Senate Electrical Wholesalers Ltd v Alcatel Submarine Networks Ltd (formerly STC Submarine Systems Ltd)
| Jurisdiction | England & Wales |
| Judge | Lord Justice Stuart-Smith |
| Judgment Date | 22 June 1998 |
| Judgment citation (vLex) | [1998] EWCA Civ J0622-14 |
| Docket Number | Case No: QBENF 97/0317/1 |
| Court | Court of Appeal (Civil Division) |
| Date | 22 June 1998 |
[1998] EWCA Civ J0622-14
Lord Justice Stuart-Smith
Lord Justice Ward
and
Lord Justice Hutchison
Case No: QBENF 97/0317/1
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM QBD (May J.) on 20.12.96
Royal Courts of Justice
Strand, London, WC2A 21L
Michael Lyndon-Stanford QC & Stephen Smith (instructed by Lovell White Durrant for the Appellants)
Richard Field QC & Kenneth MacLean (instructed by Ashurst Morris Crisp for the Respondents)
Introduction
The Agreement
By an agreement in writing (the Agreement) made in Paris and dated 19.4.91, STC Submarine Systems Limited (STC) which subsequently changed its name to Alcatel Submarine Networks Ltd, the defendants, sold to the plaintiffs, Senate Electrical Wholesalers Limited (Senate), (which at the time of the agreement was called Sashtime Limited) a business formerly known as STC Distributors (the Business) being a division of STC. The Business was one of the four major electrical wholesale distributors in the United Kingdom.
The effective purchaser of the Business was CDME (now Rexel SA), a French company and the second largest electrical wholesaler in the world, the largest being Otra/Sonepar. Senate was a subsidiary of CDME. The ultimate vendor was Northern Telecom Limited (NTL) which had purchased STC early in 1991 and wished to dispose of those businesses of STC not concerned with telecommunications.
The sale was of the assets (other than cash and intercompany balances) and goodwill, and the consideration was expressed to be divided as to £70m for the estimated capital employed (net assets as defined) and goodwill at £20m. There was provision for adjustment of the figure of £70m for the assets on the taking of completion accounts. This figure was eventually determined at £68,832,000 on 10.12.92.
The Warranty
The Agreement contained a number of warranties. The relevant one is as follows:
11.1.5 Management Accounts
11.1.5.1 The Management Accounts:
(a) have been diligently and carefully prepared in accordance with generally accepted accounting principles and practices and are true and accurate in all material respects; and
(b) give a true and fair view of all the assets and liabilities and the state of affairs, financial position and results of the Business in the case of the unaudited balance sheet, as at and up to 31 March 1991, and in the case of the unaudited income statement, up to 31 December 1990.
The Management Accounts warranted are defined in clause 1 of the Agreement as:
'The unaudited Income Statement of the Business for the twelve months ended 31 December 1990 and the unaudited balance-sheet of the Business at 31 March 1991.'
The profit and loss account which formed part of the management accounts at 31 December 1990 showed a profit for the year of £9.7m on sales of £201.7m. The balance sheet at that date showed capital employed as £43.6m. Since the capital employed figure does not include cash or intercompany balances, it varies from time to time depending largely on the state of debtors and creditors. This explains why at the time of completion it was approximately £70m.
The breach of warranty
The judge held that the profit figure was overstated by approximately £1.9m and that this constituted a breach of warranty. This figure was made up of overstatement of the Rebate Reserve account to the extent of £1.697m (£1.7m) and under provision in respect of vehicle leases to the extent of £203,000. The judge held that the £203,000 in respect of vehicle leases did not affect the maintainable earnings and was not relevant in assessing the plaintiff's loss. Mr Field QC who appeared on behalf of Senate accepted this finding. We are concerned therefore with the overstatement of profit of £1.7m. STC do not appeal the judge's finding as to breach of warranty.
The provision as to notice
Clause 11.5 of the Agreement provided:
"11.5 Notwithstanding any other provisions of the Agreement, the Vendor shall not be liable under this Agreement in respect of any breach of any of the warranties:
11.5.1 Unless notice of it is given in writing by the Purchaser to the Vendor setting out such particulars of the grounds on which such claim is based as are then known to the Purchaser promptly and in any event………within eighteen months of the completion date."
