Case No: HC03C03696
Neutral Citation Number: [2005] EWHC 644 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 18 April 2005

Before :

THE HONOURABLE MR JUSTICE PATTEN
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Between :

	(1) Michael Anthony Powell
(2) William Graham
(3) Hg Investment Managers Limited	PPt 20 Defendant 
(First Claim)/
Pt 20 Claimant
(Second Claim)	
	- and -	
	
	General Electric Company	Pt 20 Claimant
(First Claim)/
Pt 20 Defendant
(Second Claim)
	
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Timothy Dutton QC and Stephen Brown (solicitor advocate) (instructed by 
Mayer, Brown, Rowe & Maw LLP) for the Part 20 Claimant 
(First Claim)/ Part 20 Defendant (Second Claim)
    Michael Lyndon-Stanford QC and Rebecca Stubbs (instructed by Lovells) for the 
Part 20 Defendant (First Claim)/ Part 20 Claimant (Second Claim)

Hearing dates : 24th - 25th February 2005
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Judgment

Mr Justice Patten : 
Introduction
1.	On 16th January 2002 General Electric Company (“GEC”) entered into an agreement (“the Agreement”) to purchase the entire issued share capital of PII Group Limited (“the Company”) for a total consideration of some £310m.  The transaction was completed on 18th March 2002.  The Third Part 20 Defendant, Hg Investment Managers Limited (“the Sellers’ Representative”), entered into the agreement as the duly authorised agent of various shareholders in the Company listed in Part A of Schedule 1 to the Agreement.  The First and Second Part 20 Defendants, Mr Powell and Mr Graham (“the Warrantors”), executed the Agreement in order to give the warranties and representations which are set out in Schedule 4 to the Agreement.  These comprise warranties relating to the financial records of the Company;  its business since the last balance-sheet date;  the ownership and control of its shares and its subsidiaries;  and matters such as its assets, insurance arrangements, commercial agreements, employees and financial indebtedness.  In addition, Schedule 5 of the Agreement contains a tax covenant by the Warrantors which provides for the reduction of the purchase price to take account of various tax liabilities arising from events occurring before completion.  The details of the tax covenant and the warranties contained in Schedule 4 do not matter for the purposes of the preliminary issue which I have to decide.
2.	The Company is an English registered company which carries on a pipeline inspection business.  The sellers under the Agreement (represented by the “Sellers’Representative”) are private equity funds who according to the admissible evidence require to be able to distribute the proceeds of sale to investors as and when they are received.  In order presumably to facilitate this and to limit the liability of the Sellers’ Representative and the Warrantors, clause 5.13 of the Agreement established what is described as a Retention Account, to be maintained in accordance with the provisions of clause 6 of the Agreement.  On completion the Seller’s solicitors (Messrs Lovells) were required to pay into this account out of the consideration for the shares of the Company the sum of £25m.  The purpose of this fund was to meet any liabilities arising under the warranties or the tax covenant, and by clause 8.3 of the Agreement the liability of the Warrantors was limited to the “maximum amount”, which was defined as follows:
“For the purposes of this Clause the "Maximum Amount" during the First Claim Period shall be £25,000,000, during the Second Claim Period shall be £10,000,000, during the Third Claim Period shall be £5,000,000 and during the Fourth Claim Period shall be £2,500,000.  Any amounts payable to the Purchaser, or any Designated Purchaser, or any member of the Purchaser's Group in respect of all Claims shall be recoverable only from and to the extent of:
(a)	the sums held from time to time in the Retention Account;  and
(b)	any sums actually recovered by the Purchaser, or any Designated Purchaser or any member of the Purchaser's Group under the Purchaser Insurance Policy
The Purchaser (on its own behalf and on behalf of any Designated Purchaser or any member of the Purchaser's Group) agrees that it will look solely to the sums referred to in (a) and (b) above and will have no recourse for any Claim to any assets of the Warrantors, other than to the sums held from time to time in the Retention Account.”
3.	Clause 8.3 forms part of the clause in the Agreement dealing with the limitations of claims.  In respect of warranties clause 8.1 provides as follows:
“Neither of the Warrantors shall have any liability in respect of any claim arising under the Warranties (other than the Tax Warranties) unless the Purchaser has served on them a written notice of that claim on or before the expiry of the First Claim Period (being fifteen calendar months from the Completion Date), or, in respect of a claim arising under the Tax Warranties or the Tax Covenant, six months following the sixth anniversary of the Completion Date.
(a)	In each case, the Purchaser shall be required, at the same time as giving such notice of a Claim to give such details of the Claim as the Purchaser then has, including the Purchaser's then best estimate given in good faith of the amount of the liability of the Warrantors in respect thereof.
(b)	The Claim shall be deemed to have been withdrawn, and the Warrantors shall no longer be liable in respect thereof, unless the Purchaser has issued and served proceedings in respect thereof within 12 months of the date of such written notice provided that if the relevant notice was given in respect of a Claim which was then contingent only, such period of 12 months shall commence on and from the date on which the relevant Claim ceases to be contingent and becomes actual.”
4.	GEC was therefore required to notify any claims under the warranties by 18th June 2003 and any claims arising under the tax warranties or the tax covenant by no later than 18th September 2008.  Proceedings in respect of the claim have to be commenced within twelve months of the claim being notified and, in the case of a contingent claim, within twelve months of the claim becoming unconditional.  On 14th June 2003 GEC through its solicitors made a number of claims under the Agreement and gave formal notice of these claims on 16th and 17th June 2003.  The value of the claims was estimated by GEC to be some $141m.
