Case No: A3/2011/1869
Neutral Citation Number: [2013] EWCA Civ 185
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Mr Justice Norris
[2010] EWHC (Ch) 2276

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 15/03/2013
Before :

LORD JUSTICE RIX
LORD JUSTICE RIMER 
and
MRS JUSTICE BARON 
- - - - - - - - - - - - - - - - - - - - -
Between :

	BELFAIRS MANAGEMENT LIMITED	Appellant	
	- and -		
	(1) MATTHEW SUTHERLAND
(2) CHRISTIE JANE SUTHERLAND	Respondents	

- - - - - - - - - - - - - - - - - - - - -
(Transcript of the Handed Down Judgment of
WordWave International Limited
A Merrill Communications Company
165 Fleet Street, London EC4A 2DY
Tel No:  020 7404 1400, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
- - - - - - - - - - - - - - - - - - - - -

Mr Michael J. Booth QC (instructed by Follett Stock LLP) for the Appellant
Mr Ian Clarke (instructed by Rubric Lois King Solicitors) for the Respondents

Hearing date: 27 November 2012
- - - - - - - - - - - - - - - - - - - - -
Judgment
Lord Justice Rimer : 
Introduction
1.	This appeal, by the claimant, Belfairs Management Limited (‘BML’), is against an order made in the Chancery Division by Norris J on 22 June 2011 following the trial on liability of its claim against the defendants/respondents, Matthew Sutherland and his wife, Christie Sutherland. 
2.	The respondents were formerly the owners of the issued shares of Waveform Solutions Limited (‘Waveform’). By a purchase agreement completed on 11 February 2008, BML purchased 60% of their shares for £2m. The acquisition quickly proved to be a failure: Waveform entered into administration on 5 November 2008 and creditors’ voluntary liquidation on 24 February 2009. By its claim, BML sought damages from the respondents for alleged deceit and breach of warranties in the share purchase agreement. That agreement limited the amount recoverable for breach of warranty to the diminution in the value of the purchased shares by reason of the breach. The damages for any deceit were, however, at large. 
3.	The trial occupied 21 days between January and March 2010. The judge’s judgment was delivered on 10 September 2010, with consequential matters being adjourned to a date to be fixed. In the event, no date was fixed until 22 June 2011, when the judge’s order was made. The outcome of the trial was that he dismissed BML’s claim for deceit but held the respondents to be in breach of warranties in paragraphs 6.4, 8.3, 12.2 and 12.5 of Schedule 3 to the share purchase agreement and directed an inquiry as to damages for such breaches, which he reserved to himself. He rejected BML’s claim that the respondents were in further breach of warranty: in particular, of the warranty in paragraph 16.1.5 of Schedule 3. He refused permission to BML to appeal.
4.	By its appellant’s notice filed on 13 July 2011, BML challenged the dismissal of its deceit claim and of its warranty claim based on paragraph 16.1.5. Davis LJ refused permission on the papers on 13 October 2011. On BML’s renewed application at a hearing on 25 May 2012, Rix and Lewison LJJ affirmed the refusal of permission in respect of the deceit claim but permitted BML to appeal against the dismissal of its paragraph 16.1.5 warranty claim.
5.	It is, therefore, the correctness of the judge’s dismissal of that warranty claim that is in issue before the court. The grounds of appeal raise the following issues: (i) was ‘the NHS Framework Agreement’ (to which I shall come) an ‘agreement, arrangement or commitment’ within the meaning of paragraph 16.1 of Schedule 3; if yes, (ii) what was the nature of the paragraph 16.1.5 warranty; and (iii) was the warranty breached? 
6.	The judge’s judgment occupies 173 paragraphs, of which paragraphs 165 to 170 answer those questions. His answers were: (i) that the NHS Framework Agreement was not such an ‘agreement, arrangement or commitment’, so that the paragraph 16.1.5 warranty did not apply to it; (ii) if, contrary to that view, that warranty did apply to it, the warranty required no more than an honest subjective assessment by the respondents, as at the date of the share purchase agreement, of the future performance of the framework agreement, and there was no basis for a finding that their assessment of such performance was other than honest, albeit that Waveform’s future did not turn out as they had hoped; and (iii) it followed that on no footing was there a breach of paragraph 16.1.5. BML submits that the judge was wrong on all three counts; and that, as to points (ii) and (iii), the warranty was an objective warranty to the effect that the framework agreement could readily be fulfilled or performed in time, whereas on the facts it could not. 
