Failure to notify “as soon as possible” precludes indemnity claim

Hopkinson and another sold the entire issued share capital of M2, a company that provided financial advice to retail customers, to Towergate.  The SPA contained an indemnity provision under which Hopkinson and others (the Indemnitors) were required to indemnify Towergate in full against all losses and liabilities that Towergate might suffer as a result of professional negligence claims.  A separate clause in the SPA provided that there was no liability “in respect of any matter or thing unless notice in writing of the relevant matter or thing” was given “as soon as possible and in any event prior to:… in relation to a claim under the indemnity… on or before the seventh anniversary of [the SPA]”.

Shortly before the seventh anniversary of the SPA, Towergate served a notice of possible indemnity claims on the Indemnitors.  The claims arose out of FCA reviews of historic advice and promotional activities of M2 concerning certain pension and investment schemes.  The reviews resulted in liability for compensation to M2’s clients, for which Towergate had only limited insurance coverage.  The Indemnitors rejected Towergate’s demand for indemnification and Towergate sought a declaration, alternatively damages, that it was entitled to be indemnified under the SPA.

Drafting irregularities

It was common ground that giving notice of an indemnity claim in accordance with the SPA’s notice clause was a pre-condition to any liability of the Indemnitors.  However, Towergate’s case was that by giving notice before the seventh anniversary of the SPA it had complied with the clause. The Indemnitors argued that Towergate had not complied because notice was not given “as soon as possible”.

Towergate pointed to “errors” in the clause, including the use of the words “prior to” as well as “on or before” in relation to “the seventh anniversary”, and the lack of a specific time from which “as soon as possible” should be counted.  It contended that “as soon as possible and in any event prior to” did not form part of the notice provision for indemnity claims, which had a seven-year time limit.  It further argued that ambiguity in the clause meant that it must be construed against the Indemnitors who were relying on it to avoid liability, and that there was no commercial justification for “as soon as possible” as a pre-condition to indemnity claims.

“As soon as possible” could not be ignored

As a matter of plain language, the court held that while there were some issues with the clause, these could be resolved by any sensible reader without difficulty.  The clause was not ambiguous.  It plainly imported a dual condition precedent: as soon as possible and in any event seven years. This was clear, grammatical and workable.  Towergate’s interpretation, on the other hand, did “striking violence” to the wording of the clause.  The court reasoned that there was no logical or practical reason why “as soon as possible and in any event prior to” should not exist in relation to indemnity claims.  It could not be said that having a dual condition precedent was unthinkable such that the general must give way to the specific: rather, dual conditions are not infrequently encountered, including in commercial contracts.

Clause had two purposes

As part of its iterative process of interpretation, the court considered whether “as soon as possible” was redundant as a result of the commercial purpose and context of the clause.  It held that the clause had two purposes: (i) “as soon as possible” provided early notice to enable defence to be undertaken promptly; and (ii) seven years provided a longstop or limitation period.  Similarly, the court was not persuaded that the availability of other remedies to the Indemnitors under the SPA meant that a condition precedent based on “as soon as possible” was redundant.  As such, the simple linguistic reading did not need revision.

The court distinguished this case from AIG Europe (Ireland) Ltd v Faraday Capital Ltd [2006] EWHC 2707 (Comm), where the court rejected the argument that an apparently similar provision created two conditions precedent (as soon as possible/30 days).  Perhaps the most striking of several reasons given by the court for the distinction was that, while 30 days might be confused for “as soon as possible”, in the present case – where the second time limit was seven years – any such confusion was plainly absurd.  The Indemnitors were therefore not liable unless notice of “any matter or thing” was given to them “as soon as possible”.

Notice was given too late

The court had no difficulty in finding that notice was in fact not given “as soon as possible”, which it concluded was clear from chronologies produced by the parties.  Insurance was limited so there was scope for large losses to exceed it and for successful claims to feed through into the indemnity. The factual investigation was not as complicated as it might have been if there was insurance to a level that meant the indemnity was answerable only to “quasi-catastrophic losses”.

An obvious indication that notice was not given “as soon as possible” was the fact that Towergate had given notice to its insurers in the prior year, shortly after the FCA notices were served.  This was in circumstances where the insurance notification requirement was less onerous than the SPA requirement because it was predicated on the likelihood of a claim.  This indication was backed up by further evidence as to what Towergate knew and when:

• there had been contact with the FCA from three years before the notice to the Indemnitors;
• over two years before the notice, the FCA had flagged “a number of major issues” and failures of risk and compliance functions and Towergate had started to identify potential claims; and
• over a year before the notice, the first FCA notice had been served and an estimated assessment of claims had been produced. 

The court concluded that Towergate clearly knew by the time that notice was given to the insurers of a “matter or thing” that might give rise to an indemnity claim.  Notice to the Indemnitors was therefore not given “as soon as possible”.

In response to Towergate’s case that no notification was necessary, until they had “meaningful and useful information”, the court found that the level of detail that formed the basis of the earlier notification to insurers was sufficient to meet any such standard.  Towergate’s argument that it was entitled to wait for 17 months after it had formally notified the insurers was “manifestly unrealistic”.  Further, Towergate was unable to point to what changed in the sense of having such information to prompt its notification to the Indemnitors – other than the looming seven-year limitation date, which the evidence showed it had diarised.

Comment

This decision is a sharp reminder of the need to pay close attention to notice clauses in relation to warranties and indemnities, both when drafting agreements and at the outset when considering potential enforcement action.  A clause that contains two time limits may well give rise to a dual condition precedent, and the court has again demonstrated its reluctance to ignore words drafted into an agreement by commercial parties.

Determining what is “as soon as possible” is clearly highly fact-sensitive.  This decision does not offer any real guidance as to the tipping point here, since it was plain to the court that the claimant was far beyond it rather than the position being more finely balanced.  What is clear, however, is that once a claimant has begun documenting potential losses and making other notifications, such as to insurers, it is likely to be scrutinised if it then delays in giving notice of an indemnity claim.

The parties have already been to the Court of Appeal where Towergate was unsuccessful in arguing that the notice was not sufficiently detailed.  As is often the case for breach of warranty or indemnity claims, the formalities really matter.

Further information

This case summary is part of the Allen & Overy Litigation and Dispute Resolution Review, a monthly publication.  If you wish to receive this publication, please contact Amy Edwards, amy.edwards@allenovery.com.