Macquarie Internationale Investments Ltd v Glencore UK Ltd

Contractual warranties about accounts must be construed in their contractual and accounting context. Compliance with relevant accounting standards is strong evidence that accounts give a true and fair view; absent exceptional circumstances, an unknown and not reasonably discoverable liability need not be included. A warranty that management accounts fairly reflect financial position or are not materially misleading ordinarily concerns what accounts prepared on the stated accounting bases, practices, policies and purpose would contain. It does not guarantee retrospectively assessed commercial net asset value. Materiality is assessed by reference to published accounting standards, not by a purchaser-specific measure based on the effect on price. Repetition between account warranties does not justify disregarding their contractual context.

Macquarie purchased the shares in Corona Energy Holdings Ltd from Glencore and other sellers under a sale and purchase agreement. A substantial balancing charge owed to Xoserve had been omitted from Corona’s draft audited accounts and June 2006 management accounts because the liability was unknown and not reasonably discoverable at the relevant times. Macquarie claimed damages against Glencore for breach of the accounts and management accounts warranties.

Mr Justice Andrew Smith dismissed the claim in the Commercial Court: [2009] EWHC 2267 (Comm). On appeal, Macquarie abandoned its challenge concerning the accounts warranty and argued that the management accounts neither fairly reflected the group’s financial position nor avoided material misleading effect. The central issues were the meaning of true and fair view and the proper construction of paragraph 4.2 of schedule 3 to the agreement.

The Court of Appeal unanimously dismissed the appeal. Lord Justice Jackson gave the leading judgment. The Master of the Rolls and Lord Justice Lloyd agreed, and the judgment of Mr Justice Andrew Smith was upheld.

1. True and fair view. Compliance with relevant professional accounting standards is strong evidence that accounts give a true and fair view. The court considered the statutory framework in sections 226A and 227A of the Companies Act 1985, including the true and fair view override. There were no exceptional circumstances here. The group did not know, and could not reasonably have discovered, the missed meters charge when the accounts were prepared. The omission was not an error requiring the 2005 accounts to be reopened or restated under paragraph 63 of FRS 3. The draft audited accounts therefore presented a true and fair view.
2. Management accounts warranty. The opening words of the second sentence of paragraph 4.2 governed warranties (a), (b) and (c). Warranty (a) concerned the assets and liabilities which the accounting bases, practices and policies permitted or required the management accounts to include. It did not guarantee the actual position on the ground or require inclusion of unknown or undiscoverable liabilities.
3. Misleading effect and materiality. Warranty (c) required the management accounts to contain the information that a reasonably informed reader would expect from management accounts prepared on the stated basis and for their stated internal-management purpose. Management accounts could be less precise than audited statutory accounts. The word material was to be assessed by reference to published accounting standards, rather than by the effect of the discrepancy on the purchaser’s price.
4. Contractual context. Paragraphs 4.1 and 4.2 concerned accounts, whereas paragraphs 6 and 7 addressed actual assets and liabilities. Paragraph 4.1(d) also expressly addressed known liabilities for which provision or disclosure was required, and the agreement contained no warranty as to net asset value. Arguments based on redundancy were weak because cautious contractual drafting may contain repetition: see Arbuthnot v Fagan [1995] CLC 1396, Beaufort Developments (N.I.) Ltd v Gilbert Ash N.I. Ltd [1999] AC 266 and Norwich Union Life Insurance Society v British Railways Board [1987] 2 EGLR 137. On the judge’s unchallenged findings, the management accounts met the required standard and no warranty was breached.

• Court of Appeal (Civil Division): Macquarie appealed against the dismissal of its warranty claim. The appeal was dismissed.
• High Court of Justice, Queen’s Bench Division, Commercial Court: Mr Justice Andrew Smith dismissed Macquarie’s claim for damages for breach of warranty: [2009] EWHC 2267 (Comm).