NEUTRAL CITATION No. [2004] EWHC 1336 (Ch)
Case No: HC03C02196
 
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 10th June 2004

Before :

Mr Kevin Garnett QC, sitting as a Deputy Judge of the High Court
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Between :

	SNOWVILLE UK LIMITED	Claimant	
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	HOLIDAYBREAK PLC	Defendant	

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Mr Augustus Ullstein QC (instructed by Baker Gillete Solcitiors) for the Claimant
Mr Paul Newman (instructed by Eversheds LLP) for the Defendant

Hearing date: 20th May 2004
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JUDGMENT

Mr Kevin Garnett QC: 
1.	This is an appeal and cross-appeal, brought by permission of David Richards J, from the Order of Master Price dated 29th October 2003. By that order, Master Price struck out the claim form and dismissed the action on the Defendant’s application under CPR Rule 3.4(2) or, in the alternative, under CPR Rule 24.
The background facts
2.	By a trust deed dated 27th July 1989 and accompanying Rules, Baldwin PLC (‘Baldwin’) established the ‘Baldwin Pension Fund’ for the benefit of its employees (‘the Scheme’) in accordance with the provisions of the Finance Act 1970. Under the Rules, a member of the Scheme was to be entitled on retirement to such benefits by way a lump sum payment and an annuity as had been notified to the member in writing. Baldwin, for its part, covenanted with the trustees of the Scheme that it would contribute to the funds of the Scheme such amounts as it might determine on actuarial advice to be necessary having regard to the liabilities to members under the Scheme. The Rules also provided, however, that notwithstanding this rule, Baldwin was not to be under any continuing obligation to continue to make any contribution to the funds of the Scheme should Baldwin consider it impractical or inexpedient for it to do so. 
3.	Because Baldwin was not obliged to make further contributions if it was considered impracticable or inexpedient to do so, in reality it could not be obliged by the trustees to make contributions sufficient to fund the Scheme benefits. The nature of the scheme was therefore a money purchase scheme rather than a final salary scheme, under which Baldwin would have been obliged to fund any shortfall in the Fund’s ability to provide the Scheme benefits. Mr Ullstein QC, who appears for the Claimant, argued that this was not the case because the Rules provided that although Baldwin might at its discretion and with the consent of the Scheme trustees provide for the augmentation, diminution or alteration of the benefits to which a member was entitled, any such diminution or alteration should be subject to the prior approval of the Inland Revenue. He argues that without Inland Revenue approval, which was not obtained in this case, Baldwin could not diminish the benefits receivable by a member by not fully funding the Scheme. The provision he relies on, however, relates to a member’s entitlement to the defined benefits under the Scheme, not the obligation to fund the Scheme. 
4.	A Mr Sarvindra (or Sandy) Singh was a director and Chief Executive of the company, and in March 1989 he joined the Scheme. In accordance with the Rules, he was given notice that on retirement at the normal pension age under the scheme, he would receive a pension of 40/60ths of his pensionable salary (as defined under the Scheme). The notice, however, also stated that his benefits would be limited to those which could be paid from the assets of the Scheme which were actuarially applicable to him.
5.	From July 1988 Mr Singh also had a service agreement with Baldwin under which, as varied in 1991, Baldwin agreed with Mr Singh to contribute to the funds of the Scheme such sums as might be certified by an actuary as being necessary to provided for the actuarial liabilities of the fund from to time. 
6.	Baldwin duly made such payments for the years between 1991 and 1998.
7.	The issued share capital of Baldwin was acquired by the defendant in this action in August 1998. Mr Singh was placed on garden leave and another Chief Executive appointed. He was concerned to ensure that his entitlements under his service agreement were paid, in particularly in respect of his pension arrangements. He took the matter up with Mr Crichton-Miller, the chairman of the Defendant, and with the Scheme actuaries. On 11th August 1989 the actuaries wrote to Mr Singh as follows:
“I have prepared some calculations on the level of single premium payment that the Inland Revenue would permit to be paid to the Pension Fund on your behalf in the immediate future on the basis that you will be leaving the company’s service within the next few weeks. I calculate this amount to be £688,000.”
