HOE INTERNATIONAL LIMITED AGAINST (FIRST) MARTHA ANDERSEN; AND (SECOND) SIR JAMES AYKROYD
OUTER HOUSE, COURT OF SESSION
[2016] CSOH 33
CA201/13
OPINION OF LORD WOOLMAN
In the cause
HOE INTERNATIONAL LIMITED
Pursuer;
against
(FIRST) MARTHA ANDERSEN; and
(SECOND) SIR JAMES AYKROYD
Defenders:
Pursuer: Sandison QC; Brodies LLP
Defenders: O’Brien; Shepherd & Wedderburn LLP
23 February 2016
Introduction
[1] In 2012, Hoe International Ltd (“Hoe”) purchased the entire share capital of Speyside Distillers Company Ltd (“Speyside”). The terms of the bargain are set out in a share purchase agreement dated 19 September 2012. On the same date the sellers, Martha Andersen & Sir James Aykroyd (“the sellers”), provided Hoe with a disclosure letter.
[2] The disclosure letter mentioned a company called Chambers Finance Limited (“Chambers”), for whom Speyside had stored a significant quantity of whisky. It narrated that disputes had arisen out of this arrangement, which led Chambers to raise two court actions against Speyside. The parties resolved their disputes in 2011 by means of extra judicial settlement. They agreed: (a) that Chambers had an effective pledge of the whisky; (b) that Speyside would release a quantity of whisky to Chambers; and (c) that both actions would be dismissed.
[3] The disclosure letter also stated, however, that there were still outstanding matters. Chambers asserted that Speyside owed it a further sum of about £500,000 in respect of excess insurance premiums, storage charges, and the unauthorised sale of whisky to cover those charges. Speyside maintained that in fact liability travelled in the opposite direction and that Chambers owed it a sum of money.
[4] The disclosure letter described the position as follows:
“When agreement was reached on the dismissal of the court actions, around June 2011, these other matters remained live, however, since then Speyside has worked amicably with Chambers, arranging the removal of Chambers’ whisky while invoicing and receiving payment for related charges. Throughout this period Chambers has made no mention of having any continuing claims against Speyside, nor has there been any solicitor correspondence threatening legal action.
In recent discussions and correspondence between Jim Gordon of Speyside and Robert Speirs of Chambers discussing their ongoing business relationship this matter has not been raised. Given the possible sale, Jim Gordon raised the issue of formally agreeing that all possible disputes between Speyside and Chambers had been resolved. Robert Speirs responded by email dated 26 August 2012 that he is perplexed by the conversation concerning litigation between Chambers and Speyside. Chamber’s [sic] solicitor also responded on 27 August 2012 … saying he is perplexed but if Tods Murray write to him, ‘he can discuss what, if anything, remains to be done, I assume at procedural level’.
There is a sum due to be paid to the Company by Chambers Finance … This document has been intimated to Chambers but Chambers has not yet confirmed that this sum is finalised. As far as the Sellers are aware, Chambers accept that there is a sum due to be paid to the Company.”
[5] The share purchase agreement itself makes express reference to Chambers. The sellers warranted that Speyside had:
“no further liability to Chambers … in respect of the 7500 hogshead of whisky or the liability in the sum of £500,000 alleged by Chambers … as referred to in … the Disclosure Letter” (para 9.5 of schedule 5)
[6] The warranty provision is an important contractual term. Hoe relied upon the warranties in entering into the bargain: clause 7.1. The sellers represented that the warranties were true, accurate and not misleading: clause 7.2.
[7] The sellers’ belief that Chambers had no further claim on Speyside proved unfounded. On 1 July 2013 Chambers’ solicitors sent a letter of claim to Speyside. Although they did not mention a specific figure, they annexed a spreadsheet to the letter which showed the basis of their calculation. When the arithmetic was done, it brought out a figure of about £500,000.
[8] On 10 July 2013, Hoe’s solicitors sent a letter by DX and email to the sellers’ solicitors in which they stated:
“Please find enclosed a copy of correspondence … intimating a claim by Chambers … against Speyside …
This letter constitutes notice as required by clauses 8.5 and 9.1 of the share purchase agreement.”
[9] Clause 8.5 of the share purchase agreement states:
“The Sellers are not liable for a Claim … unless the Buyer has given the Sellers notice in writing of such Claim …, giving reasonable details of all material aspects of such Claim … known to the Buyer, including the Buyer’s bona fide estimate of the amount thereof and detailing the Buyer’s calculation of the loss alleged to have been suffered by it.”
[10] Clause 9.1 states that Hoe must notify the sellers in writing as soon as reasonably practicable after becoming aware of a potential claim. The purpose of that clause is evident from clause 9.2. It states that within 28 days of receiving such a notice, the sellers must intimate in writing whether or not they wish to conduct the defence of the claim.
[11] Clause 19 is also relevant in this connection. It stipulates the requirements for a valid notice. In particular it specifies that service must be sent by first class post, recorded delivery or personal service. I shall discuss this provision in more detail below.
[12] Chambers subsequently raised proceedings against Speyside. As the sellers declined to become involved, Hoe effectively undertook the defence. On the advice of its legal team, it resolved the action by means of an extra-judicial settlement.