5.	The treatment of claims is governed by clause 6 of the Agreement.  Because the dispute between the parties centres on the meaning and operation of this clause, it is necessary for me to set it out in full:
“6.1  For the purposes of this Clause 6: 
"Claim Periods" shall mean the First Claim Period, the Second Claim Period, the Third Claim Period and the Fourth Claim Period and "Claim Period" means any of them;
"Claim Period Maximum Released Amounts" means the First Claim Period Maximum Released Amount, the Second Claim Period Maximum Released Amount, the Third Claim Period Maximum Released Amount and the Fourth Claim Period Maximum Released Amount and "Claim Period Maximum Released Amount" means any of them;
"First Claim Period" means the period of fifteen calendar months from the Completion Date;
"First Claim Period Maximum Released Amount" means the sum of £15,000,000 plus all interest accrued on the Retention during the First Claim Period;
"First Claim Period Retention Claim(s)" means any claim(s) under this Agreement (including for the avoidance of doubt any Claim(s)) notified to the Warrantors or the Sellers' Representative (as the case may be) on or before the expiry of the First Claim Period;
"Second Claim Period" means the period between the end of the First Claim Period and the date which falls thirty calendar months from the Completion Date;
"Second Claim Period Maximum Released Amount" means the sum of £5,000,000 plus all interest accrued on the Retention during the Second Claim Period;
"Second Claim Period Retention Claim(s)" means any claim(s) under this Agreement (including for the avoidance of doubt any Claim(s) in relation to the Tax Warranties or the Tax Covenant) notified to the Warrantors or the Sellers' Representative (as the case may be) on or before the expiry of the Second Claim Period but not including any First Claim Period Retention Claim(s);
"Third Claim Period" means the period between the end of the Second Claim Period and the date which falls thirty six months from the Completion Date;
"Third Claim Period Maximum Released Amount" means the sum of £2,500,000 plus all interest accrued on the Retention during the Third Claim Period;
"Third Claim Period Retention Claim(s)" means any claim(s) under this Agreement (including for the avoidance of doubt any Claim(s) in relation to the Tax Warranties or the Tax Covenant) notified to the Warrantors or the Sellers' Representative (as the case may be) on or before the expiry of the Third Claim Period but not including any First Claim Period Retention Claim(s) or any Second Claim Period Retention Claim(s);
"Fourth Claim Period" means the period between the end of the Third Claim Period and the date which falls seventy eight months from the Completion Date;
"Fourth Claim Period Maximum Released Amount" the balance of the funds in the Retention Account at the expiration of the Fourth Claim Period;
"Fourth Claim Period Retention Claim(s)" means any claim(s) under this Agreement (including for the avoidance of doubt any Claim(s) in relation to the Tax Warranties or the Tax Covenant) notified to the Warrantors or the Sellers' Representative (as the case may be) on or before the expiry of the Fourth Claim Period but not including any First Claim Period Retention Claim(s) or any Second Claim Period Retention Claim(s) or any Third Claim Period Retention Claim(s).
"Retention Claims" shall mean during the First Claim Period, any First Claim Period Retention Claim(s), during the Second Claim Period, any Second Claim Period Retention Claim(s), during the Third Claim Period any Third Claim Period Retention Claim(s) or during the Fourth Claim Period any Fourth Claim Period Retention Claim(s);
"Relevant Released Amount" shall mean:
(i) 	in respect of the First Claim Period the lesser of (i)   an amount equal to the amount produced by subtracting from the First Claim Period Maximum Released Amount (a) all payments made under Clause 6.6, (b) all Initial Estimates and Revised Estimates relating to First Claim Period Retention Claim(s) (to the extent the same have not subsequently become, during the First Claim Period, Agreed Retention Amounts, Disputed Retention Amounts or Adjudicated Estimates); and (c) Agreed Retention Amounts, Disputed Retention Amounts or Adjudicated Estimates in each case in respect of First Claim Period Retention Claim(s) and (ii) such amount as leaves in the Retention Account an amount equal to £10,000,000;
(ii)	in respect of the Second Claim Period the lesser of     (i) an amount equal to the amount produced by subtracting from the Second Claim Period Maximum Released Amount (a) all payments made under Clause 6.6, (b) all Initial Estimates and Revised Estimates relating to Second Claim Period Retention Claim(s) (to the extent the same have not subsequently become, during the Second Claim Period, Agreed Retention Amounts, Disputed Retention Amounts or Adjudicated Estimates); and (c) Agreed Retention Amounts, Disputed Retention Amounts or Adjudicated Estimates in each case in respect of Second Claim Period Retention Claim(s) and (ii) such amount as leaves in the Retention Account an amount equal to £5,000,000;
(iii)   in respect of the Third Claim Period the lesser of (i)              an amount equal to the amount produced by subtracting from the Third Claim Period Maximum Released Amount (a) all payments made under Clause 6.6, (b) all Initial Estimates and Revised Estimates relating to Third Claim Period Retention Claim(s) (to the extent the same have not subsequently become, during the Third Claim Period, Agreed Retention Amounts, Disputed Retention Amounts or Adjudicated Estimates); and (c) Agreed Retention Amounts, Disputed Retention Amounts or Adjudicated Estimates in each case in respect of Third Claim Period Retention Claim(s) and (ii) such amount as leaves in the Retention Account an amount equal to £2,500,000; or
(iv)  in respect of the Fourth Claim Period an amount equal to the amount produced by subtracting from the Fourth Claim Period Maximum Released Amount (a) all payments made under Clause 6.6, (b) all Initial Estimates and Revised Estimates relating to Fourth Claim Period Retention Claim(s) (to the extent the same have not subsequently become, during the Fourth Claim Period, Agreed Retention Amounts, Disputed Retention Amounts or Adjudicated Estimates); and (c) Agreed Retention Amounts, Disputed Retention Amounts or Adjudicated Estimates in each case in respect of Fourth Claim Period Retention Claim(s).
