Nottingham Forest FC loses High Court claims following club’s sale but plans appeal

The club’s sale – what was agreed?

In 2017, the club was sold by Fawaz Al-Hasawi, who at the time was its chairman and its sole legal and beneficial owner through his company (“the Seller”). A third party company (“the Buyer”) bought the club pursuant to a share purchase agreement entered into in April 2017 (“the SPA”).

Under the terms of the SPA, the Buyer agreed to pay an initial purchase price of £1 on completion and to procure the repayment by the club of certain loans to Mr Al-Hasawi. The parties also entered into a deed of variation which provided for certain loans payable by the club to be written off or restructured and others to be repaid on completion or at later dates.

How the dispute arose

Although the first loan repayment was made, the remainder were not. So Mr Al-Hasawi served an acceleration notice under the SPA, meaning the outstanding sums became immediately due and payable and interest started to accrue.

The next day, the Buyer issued a High Court claim for various sums allegedly due from Mr Al-Hasawi under the SPA, to be set-off against the outstanding loans. The Buyer also claimed for alleged misrepresentation of the club’s liabilities.

Shortly afterwards Mr Al-Hasawi issued his own claim for repayment of the outstanding loans (circa £4.2 million) plus interest. The court consolidated both parties’ claims under Mr Al-Hasawi’s.

Claims for payments under indemnities

An indemnity is a promise by a seller to reimburse a buyer in respect of a particular type of liability on a £ for £ basis, should it arise. This usually relates to a specific potential liability which has been identified by a buyer, which it is particularly concerned about.

Here the court rejected the Buyer’s claims under various indemnities in the SPA, including:

• Leakage – the disputed payments (made to other football clubs, solicitors and a soccer school) were not received by the Seller, or any person connected to it, within the meaning of “Leakage” as defined by the SPA so the Seller was not liable for them;
• Losses – the Seller indemnified the Buyer against any liabilities of the club outstanding as at 31 December 2016, to the extent they exceeded £6.6 million; the Buyer’s case was that the liabilities were in fact circa £8 million and claimed for the difference. However, on a proper construction of the defined term “Liabilities” in the SPA, the losses claimed (including certain transfer and agents’ fees and payments to players) had to “relate to” the period up to the liability statement date of 31 December 2016. As the benefit in respect of which the disputed amounts were incurred was enjoyed or provided after 31 December 2016, the Seller was not liable to indemnify the Buyer for the losses;
• Schedule Claims – the Court accepted that certain “material” contracts (relating to agents, transfers and loans) were left out of the data room containing documents about the club, which the Buyer and its advisers had access to for carrying out due diligence before completion. The Buyer argued that the terms of the SPA required all material contracts to be included in the data room, therefore, creating a system akin to strict liability, so that the Buyer did not need to evidence loss caused by the omission of such contracts. The court rejected this argument along with the Buyer’s contention that it would have renegotiated the terms of the SPA had it known of the omitted material contracts. Having failed on both these fronts and not being able establish any related losses, this claim also failed.

Ultimately, the court held that there were no sums to be set-off against the circa £4.2 million that the parties agreed was owing to Mr Al-Hasawi and the acceleration notice was valid.

Misrepresentation of the club’s liabilities

One document included by the Seller in the data room was a spreadsheet setting out what were said to be the club's liabilities as at a certain date and totalling just over £6.5 million. The Buyer alleged that this document was a representation of the club’s liabilities which the Seller intended the Buyer to rely on and which was an inducement to enter into the SPA.

The actual liabilities were later discovered to be circa £8 million and the Seller argued that the lower figure was a misrepresentation. In an earlier ruling on the case (for the full judgment, please see here), the Court held that the entire agreement clause in the SPA was not sufficiently clear as to exclude misrepresentation claims and further that the existence of indemnities in the SPA did not constitute an agreement to exclude misrepresentation claims.

When the Court considered the substance of the misrepresentation claim at the substantive hearing (which is the subject of this note), while accepting the liabilities figure in the data room was a representation, it considered that the Seller had reasonable grounds to believe the representation was true. Further, the Court did not accept that had the liabilities figure been higher, the Buyer would have acted differently in relation to the transaction.

Appeal

The club has apparently now paid Mr Al-Hasawi the outstanding loan amount, but has been granted permission to appeal the decision.

Implications for buyers and sellers

This case serves as a useful reminder that when considering claims under a contractual indemnity, the court’s starting point will be to carefully examine the specific wording of the share purchase agreement. Share purchase agreements are often long, complex and detailed and when drafting some areas will inevitably be more commercially important than others. However, each party must ensure they understand how indemnities – and the defined terms referred to – work. Ultimately, significant sums may turn on the precise words used.

When considering misrepresentation claims, claimants should also consider if those making the representations complained of had reasonable grounds and did believe the facts represented are true. Otherwise, the representor will have a defence under section 2(1) of the Misrepresentation Act and the claim will fail.

Excluding liability for misrepresentation claims

Further, the earlier decision in this case on the entire agreement clause is a salutary lesson to parties that they should carefully consider clauses which attempt to exclude liability – if the language is not clear enough, the court may not uphold them. If it is intended that misrepresentation claims should be excluded, it would be sensible to include a clause confirming that no representations have been made or that no reliance has been placed on any representations which have been made. The SPA in this case did not include any such non-reliance clauses or language.

For the full judgment, please click here.