The actuary goes on to state that this figure was based on the remuneration which Mr Singh had received from the company between 1993 and 1995. 
8.	The actuary’s letter was also received by Baldwin. Although there was no discussion about the point, the matter has been argued before me on the basis that this letter established that the Scheme was under-funded to the tune of £688,000 and that, so Mr Ullstein argues, Baldwin then became under an obligation to pay this sum to the Scheme trustees for Mr Singh’s benefit. I shall have to say more about this in due course. On 28th August and again on 25th September 1989 Mr Singh wrote to Baldwin (the letters were addressed to Mr Crichton-Miller). In his letter of 28th August, Mr Singh recorded that Mr Crichton-Miller had agreed to arrange that any under-funding of the Scheme would be made up and requested that this now be done. In this letter of 25th September Mr Singh formally demanded payment (to him) and threatened to put the matter in the hands of his solicitors. 
9.	On 28th October 1989, a contract for the sale of the issued share capital of Baldwin from the Defendant to the Claimant was entered into (‘the Agreement’). In addition to many of the usual kinds of provisions, the Agreement contained provisions which relate specifically to Mr Singh’s pension arrangements. Thus, clause 7.1 provides:
“The [Defendant] agrees to indemnify and keep the [Claimant] indemnified from and against all costs (including costs of enforcement), expenses, liabilities (including any tax liability), losses, damages, claims, demands, or legal costs (on a full indemnity basis) and judgments which the [Claimant] incurs or suffers as a consequence of any under-funding relating to Sarvindra Singh payable pursuant to the Pension Scheme in respect of all periods ending on the day of Completion. Clauses 4.6.5.2 and 4.8 apply so as to limit the [Defendant’s] liability under this clause 7.1.”
10.	I shall refer to this clause as ‘the Indemnity’. The Pension Scheme was defined as the Baldwin Pension Fund and completion was to take place immediately after the Agreement was signed. I will need to say more about clauses 4.6.5.2 and 4.8 later. I did not understand it to be disputed that the reason why such a clause had been included in the agreement was because of the claim which had been made by Mr Singh, which must therefore have come to the notice of the Claimant in the pre-contract exchanges.
11.	On 14th January 1999 Mr Singh wrote to the Claimant, formally demanding payment of the £688,000 by Baldwin. No payment of any part of this sum has even been paid into the Scheme Fund.
12.	On 10th May 2002, Baldwin was placed into administrative receivership and Mr Singh is listed as a substantial creditor, both in respect of arrears of salary between 1998 and 2002 (it seems he was reappointed a director of Baldwin after its sale to the Claimant) and the £688,000.
13.	On 16th June 2003, the present proceedings were issued by the Claimant. It is instructive to see how the claim is framed. After reciting some of the facts which I have set out above, it is alleged:
i)	Because Baldwin did not pay £688,000 into the Fund, the Fund was under-funded in that sum in respect of its liabilities to Mr Singh.
ii)	By reason of that fact and Mr Singh’s service contract with Baldwin, Baldwin and the Claimant has a liability to Mr Singh in that sum.
iii)	In breach of the Indemnity, the Defendant has failed and refused to provide the Claimant with an indemnity in respect of that liability or pay the Claimant £688,000.
iv)	The Claimant has suffered loss and damage as a result, being its liability to the Scheme and/or Mr Singh for £688,000.
v)	A claim is then made for damages.
14.	On 29th July 2003 the Defendant applied to strike out the claim or to have summary judgment entered in their favour. This was on the basis that, for a number of reasons, the Defendant was under no liability to the Claimant under the Indemnity and also that the claim had not been brought within certain time limits. Master Price ruled that although on a true construction of the Agreement the Defendant had been liable under the Indemnity, any claim had to be brought within contractual time limits, which the Claimant had failed to do. The Claimant appeals against that decision and the Defendant cross-appeals on the issue of liability.
15.	Although this is an application to strike out under r.3(4)(2) or in the alternative for summary judgment, the issues which are raised turn almost entirely on matters of construction. Before the Master and before me it was accepted that there are no relevant matters of fact which will become any clearer on a further investigation at trial, and that it was appropriate to rule on the proper construction of the Agreement on this application, one way or the other.