The judge held that notice of the claim was given by letter dated 26.12.91 and although no particulars were set out in the letter, it incorporated particulars which had been given orally at two meetings between the parties or their representatives on 15.11.91 and 11.12.91. Accordingly the requirement was satisfied.
Damages
Senate's primary case (STC say their only case) was that damages should be assessed by applying a price/earnings ratio (p/e) of 13.67, derived from the actual transaction, to the difference between the warranted profit and the actual profit (maintainable earnings). In the Amended Statement of Claim the sum claimed was £25.95m to £27.317m. This was based on a number of alleged breaches of warranty which together showed that the profit for 1990 was overstated by about £3.34m. But Senate failed to establish a number of the alleged breaches and at the conclusion of the trial the overstatement was £1.9m which, after allowing for tax, produced a claim of £16.99m (on a figure of £1.7m it is somewhat less).
STC contended that Senate had suffered no loss. They did so for four main reasons:
(a) They submitted that Senate had not adopted a p/e approach when valuing the Business for the purpose of the purchase. On the contrary other powerful considerations weighed with them.
(b) Having regard to the fact that the assets were valued at £68m and the goodwill at £20m, a p/e calculation applied to a relatively modest difference in the profit led to an absurd result that the goodwill was worth virtually nothing and, as originally claimed by Senate, even the sum paid for the assets would be eaten into.
(c) That assuming that the warranted accounts, as a matter of accountancy practice, did not show a true and fair view, the damage had to be calculated on the basis that there was a significant difference between the warranted figure for profit and the actual profits (maintainable earnings) for 1990; and that for various reasons there was no such difference.
(d) That in any event at the time the final negotiations were being conducted between 17 & 19 April 1991 STC knew that Otra/Sonepar were still very keen to purchase and had offered £3m more than the £90m agreed with Senate. If, therefore, the error in the accounts had been disclosed and Senate had sought to negotiate a lower price, either they would still have been prepared to pay £90m to prevent Otra/Sonepar buying the Business; or if they did not, STC would have sold to Otra/Sonapar at £90m.
The judge rejected the p/e approach. Equally, he did not accept that the plaintiffs had suffered no loss or damage. He said that if the accounts had disclosed the correct figure the whole negotiation would have been conducted at a somewhat lower level and that the price would have been £5m less. He awarded interest on this sum at base rate plus one per cent, amounting to £2,334,153.23. So far as costs were concerned he ordered the plaintiffs to pay the costs on three issues but otherwise he awarded them 80% of their costs.
The appeal and cross-appeal
STC appeal on two main grounds:
(a) On damages they submit that the judge should have found that there was no loss and that his approach to the assessment of damages was not open to him since it was not the way the case was conducted at trial; alternatively that his figure of £5m was excessive.
(b) That the judge was in error in holding that Senate had complied with the notice provision.
Additionally STC appeal the amount of interest and costs.
Senate cross-appeal on damages. They submit that the judge ought to have adopted the p/e approach to the assessment of damages.
The Facts
In a full and careful judgment, which demonstrates a masterly grasp of the highly complex facts, the judge set out in great detail the steps in the negotiations which led to the Agreement. It is only necessary for the purpose of this judgment to refer to them in outline before coming to the judge's findings.
In the latter part of 1990 Barings, the merchant bankers, were instructed by STC to find a purchaser for the Business. By the end of November a number of possible purchasers had been identified; two, Newey & Eyre and Edmundsons were UK based; three, Hagemeyer, Otra/Sonepar and CDME were based on the Continent and anxious to break into the UK market. On 26.2.91 Barings sent to CDME copies of a Preliminary Information Package. They disclaimed responsibility for the accuracy or completeness of the information. Financial information from the management accounts of the Business to 31.12.90 was provided including a profit of £9.7m before interest and tax on sales of £201.7m; the capital employed at the end of 1990 was £43.6m.
By 20.3.91 offers of £80-95m had been received from Hagemeyer and Edmundsons, £70-90m from Otra/Sonepar and £67.5m from CDME, but the latter was based on the net asset value of £43.6m. Shortly after this CDME were told that the assets were nearer £70m, and on this basis they indicated that they were prepared to increase their offer to at least £75-80m. All four candidates were then invited to take part in the second round, with final offers to be made by 3pm on 17.4.91. There followed a period of...
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