Exclusion of liability – a warning for disclosed principals

England and Wales

The Court of Appeal has considered whether a non-party might be liable under a sale and purchase agreement for claims for breach of warranties.  The case of Bell v Ivy Technology Ltd [2020] EWCA Civ 1563 considered an application by a purchaser for permission to amend its claims to include a beneficial shareholder, who had been disclosed as such prior to the agreement being concluded, but who was not named as a party to the agreement. 

In circumstances in which there was a clear and unexplained discrepancy between the known factual position at the time the agreement was entered into and the terms of the agreement itself, the court concluded that there was a “real prospect” that the claimant purchaser would be successful in making out its contractual claim against the shareholder. 

Background

On 4 April 2019, Ivy Technology Ltd entered into a sale and purchase agreement for the purchase of shares in five companies.  It was undisputed that prior to completion of the SPA, it was disclosed to Ivy that the shares were beneficially owned 50/50 by the defendants, Mr Martin and Mr Bell. On its face, however, Mr Bell was not a party to the SPA.  Instead, the SPA stated that Mr Martin held “all beneficial rights, title and interest in and to” the individually held shares, and that no other person was entitled to any right in and to such shares.

Ivy’s case is that it was the victim of fraud. It contends that during the negotiations for the SPA, Mr Martin fraudulently misrepresented the financial performance of the target business, which Ivy claims was in fact loss-making and worthless. Ivy also advanced claims against Mr Martin for breach of warranty and a claim in restitution for the return of a pre-payment of £2.95 million made under the SPA.  As Mr Bell was not a party to the SPA, Ivy’s claims against him were initially founded in tort rather than contract, in the form of claims for unlawful means conspiracy and inducing breach of contract, on the basis that he had colluded with Mr Martin to make the misrepresentations.

On 11 August 2019, Ivy issued an application for permission to amend its claim form and particulars to include Mr Bell in its breach of warranty claim. This was predicated on Ivy’s assertion that Mr Martin had entered into the SPA both as principal in respect of his own beneficial interest in the shares, and as agent for Mr Bell in respect of his beneficial interest. The implication of this application was that Ivy could pursue Mr Bell for contractual, as opposed to solely tortious, liability.

Teare J, presiding over the application at first instance, concluded that Ivy had a real prospect of succeeding in its contention that Mr Bell was in fact liable for breach of the SPA. This was despite the wording of clause 15.12 of the SPA, which provided that:

"Nothing in this Agreement, express or implied, is intended to confer upon any third parties other than the Parties hereto or their respective successors and assigns any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement."

In reaching this conclusion, Teare J acknowledged that the terms of the SPA, including the clause cited above, were very cogent indications that third parties were not intended to have any rights or liabilities under the SPA.  However, in circumstances where he considered it likely that there was some reason, known to Ivy and both Defendants, why Mr Bell’s interest in the shares was not mentioned on the face of the SPA, and absent sufficient evidence on this point (which would be available to the trial judge), he considered that it was not appropriate to make a ruling at the application stage that had the effect of excluding Mr Bell from any contractual liability. 

The Court of Appeal’s decision

The Second Defendant appealed Teare J’s decision on three grounds:

  • The terms of the SPA excluded Mr Bell’s liability;

  • Ivy and Mr Martin contracted on the basis that Mr Martin was the sole beneficial owner of the shares, and Ivy was therefore estopped from contending otherwise; and

  • Ivy had irrevocably elected to bring its claim for breach of the SPA against Mr Martin to the exclusion of Mr Bell.  In support of this argument, Mr Bell relied upon the fact that Ivy had already (i) commenced proceedings against Mr Martin and not Mr Bell for breach of the SPA; (ii) filed evidence saying that Mr Martin was a party to the SPA and not alleging that Mr Bell was a party; and (iii) obtained a freezing order on those bases.

The Court of Appeal dismissed each of these arguments:

  • The court agreed that whilst Mr Bell’s argument that he had no liability under the SPA was cogent, there was a real prospect that the trial judge would conclude otherwise when the full facts were revealed in evidence and the drafting of the SPA construed in light of the relevant and admissible factual matrix.  The court noted the stark discrepancy between the facts known to the parties concerning the beneficial ownership of the shares and the terms of the SPA, which cried out for an explanation. The court also emphasised the heavy burden which principals must discharge in order to exclude their liability under contract.  The SPA did not, in terms, exclude liability arising by virtue of Mr Bell being the principal of a party who had entered into the SPA as his agent. If that had been the intention, the SPA could easily have stated this.

  • As to the question of whether Ivy was estopped from now pursuing contractual claims against Mr Bell, the court agreed with Teare J that it was necessary to investigate the facts before reaching a conclusion as to whether the effect of the relevant provisions in the SPA was that Ivy was estopped from making such claims.

  • As to the steps Ivy had already taken and its allegedly irrevocable election to sue Mr Martin rather than Mr Bell, the Court of Appeal considered this to be a question of fact which was not a matter fit for summary determination.  At this early stage, it had not been established that the decision to sue Mr Martin was unequivocal; and further, it was not “clear beyond argument” that a third party is required to elect between suing the agent or the principal.  This matter required further consideration at trial.

Accordingly, Mr Bell’s appeal was dismissed and Ivy’s application for permission to amend its claim to include a claim for breach of warranties against Mr Bell was allowed.

Comment

Despite its acknowledgment of the attractiveness of Mr Bell’s case, the court was clearly concerned by the disparity between the terms of the SPA and the facts as they were known to the parties at the time it was entered into.  The court was also troubled by the lack of any explanation for that disparity, either in the SPA itself or in the evidence provided to the court to-date. 

This preliminary judgment leaves to the trial judge the thorny question of whether the drafting of the SPA in this case can be construed so as to permit Ivy’s contractual claims against Mr Bell, despite the undisputed fact that he was not a party to the agreement.  In the meantime, the decision emphasises the weight of the burden placed on a known and identified principal who seeks to exclude liability under a contract.  Any such intention would need to be clear and unequivocal from the terms of the contract.  Absent clear drafting, a cogent explanation will likely be needed for obvious discrepancies between the factual position, as disclosed and acknowledged by the relevant parties at the time an agreement is entered into, and the wording of the agreement itself.