Is there a liability under the Indemnity?
16.	Mr Newman, who appears for the Defendant, puts forward three reasons why the Defendant is not liable under the Indemnity:
i)	On a proper construction of the Indemnity, all that it does is to create an obligation between the Claimant and the Defendant in respect of the Claimant’s liability for the under-funding of the Scheme. The Claimant, however, as distinct from Baldwin, had no liability in respect of any such under-funding. Mr Newman accepts that on this construction of the Indemnity, no liability could ever have arisen because the Claimant could never become liable for any under-funding of the Scheme. He says, however, that it makes perfectly good commercial sense for a party to give an indemnity under which no liability can arise in practice if that is the agreement put before it. He says, relying on Co-operative Wholesale Society Ltd v. National Westminster Bank plc [1995] 1 EGLR 97, that it is not the court’s job to rewrite a bad agreement to make it conform to business common sense. Business common sense can only be used as an aid to construction where the language is ambiguous, which in this case it is not. He also points out that there is no claim to rectification.
ii)	Even if on a true construction of the Indemnity the Defendant is under a liability to indemnify Baldwin, only Baldwin can claim an indemnity, not the Claimant. 
iii)	Even if the Indemnity in some way requires the Defendant to provide an indemnity in respect of Baldwin’s failure to fund the Scheme, the Indemnity only relates to Baldwin’s failure to make payments “pursuant to the Pension Scheme”, and Baldwin had no such liability under the Scheme Rules. The only liability which Baldwin had was under Mr Singh’s service agreement, not the Scheme.
17.	As to the first of these points, it is accepted by Mr Ullstein that on a literal reading of the Indemnity Mr Newman is correct: the Claimant has not incurred or suffered any liability or loss as a consequence of any under-funding of the Scheme. He says, however, that something has obviously gone wrong in the drafting of the Indemnity because there was clearly an intention to provide a meaningful indemnity against such under-funding. He points to the fact that the issue of the under-funding of the Scheme had been raised by Singh both with Baldwin and the Defendant before Baldwin was sold to the Claimant and this is why the Indemnity is found in the Agreement. Mr Ullstein says that the Indemnity should be construed as follows:
“The [Defendant] agrees to indemnify and keep the [Claimant] and Baldwin indemnified from and against all costs (including costs of enforcement), expenses, liabilities (including any tax liability), losses, damages, claims, demands, or legal costs (on a full indemnity basis) and judgments which the [Claimant] or Baldwin incurs or suffers as a consequence of any under-funding relating to Sarvindra Singh payable pursuant to the Pension Scheme in respect of all periods ending on the day of Completion.”
18.	I have been reminded of the modern principles relating to construction of agreements. The intention of the parties is to be found from the words which they have used, and by asking what those words would convey to the reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract. The background may enable the reasonable man not only to choose between the possible meanings of words which are ambiguous but to conclude that the parties must have used the wrong words or syntax. If the reasonable person would conclude from the background that something must have gone wrong with the language, the law does not require a court to attribute to the parties an intention which they plainly could not have had. In such a case, it is not necessary that the agreement be rectified before the parties’ intentions can be ascertained. See ICS Ltd v. West Bromwich Building Society Ltd [1998] 1 WLR 896. In that case, the House of Lords construed the phrase “Any claim (whether sounding in rescission for undue influence or otherwise)" to mean "Any claim sounding in rescission (whether for undue influence or otherwise)"  
19.	I do not accept Mr Newman’s submission that the Indemnity makes good commercial sense as it stands. It may make good commercial sense from the Defendant’s point of view to be able now to rely on a literal reading to avoid liability, but it makes no sense from the Claimant’s point of view nor would it have made any sense to an objective observer at the time. In my judgment, such an observer would have concluded that something had gone wrong. Mr Newman’s argument would mean that a court would never adopt a construction of the kind referred to in the West Bromwich case because it would always be the position that it made good commercial sense to the party seeking to avoid liability to rely on a literal reading of the contract.
