Al-Hasawi v Nottingham Forest Football Club Ltd

The Court of Appeal considered construction of indemnities and definitions in a bespoke share purchase agreement (SPA) arising from the sale of Nottingham Forest FC and the interaction of the SPA definition of “Liabilities” with the accruals accounting standard FRS 102. The court held that the clause 7.1 indemnity (liabilities cap of £6.6m) must be measured on the same accruals basis and in the same manner as the Trial Balance on which the £6.6m was calculated, so that the parenthetical words in the SPA did not narrow the accruals basis used in the Trial Balance. By contrast, clause 7.4 (indemnity for non‑disclosure of Material Contracts in the Data Room) requires proof of loss causally attributable to the non‑disclosure and cannot be relied on where causation is not established. The Court allowed the appeal on the construction of clause 7.1 but dismissed the appeals in relation to the clause 7.4 claims for failure to prove causation and, in the case of certain claims, for other reasons of fact.

This is an appeal from the judgment of Mr Stuart Isaacs QC in the Business and Property Courts (Chancery Division) ([2019] EWHC 1287 (Ch)). The background is the 2017 sale of Nottingham Forest Football Club. The SPA provided for repayment of certain historic loans to the seller (Mr Al‑Hasawi) subject to a mechanism by which undisclosed liabilities of the Club as at the Liability Statement Date (31 December 2016) in excess of £6.6m would give rise to indemnities under clause 7.1 and could be set off against Completion Loans in the completing deed. The Deed preserved certain loans repayable to Mr Al‑Hasawi and contained a set‑off mechanism.

The claimant sought repayment of loans advanced to the Club; the purchaser and related parties counterclaimed under the SPA for indemnities and other relief, principally under clause 7.1 (liabilities in excess of £6.6m) and clause 7.4 (losses due to non‑disclosure of Material Contracts in the Data Room). The issues on appeal were:

• How the SPA definition of “Liabilities” is to be construed and whether it adopts the accounting treatment under FRS 102 or instead excludes liabilities that, while incurred before 31 December 2016, relate in part to benefits or services to be provided after that date.
• Whether the clause 7.4 indemnity is triggered automatically by non‑inclusion of a Material Contract in the Data Room or requires proof that the buyer or the Club suffered loss causally attributable to the non‑disclosure; and relatedly whether particular contracts were Material Contracts or were precluded by other SPA provisions.
• Factual questions as to liability under particular contracts (notably contracts with Ahmadi and Chiodi) and the effect of settlements and confidentiality on inferences of liability.

The Court of Appeal held that the £6.6m figure was derived from the Trial Balance prepared on an accruals basis and that the SPA’s definition of “Liabilities” must be read consistently with that basis (and with FRS 102 principles). The parenthetical phrase limiting inclusion to liabilities "only to the extent such liabilities relate to such period" was not to be read so as to displace the accruals basis used to prepare the Trial Balance or to require apportionment of pre‑31 December liabilities merely because parts of the contractual benefit fell to be enjoyed after that date. On clause 7.4, the court held that the indemnity protects against losses suffered "due to" the non‑disclosure and therefore requires proof of causation; the appellants had not established causation in relation to the additional post‑January 2017 player contracts and had not shown that the Chiodi claim gave rise to a liability, and the Ahmadi settlement did not establish liability on the balance of the evidence. The court allowed the appeal in respect of clause 7.1 construction and dismissed the appeals concerning clause 7.4.

Appeal allowed in part. The Court allowed the appellants' appeal on the construction of the SPA definition of “Liabilities” in clause 7.1, holding that liabilities are to be measured on the accruals basis reflected in the Trial Balance (consistent with FRS 102) and that the parenthetical qualification did not narrow that basis so as to require apportionment for benefits enjoyed after the Liability Statement Date. The Court dismissed the appeals on the clause 7.4 indemnity claims, holding that clause 7.4 requires proof of loss causally attributable to non‑disclosure of Material Contracts and that the defendants/appellants had not established causation or, on the facts, liability in the specific contested cases.

Appeal from Mr Stuart Isaacs QC sitting as deputy judge of the High Court, Business and Property Courts (ChD), judgment reported at [2019] EWHC 1287 (Ch). Appeal determined in the Court of Appeal, Civil Division, [2019] EWCA Civ 2242.