7.	Mr Booth QC represented BML, as below. Mr Clarke represented the respondents, as he also did below.
The events leading up to the signing of the share purchase agreement
8.	I have gratefully taken the following summary from the judge’s judgment. 
9.	Waveform was incorporated in May 2002. At all material times until the share purchase agreement, the respondents each held five of its ten issued shares and were two of its four directors, the other two being employees. BML was incorporated in 2006 and carried on the business of providing management services. Its sole director was Dr Abdullah Al Jabbar Al Anizi. As at April 2007, it had capital and reserves of £1 and was dormant. The transaction with the respondents was the only transaction into which it ever entered.
10.	Waveform was a supplier of communications and information technology. It was also a software developer that sold its own products. The ability to develop products was part of its attraction. The judge explained as follows the business venture at the heart of the dispute between the parties:
‘29.	One of the notional trading divisions of Waveform was “Care Health Systems” (“CHS”). It was “notional” in the sense that it was not organisationally or legally separate from the remainder of the business, rather representing a grouping of products that could be usefully marketed together to create a brand identity. The CHS products were sold to primary care trusts and provided systems to support the National Chlamydia Screening Programme, Teenage Pregnancy Sure Start Programme, genitor-urinary medicine, family planning programs and so forth, and were so sold under the over-arching umbrella of “sexual health”. These systems were modular patient and practice management systems, incorporating record-keeping and management, prescribing, diary management, a web-based booking system and audit reports. The modules were the subject of constant re-development and re-packaging for new applications. The Chlamydia programme was well established and a market leader. The Surestart and GUM programmes were more recent developments.
30.	In late 2006 Mr Sutherland thought it advisable for Waveform to become involved in the NHS National Programme for IT. This was a government initiative to modernise and synchronise NHS computer systems across the country - in general practices, clinics and hospitals. Part of the £6 billion programme was called “Connecting for Health”. This was predominantly concerned with storing and transmitting patient data securely, and ensuring that patients had a single file across all services and departments. But it had certain features designed to improve service to patients such as a ‘Choose and Book’ appointments system and an electronic prescription service. It was not contemplated that the entire system should be introduced simultaneously as a unified whole. It was contemplated that there would be sequential local implementation by individual GP practices of systems from accredited competing suppliers, each of which met national standards. In some areas, there were to be Local Services Providers to whose system an individual GP practice could simply link. There were six compliance standards within “the Maturity Model”. Level 0 was the minimum standard for participation (which effectively required compliance with an existing standard for booking systems called “RF A99”). Level 1 built on Level 0 and required the system to incorporate “Choose and Book”, “Personal Demographic Services” access, and Electronic Transmission of Prescriptions. Level 2 was then to provide an up-rated specification for these facilities; and Levels 3 upwards added further functionality (including at Level 4 a data centre hostel solution).
31.	All existing suppliers of GP clinical systems were encouraged to design new systems or upgrade their existing systems to meet the requirements. There was to be encouragement for practices to retain their current system as it was upgraded through the various compliance levels. There was only limited support from central funds for a transfer from one supplier to another (from a non-compliant to a compliant provider, from a practice’s own compliant provider to a Local Service Provider, and then more freely at Level 4). To that extent, being in the market with an already compliant system therefore conferred an advantage. There were 11 suppliers working closely with the Department to develop the programmes. Waveform sought to join their number.
32.	The process whereby suppliers could request to participate in this programme was opened in February 2007. Tenderers had to demonstrate experience for the preceding three years of providing and supporting a GP clinical IT system which had (as a minimum) electronic access to storage and retrieval of patient medical data, patient scheduling, clinical coding of patient medical data, prescribing and dispensing, and analysis and reporting facilities. Mr Sutherland recognised that Waveform’s existing programmes might face some difficulty in meeting these criteria. Nonetheless Waveform put in an application. Mr Sutherland disclosed that the existing systems did not have RFA 99 accreditation, but he was informed that Waveform would have effectively 12 months from the signature of a supply agreement to get up to Level 2 (whatever the starting point).