As specified in Clause 5.13, the Retention shall be paid into a designated, interest-bearing account with Barclays Bank PLC, in the joint names of the Sellers' Solicitors and the Purchaser's Solicitors (the "Retention Account") on Completion and the Retention (together with interest accrued thereon) shall be applied in accordance with the provisions of this Clause.  The instructions given to Barclays Bank PLC on the setting up of the Retention Account shall include an instruction that no sums may be released from the Retention Account at any time without the authority of both the Purchaser's Solicitors and the Sellers' Solicitors.
6.2  If no Retention Claims are made in the relevant Claim   Period then (without prejudice to the provisions of Clause 8.1);
(a)   if the Purchaser or Designated Purchaser has not made any First Claim Period Retention Claim(s) prior to the expiry of the First Claim Period the First Claim Period Maximum Released Amount shall be released to the Sellers' Solicitors on behalf of the Sellers on the second Business Day following the expiry of the First Claim Period;
(b)	 If the Purchaser or Designated Purchaser has not made any Second Claim Period Retention Claim(s) prior to the expiry of the Second Claim Period and there are no First Claim Period Retention Claim(s) that have not been determined or settled in accordance with Clause 6.6 as at the end of the Second Claim Period, there shall be released to the Sellers' Solicitors on behalf of the Sellers on the second Business Day following the expiry of the Second Claim Period, an amount equal to the lesser of (i) the Second Claim Period Maximum Released Amount and (ii) such amount as leaves in the Retention Account an amount equal to £5,000,000;
(c)  If the Purchaser or Designated Purchaser has not made any Third Claim Period Retention Claim(s) prior to the expiry of the Third Claim Period and there are no First Claim Period Retention Claim(s) or any Second Claim Period Retention Claim(s) that have not been determined or settled in accordance with Clause 6.6 as at the end of the Third Claim Period, there shall be released to the Sellers' Solicitors on the second Business Day following the expiry of the Third Claim Period an amount equal to the lesser of (i) the Third Claim Period Maximum Released Amount and (ii) such amount as leaves in the Retention Account an amount equal to £2,500,000;
(d)  If the Purchaser or Designated Purchaser has not made any Fourth Claim Period Retention Claim(s) prior to the expiry of the Fourth Claim Period and there are no First Claim Period Retention Claim(s), Second Claim Period Retention Claim(s) or any Third Claim Period Retention Claim(s) that have not been determined or settled in accordance with Clause 6.6 as at the end of the Fourth Claim Period the Fourth Claim Period Maximum Released Amount shall be released to the Sellers' Solicitors on the second Business Day following the expiry of the Fourth Claim Period.
6.3   If Retention Claims are made in a relevant Claim Period then:
In respect of each First Claim Period Retention Claim(s), each Second Claim Period Retention Claim(s), each Third Claim Period Retention Claim(s) or each Fourth Claim Period Retention Claim(s), the Purchaser or Designated Purchaser shall as soon as is practicable during the Claim Period during which the Relevant Claim is made provide a bona fide and reasonable estimate in writing of the maximum aggregate amount of each such Retention Claim (which for the avoidance of doubt, shall include a reasonable estimate of the costs likely to be incurred by the Purchaser and/or the Designated Purchaser or any member of the Purchaser's Group or any Group member in pursuing each such Retention Claim) ("the Initial Estimate") and shall notify the Warrantors or the Sellers' Representative (as the case may be) accordingly.  The Purchaser or Designated Purchaser shall be at liberty to notify the Warrantors or the Sellers' Representative (as the case may be) that it has revised its estimate ("the Revised Estimate") at any time during respectively the First Claim Period (in respect of a First Claim Period Retention Claim(s)), the Second Claim Period (in respect of a Second Claim Period Retention Claim(s)), the Third Claim Period (in respect of a Third Claim Period Retention Claim(s)) and the Fourth Claim Period (in respect of a Fourth Claim Period Retention Claim(s)) if facts or circumstances come to light justifying any such revisions, any such revisions being bona fide and reasonable. 
6.4   If any Retention Claim is outstanding at the end of the Claim Period in which it was made and the Initial Estimate or Revised Estimate of any such Retention Claim or any part of it is disputed by the Warrantors during such Claim Period, (a "Disputed Retention Amount") then the Warrantors shall give notice in respect of the amount disputed to the Purchaser (a "Dispute Notice").  In such event, the Warrantors and the Purchaser shall refer the matter to an independent Counsel (of Queen's Counsel rank) agreed between the Warrantors and the Purchaser, or in the event of failure by the Warrantors and the Purchaser to so agree within 5 days of the date of the Dispute Notice, either party may request that the President of the Law Society shall appoint such Counsel (the "Independent Counsel").   If any Retention Claim notified in accordance with this Agreement is outstanding at the end of the Claim Period in which it was made and the Initial Estimate or Revised Estimate (which for the avoidance of doubt, shall include a reasonable estimate of the costs likely to be incurred by the Purchaser and/or the Designated Purchaser or any member of the Purchaser's Group or any Group member in pursuing such Retention Claim) or any part of it is not disputed by the Warrantors then the amount of such Retention Claim or the part not disputed shall be the "Agreed Retention Amount".
