05 May 2020 - Post by:Jason Rix
In Gwynt Y Mor Ofto the court found that an indemnity in a sale and purchase agreement for loss “prior to Completion” meant the 6-day period between signing and completion. Accordingly, it did not cover corrosion in sub-sea cables dating back months or years.
The defendants sold to the claimants the business of owning, maintaining and operating the electrical transmission link between the Gwynt y Mor wind farm and the National Grid. After the sale, two cables failed. This cost the claimant GBP 15m to fix. The parties accepted the most likely cause was damage to part of a polyethylene sheath during the process of manufacture, permitting seawater to penetrate and corrode the cables.
The claimant sought the GBP 15m under the following indemnity:
“If any of the Assets are destroyed or damaged prior to Completion (Pre-Completion Damage), then, following Completion, the [defendants] shall indemnify the [claimant] against the full cost of reinstatement of any Assets affected by Pre-Completion Damage.”
The claimant argued that “prior to Completion” was unqualified and so the indemnity applied to any damage before completion.
The court disagreed.
The court started with a textual analysis:
- While there was no express starting point for the time period, the sentence itself, and the tense used, showed the time frame. It said “If any of the Assets are destroyed” not “If any of the Assets have been destroyed”.
- The clause in which the indemnity appeared dealt with signing. The subsequent clause dealt with completion.
- There was a specific warranty dealing with damage as at the date of the agreement. This had been disclosed against. It would be “remarkable” if a carefully structured warranty was rendered “otiose by an all-embracing indemnity”.
- The different periods – before signing, between signing and completion, and after completion – all had different liability regimes.
There was a further question of what “… are destroyed or damaged” meant. The court said this depended on the specific context in which it was used and not on case law relating to construction or insurance contracts.
The court held that it meant patent damage (ie discoverable and observable damage) because of the use of the word “destroyed” (in contrast to “defect”, which was used elsewhere) and because this meaning made sense in the context of the provision applying only between signing and completion.
The court disagreed with a number of the defendants’ contextual arguments.
- The defendants’ did not evidence their contention that there was a market practice supporting their interpretation.
- The defendants had sought to relying on pre-contractual negotiations to interpret the contract. This was impermissible.
- The fact that the claimant had obtained insurance due diligence reports was neither here nor there.
Having considered the evidence on the negotiations, and applying the new test for common mistake set out in FSHC, the court also held, obiter, that the defendants would have been entitled to rectify the provision so that it read: “If any of the Assets are destroyed or damaged between the date of this Agreement and Completion (Pre-Completion Damage)….”.
There’s a useful, admittedly quite long, paragraph in the judgment about the importance of the words used: “30. The claimant, emphasising that the SPA is a detailed and complex contract negotiated over several years with professional assistance, submitted that it can and should be interpreted principally by a textual analysis. I did not understand the claimant to be suggesting, by that submission, that the relevant provisions should not be considered in the context of the contract as a whole, nor that the commercial sense of the competing considerations should be ignored…. The submission, as I understood it, was that this was a case in which limited or possibly no regard should be had to the factual matrix. However, as Lord Hodge explained, provisions in such contracts can nevertheless lack clarity and assistance can be found in the factual matrix. It is therefore still necessary at least to consider the background as known to both parties at the time of contracting, whilst recognising that the text of the contract has particular and potentially decisive weight in relation to a contract such as the SPA.”