable to the Company.
….
3 The costs to complete each construction contract entered into by the Company as shown in the CVRs has been calculated based on all the material information known to the Vendor at the time the CVR is prepared.
Profits
….
2 The Profit Forecast produced by the Vendor has been honestly and...
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