The Issues
[13] Hoe now seeks to enforce the warranty against the sellers. In the summons it concludes for declarator, implement and damages. The sellers defend the action on the merits, but they also take a preliminary point. They contend that Hoe’s letter of 10 July is deficient in two respects. First, it did not supply all the information required by clause 8.5. Secondly, it was not served by the means prescribed by clause 19.1. Both issues turn on the proper construction of the share purchase agreement.
The Legal Framework
[14] Mr Sandison drew a distinction between option and non-option cases. He submitted that when a party sought to exercise an option that had a major effect on the parties’ contractual arrangements. Accordingly, the law demanded rigorous compliance with the notice requirements. In non-option cases, however, the law adopted a less strict approach.
[15] I see no basis in the case law for making such a distinction. In each case the court must approach matters using the principles of contract interpretation summarised by Lord Neuberger of Abbotsbury in Arnold v Britton [2015] 2 WLR 1593 at paragraphs 14 – 23.
[16] The construction of contractual notices involves asking whether the notice provision is obligatory or permissive: Yates Building Co Ltd v R J Pulleyn 1976 1 EGLR 157. If obligatory, then “the acceptance is only good if it complies with the stated requirements”: per Lord Denning MR at page 2.
[17] In determining whether there has been compliance, the court asks “how a reasonable recipient would have understood” the notice in question: Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749 per Lord Steyn at 767G-H. That is an objective approach that has regard to the contextual scene.
[18] Lord Clyde framed the matter in this way:
“The standard of reference is that of the reasonable man exercising his common sense in the context and in the circumstances of the particular case. It is not an absolute clarity or an absolute absence of any possible ambiguity which is desiderated. To demand a perfect precision in matters which are not within the formal requirements of the relevant power would in my view impose an unduly high standard in the framing of notices such as those in issue here. While careless drafting is certainly to be discouraged the evident intention of a notice should not in matters of this kind be rejected in preference for a technical precision.” (at 782C-D)
[19] The Scottish courts have adopted a similar line. Delivering the opinion of the Extra Division in Scrabster Harbour Trust v Mowlem plc 2006 SC 469, at para 47, Sir David Edward stated: “If strict compliance with a particular condition is called for, then strict compliance will be enforced.” He was reluctant, however, to follow an example proffered by Lord Hoffman in Mannai (at 776A-B) that if the parties specified that a notice had to be on blue paper, a notice on pink paper would not suffice.
[20] Lord Prosser explained the rationale of upholding notice provisions in Muir Construction Ltd v Hambly Ltd 1990 SLT 830, at 834E-I:
“A lawyer may feel uneasy at coming down on the side of formality, but in a situation where business relationships are being regulated by contractual conditions which, overall, are decidedly formal, and where these conditions have been drawn up in a standard form which attempts great (and perhaps excessive) precision, I would find it very hard to hold that only the broad overall purpose of a clause is intended to be mandatory and its careful formalities are intended to have only some imprecise effect.
…Having regard to the origin, grammar and terms of the present provision, I would find it wholly unnatural to regard it as merely some sort of aide memoire for the person exercising the power, included only in his interests, and intended to leave him free to adopt other methods if he wanted to take the risk of a subsequent argument about receipt. … I see nothing unduly demanding in expecting that the contractor or those acting for him will have the terms … in front of them, and will assume that cutting corners is dangerous. … I see the required formality as intentional, binding, and useful to both parties.”
[21] As to any perceived inequity in following a strict approach, Lord Reed stated in Ben Cleuch Estates Ltd v Scottish Enterprise [2006] CSOH 35, at para 138:
“… I am satisfied that the break notice was not validly served. This result may be thought to confer an adventitious bonus on the pursuers, enabling them to take unmeritorious advantage of the defenders' error when they realised perfectly well that the defenders intended to exercise their entitlement under the break clause. This criticism however misses the point that the parties have agreed, as it were, on the key which is to be capable of turning the lock: if the tenant has not used the right key, then the lock will not turn. The absence of confusion or prejudice on the part of the landlord is irrelevant. If the parties had intended that the break clause should require no more than that the tenant should evince a clear intention to terminate the lease, which should come to the attention of the landlord, then they could have said so in their contract. They did not; and it is not for the court to re-write their contract for them.”
Did the Notice contain all the necessary information?
[22] The sellers maintain that Hoe’s letter of 10 July 2013 failed to comply with the contractual requirements because it did not (a) identify which warranty or warranties were relied upon; (b) state whether and to what extent Hoe adopted the claim letter; or (c) include Hoe's own bona fide calculation of loss.
[23] In my view clause 8.5 had a twofold purpose. The first was to give notice to the sellers that a claim existed. The second was to furnish them with sufficient information to determine whether they wished to defend any action themselves.
[24] I conclude that the reasonable recipient would have been in no doubt that Hoe’s letter of 10 July 2013 complied with clause 8.5. It bore to be issued in terms of that provision and plainly related to the “Chambers’ warranty”. The letter provided all the details known to Hoe at that stage. As the claim related to the period when the sellers had control of Speyside, they were best placed to assess the validity of Chambers’ claim.
