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Equitix Eeef Biomass 2 Ltd v Fox & Ors [2021] EWHC 2781 (TCC): Doffing the Cap and Upping the Ante

Equitix Eeef Biomass 2 Ltd v Fox & Ors [2021] EWHC 2781 (TCC): Doffing the Cap and Upping the Ante

Overview

In a consequential matters judgment handed down on 19 October 2021, the High Court ruled on the correct interpretation of the liability cap in the share sale agreement ("SSA") and the cost consequences of the Part 36 offer.

The court held that the contractual cap on liability for breach of warranty claims under the SSA did not capture ancillary liabilities such as costs. The liability cap applied only to any damages awarded in respect of a breach of warranty claim.  

The court also held that it is an ordinary consequence of the Part 36 regime that an enhanced rate of interest is payable on the amount awarded at trial and not the amount that the offeror was prepared to settle for. The court observed that parties often have to consider a Part 36 offer "without all pieces of the jigsaw in place" and "[m]uch of the purpose of Part 36 would be lost if it were otherwise".

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Background

The main judgment

The claimant, Equitix Eeef Biomass 2 Limited ("Equitix"), purchased the entire share capital of an energy company, Gaia Heat Limited ("Gaia"), from the defendants (Michael Fox and others) ("Fox and others"). Equitix claimed damages for breaches of certain warranties in the SSA. In the main judgment (handed down on 27 September 2021), the court concluded that a number of warranties given by the defendants were indeed false and awarded damages. The court held that the correct measure of damages was the diminution in value of Gaia's shares attributable to the falsity of the warranties of quality that had been breached. Equitix was awarded damages of £11 million, and it accepted that liability for breach of warranties was capped at £11 million under the SSA.

The consequential matters judgment

The court subsequently dealt with consequential matters. It considered, amongst other matters:

  1. The liability cap: did the liability cap in the SSA apply only to the damages awarded in respect of a breach of warranty claim or were ancillary liabilities, such as costs, also captured by the liability cap?; and

  2. Part 36: (a) the date from which the enhanced rate of interest should apply; and (b) whether the enhanced interest rate should be awarded on the amount Equitix was willing to accept in its Part 36 offer or the amount awarded at trial.

The Liability Cap

The parties disagreed on the correct interpretation of the liability cap. The relevant clause in the SSA stipulated that the cap applied to liability "in respect of a claim". A "claim" was defined as "any claim under this Agreement for breach of the Warranties".

Fox and others submitted that the aggregate liability cap of £11 million included not just damages, but also interest on damages, any uplift under CPR 36.17(4)(d), costs, interest on costs and any order to make a payment on account of costs. They also asserted that the parties could not have intended that the ancillary obligations would be uncapped as this would be inconsistent with the "carefully chosen and broad words in respect of". The cap applied to liability "in respect of" the relevant kinds of breach of warranty claim.

Equitix disagreed with the defendants' interpretation. It asserted that such wording would deprive the court of its discretion to determine costs questions and award interest on damages and, it would, in effect, be an ouster clause. Equitix further submitted that any ancillary order regarding costs and interest would not create a liability in respect of the claim itself, but rather in respect of the litigation process to determine the claim – it would not therefore be a liability in respect of a claim "under" the SSA.

Conclusion

The court held that Equitix's interpretation of the liability cap was correct. The court concluded that it could not be said that a claim for interest or costs is a claim made under the SSA itself; it is made pursuant to the court's jurisdiction to make ancillary orders when determining such claims. However, the court did not agree with Equitix's submission that if the cap captured such ancillary liabilities it would constitute an ouster clause. The court, by analogy, stated that mortgage agreements frequently provide for indemnity costs in favour of the mortgagee in the event that it needs to enforce the terms of the mortgage and, in such cases, the court's discretion is not ousted.

Part 36 Offer

On 25 January 2021, Equitix made a Part 36 offer to Fox and others. Equitix was willing to accept £5,471,093.60 in full and final settlement of the claim and counterclaim.  Fox and others did not accept the offer, which was considerably lower than the £11 million awarded to Equitix at trial. Given the Part 36 offer was beaten at trial, an enhanced rate of interest was applied to the damages awarded.

Fox and others submitted that the enhanced rate of interest should only apply from 22 March 2021. This was the date on which Equitix's expert's second report was served. It was only then, according to Fox and others, they were able to make an informed assessment of Equitix's Part 36 offer. Fox and others also asserted that the enhanced rate of interest should only apply to the sum of £5,471,093.60, being the amount Equitix was willing to accept in its Part 36 offer. The defendants asserted that it would be unjust to award an enhanced rate of interest on double the amount that Equitix was willing to accept.

Conclusion

The court rejected both arguments. The court held:

  • Parties frequently face the pressure of considering a Part 36 offer "without all pieces of the jigsaw in place" and "[m]uch of the purpose of Part 36 would be lost if it were otherwise". The enhanced interest rate on damages should therefore apply from 16 February 2021 (being the 22nd day after Equitix's Part 36 offer); and

  • It is an ordinary consequence of the Part 36 regime that an enhanced rate of interest is payable on the amount awarded at trial rather than the amount that the offeror would have settled for.

The court went on to state that part of the incentive to settle is the "upping the ante consideration" - the offeree may pay dearly for rejecting an offer that was beaten at trial.

Commentary

This case highlights the importance of precise and careful drafting. If ancillary liabilities are also intended to be caught by a liability cap in an SSA, parties should clearly specify this in the SSA and ensure there is no room for ambiguity. The court will normally exercise its discretion in the manner contractually provided for by the parties. 

The judgment also serves as a useful reminder that an enhanced rate of interest is payable on the amount awarded at trial (rather than the amount the offeror would have settled for), and that parties frequently have to consider an offer without "having all pieces of the jigsaw in place"; this is part and parcel of the Part 36 regime.

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