Related People Keshav Rikhi
The English Courts have in recent years held that parties must comply with the strict wording of procedural matters in contracts, such as notice provisions1 and indeed any other conditions precedent such as the need to attempt alternative dispute resolution prior to commencing litigation2.
In the recent case of Towergate Financial Limited v Hopkinson3, the High Court followed the same pattern in rejecting a claimant's indemnity claim under an SPA because the claimant had failed to give notice of its claim "as soon as possible".
In doing so, the Court provided helpful guidance on how to construe the requirement to notify a party "as soon as possible" and, in particular, when that requirement is triggered. It also serves as a further reminder of the importance of parties ensuring that they adhere to notice provisions, particularly where they are drafted as a condition precedent.
On 5 August 2008, Towergate Financial (East) Limited (the "Claimant") entered into a share purchase agreement with Mr Mitchel Hopkinson and Mr Mark Howard, both in their personal capacity and in their capacity as trustees of certain trusts (the "Defendants"), to acquire M2 Holdings Limited, a company that provides financial advice to retail customers (the "SPA"). Pursuant to the SPA, the Defendants provided certain indemnities to the Claimant including with regard to professional negligence claims for mis-selling financial products.
To pursue an indemnity claim under the SPA, the Claimant was required to give notice under Clause 6.7.3. This clause provided that the Defendants shall have no liability "in respect of any matter or thing" unless:
"… notice in writing of the relevant matter or thing… is given … as soon as possible and in any event prior to … on or before the seventh anniversary of the date of the Agreement."
The Claimant had become aware of certain professional negligence claims in early 2013 and subsequently notified the Defendants on 29 July 2015, shortly before the seventh anniversary of the SPA on 5 August 2015.
After the Claimant and its group companies issued a claim seeking a declaration that they were entitled to be indemnified against certain liabilities for professional negligence, the Defendants argued that the claim should be rejected because it had not been notified to them "as soon as possible". Given that this dispute concerned a narrow issue which was susceptible of disposing of the dispute entirely, a preliminary issue hearing was ordered with the consent of both parties. The points for Mrs Justice Cockerill to consider were as follows:
- On the proper construction of Clause 6.7.3, was there a condition precedent as to the time by which such notice must be given?
- If there was a condition precedent as to the time by which such notice must be given, what is that time?
- What triggered the requirement to notify?
- In light of the above, had the Claimant complied with the requirements of any condition precedent in Clause 6.7.3 as to the time by when such notice must be given?
1. Was there in Clause 6.7.3 a condition precedent as to the time by which notice must be given?
With regard to this first question, it was common ground between the parties that Clause 6.7.3 incorporated some form of condition precedent to any liability of the Defendants under the indemnity. There were submissions before the Court as to how far it was bound by two previous decisions in this dispute – one from the High Court and one from the Court of Appeal4 – but this first point was agreed by the parties.
2. What was the time by which the notice was to have been given?
There was, however, disagreement between the parties regarding the time by which the notice had to be given. It was the Claimant's case that Clause 6.7.3 simply provided a requirement that the notice is given of the matter or thing "on or before the seventh anniversary", not "as soon as possible". Conversely, the Defendants argued that the provision imposed a dual requirement and, as well as notifying within seven years, there was a stand-alone obligation to do so "as soon as possible".
In support of its claim, the Claimant's primary position was that, as a matter of construction, the final phrase of Clause 6.7 ("as soon as possible and in any event prior to") was not apt to and does not form part of Clause 6.7.3. In making this argument, it relied on a number of "errors" in the drafting of the clause such as a tautology in the language of Clauses 6.7 and 6.7.3: " and in any event prior to […] in relation to [a Clause 5.9 claim] on or before the seventh anniversary". It also stated that the provisions failed to set out a point from which "as soon as possible" would begin, and reading in such a starting point would be impermissible in the context of a condition precedent / notice clause.
Further, the Claimant contended that, as regards the contractual context and commercial purpose of Clause 6.7 as a whole, there was no commercial justification for the requirement to notify an indemnity claim "as soon as possible" as constituting a condition precedent. This was because enabling the indemnitors to take steps for their own protection in relation to third-party claims was the purpose of Clause 5.12, not Clause 5.9 (which provided the indemnity upon which the Defendants relied in this case).
In light of the above points, the Claimant argued that where there is ambiguity and/or a lack of clarity in a condition precedent, that should be construed against the person seeking to rely on it.