20.	As to what was actually the intention of the parties was, on the assumption that something has gone wrong with the drafting of the Indemnity, I consider that a reasonable person, knowing of all the facts, would have concluded that the Indemnity was meant to deal with the situation which would arise if Baldwin had to pay £688,000 to the Scheme trustees following the sale. He would have concluded that the parties intended that the Defendant would provide an indemnity at least to the extent set out in paragraph 18. This deals with the first and second limbs of Mr Newman’s argument. 
21.	As to the third limb of Mr Newman’s argument, this raises a rather different point. As I see it, the underlying basis of the claim, which is not really articulated in the Particulars of Claim, is that the Indemnity either covers any loss, liability, claims etc, made or suffered by Baldwin in respect of claims by the trustees of the Scheme in respect of the Scheme being under-funded or, alternatively, any loss, etc., which Baldwin has suffered by reason of a claim made against it by Mr Singh under his service contract. Baldwin’s liabilities, such as they may be, to the trustees under the Trust Deed and the Rules are separate from any liability which Baldwin may have to Mr Singh under his service agreement.  Although both types of loss would be covered by the Indemnity as construed in accordance with paragraph 20, above, they raise different issues.
22.	As to a claim by the trustees against Baldwin, there is no evidence of any such claim being made or intimated. If this is the correct position, there will no liability under the Indemnity against such claims. In any event, however, Mr Newman relies on the provision in the Rules which states that Baldwin should not be under any obligation to continue to make any contribution to the funds of the Scheme should Baldwin consider it impractical or inexpedient to do so. He points out that clearly Baldwin has not made any payment (and is now in administrative receivership) and this can only be because it has been impractical or inexpedient for it to do so. 
23.	Mr Ullstein argues that, notwithstanding this provision, Baldwin remained liable to contribute such amounts as were necessary having regard to the liabilities to members under the scheme because member’s benefits could not be reduced without Inland Revenue approval. I have already rejected this argument (paragraph 3, above). He also refers to Rule 39.1, which provides that where a discretion or power is conferred on the Company such discretion or power “may” be exercised by resolution of the Board, and he argues that here there is no evidence of any Board resolution. Quite apart from the fact that Rule 39.1 appears to be permissive rather than mandatory, in my judgment the argument suffers from the same defect as his Inland Revenue approval argument. The only conclusion which I think it right to draw is that Baldwin has considered it inexpedient or impractical to make further contributions to the scheme. Baldwin is therefore under no liability to the scheme trustees in this respect and the claim based on this aspect of the indemnity must fail.
24.	As expressed in his skeleton argument, Mr Ullstein also says that: “Furthermore, it is not right to say that the contractual obligation of Baldwin to Mr Singh is somehow separate and distinct from the scheme. The two have to be read in parallel. … The two obligations are inextricable interlinked.” For the reasons given above, I do not think that this is a correct way to approach the matter. In my judgment, the real issue here is whether the liability to indemnify Baldwin against all claims, etc, which Baldwin suffers as a consequence of any under-funding relating to Mr Singh payable “pursuant to the Pension Scheme” covers, as a matter of further construction, any under-funding in breach of Mr Singh’s service agreement. 
25.	This issue is not precisely the same as that raised by the earlier question of construction. An indemnity restricted to claims by the trustees for under-funding of the Scheme is arguably a more legitimate reading of the actual words of the Indemnity. Again, however, in my judgment a reasonable person, given the factual context, would think that something had gone wrong if the Indemnity was indeed limited in this way. There would have been little point in it, given that the claims which had been raised were being made by Mr Singh against Baldwin. These can only have been under his service agreement: he had no claim under the Rules against Baldwin for under-funding of the Scheme, which was a claim which could only be brought by the trustees, a claim which in any event was, or was likely to be, of no value. 
26.	The words “… any under-funding relating to Sarvindra Singh payable pursuant to the Pension Scheme” are not particularly precise. The reasonable person would in my judgment regard the words “payable pursuant to the Pension Scheme” as including amounts payable generally in respect of the Pension Scheme. In my judgment, the Indemnity should therefore be construed so as to include an obligation owed to the Claimant to indemnify Baldwin against claims made by Mr Singh against Baldwin for under-funding of the Scheme in breach of his service agreement.
