In The Hut Group Limited v (1) Oliver Nobahar-Cookson and (2) Barclays Private Bank and Trust Limited , the claim in the High Court by The Hut Group Limited (THG) against Mr Nobahar-Cookson (Mr Cookson) and the trustee of Mr Cookson’s family trust, Barclays Private Bank and Trust Limited (the Trustee) (together the Defendants) and the Trustee’s counterclaim arose out of the sale of Mr Cookson’s company, Cend Limited (Cend), an online sports nutrition business, to THG pursuant to a Sale and Purchase Agreement dated 31 May 2011 (the SPA). The consideration for the share capital of Cend was a mixture of cash and shares in THG, all the shares being issued to the Trustee.
Both the claim and counterclaim related to the value of the shares acquired by the relevant party. THG claimed damages of £8,567,085 for breach of warranty regarding Cend’s management accounts for the six month period to 30th March 2011. The Trustee counterclaimed for damages of £12.5 million for breach of warranty regarding THG’s audited accounts and management accounts. The Trustee also claimed against THG in deceit, a claim which did not succeed.
THG made an offer for Cend of £58 million of which £30 million was payable in cash and the balance in shares in THG. The share element would have a value in the combined business of £28 million and represent 12% of the enlarged equity. The consideration shares in THG were all issued to the Trustee. The cash element was split between the Defendants.
From about 2009 THG’s majority shareholder, began to prepare the company for a future Initial Public Offering (IPO) on the main market of the London Stock Exchange. As part of that process, PwC was appointed as THG’s auditors. THG indicated that because of the IPO, which THG intended for October of that year, the “look-through” value of the share element of the consideration would be £42 million rather than £28 million.
On 27 May 2011, the SPA was signed and formal completion took place in Jersey on 31 May 2011.
In February 2012 THG gave notice of a warranty claim under the SPA. THG claimed that seven adjustments were needed to Cend’s Management Accounts for the period to 30 March 2011 in order for those accounts to give a true and fair view of Cend’s financial position and (as regards one of those adjustments for it to be prepared on a basis consistent with that used in the preparation of Cend’s statutory accounts). As a result, the Defendants were in breach of warranty. The Defendants denied that there was any breach of warranty.
In the run-up to the IPO, PWC uncovered fraud in THG’s accounts department and the IPO process was halted. Following the discovery of the accounting fraud, it became apparent that THG’s EBITDA had been overstated. When THG’s EBITDA was restated there was an admitted discrepancy of £5.6 million this amounted to a breach of THG’s accounts warranty for the period to 31 December 2010 and, additionally, a breach of its management accounts warranty for the period to 31 December 2011. The Trustee counterclaimed for breach of warranty by THG.
The relevant warranties in the SPA
THG’s breach of warranty claim was based on the Defendants’ warranty in its SPA that:
“[Cend’s] Management Accounts have been prepared on a basis consistent with that used in the preparation of [Cend’s] Accounts and the past practice of the Business in the 12 months prior to the date of Completion [31 May 2011] and fairly present the assets and liabilities and profits and losses of [Cend] for the period from the Accounts Date [30 September 2010] to the Management Accounts Date [30 March 2011]”
The Trustee’s counterclaim was based (in part) on THG’s warranty in the SPA, given in respect of the share element of the consideration, that THG’s draft statutory accounts gave a true and fair view of THG’s state of affairs, assets and liabilities and profit and loss as at 31 December 2010 and that its Management Accounts fairly presented its assets and liabilities and profits and losses for the period from 31 December 2010 to 31 March 2011. It was not in dispute that these warranties were broken following the discovery of the fraud.
The relevant limitations in the SPA
As regards quantum, the SPA limited the parties’ liabilities for claims for breaches of warranty “save insofar as it results from the fraud of [THG]” or “...the fraud of any of [Mr Cookson and the Trustee]”. The relevant limitations included £7.24 million for claims by Mr Cookson or the Trustee against THG.
As regards notification of a claim the SPA provided that:
“The Sellers [the Defendants] will not be liable for any Claim unless the Buyer [THG] serves notice of the Claim on the Sellers (specifying in reasonable detail the nature of the Claim and, so far as practicable, the amount claimed in respect of it) as soon as reasonably practicable and in any event within 20 Business Days after becoming aware of the matter.”
The key issues
- In relation to the claim by THG, the Defendants argued that the notification provisions in the SPA (set out above) ruled out THG’s claim (The Notice of Claim Issue).
- In relation to the counterclaim by the Trustee, THG admitted the breach of warranty. However, the breach resulted from an accounting fraud within the company and THG argued that the fraud should not be attributed to THG. If the fraud was attributable to THG, then the contractual cap on damages in the SPA of £7.24 million would not apply because fraud was an exception to the application of the cap (The Cap on Liability Issue).
The Notice of Claim Issue
The Defendants argued that (1) the required notices were not given in time and (2) even if given in time, they were not valid because the notices did not contain sufficient detail. The points in dispute in relation to the construction of the wording of the relevant limitation (set out above) were (1) what was meant by “becoming aware of the matter”; (2) who within THG had to become aware of the matter; and (3) the level of detail required in the notices.
