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You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Belfairs Management Ltd v Sutherland & Anor [2013] EWCA Civ 185 (15 March 2013) URL: https://www.bailii.org/ew/cases/EWCA/Civ/2013/185.html Cite as: [2013] EWCA Civ 185 |
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ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Mr Justice Norris
Strand, London, WC2A 2LL |
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B e f o r e :
LORD JUSTICE RIMER
and
MRS JUSTICE BARON
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BELFAIRS MANAGEMENT LIMITED |
Appellant |
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- and - |
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(1) MATTHEW SUTHERLAND (2) CHRISTIE JANE SUTHERLAND |
Respondents |
____________________
WordWave International Limited
A Merrill Communications Company
165 Fleet Street, London EC4A 2DY
Tel No: 020 7404 1400, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
Mr Ian Clarke (instructed by Rubric Lois King Solicitors) for the Respondents
Hearing date: 27 November 2012
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Crown Copyright ©
Lord Justice Rimer :
Introduction
The events leading up to the signing of the share purchase agreement
'29. One of the notional trading divisions of Waveform was "Care Health Systems" ("CHS"). It was "notional" in the sense that it was not organisationally or legally separate from the remainder of the business, rather representing a grouping of products that could be usefully marketed together to create a brand identity. The CHS products were sold to primary care trusts and provided systems to support the National Chlamydia Screening Programme, Teenage Pregnancy Sure Start Programme, genitor-urinary medicine, family planning programs and so forth, and were so sold under the over-arching umbrella of "sexual health". These systems were modular patient and practice management systems, incorporating record-keeping and management, prescribing, diary management, a web-based booking system and audit reports. The modules were the subject of constant re-development and re-packaging for new applications. The Chlamydia programme was well established and a market leader. The Surestart and GUM programmes were more recent developments.
30. In late 2006 Mr Sutherland thought it advisable for Waveform to become involved in the NHS National Programme for IT. This was a government initiative to modernise and synchronise NHS computer systems across the country - in general practices, clinics and hospitals. Part of the £6 billion programme was called "Connecting for Health". This was predominantly concerned with storing and transmitting patient data securely, and ensuring that patients had a single file across all services and departments. But it had certain features designed to improve service to patients such as a 'Choose and Book' appointments system and an electronic prescription service. It was not contemplated that the entire system should be introduced simultaneously as a unified whole. It was contemplated that there would be sequential local implementation by individual GP practices of systems from accredited competing suppliers, each of which met national standards. In some areas, there were to be Local Services Providers to whose system an individual GP practice could simply link. There were six compliance standards within "the Maturity Model". Level 0 was the minimum standard for participation (which effectively required compliance with an existing standard for booking systems called "RF A99"). Level 1 built on Level 0 and required the system to incorporate "Choose and Book", "Personal Demographic Services" access, and Electronic Transmission of Prescriptions. Level 2 was then to provide an up-rated specification for these facilities; and Levels 3 upwards added further functionality (including at Level 4 a data centre hostel solution).
31. All existing suppliers of GP clinical systems were encouraged to design new systems or upgrade their existing systems to meet the requirements. There was to be encouragement for practices to retain their current system as it was upgraded through the various compliance levels. There was only limited support from central funds for a transfer from one supplier to another (from a non-compliant to a compliant provider, from a practice's own compliant provider to a Local Service Provider, and then more freely at Level 4). To that extent, being in the market with an already compliant system therefore conferred an advantage. There were 11 suppliers working closely with the Department to develop the programmes. Waveform sought to join their number.
32. The process whereby suppliers could request to participate in this programme was opened in February 2007. Tenderers had to demonstrate experience for the preceding three years of providing and supporting a GP clinical IT system which had (as a minimum) electronic access to storage and retrieval of patient medical data, patient scheduling, clinical coding of patient medical data, prescribing and dispensing, and analysis and reporting facilities. Mr Sutherland recognised that Waveform's existing programmes might face some difficulty in meeting these criteria. Nonetheless Waveform put in an application. Mr Sutherland disclosed that the existing systems did not have RFA 99 accreditation, but he was informed that Waveform would have effectively 12 months from the signature of a supply agreement to get up to Level 2 (whatever the starting point).
33. On 16 March 2007 Waveform was notified by the NHS that it had satisfied the pre-qualification requirements and would receive an Invitation to Participate.
34. By 24 April 2007 Waveform had got through the first four of the five approval stages and had been listed to provide its "Best and Final Offer". Mr Sutherland knew that Waveform was undercapitalised. The development to Level 2 demanded the commitment of very significant resources beyond what could be funded by the rather sporadic cashflow derived from existing business. He sought the assistance of Grant Thornton Corporate Finance.
35. In May 2007 (under a contract which had been placed in February 2007) Waveform built a website for the group of which [BML] formed part (web design being one of its commercial services). The work had been introduced through a Mr Khalid Mahmood. He offered to try and engage the interest of Dr Al-Anizi in participating in Waveform's NHS bid.
