In Capita (Banstead 2011) Ltd v RFIB Group Ltd [2015] EWCA Civ 1310 a seller of a company was only partially liable under an indemnity for losses incurred by the purchaser (on behalf of the company) as a result of negligently performed services provided by the company to a client before the transfer date of the shares, the results of which only came to light post-sale. A new negligent (or fraudulent) act by the company, post-sale, was a concurrent cause of the loss suffered from that point. The purchaser was thus unable to claim for losses incurred after the new act. This case is important for its analysis of what is (and what is not) covered by an indemnity in a share purchase agreement. It also highlights how a target's negligent acts, post-sale, can limit or preclude recovery under such an indemnity.
The company was sold by the defendant to the claimant in April 2004. The company (by one of its employees, Mr Le Cras) negligently provided pension services and advice to the Trustees (Trustees) of a pension scheme between 2000 and 2007. It had failed to inform the Trustees that their requested amendments to the pension scheme required the Trustees' execution of a formal document. The failures occurred before the sale in April 2004 but their effects continued afterwards. In December 2004 Mr Le Cras represented to the members and Trustees, in a new scheme guidance booklet that the appropriate amendments were in place. The negligence was discovered in December 2007, and the scheme rules were finally amended in July 2008. The Trustees had additional liability to the members of over GBP 4 million owing to the changes not having been made, and sued the company, which settled for just under GBP 4 million.
This appeal relates to the purchaser's claim under the indemnity clause contained in the share purchase agreement.
A continuing breach, reoccurring daily, or one unremedied breach?
In Popplewell J's opinion (and Gloster LJ, dissenting in the Court of Appeal), the failures by the company were a continuing breach of contract because the company had an on-going general retainer and duty to assist in ensuring that the Trustees' instructions were implemented. This continuing breach gave rise to a fresh breach daily both before and after the sale. As the indemnity only covered liabilities arising from services supplied by the Company before the sale, Popplewell J concluded that some of the loss, and thus some of the liability arose after the sale and apportioned the claim 50/50.
The majority of the Court of Appeal (Longmore LJ and Henderson LJ) disagreed with the continuing breach analysis. They regarded the company's failure as a single unremedied breach which occurred before sale. Longmore LJ stated that an unremedied breach of contract is not a continuing contractual obligation (ie one which gives rise to a fresh breach on a daily basis). The features of the continuing retainer were "factually incidental". The provision of advice after a mistake has been made does not mean that an obligation to correct continues to accrue and gives a fresh cause of action every day.
The Court of Appeal concluded that losses occurring both before and after the sale were potentially covered by the indemnity as they stemmed from one, pre-sale, breach.
Concurrent cause of loss precludes recovery
However the employee's alleged negligence or deceit when making new representations in December 2004 (the new scheme booklet which stated that the changes had been made) gave rise to a new cause of action (based on misrepresentation/deceit) which was a concurrent cause of the loss from that point.
Where there are concurrent causes of loss to which an indemnity apparently applies, one of which involves the claimant's negligence and the other which is non-negligent, there can be no recovery because it is not intended that the clause should apply to losses caused by the claimant's negligence (applying EE Caledonia Ltd v Orbit Value Co Europe [1994] 1 WLR 221).
The claimant's negligence in this case was that of the company employee (by this stage, the company was owned by the claimant). The indemnity was not intended to protect the claimant against the consequences of its own negligence. Although the court recognised that the claimant was not the employee's employer, there was a "common interest" between the company and the claimant.
In conclusion the indemnity covered the claimant's loss from 2000 until when the guidance booklets were published (December 2004) – apportioned at about 50%.
Comment: Understanding the scope of an indemnity in a business or share sale agreement helps with risk assessment, both at the pre-deal stage (by making sure the indemnity covers what it is intended to cover) and during a dispute. Each case will depend on the drafting of the indemnity in question, but this case shows that any arguments concerning "continuing" breaches as a way of limiting liability under an indemnity are unlikely to be successful.
This case highlights how actions taken by the target post-transfer may affect a purchaser's ability to recover 100% of its loss under an indemnity. Those advising a claimant or defendant will want to look out for any post-sale new act by the target which may constitute what the courts have termed a "concurrent cause of loss". If this new breach is an additional cause of loss, then the indemnity will no longer apply.
The Court of Appeal recently considered another indemnity in Andrew Wood v Sureterm Direct Ltd & Capita Insurance Services Ltd [2015] EWCA Civ 839, 30 July 2015, in which an indemnity in a share purchase agreement for the purchase of shares in an insurance broker did not allow the buyer to recover loss due to customer compensation, caused by misselling insurance, in the absence of claims or complaints by customers to the Financial Services Authority (FSA). This case also showed how understanding the scope of a proposed indemnity or warranty at the negotiation stage is important for managing risk.