33.	On 16 March 2007 Waveform was notified by the NHS that it had satisfied the pre-qualification requirements and would receive an Invitation to Participate.
34.	By 24 April 2007 Waveform had got through the first four of the five approval stages and had been listed to provide its “Best and Final Offer”. Mr Sutherland knew that Waveform was undercapitalised. The development to Level 2 demanded the commitment of very significant resources beyond what could be funded by the rather sporadic cashflow derived from existing business. He sought the assistance of Grant Thornton Corporate Finance.
35.	In May 2007 (under a contract which had been placed in February 2007) Waveform built a website for the group of which [BML] formed part (web design being one of its commercial services). The work had been introduced through a Mr Khalid Mahmood. He offered to try and engage the interest of Dr Al-Anizi in participating in Waveform’s NHS bid.
36.	On 12 June 2007 Waveform submitted its “Best and Final Offer” to participate in the NHS programme. It explained that it would not be releasing products compliant with Level 1 (which would be for internal development purposes only). The first general release would be Level 2 and would be available within 12 months of signing the Framework Agreement. Levels 3 and 4 (and in particular the hosting [of] the services) would be part of a second general release some 18 months after signing the Framework Agreement. (At least one competitor decided to adopt this course as well). All this was set out in a very detailed “Proposal in Response to Invitation to Finalise” over 100 pages in length. The business plan was disclosed to the NHS in these terms:-
“We anticipate achieving 20 seats within our first year, a further 30 within our second year and another 50 again within our third year. This is the basis of our business model to achieve a return on investment after three years, at which point we will begin to turn an acceptable profit on each installation”.
It is clear from the context that the phrase “within our first year” meant “within our first financial year of trading in the GP clinical IT market”.
37.	On 25 July 2007 Waveform received from the NHS an “intention to award” letter nominating it as one of the 8 successful parties invited to sign an agreement with the NHS. The NHS press release highlighted the fact that Waveform was a “newcomer to the market”. (The effective letter was to come through on 30 August 2007 formally awarding Waveform a “Lot 1 Framework Agreement”).’
11.	Grant Thornton, instructed by Mr Sutherland, had in the meantime been working with Waveform in connection with achieving either a capital investment in, or a purchase of, Waveform. By August 2007, Dr Al-Anizi had emerged as a possible funder in exchange for a 60% interest. By an email of 2 August 2007, Mr Sutherland explained to him his thoughts on the value of Waveform and proposed an indicative price of £13m for a 60% share based in part on Waveform’s projected earnings over the next three years, a projection which, however, excluded the NHS framework agreement. The judge said (paragraph 39) that:
‘Mr Sutherland wrote that, because he felt that the NHS contract had considerable potential, he wanted to retain a shareholding [in] Waveform and was also prepared to reinvest £2 million for working capital to be locked in for 5 years. I find the proposal to retain a shareholding and to commit further investment to be entirely genuine. …’
12.	 On 1 August 2007, Mr Sutherland had prepared a draft executive summary of Waveform’s proposition, directed at soliciting investment to enable Waveform to achieve its potential. It referred to Waveform’s profit performance to date. It referred to the recent award by the NHS of a framework contract, which the draft said ‘could be worth £300 million a year’ but it also made clear that, for the purposes of financial forecasts, Waveform had estimated that it would realise £7.5 million a year from that contract after several years trading. The estimate of its financial forecasts stated that it ‘also does not take into account the full and very real value of our recently awarded NHS … contract … This framework could be worth in the region of £300 million per annum’.  The judge found that this summary was provided to Dr Al-Anizi in early August 2007 and was available in draft form at a meeting with him held on 3 August 2007.
13.	There was a further meeting between Mr Sutherland and Dr Al-Anizi on 10 September 2007, when the latter offered £2m for a 60% interest. By an email of 11 September 2007, Mr Sutherland made a counter-offer of £5m, which Dr Al-Anizi did not take up. 
