Summary

The determination of a preliminary issue in relation to the proper construction of an agreement with regard to the release of funds out of a retention account established by an agreement for the purchase of the entire issued share capital of a company in order to meet any liabilities arising under the warranties or the tax covenant in the agreement.

Facts

The Part 20 claimant (GEC) sought a declaration that, pending the settlement or determination of claims brought by the Part 20 defendants (P), P were not entitled to any further release of funds from a retention account established by an agreement for GEC to purchase the entire issued share capital of a company. A preliminary issue arose as to the construction of clause 6 of the agreement. P were the company who entered into the agreement as agent of various shareholders in the company and the warrantors of certain warranties and representations set out in the agreement. Clause 6 required that, on completion of the sale, the sellers would pay into the retention account a sum of £25 million out of the consideration for the shares. The fund's purpose was to meet any liabilities arising under the warranties or the tax covenant in the agreement. Under the agreement, GEC was required to notify any claims under the warranties by June 18, 2003. The agreement provided that the liability of the warrantors was limited to a specified "maximum amount" in respect of each claim period. Clause 6 stated that if no retention claims were made in a relevant claim period then the "maximum released amount" would be released to the sellers. GEC made a number of claims under the agreement and gave formal notice of its claims within time, at the end of the first claim period. The value of the claims was estimated by GEC to be $141 million. The warrantors served a dispute notice in respect of GEC's claims and independent counsel determined the value of the claims to be nil, which triggered the release of the first claim period maximum released amount of £15 million to the sellers. P brought proceedings against GEC for a declaration that the maximum liability of the warrantors following the release of the £15 million was limited to the amount remaining in the retention account. Later GEC brought proceedings in respect of its claims. GEC argued that on a proper construction of clause 6 the amount held in the retention account could not be reduced at the end of the second claim period by the maximum released amount of £5 million or any lesser sum because no claims of any kind were made in the second claim period. GEC submitted that it was clear from the wording of clause 6 that a claim notified to the warrantors during the first claim period that remained unsettled as at the end of the second claim period prevented the further release of funds from the retention account that would otherwise have occurred at the end of that period. P argued that to allow a claim made in one period, which had been adjudicated upon, to be carried over against the maximum released amounts for subsequent periods, would destroy the intended structure of the scheme.

Held

Clause 6 had an obvious and agreed meaning. The drafting of clause 6 made provision for outstanding claims from earlier claim periods to be maintained against the maximum released amount attributable to each subsequent period in which no further retention claims were made. The clause therefore gave GEC a limited restraint on the release of the maximum released amount for any period in which there were no claims. In the circumstances, it was not open to the court to apply a construction that involved the deletion of words, City Alliance Ltd v Oxford Forecasting Services Ltd (2001) 1 All ER (Comm) 233 applied. The declaration sought by GEC was granted with an amendment to reflect the existence of the third claim period retention claims that had since been made.

Declaration granted in favour of claimant.