[2025] EWHC 1889 (Comm)

The issue here is whether LCG’s ability to claim under the Funding Indemnity precludes (either as a matter of construction or as a result of an implied term of the SPA) any claim under the warranties set out in the particulars of claim.

In addressing Issue 13 above, I have already mentioned the concern expressed by Burness Paull in their letter dated 22 November 2022 that the defendants’ satisfaction of the claim under the Funding Indemnity, by the unilateral transfer of the £783,325 to LCG, should not operate as a “crude attempt to block our client from bringing its warranty claim”. This issue therefore began to surface in the pre-claim correspondence.

The defendants make the following points:

The last of those points, in particular, prompts the obvious question as to why, in the situation of the Clawback, it is the warranty claim (if the Clawback triggers liability on the part of the defendants under a particular warranty and particularly where the potential liability could be greater than the cap under paragraph 2.2) which should yield to the indemnity claim.

The decision of the Supreme Court in Arnold v Britton, at [15-[20] per Lord Neuberger, makes it clear that considerations of commercial common sense are only relevant to the extent of how matters would or could have been perceived by the parties, or by reasonable people in their position, as at the date of the SPA, and cannot be invoked in hindsight to relieve one party of what might be said (if only by that party) to be a bad bargain. They certainly cannot be permitted to override any provision of the contract where the court considers its natural and ordinary meaning to be clear from the words used. In the SPA the parties included a term against double-recovery (paragraph 4 of Schedule 5) which expressly contemplated “the same fact, matter, event or circumstance” might give rise not only to more than one allegation of breach of warranty but also to “a claim both under the Warranties [and] an Indemnity Claim.”

Only the defendants’ second point above steers towards a conclusion that the (presumed-to-be more valuable claim) should yield to the claim under the Funding Indemnity but that too appears to overlook the significance of the provision against double-recovery.

Arnold v Britton, at [15], identifies the core task for a court confronted with a question over the true meaning and effect of a contract and the need to identify the intention of the parties by reference to “what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean.” In support of their first point above, the defendants place heavy emphasis upon what they say was, to LCG, a “known risk” of a funding clawback. It is the first of the headline points made in their written closing submissions.

There is potential for overlap between the evidence on this issue and that relation to Issue 7 – the Purchaser’s Knowledge Issue – but it is necessary to address here the evidence given in relation to LCG’s “background knowledge” of the risk of such a clawback.

The defendants point to the evidence about this given by Mr Gavin Higgins on behalf of LCG. Mr Higgins was the CFO of LCG between December 2016 and May 2024. In his witness statement he explained that, over the course of a professional career which began in 2000 and has involved positions as finance manager, accountant or CFO within a number of different companies, he has been involved in the buying and selling of about 50 companies. LCG’s acquisition of the Company was similar in size to many of those other transactions (although it was a large acquisition for LCG) and he said it was a fairly standard acquisition from his perspective; though it is the only one that has led to a claim for breach of warranty and an indemnity claim.

In cross-examination, Mr Higgins said he had no particular recollection of the negotiations over the Funding Indemnity and that LCG would have been reliant upon the advice from lawyers in relation to the wording of the SPA and such matters as the provision against double-recovery. He accepted that the inclusion of the Funding Indemnity reflected LCG’s awareness that there was a “generic risk” of funding clawback claim but not a “specific, known risk”. That evidence was given by reference to an email dated 12 October 2021 from Burness Paull to Capital Law (with Mr Higgins and others copied in) in which LCG’s solicitors said they had reinstated the “on demand” wording in the Funding Indemnity as it appeared in the draft of the SPA. This was said to fundamental from LCG’s perspective because “the purpose of an indemnity is to compensate for known risks” and, without it, the indemnity was little more than a warranty.

