In the recent decision in Al-Hasawi v Nottingham Forest Football Club Limited and ors1, the Court of Appeal found that a football club was entitled to indemnity payments from the seller under a share purchase agreement ("SPA").
In reaching its decision, the Court of Appeal emphasised that the contractual effect of wording in parenthesis ought not to be underestimated and, accordingly, should be drafted with caution. More generally, it also provided a useful reminder that arguments based on contractual language (whether or not in parenthesis) being "superfluous" or "redundant" are rarely reliable on issues of construction.
Mr. Al-Hasawi acquired Nottingham Forest Football Club Limited (the "Club") in 2012.
In 2017, an SPA was entered into by which NFFC Group Holdings Limited (the "Seller"), a company owned and controlled by Mr. Al-Hasawi which held the issued shares of the Club, agreed to sell those shares to Nottingham Forest Investments Limited (the "Buyer").
The SPA provided, amongst other things, that:
- the shares were sold to the Buyer for a nominal value of £1;
- Mr. Al-Hasawi was to be repaid the balance of various unsecured loans which he had made to the Club during his period of ownership;
- the Seller would indemnify the Buyer and the Club from and against all losses suffered or incurred by the Buyer arising out of the aggregate of the "Liabilities" in excess of £6.6 million as at the "Liability Statement Date" of 31 December 2016 – as per Clause 7.1; and
- a database would be provided whereby the Seller was to share financial information relevant to the Club, including a "Trial Balance" spreadsheet summarising its assets and liabilities.
Following the sale of the club in May 2017, the Buyer claimed that the Club's "Liabilities" exceeded the sum of £6.6 million and so the difference between such sums should be set off against repayment of the loans to the Seller. The Seller counter-claimed for repayment of those loans.
The High Court held that the Buyer was not entitled to indemnity payments from the Seller under Clause 7.1 of the SPA. Therefore, the Buyer was ordered to pay the Seller over £4 million for the unpaid loans.
On appeal, the Buyer and the Club sought to challenge the judge's dismissal of the claim under Clause 7.1.
The Court of Appeal was required to consider the definition of "Liabilities" and the basis upon which they should be calculated for the purpose of the indemnity provided by the Seller. The Court of Appeal considered that the High Court had misinterpreted this definition, which cut across the purpose of the indemnity clause and the terms on which the Buyer had agreed to take over the Club.
The central issue for the Court of Appeal to consider was whether:
- the "Liabilities" should be determined, as the Buyer contended, in accordance with the accounting standard FRS 102 (i.e. on an accruals basis) which the Club had used in preparing the Trial Balance and its other accounts; or
- that approach had been modified by the definition of "Liabilities" in the SPA, so as to exclude liabilities of the Club which were incurred prior to 31 December 2016 but related in some part to a subsequent period (i.e. if the services which the Club is obliged to pay for extended beyond 31 December 2016). "Liabilities" were defined as "the aggregate amount of all liabilities…on or prior to the Liability Statement Date (and only to the extent such liabilities relate to such period) and whether or not due for payment at the Liability Statement Date…" (emphasis added).
The High Court had agreed with the approach set out at point (b) above, holding that the definition only captured those liabilities that "related to" the period up to 31 December 2016. It had based this construction on the definition of "Liabilities" and, in particular, the words in parenthesis ("and only to the extent such liabilities relate to such period") on the basis that Mr. Al-Hasawi did not have to pay for benefits which accrued to the Buyer in the period after the purchase of the Club.
However, the Court of Appeal held that this misunderstood the purpose of the indemnity provision at Clause 7.1 of the SPA and, instead, agreed with the Buyer that point (a) above accurately recorded the manner in which the "Liabilities" should be calculated.
The indemnity provision at Clause 7.1 of the SPA struck a balance in terms of the amount of the Club's disclosed debts and other liabilities that the Buyer was willing to accept without any further adjustment to the sum payable to the Seller. Given that this indemnity provision required a comparison to be made between the "aggregate of the Liabilities" as at 31 December 2016 and the figure of £6.6 million (which had been calculated on an accruals basis using the "Trial Balance" figures), it necessarily followed that the "Liabilities" had to be calculated adopting the same accruals accounting method.
In particular, the Court of Appeal noted that the words in parenthesis were not intended to change or modify the "Trial Balance" accruals basis of calculation for the purpose of operating the indemnity. The High Court had been incorrect to assume that, if the words in parenthesis did no more than to confirm that the "liabilities" of the Club were to be calculated on an accruals basis, then they were meaningless or at least unnecessary. Citing the case of Macquarie v Glencore2, the Court of Appeal stated that such arguments "based on surplusage or redundancy" are rarely a reliable or strong ground on issues of construction. In fact, it was far more likely that the language in parenthesis was intended to confirm that the liabilities referred to were accruals (i.e. relating to) the period prior to 31 December 2016, rather than changing the whole basis of accounting under Clause 7.1 of the SPA.
This decision serves as a useful reminder about clarity of drafting and the ways in which a single set of words can be interpreted differently by different parties, resulting in significantly diverse outcomes.
Furthermore, the Court of Appeal's judgment highlights the fact that wording in parenthesis ought not to be underestimated when construing the true meaning of a contract. In practice, such wording can (and often does) play a significant role in facilitating the parties' contractual intentions. Arguments which are reliant upon the effect of such wording being redundant or unnecessary are unlikely to be a strong ground on issues of construction. In this case, the High Court had erred in considering that, if the words in parenthesis did no more than to confirm that the "Liabilities" of the Club were to be calculated on an accruals basis, they were meaningless.
The safest way to avoid such disputes from arising, particularly in the context of drafting integral components of an agreement (such as the indemnity provisions and corresponding definitions in an SPA) is to draft the clause using unambiguous language which expressly sets out what is intended by the parties. Parties may also wish to include indicative examples setting out what is intended to happen upon the occurrence of specific events. This will provide guidance to the parties (and ultimately to a judge) if the true meaning of the contractual terms ever becomes the subject of a commercial dispute.