6.5   The Independent Counsel appointed pursuant to Clause 6.4 shall only determine whether the Disputed Retention Amount (which for the avoidance of doubt, shall include a reasonable estimate of the costs likely to be incurred by the Purchaser and/or the Designated Purchaser or any member of the Purchaser's Group or any Group member in pursuing the relevant Retention Claim) is fair and reasonable in all of the circumstances.  The costs of the Independent Counsel shall be borne by the Sellers.  The Independent Counsel will make his determination as to whether the Disputed Retention Amount is fair and reasonable in all of the circumstances. If he decides it is not he shall increase or decrease the Disputed Retention Amount to an amount which he believes is fair and reasonable in all the circumstances (the "Adjudicated Estimate") within 21 days of being so appointed. Once the Independent Counsel has so determined, the Relevant Released Amount shall be paid forthwith from the Retention Account to the Sellers' Solicitors Account.  In respect of each relevant Retention Claim, the Agreed Retention Amounts, together with either (as the case may be), the Disputed Retention Amount or the Adjudicated Estimates plus any interest accrued in respect of that remaining balance shall be held in the Retention Account pending final determination of the relevant Retention Claim(s).  
If, upon final determination or settlement of a relevant Retention Claim(s), any amount that has been retained at the end of a Retention Period which, had it not been so retained as a result of such Relevant Claim, would have been released at the end of that Retention Period (the "Potentially Releasable Amount"), then any amount of that Potentially Releasable Amount ("the amount in question") that does not constitute or would not be needed for all or part of an Initial Estimate or Revised Estimate (to the extent the same have not become Agreed Retention Amounts, Disputed Retention Amounts or Adjudicated Estimates), an Agreed Retention Amount, a Disputed Retention Amount or an Adjudicated Estimate and which would (i) if it arises in the First Claim Period not have the effect at the end of the First Claim Period of reducing the amount in the Retention to below £10,000,000, or (ii) if it arises in the Second Claim Period not have the effect at the end of the Second Claim Period of reducing the amount in the Retention to below £5,000,000, or (iii) if it arises in the Third Claim Period not have the effect at the end of the Third Claim Period of reducing the amount in the Retention to below £2,500,000, or (iv) if it arises in the Fourth Claim Period not have the effect of reducing the amount in the Retention whilst any Retention Claim has not been finally determined or settled, then the amount in question shall be released to the Sellers' Solicitors.
The Independent Counsel's determination shall not prejudice the rights of any of the parties in respect of any subsequent proceedings in respect of such Retention Claim.  The Independent Counsel shall act as an expert and not as an arbitrator. Each party shall provide the Independent Counsel with all information and documentation reasonably requested by him for the performance of his duties pursuant to this Clause 6.5.
6.6  Upon the final settlement or determination of any Retention Claim(s) the Warrantors or the Sellers' Representative (as the case may be) and the Purchaser shall procure that any amount retained in the Retention Account (and all interest accrued thereon) shall forthwith be applied in or towards the discharge of the amount(s) agreed or determined to be payable to the Purchaser or Designated Purchaser in respect of such Retention Claim(s).  Following the final determination or settlement of all Retention Claim(s) in the period following the expiration of the Fourth Claim Period the balance of the Retention Account, after the complete discharge of all such Retention Claim(s) in respect of all relevant Claim Periods, shall be released to the Sellers' Solicitors on behalf of the Sellers.
6.7  The Warrantors and the Purchaser shall promptly give to the Sellers' Solicitors and the Purchaser's Solicitors respectively all such written instructions as shall be necessary to give effect to the provisions of this Clause.
6.8   Pipeline Integrity International Trustees Limited shall not be required to contribute any money to the Retention Account.”
6.	The Claim Periods and the Maximum Released Amounts referred to in the definitions are as follows:
i)	First Claim Period:  18th March 2002 to 17th June 2002:  £15m plus interest;
ii)	Second Claim Period:  18th June 2002 to 17th September 2004:  £5m plus interest;
iii)	Third Claim Period:  18th September 2004 to 17th March 2005:  £2.5m plus interest;  and
iv)	Fourth Claim Period:  18th March 2005 to 17th March 2008:  Balance of funds.
7.	Because the service of the notice of claims on 16th and 17th June 2003 was made at the very end of the First Claim Period, the claims remained unrevised in amount as at the end of that period, and on 17th June the Warrantors served a Dispute Notice in accordance with clause 6.4 in respect of each of the claims made by GEC.  The matter was then referred to Mr John Boyd QC, acting as the Independent Counsel, to determine whether the Disputed Retention Amount (as defined) was fair and reasonable.  On 18th September 2003 he determined the value of the claims to be nil.
8.	There are no specific provisions beyond clause 6.5 itself which dictate how the Independent Counsel should approach this task.  Although the procedure adopted was to allow both parties to make written representations about the value of the claims, the determination was conducted as a paper exercise and Mr Boyd QC gave no reasons for his decision.  He did, however, emphasise (in accordance with the third paragraph of clause 6.5 of the Agreement) that his task was not to adjudicate on the claims as an arbitrator, nor to prevent any of the claims being pursued in subsequent proceedings.  His determination did, however, have the effect of producing an Adjudicated Estimate of nil, which triggered the release of the Relevant Released Amount in the sum of £15m under clause 6.5, which was the Maximum Released Amount for the First Claim Period.