The defendants say Mr Higgins’s evidence confirms that the Clawback fell into the “known risk” category for which the only relevant protection was the Funding Indemnity. That went beyond protection for a mere theoretical risk, as LCG had said in its reply to the defence. The protection covered over 3 years, back to 1 March 2018, and under paragraph 2.2 of Schedule 5 it extended to a potential claim of over £7m. This was therefore very substantial protection. Mr Higgins’s evidence confirmed it was an actual, known risk, irrespective of whether or not a specific eventuation of the risk was identified at the time of the SPA (as the former embraces the latter).

On my assessment of it, Mr Higgins’s evidence does not support the degree of background knowledge (for Arnold v Britton purposes) that the defendants seek to attribute to the parties so far as anticipating the Clawback is concerned. That is before one gets to the question, assuming the evidence about that had been firmer, as to whether it would be correct, in the exercise of contractual interpretation, to conclude that the Funding Indemnity was to be the only source of redress for LCG in the event that the Clawback (or any other funding clawback) was later made. It should be noted, for example, that the Burness Paull email of 12 October 2021 itself went on to refer separately to a drafting point over what became Warranty B5.2.2: “Warranty 5.2 – in line with our previous emails, we understand that a large proportion of the business relates to contracts with entities other than the ESFA. Reinstated on that basis.”

Mr Higgins confirmed that the inclusion of the Funding Indemnity did not reflect awareness of any particular issues or concerns about the Company’s ESFA funding. He said the lawyers would have drafted it and “we would have that in all our heads of terms agreements on previous deals as well [meaning those where the company received such funding]. We would try and introduce that … it is pretty standard.”

The evidence given by him on this point was entirely consistent with what Mrs McLeish said about it. She said: “If we are buying a business ... that has funding contracts with government, which could potentially be clawed back up to five years historically, it is an indemnity we put in all contracts to protect the business.” She pointed out that the Funding Indemnity covered the Company’s English and Welsh contracts and “we have had an indemnity on every single ESFA contract that we have bought.” On the basis there was a risk of a clawback in relation to the preceding 5 years, Mrs McLeish said “the ESFA risk was a £30 million risk”, that the starting point was five years and “between the lawyers they negotiated it down to three years.”

On behalf of the defendants, Mr Lewis’s witness statement said he was aware of LCG’s insistence during negotiations that a funding indemnity should be included, and that was reflected in Heads of Agreement dated 22 June 2021, but that he did not recall any mention of an inclusion of a funding warranty at that stage. He said: “I understand this was added later during the negotiations, and I became aware of it just before signing the SPA in October 2021.”

In my judgment, this evidence on behalf of the parties does not assist much in determining the present Issue. Instead, it simply confirms that the Indemnity versus Warranties Construction Issue falls to be decided solely by reference to the carefully negotiated terms of the SPA.

By that I mean the express terms of the SPA. Those terms in my judgment are sufficiently comprehensive and clear, for the purpose of discerning their meaning and effect on this point, that I cannot see any basis for implying a term.

Both sides recognised that a term may only be implied into a contract if it is necessary to make the contract work and that, without it, the contract would lack commercial or practical coherence: see Marks & Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] UKSC 72, [2016] AC 742, at [21], per Lord Neuberger. The requirement of business necessity and/or obviousness in the term must not be watered down. The implication of a term cannot be justified simply by suggesting it would appear to be a reasonable and fair one which the parties might have expressly agreed upon (the fairness of the suggested term being an essential but not sufficient pre-condition for its inclusion) and, plainly, neither can it be permitted where it would contradict an express term of the contract. The last point is the “cardinal rule” which respects the parties’ agreement upon how the contract is to work. The implied term must also be capable of clear expression (in a way that obviously does not undermine the cardinal rule). See Marks & Spencer, at [16]-[31] and Ali v Petroleum Co of Trinidad and Tobago [2017] UKPC 2, at [7], per Lord Hughes.

The defendants did suggest some wording for an implied term in a Part 18 response (suggesting it might appear in Schedule 5 or elsewhere in the SPA) but, aside from invoking commercial common sense, their argument essentially rests upon a rival interpretation of the ‘Double Claims’ provision in paragraph 4 of Schedule 5 to that advanced by LCG.

