THE SUPREME COURT

Record Nos  205/99
	           214/99
Murphy J
Murray J
McGuinness J
Hardiman J
Geoghegan J

Between:

UPM Kymmene Corporation, Rauma Repola (Ireland) Limited,
Brooks Thomas Limited, Brooks Haughton Limited
and Brooks Hanley Limited

									Plaintiffs/ Appellants

AND

BWG Limited

									Defendant/ Respondent

Judgment of Mr Justice Francis D Murphy Delivered the  4th  Day  of April, 2000 [nem diss.]
_________________________________________________________________________

The primary issue in these proceedings, and the only issue in the appeal to this Court, is whether BWG Limited (under its then name of Brooks Watson Group Limited and hereinafter referred to as “the Vendors”) disclosed to UPM Kymmne Corporation (formerly Rauma Repola OY and hereinafter referred to as “the Purchasers”) certain deficiencies in the pension funds of Brooks Thomas Limited, Brooks Haughton Limited and Brooks Hanley Limited (which were subsidiary companies of the Vendors and are hereinafter referred to as “the Companies”).
The issue arises in this way.  By an agreement in writing dated the 21st day of December, 1981, made by the Vendors of the one part and the Purchasers of the other part (and therein so described)  the Vendors agreed to sell and the Purchasers agreed to purchase the entire issued share capital of and in the Companies for a sum of £675,474 and to secure the discharge by or on behalf of the Companies of sums totalling not more than £2,275,000 and certain other short term loans.  The take-over agreement contained in Clause 4A thereof the provision following:-

“The sale and purchase of the shares hereby agreed upon is made on the basis of the balance sheet and the vendors jointly and severally represent and warrant to the purchaser (to the intent that the provisions of this clause shall continue to have full force and effect notwithstanding completion and shall also be binding upon their successors) in the terms set out in Part 1 of the second schedule but subject to the disclosure listed in the Disclosure Letter ....”

The warranties contained in Part 1 of the Second Schedule are set out in 34 paragraphs and numerous subparagraphs thereof.  The warranty crucial to the present case is that contained in paragraph 25 which is in the following terms:-

“25	The rules of the retirement benefit and other pension schemes or funds now in existence (if any) will pending Completion remain unaltered, the Company will after Completion have no liabilities under such schemes or funds except to persons who are or were full time employees of the Company or the widows and dependants of such persons and no sums have since the Balance Sheet Date or will in future become payable by the Company to secure or otherwise fund in full any pension or other benefit in respect of service prior to Completion”.

The Disclosure Letter had been defined in the preliminary section of the take-over agreement in the following terms:-

“E	The Vendors have disclosed to the Purchaser certain exceptions to the warranties hereinafter contained by letter of even date herewith from the Vendors’ Solicitors to the Purchasers’ Solicitors.”

Furthermore, Part 1 of the Second Schedule contains a specific warranty in relation to the Disclosure Letter in the following terms:-

“33	All information contained in the Disclosure Letter was when given and the statements contained in the Preliminary to this Agreement are true and accurate in all material respects, all other information and documents concerning the Company supplied in writing to the Purchaser or its Accountants any Vendor, any Director, the Vendors’ and the Company’s Auditors within the last twelve months was when given true and accurate in all material respects in relation to information given in the course of the Vendors’ enquiries into the affairs of the Company to the best of the knowledge and belief of the Vendors reasonable Enquiries having been made and there is no fact or matter which has not been disclosed in the Disclosure Letter which renders any such information or documents untrue or misleading at the date of this Agreement which on the basis of the utmost good faith ought to have been disclosed to an intending purchaser of shares of the Company and the Vendors will not procure or permit any act or omission prior to Completion which would render untrue or incorrect as at Completion any such information or documents or any of the warranties herein contained.”

In the Disclosure Letter dated the 8th September, 1981 and annexed to the agreement the solicitors on behalf of the Vendors refer expressly to paragraph 25 of Part 1 of the Second Schedule to the agreement and state as follows:-

“(A)	Rules of the Thomas’ Retirement Benefit and other pension schemes or funds now in existence will, pending completion, remain unaltered except for developments at present under discussion and disclosed in Appendix 4 hereto, which also states the basis on which benefits are being funded.

(B)	Thomas’ has agreed to fully fund by 31 December 1981 the entitlement of a former director to a pension of £7,000 per annum.  Full provision for this liability was made in the accounts of Thomas at the 31 December 1980 under the heading of Provision for Retirement Benefits.  Certain payments have already been made in 1981 and a further payment to Irish Pensions Trust Limited on 31 December 1981 of an estimated £17,100 is required to complete the funding.”

Appendix 4, to which reference is made in the Disclosure Letter, comprises three letters (the IPT Letters) from Irish Pensions Trust Limited to the secretary of the Vendors, one dated the 27th August, 1981 and two dated the 3rd September, 1981.  