36. On 12 June 2007 Waveform submitted its "Best and Final Offer" to participate in the NHS programme. It explained that it would not be releasing products compliant with Level 1 (which would be for internal development purposes only). The first general release would be Level 2 and would be available within 12 months of signing the Framework Agreement. Levels 3 and 4 (and in particular the hosting [of] the services) would be part of a second general release some 18 months after signing the Framework Agreement. (At least one competitor decided to adopt this course as well). All this was set out in a very detailed "Proposal in Response to Invitation to Finalise" over 100 pages in length. The business plan was disclosed to the NHS in these terms:-
"We anticipate achieving 20 seats within our first year, a further 30 within our second year and another 50 again within our third year. This is the basis of our business model to achieve a return on investment after three years, at which point we will begin to turn an acceptable profit on each installation".
It is clear from the context that the phrase "within our first year" meant "within our first financial year of trading in the GP clinical IT market".
37. On 25 July 2007 Waveform received from the NHS an "intention to award" letter nominating it as one of the 8 successful parties invited to sign an agreement with the NHS. The NHS press release highlighted the fact that Waveform was a "newcomer to the market". (The effective letter was to come through on 30 August 2007 formally awarding Waveform a "Lot 1 Framework Agreement").'
'Mr Sutherland wrote that, because he felt that the NHS contract had considerable potential, he wanted to retain a shareholding [in] Waveform and was also prepared to reinvest £2 million for working capital to be locked in for 5 years. I find the proposal to retain a shareholding and to commit further investment to be entirely genuine. …'
'We are pleased to confirm that [the NHS] … recently awarded us an NHS framework contract, the value of which is inestimable.'
Whereas the August draft summary had estimated an annual income from the NHS of £7.5m after several years marketing, Mr Sutherland thought this was not an assumption that could properly be made and he withdrew it in the September version. In the financial forecasts section, the summary made clear that its estimate 'does not take into account the full and very real value of our recently awarded NHS … contract'.
'My opinion, based on the information and explanation provided to us, is that the company is good for an investment of £2 million. However it is so only if the NHS contract is solid and continues. On this Mr Albanese should be able to make comments.'
'61. I consider that the reference to the NHS contract is a reference to what is called the Framework Agreement (over 136 pages in length) which was intended to govern the relationship between the NHS and Waveform concerning the supply of a compliant system. It ran for a period of two years extendable at the option of the NHS. Whilst it set out the specifications of and range of permissible charges for the relevant services, the Framework Agreement did not itself provide for the supply of a stated number of systems. The systems were actually to be supplied under "Call Off Agreements" entered into between Waveform and individual Primary Care Trusts during the term of the Framework Agreement (which Call Off Agreements might themselves last for up to 4 years). The Framework Agreement itself therefore did not guarantee that even if Waveform produced a compliant system it would effect any sales. This would have been apparent to Mr Albanese (and indeed to anyone else who read the Agreement).
62. My attention was not drawn to any complaint that Mr Albanese did not have all the relevant NHS documents sufficient to enable him to advise [BML]: nor was I told or shown what advice he gave or comments he made.'
The signing of the share purchase agreement and the subsequent events
'About £800,000 of the £1.6 million injected had been spent. I consider a very substantial portion of this was caused by Waveform having taken on 13 extra staff to work on the NHS contract. But the position of Waveform was not good, either in terms of achieving the NHS "milestones" or in maintaining its original cash-generative business. Indeed the NHS had written to Waveform "to express … concern at the lack of evidence of progress towards the meeting of a number of … key obligations under the Framework Agreement". The true position was that whilst Waveform already had clinical IT systems and the beginnings of the NHS core requirements (such as appointment booking and general patient management) it was, as Mr Sutherland put it to one potential source of help "the higher specifications and achieving Level 2 compliance that is potentially eluding us". In an endeavour to meet the NHS contractual "milestones" Mr Sutherland had diverted all of the employees to that task so that the regular business of the company had all but disappeared, thereby depriving it of income.'
Dr Al-Anizi said at the meeting that he was considering pulling out his money and closing Waveform.
The relevant provisions of the SPA and other sale documentation
'1.1.12 "Disclosure Letter": the letter of the same date as this Agreement in the agreed form from the Vendors or their solicitors to the Purchaser or its solicitors, together with any attachments, disclosing matters that are exceptions to the Warranties; …
1.1.34 "Warranties": the warranties and representations referred to in clause 6 and set out in schedule 3 and Warranty means any one of them.'
'The Vendors jointly and severally warrant to the Purchaser that each of the Warranties in Schedule 3 is true and accurate in all respects and not misleading at the date of this Agreement.'
'16.1 The Company is not a party to any agreement, arrangement or commitment which:
16.1.1 has or is expected to have material consequences in terms of expenditure or revenue;
16.1.2 relates to matters outside its ordinary business or was not entered into on arms' length terms;
16.1.3 constitutes a commercial transaction or arrangement which deviates from the usual pattern for it;
16.1.3 can be terminated in the event of any change in the underlying ownership or control of it or would be materially affected by such change;
16.1.5 cannot readily be fulfilled or performed by it on time; or
16.1.6 cannot be terminated, without giving rise to any liabilities on it, by it giving three months' notice or less, to which any former or current manager, director or shareholder, is a party or to which the Company is liable.'