Mr Sims KC and Mr Jagasia relied upon the decision of the Supreme Court in Triple Point Technology Inc v PTT Public Co Ltd [2021] UKSC 29; [2021] 1 AC 1148 in support of the defendants’ position that the terms of the SPA (and, as I understood the argument, paragraph 4 of Schedule 5 – ‘Double Claims’ - in particular) set out the parties’ bargain as to how the risks arising from the Clawback were to be allocated between them. They referred to the judgment of Lord Leggatt, at [108], where he said the modern view adopted in the interpretation of exclusion clauses is that “commercial parties are free to make their own bargains and allocate risks as they think fit, and that the task of the court is to interpret the words used fairly applying the ordinary methods of contractual interpretation”.

That was said by Lord Leggatt in his judgment giving additional reasons in support of the majority decision given by Lady Arden. The decision was that a carve-out for “negligence” in a contractual cap upon liability included negligence in its sense of a breach of a contractual provision requiring the contractor to exercise skill and care in providing its services. The majority did not agree with the courts below. They had adopted a “strained meaning” of the term negligence (confining it to independent torts arising separately from the contractual duty of care) on the basis that, in a contract which was largely concerned with the provision of services, the cap on liability would be largely emasculated if the carve out applied to negligent performance of those services.

There is some similarity between that ultimately unsuccessful reasoning and the defendants’ general argument on Issue 3 that LCG’s pursuit of warranty claims based upon the Clawback should not be permitted to overcome the cap on liability under paragraph 2.2 of Schedule 5. However, the more acute problem for them is that the passage in Lord Leggatt’s judgment on which they rely appears in the part of his judgment headed “Clear words needed to restrict valuable rights”.

In Triple Point the predicated rights, contemplated by that heading, were what Lord Leggatt described, at [108], as “normal rights and obligations” (either under the law of tort or implied by contract so far as negligent performance was concerned). On the present Issue 3, the essential question is whether the defendants are right to say that paragraphs 2.2 and 4 of Schedule 5 (headed ‘Limitation on Claims’) do clearly operate to cut down what would otherwise be LCG’s contractual rights under the SPA. I say that on the basis that (subject of course to my decision on Issue 6: the Breach Issue) there is a warranty – Warranty B5.2.2 – which appears to be triggered by the Clawback.

In my judgment, the defendants have failed to establish that that is the effect of the SPA. Their attempt to do so only highlights the strain they must place upon the language of paragraph 4 of Schedule 5 (the ‘Double Claims’ provision is set out in paragraph 119 above) in order to achieve the desired result. The true position, in my judgment, is that nothing in the SPA supports the Indemnity versus Warranties Construction Issue as a serious one. Any point the defendants have about the interconnection between the Funding Indemnity and Warranty B5.2.2 (in particular) really only goes to Issue 9: the Indemnity Claim Value Cap Issue.

The defendants suggest that paragraph 4 of Schedule 5 means that LCG cannot pursue both an indemnity claim and a warranty claim in respect of the Clawback. However, the paragraph not only does not say that but, instead, expressly contemplates that there might be a claim for both. It says that, if there is “more than one claim” for breach of any of the Warranties or “a claim both under the Warranties [and] an Indemnity Claim”, then, if those claims are based on the same matter, there shall be no double-recovery under such compound claims. The most obvious reason for doing so is because the SPA provides different caps on the defendants’ liability for each, thereby recognising that one may be greater than the other.

The phrase “an Indemnity Claim” is defined in the SPA as meaning “a claim for breach of any of the indemnities in Clause 7”, of which the Funding Indemnity (singled out for the lower cap on liability under paragraph 2.2. of Schedule 5) is one. Paragraph 4 is headed ‘Double Claims’ (not ‘No Double Claims’, though I have noted clause 1.2.3 of the SPA says the heading is immaterial to its interpretation) and is aimed only at preventing double (or multiple) recovery through reliance upon more than one contractual promise or assurance in respect of the same underlying subject matter. The stated premise is, therefore, that there could be a claim in respect of the same matter under more than one such provision in the SPA which might otherwise arguably lead to greater recovery. Just as the provision recognises that LCG might make a claim in respect of the Clawback by reference to more than one warranty (and, beyond Issue 2, the defendants have not suggested that is not permitted) so too it expressly recognises it might make a warranty claim alongside a claim under the Funding Indemnity.