9.	On 11th June 2004 GEC issued and served proceedings against the Warrantors in respect of a number of the warranty and tax covenant claims which had been assessed by Mr Boyd QC.  The claim form valued the warranty claims that were being pursued at not less than £5.02m and €54,597.22.  GEC also gave notice of certain contingent claims valued at €3.32m and $71m, and further tax covenant claims amounting to some £6m were notified on 28th January 2005.
10.	On 22nd October 2003 the Warrantors and the Sellers’ Representative had themselves commenced proceedings against GEC for a declaration that on the true construction of clause 8.3 of the Agreement the maximum liability of the Warrantors following the release of the £15m plus interest from the Retention Account on 1st October 2003 was limited to the sum of £10,081,665.75, being the amount still retained in the Retention Account after that date.  On 25th June 2004 GEC issued a Part 20 Claim Form against the Warrantors and the Sellers' Representative, seeking a declaration that pending the settlement or determination of their claims in the 2004 action the Part 20 Defendants were not entitled to any further releases of funds from the Retention Account.  These are the proceedings which raise the issue of construction that I have to decide.
The Issue
11.	The Part 20 Claim Form sets out the background already referred to, including the issue of the claim for breach of warranty in June 2004.  GEC contends that, on a proper construction of clause 6.2(b) of the Agreement, the amount held in the Retention Account may not be reduced at the end of the Second Claim Period by the Second Claim Period Maximum Released Amount of £5m or any lesser sum.  Clause 6.2 applies, it is said, because, although the claims which were assessed by Mr Boyd QC and now form the subject-matter of proceedings were made during the First Claim Period, no claims of any kind were made in the Second Claim Period.  The consequence of this would be to reduce the amount in the Retention Account to £5m but for the qualification introduced by the words “and there are no First Claim Period Retention Claim(s) that have not been determined or settled in accordance with clause 6.6 as at the end of the Second Claim Period”.  GEC’s case is that these words make it clear that a claim notified to the Warrantors during the First Claim Period which remains unsettled or undetermined as at the end of the Second Claim Period prevents the further release of funds from the Retention Account which would otherwise have occurred at the end of that period.  On 22nd September 2004 Master Price ordered this to be tried as a preliminary issue.
12.	The Warrantors’ argument on this point of construction is summarised in their Defence and second Part 20 Claim served on 27th July 2004.  They point in paragraph 3 to the provisions of clauses 6.3 to 6.5, which set out the mechanism for calculating whether there is to be a payment from the Retention Account at the end of any particular claim period.  Clause 6.3 requires GEC (as already mentioned) to provide a bona fide and reasonable estimate of the maximum aggregate amount of each Retention Claim.  Subject to any revision in that estimate prior to the end of the relevant claim period, the Warrantors may then serve a notice disputing the value of the claim and, failing agreement, clause 6.4 provides for the dispute to be referred to the Independent Counsel.
13.	In paragraph 3.4 of their Defence the Warrantors accept that in accordance with clause 6.5 the remit of the Independent Counsel is confined to determining whether the value put on the claim by GEC is fair and reasonable in all the circumstances.  They then refer to the Adjudicated Estimate arising from his determination of what is fair and reasonable and to the provision in clause 6.5 for the release of any balance of the relevant Claim Period Maximum Released Amount after deducting the Agreed Retention Amounts or the Adjudicated Estimate, as the case may be.  
14.	The construction and effect of clause 6.2(b) relied on by GEC is denied for two reasons.  First (as a matter of construction) it is said that it runs counter to the tenor of the Agreement as a whole, particularly when there has been an Adjudicated Estimate.  I shall come in a moment to the detail of Mr Lyndon-Stanford QC’s submissions on this point, but in essence what he contends is that the overall scheme of the Agreement, and in particular clause 6, is to enable all warranty claims made within the time limited by clause 8 (i.e. the First Claim Period) to be valued, absent agreement, by the Independent Counsel, and for his determination of value to control the release of the sums from the Retention Account in accordance with the timetable set out in the definition of Relevant Released Amount.  The consequence of a determination by the Independent Counsel that a particular claim has a certain value leading to the release of the Relevant Released Amount, whilst not preventing GEC from pursuing the claims in litigation, does effectively limit the fund out of which those claims may be satisfied if ultimately successful.  The Sellers’ Representative is able to distribute the released monies to the shareholders it represents and any claims against the Warrantors are limited to the amount (if any) remaining in the Retention Account at the time when the claim comes finally to be determined.  To allow a claim made in one period and agreed or adjudicated upon under clause 6.4 to be carried over against the Maximum Released Amounts for subsequent periods would, it is said, destroy the intended structure of the scheme.
15.	As an alternative to this, the Part 20 Defendants also seek rectification of the Agreement on the basis of an alleged “agreement in principle” made between solicitors in about December 2001.  It is pleaded that the solicitors agreed that the mechanism of the Independent Counsel was intended to weed out bogus claims and that, once he had made his assessment of the value of the claim, this was to be taken into account in calculating whether, and if so what, sums were to be released from the Retention Account, regardless of the period in which the calculation took place and regardless of whether or not claims were advanced in any subsequent period.
16.	The claim for rectification formed no part of the preliminary issue ordered by the Master and proceeds, of course, on the assumption that GEC is right about the construction of clause 6.2(b).  If it arises, it will require to be determined at a full trial, and I need say no more at this stage than that the allegations of the agreement in principle or any common continuing intention in those terms are denied by GEC.