Several years after the sale and purchase of the shares had been completed - and at a stage when the shares in the Vendors were themselves the subject matter of a take-over bid - the solicitors on behalf of the Purchasers wrote to the Vendors complaining that the pension funds maintained by each of the three companies was under funded at the date on which the sale had been completed and that accordingly the Vendors were in breach of the warranty herein before referred to.  It was the contention of the Vendors in the correspondence and in the subsequent proceedings that the Vendors were obliged to make good to the Purchasers  the amount - estimated at £2.2 million - which would have been required to make good the alleged deficiency on the pension schemes maintained by the Companies.  In those circumstances three issues arose, namely:-

1	The nature and extent of the warranty given by the Vendors.

2	The nature and extent of the disclosure made by the Vendors.

3	The extent of the loss (if any) suffered by the Purchasers.

The warranty contained in the take-over agreement has already been quoted but the crucial words thereof were as follows:-

“ .... No sums .... will in future become payable by the company to secure or otherwise fund in full any pension or other benefit in respect of service prior to completion.”

The Vendors readily concede that in fact sums would have and did  become payable by the Companies to secure benefits in respect of services provided prior to completion.  What the Vendors contend is that this situation had been made known to the Purchasers by the IPT Letters which were annexed to the Letter of Disclosure.  As the contents of the those letters, but most particularly the letter dated 27th August, 1981 (the August Letter), were central to the argument addressed to this Court and the focus of much of the evidence in the High Court it may be helpful to attach a photostat copy of that letter to this judgment. 

Obviously this three page letter gives much helpful and relevant information with regard to the pensions maintained by the Companies.  It sets out the number of employees of each of the three companies for the years 1979-1981; total pensionable salaries payable to those employees during each of those years and the funding rate for the year 1981 as a percentage of those salaries.  It is apparent that Brooks Thomas Limited was the most substantial of the three Companies.  It had over 200 hundred employees whose salaries during the relevant period were in the order of £1.25 million per annum.  Brooks Haughton Limited had 50 employees or less with pensionable salaries in the order of £250,000.  Brooks Hanley Limited had less than 25 employees and pensionable salaries of some £100,000.
The August letter dealt with the “staff pension fund” of each of the three companies.  The purpose of the letter - as explained in the opening paragraph thereof - was to report on the results of the triennial valuation of the pension funds as of the 1st January, 1981.  The report explained that the funding rate was that “recommended” following the previous valuation in July, 1979.  It is clear that the recommendation of funding rates was the task of the pension advisors although the final paragraph of the letter demonstrated that the Companies had an input in determining what funding rates would be employed in fact.  The pension advisors referred to the fact that a funding rate of 12.25% of pensionable salary had been recommended for Brooks Thomas Limited with effect from January, 1979, but that the Vendors had decided to achieve that rate over a five year period by a “stage” increase of 1%  per year up to January, 1984.  On that date, as the report pointed out “the recommended funding rate” would be in force.  Whilst the advisors explained in their report that, subject to certain conditions, there was nothing unusual about introducing the recommended funding rate over a five year period it does appear, first, that there was a dramatic rise in the funding rate and secondly that, by definition, during the period of the introduction of the full recommended rate a lesser figure was being contributed.  The 1981 report advised a further increase in the  funding rate for Brooks Thomas Ltd from 12.25% (which had not yet been attained) to 13.54% in the following terms:-

“The valuation results show a minor increase in the 1978 recommended funding levels to the following.”

It then goes on expressly to recommend the higher rate.
In my view those terms clearly relate the funding rate to the value of the fund as a means of discharging the obligations which it was designed to meet.  No doubt the Vendors or any other employer could for some period, as the Vendors did, make annual contributions which were less than those recommended by the experts.  Alternatively employers might, in theory at least, make excessive annual contributions to the fund.  This theoretical possibility was dismissed by the trial Judge having regard to the evidence given of the financial circumstances of the Companies in the years preceding the take-over.  That evidence revived memories of the depressing economic conditions which existed in Ireland, and elsewhere, throughout the 70s and early 80s.  Those conditions presented particular difficulties in the building industry in which the Companies were engaged.  It was common case that they were in desperate financial circumstances.  Furthermore, the financial problems of the Companies were well known to the Purchasers.  The Purchasers are, and were, a very substantial company engaged in the supply of timber and forest products in Finland and elsewhere.  They had had very substantial dealings with the Companies and had, apparently, considerable sympathy with their problems.  Such was their relationship, that the Companies or the Vendors borrowed substantially from the Purchasers and ultimately it was the Vendors who approached the Purchasers and invited them to take-over the Companies.  Both parties sought to facilitate this arrangement.  The Vendors readily agreed that the Purchasers could retain as their financial advisors, in relation to the take-over, the firm of accountants who acted as auditors to the Companies.  The take-over was structured in such a way that the agreement for sale was approved in principle in September, 1981, and finally implemented in pursuance of a “put and take option” in December of that year so as to enable the Vendors to secure a sufficient number of redundancies to make the take-over a viable proposition.  It is inconceivable that the Companies had overfunded the pension schemes or that the Purchasers might have believed that this was so.  