This provision against double-recovery therefore anticipates and addresses any wider point about commercial fairness to be made by reference to the different caps on liability under the Funding Indemnity and the ‘General Warranties’ given by clause 6.2 of the SPA. By the express terms of the SPA the parties have decided what is commercially fair in this respect. They have allocated to the defendants the risk that a warranty claim in respect of the Clawback might be greater than a claim under the Funding Indemnity (see Issue 9 below).

This is clear not only from the ‘Double Claims’ provision but, as LCG’s counsel highlighted, the language of the Funding Indemnity itself (set out in paragraph 115 above). Clause 7.1 begins with the phrase “Without prejudice to any other rights or remedies available to the Purchaser.” This language directly undermines the defendants’ argument that the Funding Indemnity does prejudice LCG’s claim under Warranty B5.2.2. The defendants’ counsel did not directly engage with that wording (or the wider point about the consequences of their argument upon the justification for including that particular warranty at all) and it is difficult to understand what could have been said by them that would not offend the cardinal rule in Marks & Spencer, at [28].

Moreover, as Mr Booth KC and Mr Adamyk also highlighted, the defendants’ argument is further undermined by clause 6.7.2 of the SPA which (with their emphasis) provides that “Each of the Warranties … shall not be limited or restricted by reference to or inference from the terms of any other Warranty or any other term of this Agreement”.

The defendants’ argument on Issue 3, either as a matter of interpretation or implication, is therefore at odds with the clear language used in four distinct terms (if one includes the inclusion of Warranty B5.2.2 as one of them) of the SPA.

Other points made on behalf of LCG illustrate that liability under the Funding Indemnity is truly distinct from any parallel liability under a warranty, so that it would be surprising if establishing the first obliterated the second, or vice versa. A claim under the Funding Indemnity is not subject, as a warranty claim is (see Issues 5 and 7), to a potential defence based upon disclosure or LCG’s actual knowledge of facts and matters giving rise to it: see clauses 7.3 and 7.5 of the SPA. Neither is LCG under an obligation to mitigate its loss in respect of the claim: see clause 7.4 (and compare paragraph 11 of Schedule 5: ‘Duty to Mitigate’). Those provisions reflect the characterisation of the indemnity as a promise to reimburse the relevant liability, should it arise, and on that basis it was given both to LCG and “the Group” (meaning the Company and its subsidiaries). It also extended to payment of costs and expenses reasonably and properly incurred by LCG or any member of the Group.

I note that clauses 7.7 and 7.8 of the SPA expressly provided that certain claims under the Funding Indemnity would be reflected in the calculation of MEBITDA (under Schedule 8) for the purpose of calculating any Earn-Out Consideration payable to the defendants. The Clawback triggered those provisions so that the defendants received no further consideration beyond the Initial Consideration. That is potentially relevant to the defendants’ wider argument under Issue 8 – the No Loss/Amount of Loss Issue – but, for the purpose of Issue 3, the defendants go much further and say that this shows the Funding Indemnity was to provide “complete compensation” in respect of the Clawback relied upon by LCG in their warranty claim.

However, the difficulty with that argument is that the SPA simply does not say that (when one might expect it to have done so if that was intended) and the submission begs the question. Instead, only the ‘Double Claims’ provision in the SPA addresses the point about mutual (as opposed to exclusive) remedies and its focus is upon damages (an entitlement “to recover”) in respect of whatever price was paid for the Company – with or without Earn-Out Consideration - in the first place.

My decision in Issue 3, therefore, is that LCG’s ability to claim under the Funding Indemnity does not preclude a warranty claim in respect of the Clawback.