17.	Notwithstanding this, Mr Lyndon-Stanford invited me to read and admit the witness statement of Mr Malcolm MacDougall (a solicitor at Lovells) dated 4th November 2004, which describes the alleged agreement in principle or understanding referred to in the pleading.  He submitted that it was part of the relevant matrix of fact surrounding the making of the Agreement and was therefore admissible as an aid to construction.  Alternatively, he said that it would assist me to know for whose benefit clause 6 had been introduced.  I refused to admit this part of  the witness statement, although its contents are doubtless summarised in the paragraphs of the Defence where the claim for rectification is pleaded.  It seemed to me that although the Court’s approach to questions of construction has undoubtedly been refined following the decisions of the House of Lords in Mannai Ltd v. Eagle Star Life Assurance Co Ltd [1997] AC 749 and Investors Compensation Scheme Ltd v. West Bromwich Building Society [1998] 1 WLR 896, it does not extend to admitting as part of the factual background the previous negotiations of the parties and statements of what they intended the document to mean:  see ICS v. West Bromwich Building Society per Lord Hoffmann at page 913B.  It is also clear from the provisions of clause 6 themselves that I am not dealing here with a contractual provision which was inserted solely for the benefit of one or other of the parties.  Clause 6 contains complicated machinery for the valuation of claims and the progressive release of monies from the Retention Account.  It therefore attempts to accommodate an obvious tension between the desire on the part of the Sellers’ Representative to have the retained sum of £25m released as quickly as possible and the obvious insistence by GEC that it should have some form of security and redress for any warranty or tax covenant claims.  The real issue in this case is where the balance between those two competing interests was struck by the draftsman of the Agreement.  Mr MacDougall’s evidence is directed to that issue rather than to any question of for whose benefit the clause was inserted.  I therefore took the view that this part of his evidence was inadmissible.
Clause 6.2(b)
18.	I turn, then, to consider the issue of construction which has arisen, and it is important at the outset to identify the measure of common ground which exists between the parties in relation to the clause 6 machinery.  Mr Dutton QC accepts that the Agreement defines a “claim” as including any claims arising under the warranties or the tax covenant (see clause 1), but that, subject to this, clause 6 identifies four claim periods, and any warranty claims must be made within the first such period.  He also accepts that in the absence of any claims being made by GEC in any of the claim periods, there would be a progressive reduction in the £25m held in the Retention Account, culminating in the release of the balance in 2008.  If, however, a claim is made in a relevant claim period, then clause 6.3 applies, which brings into operation the machinery for assessing the value of the claim, if necessary by reference to the Independent Counsel.  Clauses 6.3 to 6.5 provide, he submits, a perfectly intelligible mechanism for keeping in the Retention Account until the ultimate disposal of the claim what is assessed to be the value of the claim occurring in that period.  The determination may result in an assessment of value which exceeds the Maximum Released Amount for the claim period in question, thereby preventing any release of funds to the Sellers’ Representative.  Equally it may result in a reduction in the sums estimated and a partial release of the relevant stepped payment.
19.	Where, however, he parts company with Mr Lyndon-Stanford is in relation to the suggestion that clauses 6.3 to 6.5, read alone, indicate that the Independent Counsel’s assessment of the value of the claim should be treated as in some way determining GEC’s access to any other part of the Retention Account monies for the purpose of satisfying a claim which has been valued as part of that assessment.  He relies on the limitation of the Warrantors’ liability under clause 8.3 to the monies remaining in the account as support for his argument that a determination of value under clause 6.5 of the Agreement was not intended to do more than to strike a balance between the desire on the one hand of the Sellers’ Representative and the Warrantors for an early resolution of disputes and release of funds and the requirement by GEC to have an effective means of enforcing its warranty and tax covenant claims.  That balance was, he submitted, struck by allowing for the release of the Relevant Released Amount at the end of every claim period, in accordance with the first paragraph of clause 6.5, but preventing any further releases of funds at the end of the Second, Third and Fourth Claim Periods, if no further claims were made in those periods and there remained a claim outstanding from an earlier period at that time.  
20.	For this Mr Dutton relies on the express terms of clause 6.2(b).  He submits that the reference in the fourth line to First Period Retention Claims that have not been determined or settled in accordance with clause 6.6 prevents the payment of either the greater or the lesser sum specified until after judgment in the 2004 action brought to enforce those claims, regardless of the amount at which they have been estimated by the Independent Counsel.  The clause, he says, therefore links in to the third paragraph of clause 6.5 and clause 6.6 itself, which both contemplate the continuation of a claim by action following a determination by the Independent Counsel.  Clause 6.2(b) also recognises the obvious fact that a claim commenced within the limitation period laid down under clause 8.1 is unlikely to be finally determined within the meaning of clause 6.6 until well into, or even after, the expiry of the various claim periods.  A claim which was meritorious (but perhaps undervalued by the Independent Counsel) would therefore go unsatisfied unless some restriction can be placed on further releases from the Retention Account.  This is what clause 6.2 is intended to achieve.
21.	Mr Lyndon-Stanford’s starting point is to accept two things:
i)	that clause 6.2(b) of the Agreement, literally construed, does have the meaning and effect for which Mr Dutton contends;  and
ii)	that a claim pursued by action following a determination by the Independent Counsel may be satisfied out of the funds remaining in the Retention Account at the time when the claim comes to be finally determined or settled under clause 6.6, regardless of whether the sums remaining in the account at that time represent the Maximum Released Amount for the period in which the claim was first notified.  This follows from the reference in clause 6.6 to the discharge of the amounts agreed or determined from “any amount” retained in the account at the relevant time.
