Wallace secures a comprehensive victory for company sellers in the Court of Appeal

On 3 November 2023, the Court of Appeal handed down judgment in the appeal brought by Wallace clients Stephen Garbett and Anis El-Mariesh against two companies in the South African headquartered Decision Inc Group (Decision Inc Holdings Proprietary Limited and another v Garbett and El-Mariesh [2023] EWCA Civ 1284). The Court of Appeal found for Messrs Garbett and El-Mariesh on all the primary grounds of appeal, overturning the first instance decision made earlier this year. Messrs Garbett and El-Mariesh were also awarded the full amount of their counterclaim, interest and costs, predominantly on the indemnity basis.

Background

The dispute concerned the sale of the EPM consulting business, Copperman Consulting Limited, by Mr Garbett and Mr El-Mariesh (the “Sellers”) to Decision Inc Holdings Proprietary Limited (the “Buyer”) in 2018.

In September 2020, the Buyer and its assignee purported to notify the Sellers that they had a prospective breach of warranty claim against them (the “Notice”) and duly issued a claim the following month, seeking more than £9 million on the alleged basis that the Sellers had breached two contractual warranties, set out in the Share Purchase Agreement (“SPA”), in ways that they alleged gave rise to six claims.

The trial of the matter took place in January 2023 before Mr Simon Gleeson, sitting as a Deputy High Court Judge (the “Judge”). The Judge gave judgment in March 2023. The Sellers successfully defended five out of six claims. However, the Judge held that the Sellers’ warranty that “since the Accounts date there has been no material adverse change in the … prospects of the Company” (the “Prospects Warranty”) had been breached and awarded the Claimants damages of approximately £1.3m. The Sellers appealed the first instance judgment.

The Appeal

The Court of Appeal permitted the Sellers to appeal on four grounds:

that the Judge’s interpretation of, and approach to, the Prospects Warranty was wrong.
that the Judge’s order should be set aside on the basis that the breach of the Prospects Warranty which he held to have taken place did not reflect a claim pleaded or argued by the Claimants.
that the Notice was defective for failing to identify the quantum of the Prospects Warranty claim and deficient because it did not give adequate notice of a claim for the breach of the Prospects Warranty which the Judge found proved.
alternatively, if the judgment were upheld on liability, that the Judge failed to take proper account of revenues from work on a specific project in assessing quantum.

The appeal was heard on 18 and 19 October 2023 before Newey LJ, Asplin LJ and Baker LJ. Judgment was handed down on 3 November 2023. The Lords and Lady Justices unanimously found for the Sellers on grounds (a), (b) and (c), rendering ground (d) unnecessary to determine.

With the first instance judgment dismissed, the Court of Appeal held that the Sellers were entitled to £787,000 as damages for their uncontested counterclaim as well as interest and costs. Indemnity costs were awarded in respect of the part of the claim governed by the consequences of an unaccepted Part 36 Offer made by the Sellers.

Key Findings

The key findings of the Court of Appeal included:

The Judge was wrong to approach the question of whether there was a breach of the Prospects Warranty on the basis that he needed to compare “the expected or forecast level of the relevant factor at the time of the contract” (which the Judge had termed the “baseline” figure) with the “actual position as at the date of the contract”. The wording of the Prospects Warranty necessarily required an evaluation of the Company’s “prospects” from the Accounts Date as against its prospects when the SPA was signed and such was not undertaken by the Judge.

The word “prospects” looks to the future and is necessarily concerned with what might happen after the relevant dates and not before or as at those dates.

The word “prospects” should not have been equated with a singular metric such as EBITDA. Rather, that word, read naturally, appears to connote “chances or opportunities for success” in a more general way.

The approach which the Judge took to the Prospects Warranty differed radically from any that the claimants had espoused, such that, even supposing that the Judge’s reading of the Prospects Warranty had been correct (which it was not), he could not properly have adopted it. For the Judge’s idea to have been taken into account, the claimants would have had to have applied to amend their Particulars of Claim and the defendants would have been entitled to time to consider the implications of the new case.

The Notice was defective because the proper interpretation of the SPA was that the Buyer was required to provide, not only a summary of each claim, but also, as far as reasonably practicable, the amount claimed in respect of each claim. The Buyer had only notified the total amount of the claims it was pursuing. The Court of Appeal found that, in the circumstances of this case, it would have been reasonably practicable for the Buyer to allocate a value to each claim - including the claim being pursued in relation to the Prospects Warranty - and they failed to do so.

It was not appropriate to remit the matter for a re-trial because (a) the finding that the Notice was defective meant that any re-trial would have been pointless; and (b) a claim for breach of the Prospects Warranty could not properly proceed on the basis of the pre-existing particulars of claim and, even supposing that an amendment to them was compatible with the Notice, it was much too late to permit one.

Final Thoughts

Wallace is proud to have been involved in this case which will assist the interpretation of common contractual MAC clauses and notice provisions in the future. However, more importantly, Wallace is delighted to have achieved considerable success for our clients, the Sellers. Anis El-Mariesh comments “the Wallace team and Counsel have been our rock, competently and diligently guiding and defending us through this litigation. I am grateful and proud to have been represented by them”.

The Wallace team was led by Partner Oli Goldman with assistance from Senior Associate Elizabeth Asher and Associate Harriet Montgomery. David Lowe (of Blackstone Chambers) was retained as Counsel.

The judgment can be found here

Decision Inc Holdings Proprietary Limited and another v Garbett and El-Mariesh [2023] EWCA Civ 1284