27.	I therefore agree with the decision of Master Price on this issue and, subject to the point made at the end of this judgment, I will therefore dismiss the cross-appeal.
The time limit point
28.	In order to deal with this point, I need to refer to some of other terms of the Agreement. In clause 7.1, the Indemnity, it is stated that “Clauses 4.6.5.2 and 4.8 apply so as to limit the [Defendant’s] liability under this clause 7.1.” Clause 4 is a clause headed “Warranties”. Clause 4.1 contains many of the usual type of warranties found in agreements of this type, Clause 4.2 contains standard-type acknowledgements such as “entire contract” clauses, Clauses 4.3 to 4.7 contain various exclusion and limitation provisions. In particular, Clause 4.6.4 provides that the Defendant will be under no liability in respect of any claim unless written particulars shall have been given to the Defendant before 31st December 1999 and unless legal proceedings in respect of such a claim shall have been commenced and served on the Defendant with 9 months of such particulars having been given. A claim is defined as any claim which would be capable of being made against the Defendant in respect of any liability for breach of the representations, warranties, undertakings and covenants given under the Agreement. Clause 4.6.5.2 provided that the Defendant will have no liability in respect of any claim if such a claim would not have arisen but for anything voluntarily done or omitted to be done after completion by the Claimant.
29.	Clause 4.8 makes provision for what should happen if the Claimant becomes aware that a claim has arisen or may arise. Clause 4.8.1 states that in this event the Claimant will “without prejudice to clause 4.6.4 as soon as practicable notify the Defendant in writing of the potential claim and of the matters which will or are likely to its knowledge to give rise to such a claim.” The remaining provisions of clause 4.8 deal with the supply of further information about claims and a requirement that the Purchaser reasonably resist any claim.
30.	On the face of it, the matter is straightforward. The provisions of Clause 7.1 incorporate the provisions of Clause 4.6.5.2 and 4.8, so that (a) the Claimant must notify the Defendant of any potential claim as soon as practicable, provide information about the claim and reasonably resist it, and (b) there is to be no liability under the Indemnity if liability would not have arisen but for the voluntary act or omission of the Claimant after completion.
31.	It is said however that the words “without prejudice to Clause 4.6.4” in clause 4.8.1 incorporate by reference the provisions of clause 4.6.4 into clause 4.8.1, and thus the time limits provided for there. It is accepted that if this is the case then the claim was not notified and the proceedings were not brought within those limits. This was the construction which appealed to the master. He said:
“… as it seems to me … clause 4.8 incorporates by reference the provisions of clause 4.6.4. I do not accept that one can regard the reference to clause 4.8 in clause 7.1 as not including the reference to clause 4.6.4. The provision is in no way repugnant to the rest of clause 4.8 and in my view can only have the effect of incorporating clause 4.6.4.”
32.	I do not agree. In my judgment the words “without prejudice to” when used in Clause 4.8.1 simply mean that the obligation under that clause to give notice of any claim as soon as practicable does not affect in any way the operation of the time bars contained in Clause 4.6.4. The result is not to incorporate Clause 4.6.4 into Clause 4.8.1 so as to amplify or control its operation in some way but to make it clear that the clauses operate independently of each other. It follows that in my judgment Clause 4.6.4 is not incorporated into Clause 4.8.1 when the latter clause is incorporated into Clause 7.1. If the draftsman had intended that the time limits of clause 4.6.4 should apply to any claim under the Indemnity this would be a bizarre way of doing it. Why not expressly incorporate it?
33.	I will therefore allow the appeal.
Closing remarks
34.	Although the overall result of my judgment is to reinstate the claim, I consider that there are serious problems with the way the claim is framed at present. I have already set out the way this is done earlier in my judgment. It bears little relation to what appears to me to be the true nature of the claim, which is that the Defendant owes a contractual obligation to the Claimant to indemnify Baldwin against claims which Mr Singh may have against Baldwin in respect of any under-funding of the Scheme. Quite what this liability might amount to, in Baldwin’s present circumstances, was not explored before me and it was unnecessary to do so. I do not consider it would be right, however, to allow the claim to continue in its present form. I will hear counsel as to the appropriate order.