Mandrake Holdings Ltd & Anor v Balanus Ltd

The Court of Appeal upheld the first-instance construction of a "Pensions Deed" and held that the vendor's covenant to meet "Pension Liability" was not confined to the priority categories then under active SIB review. In construing the deed the court gave weight to the contractual language read in its factual and commercial context, including the recitals, clause 1 (obligation to continue and complete the review in accordance with SIB/PIA standards), clause 2.2 (definition of Pension Liability) and the sweep-up wording of clause 2.3.1.6.

Key grounds for the decision were: (1) the SIB 1994 Review and related guidance established that the review process covered identification, fact-gathering, compliance assessment, loss assessment and redress, not solely the priority "active review" categories; (2) the structure of the deed imposed broad obligations on MAL and conferred wide powers on Hambro, consistent with Hambro bearing risk beyond priority cases; (3) the language of clause 2.3.1.6 was interpreted as a general exception to the broad covenant, not as introducing a limitation by reference to SIB priority categories; and (4) the commercial and financial background (including accounting and Companies Act compliance material) supported the construction that Hambro remained liable for non-priority cases within the classes in clause 2.2. The court therefore dismissed the appellant's challenge to the judge's declaration on construction.

Background and parties. Mandrake Associates Ltd (MAL), an independent financial adviser, and Mandrake Holdings Ltd (MHL) purchased MAL from Hambro Countrywide Plc (later Balanus Ltd). As part of the sale Hambro executed a Pensions Deed dated 1 March 1996 under which Hambro covenanted to pay amounts equal to "Pension Liability" subject to exclusions set out in clause 2.3. The transaction took place against the regulatory background of the SIB 1994 Review of pension transfers, opt-outs and non-joiner business.

Nature of the claim and procedural history. MHL and MAL sought a declaration that Hambro was liable under the Pensions Deed for pension transfer and opt-out business transacted between 29 April 1988 and 30 June 1994 except for specified narrow exclusions; alternatively they sought rectification. HH Judge Norris QC concluded that the deed covered all such business except certain categories listed in clause 2.3.1.1 and related subparagraphs and granted the declaratory relief. Permission to appeal was given on the construction point and, separately, permission on rectification was later allowed to MHL by Neuberger LJ. The Court of Appeal heard full argument limited to the construction issue and dismissed the appeal.

Issues for decision.

• Whether clause 2.3.1.6 of the Pensions Deed excluded liability in respect of "Phase 2" or other non-priority cases by reference to the SIB priority categories or the SIB concept of "active review".
• Whether the Pensions Deed, read as a whole and in its factual matrix, imposed liability on Hambro only for cases subject to the SIB priority "active review" or more broadly for the classes described in clause 2.2.

Court's reasoning. The court emphasised that the SIB 1994 Review contemplated a multi-stage review process (identification, fact gathering, compliance assessment, loss assessment, redress) and that the priority categories were sub-sets to be given priority in stages two to four, not categories excluded from the review or from potential redress. Recitals and clause 1 showed an obligation to continue MAL's review in accordance with SIB/PIA standards as published; clause 2.2 defined the covered business by type (transfers, opt-outs, non-joiners) rather than by priority category. Clause 2.3 listed specific investor categories excluded from liability and contained subclause 2.3.1.6, which the court read as a "sweep-up" provision referring to categories of investor as understood at the date of the deed, not as a device to limit liability to those within SIB priority active-review categories. The structure of the deed (including Hambro's power of attorney over claims) and the commercial/accounting context supported the broader construction. The Court of Appeal therefore concluded the judge was right to declare Hambro liable beyond the priority categories and dismissed the appeal. The alternative rectification claim was not addressed on appeal.

Appeal dismissed. The Court of Appeal agreed with HH Judge Norris QC that, on true construction of the Pensions Deed read in its commercial and regulatory context, the covenant in clause 2.2 was not confined to the SIB priority ("active review") categories; clause 2.3.1.6 operates as a general sweep-up of certain investor categories and does not import an exclusion limited to priority-phase cases. The judge’s declaratory order was therefore affirmed and the appeal dismissed; the rectification point was not reconsidered on appeal.

Appeal from the Chancery Division (HHJ Norris QC) HC03C02231; first-instance judgment and declaratory order dated 3 March 2006. Permission to appeal given on the construction point; permission on the rectification point was later granted by Neuberger LJ on 26 May 2006. This Court (CA) delivered judgment dismissing the appeal, [2006] EWCA Civ 1716.