22.	But the argument for the Part 20 Defendants is that it is wrong to seek to construe clause 6.2(b) (or, for that matter, any part of clause 6.2) in isolation from the rest of the Agreement.  The claims made by GEC during the First Claim Period attracted the provisions of clauses 6.3 to 6.5 and, as a consequence of the nil assessment of value by the Independent Counsel, the entire First Claim Period Maximum Released Amount fell to be paid out to the Sellers’ Representative in accordance with the first paragraph of clause 6.5, without regard to the continued existence of the claims.  It is adjudication by the Independent Counsel which controls the release of the first part of the retention, not the headline amount of the claim.
23.	None of this is in dispute, but Mr Lyndon-Stanford stresses that, on GEC’s construction of the Agreement, a different position pertains at the end of the Second Claim Period as a result of clause 6.2(b).  There is, he submits, no logic in this.  If there had been tax claims made in the Second Claim Period, then clause 6.2(b) would have had no application and, subject to the value placed on the Second Period claims, a further £5m of the retained fund would have been released.  Clause 6.2 would not have applied at all unless and until a claim period passed free of claims in that period.  Only in that event would any brake have been placed on the further release of retained funds.
24.	There clearly are oddities produced by the provisions of clause 6.2.  At first sight it does seem strange to allow the existence of outstanding claims to impose a restraint on further releases from the Retention Account in the event that there is no claim in a particular claim period, but not to impose any such restraint as part of the machinery of clauses 6.3 to 6.5.  Clause 6.2(b) has the effect of re-imposing GEC’s estimate of the value of its claim for purposes of calculating the amount to be released at the end of the Second Claim Period, even though (as in this case) that value has been superseded by the Independent Counsel’s Adjudicated Estimate for the purpose of assessing the Relevant Released Amount at the end of the First Claim Period.  Mr Lyndon-Stanford submits that it makes no sense for the Adjudicated Estimate to operate so as to allow the release of £15m at the end of that period, but not to be determinative of the release of subsequent tranches of Maximum Released Amounts.
25.	He also gives other examples of the possible consequences of the operation of clause 6.2(b).  On the strict construction of the clause, no part of the £5m Maximum Released Amount for the Second Claim Period could be released from the Retention Account, even if the outstanding claims by GEC were for less than £5m.  The same result would follow if the assessment of the claims by the Independent Counsel had produced an Adjudicated Estimate of £2m (rather than nil).  The claim would still prevent any release of the £5m from the Retention Account until settled or determined in accordance with clause 6.6. 
26.	Another example given of what is said to be the commercial illogicality of clause 6.2 concerns the Third Claim Period.  Mr Lyndon-Stanford pointed out that if GEC were to make a tax claim in the Third Claim Period, clause 6.3 would govern the position at the end of that period in respect of that claim and (subject to the adjudication procedure) the Relevant Released Amount would be released at the end of that period under clause 6.5 without regard to the outstanding First Claim Period retention claim.  This is difficult to reconcile, he says, with clause 6.2(b), which in terms prevents any further releases from the Retention Account pending the final determination of the outstanding First Claim Period retention claims.  This is now a real issue, because GEC have made tax covenant claims in the Third Claim Period and a Dispute Notice has been served by the Warrantors under clause 6.4.  Mr Dutton, I think, accepts that the result of an adjudication of the claims by the Independent Counsel in a sum which is less than £2.5m will result in the release of the balance of that sum as the Relevant Released Amount for the Third Claim Period.  Clause 6.2(b) will therefore be limited in its operation to restricting the release of the Second Claim Period Maximum Released Amount of £5m until the final disposal of the outstanding First Claim Period retention claims.
27.	The Warrantors’ case is that this merely serves to illustrate the tensions and inconsistencies in the Agreement.  Mr Lyndon-Stanford submits that the words in clause 6.2(b) beginning with “and there” at the end of the second line and ending with the words “Claim Period” at the beginning of the fifth line are repugnant to the scheme and to the commercial sense of the Agreement as a whole and that the Court should delete them as part of the process of construction, so that clause 6.2(b) reads as follows:
“If the Purchaser or Designated Purchaser has not made any Second Claim Period Retention Claim(s) prior to the expiry of the Second Claim Period . . . there shall be released to the Sellers' Solicitors on behalf of the Sellers on the second Business Day following the expiry of the Second Claim Period, an amount equal to the lesser of (i) the Second Claim Period Maximum Released Amount and (ii) such amount as leaves in the Retention Account an amount equal to £5,000,000”
28.	The Court will, he submits, carry out this kind of pruning exercise if it is necessary in order to make commercial sense of the document or to iron out inconsistencies in its provisions.  He referred me to the decision of the House of Lords in Adamastos Shipping Co Ltd v. Anglo-Saxon Petroleum Co Ltd [1959] AC 133, where what was at issue was a charter-party which expressly incorporated, and took effect subject to, the provisions of the US Carriage of Goods by Sea Act 1936.  Section 5 of this Act stated that “the provisions of this Act shall not be applicable to charter-parties”.  The House of Lords rejected this as meaningless and of no effect in the context of the express incorporation of the provisions of the Act into a charter-party.  I was also taken to the decision of the House of Lords in Investors Compensation Scheme Ltd v. West Bromwich Building Society (supra), where the words in the claim form: “Any claim (whether sounding in rescission for undue influence or otherwise) that you have” were construed to mean: “Any claim sounding in rescission (whether for undue influence or otherwise) that you may have”.  Although not involving the deletion of several lines of text, this is relied upon as an example of the Court’s power to discard words and existing sentence construction in order to get at what the parties must have meant.