In my view it is clear beyond debate that the principal pension scheme had been and was being at the time of the take-over very significantly under funded with the inescapable consequence that the assets comprised in the fund would be less than the amount considered by the advisors necessary and appropriate to discharge the obligations which might be expected to fall thereon.  This proposition was conceded by Mr Botterill (Day 6 Q.165) and accepted by the learned trial Judge.  On the other hand that information did little to quantify the extent of the shortfall.  The Vendors say that this information is set out explicitly elsewhere in the report. 

The August Letter is divided - as the photostat copy demonstrates - into four paragraphs designated with the capital letters ABC and D.  Paragraphs A and B deal essentially with the funding rates already mentioned.  Paragraph C sets out the numerous assumptions on which the valuations as of the 1st January, 1978, and 1st January, 1981, were based.  The selection of those assumptions, no doubt, required considerable expertise and their application might involve sophisticated actuarial calculations but their exposition in the letter is a helpful reminder that a fund was being established, and its valuation made, by reference to its capacity to discharge obligations which might be ascertained with a high degree of probability but well short of certainty.  Little purpose would be served in expressing the value of a pension fund in financial terms - however large:  the vital information is the relationship between the existing assets as a fraction (or multiple) of liabilities which might be said to have accrued.  It is this reality which gives importance to the brief statement with which paragraph D concludes, namely:-

“The results for each Company were as follows:-

Brooks Thomas Ltd 		- 	33%
Brooks Haughton Ltd		-	53%
Brooks Hanley Ltd		-	54%”

Counsel for the Vendors contended, and the witnesses on their behalf asserted, that this represented a clear and unequivocal disclosure of the extent to which the pension schemes were under funded.  Mr Breffni Byrne, an experienced accountant, but not an actuary or a pensions expert, had explained the manner in which pension scheme results were presented (Day 8 Q.227 - 231) in the following terms:-

“My understanding was that when they were being valued, that the actuary would seek to value the accrued liability of the scheme and would then attempt to value the assets of the scheme and to relate  the two of them with 100% implying or suggesting that the accrued liabilities had been fully funded at that date and a figure of 33% suggesting that the assets only covered 33% of the accrued liability and that accordingly, there was a significant under funding.”

With his attention directed to paragraph D on the third page of the Report the following interchange took place:-

“Q	How did you know that was a valuation?

A	Well, it’s, within the business community, it’s accepted that a way of measuring the solvency or otherwise of a pension fund is in percentage terms by relating the assets and liabilities.  In lay man’s terms - could I emphasise this was in lay man’s terms and this would be in accountants terms and I was aware of the esoteric calculations that the actuaries get in to but certainly in accountants terms, my understanding of it as a practising accountant was that the measure of a pension scheme was the extent to which the assets funded the accrued liabilities at that date.”

As to the extent of the shortfall Mr Byrne said:-

“When I read the section, my lord, it was quite clear to me and really this is fairly obvious that there is,  that the pension scheme was funded to the extent of 33% i.e. that there was an under funding to the extent of 67%.  And given the amounts involved, namely the size of the payroll, they would be talking about very significant amounts of money and very significant additional payments which would have to be made in the future of the company.  That was my understanding.”

Apart from saying that the under funding was “fairly obvious” Mr Byrne had said as follows:-

 “This would have been fairly obvious, my Lord to me the type of things as an investigating accountant, something you would do in relation to looking at something like that as a rule of thumb, you would say  to what extent is the pension scheme funded and this year is 33% so it is obviously significantly under funded and it really jumps straight off the page and says something to me that would have been fairly obvious.”

The actuary who gave evidence on behalf of the Vendors, Mr McNamee, was equally emphatic as to the information conveyed by the Report and the clarity with which it was expressed.  He said (Day 7 A 139):-

“The results then are quoted in percentage terms and may be to take Brooks Thomas as an example, it tells me in the case of Brooks Thomas, having regard to past service liabilities based on pensionable salaries at that time, that the assets of the fund were equivalent to 33% of past service liabilities based on salaries at that time and that there was nothing in the fund to meet future salary increases.  That it wasn’t the .......... that it was a very poorly funded pension, that we have  1/3  of what we need for current salaries and absolutely nothing for future salary increases.  So, all of that left me absolutely no doubt whatsoever;  it really could not have been clearer, it was sort of up in lights on the wall, it could not have been clearer that this was a pension scheme with very serious under funding which under funding is being dealt with in the contribution rate over a 40 year period which may bring you back to the question you asked me at the start.”