In rejecting the Claimant's argument, Mrs Justice Cockerill concluded that, as a pure exercise of linguistic analysis, she had no difficulty in finding that that the Clause was sufficiently clear, despite its imperfections. The "issues" raised by the Claimant were unproblematic and, on its face, the provision was clearly held to import a dual condition precedent: the notice had to be made: (a) as soon as possible; and (b) in any event, within seven years.
With regard to the commercial purpose of the clause, Mrs Justice Cockerill noted that Clause 6.7.3 was dependent on the introductory words in Clause 6.7 for its context and sense. It was held that the language of the Clause must not be divorced from its commercial purpose.
Finally, the facts of the case were also distinguished from a similar case of AIG Europe v Faraday5, which held that there could be scope for confusion as notice in that matter was required to be given "…as soon as reasonably practicable or in any event within 30 days". In that case, it was held that the reference to the 30 day period could be seen as elaborating on how to interpret the former requirement to notify as soon as reasonably practicable. In the present case, it was held that on a plain reading of the clause there could be no such confusion because the seven year time period could not be seen as defining what was meant by "as soon as possible".
3. What triggered the requirement to notify?
The court was therefore of the view that there were two triggers to the requirement to notify: 1) the seven year period which began from the date that the SPA was signed; and 2) the "as soon as possible" condition which was triggered when a matter or thing occurred which might give rise to an indemnity claim.
The Judge stated that, when considering the question of whether the Claimant had notified its claim to the Defendants "as soon as possible", it is important to first ascertain "the point at which the [Claimant] knew any matter or thing, which they knew or any reasonable person would know might give rise to a claim". More specifically in relation to this case, the Judge considered that the duty to notify starts to run "at a time when there is an identifiable matter or thing in relation to which a claim under the…indemnity may arise". It is only once that point in time has been identified that it is possible to assess whether a party has complied with the requirement to notify "as soon as possible" thereafter.
The effect of this guidance is that the notifying party simply needs to have some knowledge (or a reasonable person in such a situation would know) that there "might" be a claim against the other party and it is at that point that it becomes incumbent on it to notify the other party of the claim "as soon as possible". This is a relatively low threshold for triggering the requirement to notify the other party.
4. Had the Claimant given notice of its claim "as soon as possible"?
Applying the above principles, and based on the facts of the case, it was held that the condition precedent in Clause 6.7.3 was not complied with as notice had not been given "as soon as possible".
This conclusion was reached primarily because, among other things:
(a) the Claimant had been in contact with the FCA as early as mid-2012 with regard to the transactions in question and, in turn, by early 2013, the FCA had flagged "a number of major issues" and failures of risk and compliance functions;
(b) by March 2013, the Claimant had conducted an internal review into potential professional negligence claims and, in doing do, produced a spreadsheet containing details of what steps the Claimant had taken to manage the claims thus far; and
(c) most pertinently, the Claimant had issued multiple notifications of a potential claim to its insurers in accordance with its insurance policy which required it to provide notice of "circumstances that are likely to give rise to a loss". The first such notice was given in February 2014, some 15 months prior to notice being given to the Defendants.
Perhaps unsurprisingly, the Judge held that the latest point at which the Claimant (or any reasonable person) would have known "any matter or thing" which they knew "might give rise to a claim" was when the Claimant sent its first notification to insurers in February 2014. If the Claimant knew of the possible claim at that point and was in a position to notify its insurers about it, it follows that it should have been in a position to notify the Defendants. The Judge also proceeded to state that the trigger for notifying the claim was in fact likely met much earlier than this (i.e. see points (a) and (b) above) but she did not opine on this in any detail given that it was unnecessary to do so.
Whilst each case will ultimately be decided on the facts, this case provides helpful guidance for parties on how the Courts will interpret a contractual requirement to notify another party of an indemnity claim (or indeed any claim) "as soon as possible". The notifying party, or a reasonable person in such a situation, simply needs to know of a circumstance (or, in this case, a "matter or thing") which "might" give rise to a claim against the other party and that is what triggers the obligation to notify "as soon as possible" thereafter.
Therefore, given this relatively low threshold, and the fact that the Courts have been taking a tough stance in relation to requiring strict compliance with notice provisions, the claimant should err on the side of caution and, if in doubt, notify at the earliest possible opportunity. In practice, it may be helpful for parties to keep a record of all the notice provisions and/or conditions precedent included in each of their main commercial contracts, e.g. in the form of a spreadsheet. This could then be referred to readily and quickly as and when any significant developments arise, such as a potential indemnity claim under an SPA.