29.	Mr Dutton accepts that there are anomalies in the way that clause 6.2 works, but he submits that I would not be justified in excising part of each sub-clause in clause 6.2 in order to achieve what Mr Lyndon-Stanford suggests was the intention of the parties.  Although I was initially sympathetic to the Warrantors’ argument, I have come to the conclusion that Mr Dutton is right.  The phrase which fell to be construed in ICS was clumsily expressed and led to the majority in the House of Lords concluding that a drafting error had occurred.  This is made clear by Lord Hoffmann in his speech at page 914E, where he said this:
“Finally, on this part of the case, I must make some comments upon the judgment of the Court of Appeal. Leggatt LJ said that his construction was ‘the natural and ordinary meaning of the words used’. I do not think that the concept of natural and ordinary meaning is very helpful when, on any view, the words have not been used in a natural and ordinary way. In a case like this, the court is inevitably engaged in choosing between competing unnatural meanings. Secondly, Leggatt LJ said that the judge’s construction was not an ‘available meaning’ of the words. If this means that judges cannot, short of rectification, decide that the parties must have made mistakes of meaning or syntax, I respectfully think he was wrong. The proposition is not, I would suggest, borne out by his citation from Alice Through the Looking Glass. Alice and Humpty Dumpty were agreed that the word ‘glory’ did not mean ‘a nice knock-down argument’. Anyone with a dictionary could see that. Humpty Dumpty’s point was that ‘a nice knock-down argument’ was what he meant by using the word ‘glory’. He very fairly acknowledged that Alice, as a reasonable young woman, could not have realised this until he told her, but once he had told her, or if, without being expressly told, she could have inferred it from the background, she would have had no difficulty in understanding what he meant.”
30.	In this case, however, we are dealing with a clause which, as a matter of language, contains no apparent oddities of expression and has an obvious and agreed meaning.  The objection to it is that it does not fit easily with what follows in the remaining parts of clause 6, but that assumes that the clause 6.3 to 6.5 machinery was intended to determine conclusively what monies should be left in the Retention Account in order to meet outstanding claims.  If that was what was intended, it could have been achieved by a very simple provision in clause 6.2 to the effect that if no retention claims were made in the relevant claim period, then the claim period Maximum Released Amount would be payable at the end of that period.  This is in fact what clause 6.2 provides in relation to the First Claim Period:  see clause 6.2(a).  But the remainder of clause 6.2 has, it seems to me, been carefully drafted so as to include the qualification which is objected to in respect of each of the subsequent claim periods:  see clause 6.2(b) to (d).  This shows consistent drafting throughout the sub-clause.  It is not indicative of an error.  Indeed it is difficult to see how the draftsman could have included such elaborate provisions either unconsciously or by mistake.
31.	The drafting of clause 6.2 makes provision for outstanding claims from earlier claim periods to be maintained against the Maximum Released Amount attributable to each subsequent period in which there are no further retention claims made.  If such claims are made during that period, then they have the effect of triggering the machinery of clause 6.3.  The clause therefore gives GEC the benefit of a limited restraint on the release of the Maximum Released Amount for any period in which there are no claims, but otherwise allows clause 6.3 to determine what should remain in the Retention Account.  Although the operation of these provisions can produce what appear at first sight to be anomalies, there are, in my judgment, well-recognised dangers for a Court in seeking to impose its own views or preconceptions as to what the parties are likely to have intended, when the language used is clear and there is nothing in the factual background which points decisively away from that meaning.  For an integral part of the provisions of clause 6.2(b) and the remaining sub-clauses to be regarded as repugnant, they must be clearly inconsistent with the operative provisions of the remainder of the Agreement, so that the Court is left in no doubt that they were either inserted in error or were not intended to have any effect.  The decision in Adamastos Shipping is a good and obvious example of this.  I prefer to approach the construction of clause 6.2(b) in much the same way as that suggested by Chadwick LJ in City Alliance Ltd v. Oxford Forecasting Services Ltd [2001] 1 All ER (Comm) 233, where at page 237 he said this: 
“It is not for a party who relies upon the words actually used to establish that those words effect a sensible commercial purpose. It should be assumed, as a starting point, that the parties understood the purpose which was effected by the words they used; and that they used those words because, to them, that was a sensible commercial purpose. Before the court can introduce words which the parties have not used, it is necessary to be satisfied (i) that the words actually used produce a result which is so commercially nonsensical that the parties could not have intended it, and (ii) that they did intend some other commercial purpose which can be identified with confidence. If, and only if, those two conditions are satisfied, is it open to the court to introduce words which the parties have not used in order to construe the agreement. It is then permissible to do so because, if those conditions are satisfied, the additional words give to the agreement or clause the meaning which the parties must have intended.”
The same principle must, I think, apply to a construction which involves the deletion of words.
32.	Despite Mr Lyndon-Stanford’s attractive submissions, I am not therefore persuaded that I have the material from which I can be satisfied that I ought to give clause 6.2(b) anything but its ordinary meaning and effect, as drafted.  If the clause is to be in effect remodelled, that will have to be on the basis of the claim for rectification.  
Conclusions
33.	I will therefore make the declaration sought by GEC with a suitable amendment to reflect the existence of the Third Claim Period retention claims which have now been made.  I will, if necessary, hear Counsel on the form of the order and on any consequential matters which now arise.