The actuaries who gave evidence on behalf of the Purchasers, Mr Botterill and Mr Delaney disagreed vehemently.  Mr Botterill expressed the view that the IPT Letters did not contain adequate information on which to advise a client as to the existence of a deficit or surplus in the funds (Day 5 Q 280).  Mr Delaney agreed and urged (Day 7 Q 305) that if it was intended to say that there was an under funding that would have been a simple and correct thing to say that the funds were “under funded”.
The grounds on which the Purchasers challenge the adequacy of the disclosure made by the Vendors may be summarised as follows:-

1	That if the Vendors had been seeking to withdraw or vary their express warranty to the effect that the accrued liabilities of the scheme had been funded to date that there was a simple and obvious method of doing so.  The Vendors should have stated unequivocally that the schemes were “under funded” and identified the extent of the under funding.

2	That even if the information expressed in the final paragraph of the Report would have been otherwise sufficient warning that the terms in which that subparagraph was introduced were so confusing and misleading as to negative the value of the information which it might otherwise have conveyed.

3	That the failure to express the position with clarity and/or the introduction of ambiguous material constituted a breach of the Vendors obligations to exercise the utmost good faith in preparing the contents of the Disclosure Letter.

All three arguments involve to a greater or lesser extent the analysis of the expression which precedes the results attributed in percentage terms to each of the three Companies.  That expression is as follows:-

“A further standard test was also applied to the valuation to determine the extent to which pension benefits secured to date would be reflective of a members service and the test formula was t/n x Pensionable Salary at 1.1.1981, where
	
			t= service with the Group to 1.1.1981
			n= potential service with the Group to Normal Pension Date.”

That sentence was described by the Appellants as being ambiguous, confusing and indeed nonsensical.  Put simply it was argued that the formula “t/n” would provide a fraction which if multiplied by Pensionable Salary (or indeed the “pension”, as the Respondents conceded that it should be,) would result in a monetary sum and not a percentage as the results would appear to indicate.  The Appellants complaint in this regard was substantially conceded.  There is no direct nexus between the formula quoted and the result set out.  It was explained that the formula was merely one ingredient, albeit a significant one, in the procedures used in calculating the tabulated results.

Whilst I would readily accept that different terminology could have been used or that the estimated liabilities could have been contrasted with the actual valuation of the funds in addition to expressing one as a fraction or percentage of the other.  Indeed the Report might have been laid out in such a way as would have highlighted the shortfall in the funds.  In particular I agree that the inclusion of the incomplete or defective formula by which the results were introduced was regrettable and might have given rise to a query as to what the formula meant.  However,  the actual results set out, particularly in the context of the letter as a whole and the trading circumstances of the three Companies, should not have left any doubt whatsoever as to the status of the funds.  In her judgment the learned trial Judge reached the following conclusion:-

“Reading the description of the standard test and the result of the standard test as set out in the IPT Letter of 27th August 1981 objectively in the light of the expert actuarial evidence as to the process involved in the standard test, in my view, what was represented by the Vendor through the medium of that letter was that as of 1st January 1981 the staff pension fund was funded to the extent of 33% in the case of Thomas, 53% in the case of Haughton and 54% in the case of Hanley to secure benefits accrued in respect of service prior to 1st January 1981 on a discontinuance, rather than an ongoing funded level, basis, that is to say, not allowing for future salary increases. That disclosure, in my view, was unambiguous, so that there is no need to resort to the contra proferentem rule and it properly and in a meaningful way qualified the statement in paragraph 25.  Both the statement and the disclosure were directed to the same objective: stating the extent to which the relevant scheme benefits were secured in respect of service prior to a specific date.”

The learned High Court Judge was at pains to explain the significance of the controversial formula.  She was satisfied on the evidence that the reference to that formula - properly understood - expressed a preference for one of two options in determining potential liability under the pension scheme. To that extent the information was of value and significance to the informed observer but the vital point, as I see it, is the clear finding by the learned High Court Judge, with which I respectively agree, as to the meaning of the percentages set out opposite each of the three Companies in the August letter.  That finding is not subject to the qualification that the Purchasers would have required expert advice in the appreciation thereof nor is it suggested, in that regard, that this information merely put the Purchasers on inquiry.  The Purchasers were being unequivocally advised that, notwithstanding the express terms of the warranty, the funds were deficient to meet the liabilities which might be said to have accrued thereon at the date of the valuation and at the same time the Report was recommending further increases in the funding which would be necessary over the term of the fund to ensure its viability.  On that basis the Letter of Disclosure and the documents referred to therein fully discharged the obligations of the Vendors irrespective of the standard by which those obligations fall to be judged.  

Accordingly I would dismiss the appeal. 

[See hard-copy of this judgment for photocopied attachment referred to in judgment].