It is the warranty in paragraph 16.1.5 that is the material one.
'3. The Warranties on the part of the Vendors are given and made subject to the disclosures in this Disclosure Letter and no claim may be made by the Purchaser for breach of any of the Warranties if the fact omission or circumstance giving rise to or forming the basis of the claim has been disclosed to the Purchaser in this Disclosure Letter. …
8. The disclosure of any matter or documents by this Disclosure Letter shall not, other than as specifically provided for in the Agreement, imply any further representation, warranty, undertaking or indemnity as to the same nor shall such disclosure be taken as extending the scope of any Warranty.'
Paragraph 11 incorporated by reference various documents that had made disclosures of one sort or another. The disclosure letter then continued, so far as material:
'12. There are further specifically disclosed (but without prejudice to [the] generality of the general disclosures above) the matters set out below which appear for ease of reference in connection with the paragraph numbers of those of the Warranties in relation to which the relevant disclosures seems most immediately applicable.
Warranty Disclosure
13. Schedule 3
paragraph
…
16.1.1 NHS Connecting for Health formally notified the Company of 30 August 2007 that it has been awarded a framework agreement on the National Programme for IT. This may have material consequences in respect of expenditure and revenue, as disclosed to the Purchaser.
16.1.4 See the disclosure to paragraph 16.1.1. The framework agreement, once fully entered into, may be terminated upon a change of control of the Company.
16.1.6 See the disclosure to paragraph 16.1.1. The framework agreement may give rise to liabilities if terminated by the Company. …'.
'165. The fifth relevant warranty is that by clause 16.1.5 Mr Sutherland warranted that Waveform was not a party to any agreement, arrangement or commitment which could not readily be fulfilled or performed by Waveform on time. Two points of construction arise.
166. First, Mr Booth QC submits that this is an absolute warranty as to outcome and the mere fact that Waveform did not (for whatever cause) perform under the NHS framework agreement readily or on time (so that notice was served by the NHS in September 2008) establishes that there was a breach of it.
167. I disagree. The warranty required a present assessment of future performance. It required Mr Sutherland to ask himself: "As at 11 February 2008 has Waveform undertaken an obligation which I can see now it cannot readily perform in the future?" In clause 5 of the SPA Mr Sutherland warranted that that assessment was not misleading. There would be a breach of warranty if the statement that results from the assessment was misleading; but not otherwise.
168. Second, Mr Booth QC submits that this warranty extends to the NHS Framework Agreement even though this was not signed until after the SPA. His argument is that there may not be an "agreement" but there was an "arrangement", and the unsigned NHS Framework Agreement as an arrangement was obviously considered to fall within this warranty because it was the subject of disclosure in the Disclosure Letter. This last point is not a good one: paragraph 8 of the Disclosure Letter said that the disclosure of any matter "shall not … be taken as extending the scope of any warranty". So if the NHS Framework Agreement is not within the scope of the warranty the fact that it is mentioned in the Disclosure Letter will not bring it within the warranty. On the main point I do not consider that the unsigned NHS Framework Agreement can be regarded as an "arrangement" or a "commitment" for the purposes of the warranty. At the transaction date Waveform had simply been selected as a party to whom an NHS Framework Agreement would be offered: it was not at that time subject to any obligation which had to be "fulfilled or performed by it on time". I hold that there can be no breach of warranty.
169. In case this construction is wrong I will consider the complaint made. Mr Sutherland is said to be in breach of that warranty simply because after the transaction date the existing core business ceased. That is to misread the warranty as an absolute warranty relating to outcomes. Then it is said that at the transaction date he knew that the existing core business would (or he intended that it should) cease or largely cease. I find that he neither knew nor intended that that should be the case. The existing business continued (and about 100 orders were taken in the last six months of the calendar year 2008, though the decline in receipts would suggest that they were not sizeable jobs). The process of allocating resources to the NHS contract had begun in the autumn of 2007, began in earnest following the injection of funds shortly after the transaction date, but only involved the diversion of all employees between May and July 2008. This was not Mr Sutherland's intention at the transaction date, it was not what he actually foresaw, and I see no ground for supposing that any objective and honest chief executive would of necessity have predicted it. It came about through a reassessment of the timeline (in May 2008), combined with difficulties in staff retention and recruitment and problems in outsourcing. But the failure to predict the impact of these problems upon the existing core business does not amount to a breach of warranty.
170. Then it was said that the problems with the NHS contract itself (to which I have adverted) themselves amount to a breach of this warranty. The problems themselves do not amount to a breach. The question is whether Mr Sutherland's assessment of the NHS contract was misleading. I have already found as at the transaction date Mr Sutherland himself believed that the attainment of Level 2 within a 12 month period was achievable, and this was not an ungrounded or reckless belief.
171. That concludes a consideration of the warranties. …'.
The appeal
(a) Was the NHS Framework Agreement one to which paragraph 16.1 applied?
(b) What was the nature of the paragraph 16.1.5 warranty?
(c) Has the paragraph 16.1.5 warranty been breached?
Disposition
Baron J :
Rix LJ :