Becoming aware of the matter
Whether the notice of claim was served in time or out of time depended on when the 20 Business Day period began to run. It was accepted that in determining that period, time counts back from the date of receipt of the notice. The question was, therefore, when did the Buyer become “aware of the matter”.
THG argued that the “matter” means “claim” and the clause requires awareness that there is a proper basis for putting forward a claim for breach of warranty. The Defendants on the other hand argued that the “matter” means the factual grounds for a claim and not that those grounds may constitute an actionable claim. THG accepted that if the Defendants were right, the notification was out of time, because if knowledge was simply knowledge of the facts which are later determined give rise to a breach of warranty, then it knew of the matter before the 20 Business Day period began. Time would start running when the relevant individuals were aware of the underlying facts even if unaware that they may give rise to a claim.
Who within THG had to become aware of the matter?
It was accepted that the matter had to come to the attention of somebody with knowledge of the SPA.
The level of detail required in the notice
The SPA required the notice to specify ‘in reasonable detail’ the nature of the claim and, so far as practicable, the amount claimed in respect of it. The notice gave the amount of the required adjustment to Cend’s management accounts but did not state the multiple to be applied and was therefore substantially less than the actual claim.
The Defendants argued that the notice of claim was defective because (1) it massively understated, for tactical reasons, the amount subsequently claimed; (2) it contained no information about the basis of the calculation; and (3) it inaccurately described the nature of an adjustment.
The Cap on Liability Issue
THG accepted that its breach of warranty resulted from the fraud, but it argued that the fraud should not be attributed to THG.
The question was, which persons fell within the term “the fraud of the Buyer” as used in the “fraud exception” in the SPA. The legal principles were not in dispute and the issue was the identification of the natural person or persons who are to be regarded as representing the juridical person for the purposes of the clause. It is a question of construction in each case as to whether the knowledge of an act, or the state of mind with which the act was done, should be attributed to the company.
THG argued that the answer to this question depends on whoever was regarded as representing THG in relation to the conclusion of the SPA and accepted that this included members of the board. However, it cannot have been the parties’ intention, looking at it commercially, that the cap would be lost just because somebody somewhere within the organisation had committed fraud. It cannot have been intended that the fraud of the post boy would count as the fraud of THG for these purposes.
The person who appeared to be primarily involved in the fraud, Mr McCarthy, was the financial controller of the business, who was dismissed along with another member of the finance team on discovery of the fraud. Three other individuals were disciplined. Mr McCarthy had a team working under him, and was responsible for the preparation of THG’s management accounts at monthly intervals. Mr McCarthy also prepared the draft December 2010 accounts which THG also warranted. The Defendants argued that Mr McCarthy held a critical role within THG’s finance department and that he was heavily involved in the acquisition. THG argued that, although Mr McCarthy was involved in handing over certain financial information to the finance director and others for the purposes of the deal, he had nothing to do with the deal itself and had no “outward facing” role in relation to the SPA. The fact that, internally he was responsible for some of the warranted numbers, did not result in the fraud being attributable to THG.
The Notice of Claim Issue
THG’s construction of the wording of the limitation provision was more consistent with the wording of the clause and with commercial sense, and the Court held that it was the correct construction.
In relation to “becoming aware of the matter”, as a matter of commercial sense, without knowing that a claim has a proper basis, a party to a share purchase agreement would not expect to (or wish to) have to notify the other party of it. The use of the phrase “aware of the matter” is a reference back to awareness of “the Claim” of which THG is to give notice. Without such awareness, it cannot be said that the relevant individuals at THG became “aware of the matter”.
In relation to the level of detail required, the court accepted that the notice provided all that was practicable by way of quantification at that early stage. In relation to the absence of the basis of calculation, the Court accepted THG’s argument that the notice was not invalidated by the fact that the method of calculation of loss was not supplied until later and that, again, THG had provided all that was practicable by way of quantification at that stage. As to the adjustment being incorrectly described the Court accepted THG’s argument that the adjustment was described in sufficient detail. Not much was contractually required and the detail would follow.
The Court held that the notice of claim was not invalidated by the wording of the limitation clause and THG’s breach of warranty claim therefore succeeded.
The Cap on Liability Issue
Mr McCarthy was heavily involved in the transaction and provided numbers which were prepared fraudulently, thereby placing THG in breach of warranty. The financial information was of central importance for the deal to get done, since the Trustee was acquiring a substantial minority stake in the merged company. Mr McCarthy was well aware of the reason for providing the information, which was done through the finance director. The fact that Mr McCarthy was not “outward facing” did not affect this conclusion. The Court held that Mr McCarthy’s fraud was to be attributed to THG in such circumstances.
Accordingly, on a true construction of the SPA, the contractual cap did not apply because “it results from the fraud of the Buyer” and the Trustee’s breach of warranty claim succeeded without the cap applying.
This case is a reminder of the need for precise wording in limitation clauses to avoid uncertainty. Standard wording should be reviewed when incorporated into agreements to ensure that any ambiguities are removed wherever possible. In particular, it should be clear from the wording that knowledge of a claim means just that, not simply knowledge of the facts which result subsequently in a claim being made.
The part of the judgement dealing with the attribution of fraud, was the application of existing legal principles to the facts of the case and the role of the person involved in the context of the transaction.