[25] It was unlikely that Hoe could usefully have investigated the claim in the limited time available. With regard to the merits, it would have had to make enquiries of the sellers. There is a degree of absurdity in requiring Hoe to make enquiries of the sellers in order to relay the same information back to them.
[26] There is another factor that points towards the same conclusion. If Hoe had delayed to investigate matters itself, for example by instructing forensic accountants, it might have fallen foul of its obligation to notify the sellers as soon as reasonably practicable after becoming aware of the claim.
[27] Put short, the reasonable recipient would have known that a claim was being made (Hoe’s cover letter) and what the claim was about (the claim letter from Chambers’ solicitors). He or she would be able to tie it in exactly to the disclosure letter.
[28] I observe that, according to the Defences, the sellers informed Hoe that they did not wish to intervene and conduct the defence themselves. Accordingly, they had no difficulty at the time in understanding the content of the letter.
Did Hoe serve the notice by the correct means?
[29] As mentioned above, Clause 19 applied to all notices issued in terms of the share purchase agreement. It prescribes what constitutes valid notice. Because of its importance to the parties’ dispute, I shall set it out in full.
“19.1 A notice given under this agreement:
(a) shall be in writing in the English language …;
(b) shall be sent for the attention of the person and to the address specified in clause 19 … ; and
(c) shall be:
(i) delivered personally; or
(ii) sent by pre-paid first-class post or recorded delivery; or
(iii) (if the notice is to be served by post outside the country from which it is sent) sent by airmail.
19.2 Any notice to be given to or by all of the Sellers under this agreement is deemed to have been properly given if it is given to or by the Sellers’ representative named in clause 19.3 …
- The addresses for service of notices are:
- the Sellers’ representative:
- name: Tods Murray LLP
- address: Edinburgh Quay, 133 Fountainbridge, Edinburgh EH3 9AG
- for the attention of: Malcolm Holmes
- the Buyer …
19.4 A notice is deemed to have been received:
(a) if delivered personally, at the time of delivery; or
(b) in the case of pre-paid first class post or recorded delivery 2 Business Days from the date of posting; or
(c) in the case of airmail, 5 Business Days from the date of posting; or
(d) if deemed receipt under the previous paragraphs of clause 19.4 is not within business hours … when business next starts in the place of receipt and all references to time are to local time in the place of deemed receipt.
19.5 To prove service, it is sufficient to prove that the envelope containing the notice was properly addressed to the address of the relevant party in accordance with this Clause and delivered either to this address or into the custody of the postal authorities.
19.6 Email shall not be deemed to be appropriate to serve notices and any notices so served shall not be deemed to be lawful or effective notices for the purpose of this agreement.”
[30] The sellers submitted that Hoe’s letter of 10 July is deficient in three respects, First, Hoe sent it by DX and email. Second, Hoe did not mark it for the attention of Malcolm Holmes. Third, the envelope did not give the full postal address of the sellers’ solicitors.
[31] Mr Sandison contended that the letter did comply with clause 19. In essence, he advanced the same line of argument that he had deployed in respect of clause 8.5. While the law requires strict compliance in the case of option notices, it is less strict with other types of contractual notice. Here a sensible commercial person would think that service by means of DX was sufficient. Whether Hoe had used DX or Royal Mail was immaterial. In each case the result would be the same. The envelope containing the claim letter would be placed on the sellers’ solicitors’ reception desk. Not only had Hoe informed the sellers of the claim, they had clearly received and understood it.
[32] Mr Sandison relied on J M Hill & Sons Ltd v London Borough of Camden (1982) 18 BLR 31. On not dissimilar facts, the Court of Appeal held there that service had been effected. Ormrod LJ regarded the recipient’s position as “blatantly formalistic” and added (at page 7):
“Everybody concerned knew perfectly well what was happening. No one was in the very slightest degree prejudiced by it or pretends that they were prejudiced by it or would be believed if they did.”
[33] I agree with Mr Sandison that there is no common thread in clause 19 that obviously yokes the different modes of service together. The parties did not, for example, stipulate that service should be by a method that produced a receipt. What they did, however, was to specify how a notice had to be served, and they did so in some detail.
[34] I conclude that the parties did not intend to allow deviation from the provisions of clause 19. It specifies exactly what constitutes a valid notice. The exclusion of email demonstrates that the parties regarded the mode of service as important. Instantaneous communication was not sufficient. Further, they prescribed when service was deemed to occur which could not apply in the case of service by DX without rewriting the contract.
[35] To borrow Lord Reed’s words, I hold that Hoe failed to use the right key, and accordingly the lock will not turn. As Lord Justice Lewison said in Siemens Hearing Instruments Ltd v Friends Life Ltd [2014] EWCA Civ 382 at paragraph 66:
“The clear moral is: if you want to avoid expensive litigation, and the possible loss of a valuable right to break, you must pay close attention to all the requirements of the clause, including the formal requirements, and follow them precisely.”
Decision
[36] For the reasons outlined, I hold that Hoe did not serve a valid notice. I shall put the case out By Order to discuss further procedure in the light of this opinion.