14.	On 25 September 2007, Mr Sutherland sent Mr Albanese (BML’s US attorney) a final version of the executive summary. The body of the email estimated Waveform’s cumulative profits before tax for the next five years at about £35m, said to be conservative. Mr Sutherland explained (inter alia) that Waveform was one of only eight suppliers to have been awarded a NHS contract, but he had only forecasted a 1% market share (as opposed to a 12.5% share) over the next five years. The attached executive summary made a number of statements about Waveform’s past and future, including that it now required investment ‘in order to fulfil the [NHS] contract and to take advantage of the company’s vast skills, experience and expertise, its reputation, envious market position and five years’ concerted research and development.’ It outlined the NHS ICT programme and explained that CHS had been working for several years on systems to fulfil the requirement of the contract, and was currently taking its products for type approval and compliance accreditation. It stated that:-
‘We are pleased to confirm that [the NHS] … recently awarded us an NHS framework contract, the value of which is inestimable.’
Whereas the August draft summary had estimated an annual income from the NHS of £7.5m after several years marketing, Mr Sutherland thought this was not an assumption that could properly be made and he withdrew it in the September version. In the financial forecasts section, the summary made clear that its estimate ‘does not take into account the full and very real value of our recently awarded NHS … contract’.
15.	On 3 October 2007, Mr Sutherland accepted Dr Al-Anizi’s £2m offer. On 17 October 2007, Mr Albanese sent draft agreements to Mr Sutherland, who had been pressing Dr Al-Anizi to make the investment. Dr Al-Anizi had not yet, however, taken steps to put himself in funds with which to make it. On 26 October 2007, Mr Moore, a key Waveform employee resigned, saying he had suffered a mental breakdown which he attributed to pressure of work. He had been the technical director responsible for developing CHS’s Chlamydia Screening Programme. On 29 October 2007, Mr Sutherland, having received legal advice, returned the contractual documents to Mr Albanese in revised form, with a disclosure letter accompanied by the relevant documents and schedules. Completion was scheduled for the first week of November 2007.
16.	The scheduled completion was, however, held up by Dr Al-Anizi’s wish for his accountant, Mr Rizvi, to carry out a due diligence exercise at Waveform’s premises. The visit did not take place until 23 December 2007, when Mr Khan of Rizvi & Co attended Waveform’s premises to make the inspection. Mr Khan’s visit was short, concluding by 11.45am. Mr Khan wanted little and Mr Sutherland provided whatever he wanted, or promised to provide it, as he did. In the meantime, on 13 December 2007, Mr Albanese had sent Mr Sutherland the final version of the contract. 
17.	On 7 January 2008, Rivzi & Co emailed its report on Waveform to Dr Al-Anizi. Having noted some revisions made to the December 2007 draft accounts, it noted that the ‘the company looks OK’. It did, however, also raise a number of comments and concerns. The letter (quoted by the judge in paragraph 60 of his judgment) commented on Waveform’s solvency in the following terms:
‘My opinion, based on the information and explanation provided to us, is that the company is good for an investment of £2 million. However it is so only if the NHS contract is solid and continues. On this Mr Albanese should be able to make comments.’
18.	The judge said of that reference to ‘the NHS contract’:
‘61.	I consider that the reference to the NHS contract is a reference to what is called the Framework Agreement (over 136 pages in length) which was intended to govern the relationship between the NHS and Waveform concerning the supply of a compliant system. It ran for a period of two years extendable at the option of the NHS. Whilst it set out the specifications of and range of permissible charges for the relevant services, the Framework Agreement did not itself provide for the supply of a stated number of systems. The systems were actually to be supplied under “Call Off Agreements” entered into between Waveform and individual Primary Care Trusts during the term of the Framework Agreement (which Call Off Agreements might themselves last for up to 4 years). The Framework Agreement itself therefore did not guarantee that even if Waveform produced a compliant system it would effect any sales. This would have been apparent to Mr Albanese (and indeed to anyone else who read the Agreement).
62.	My attention was not drawn to any complaint that Mr Albanese did not have all the relevant NHS documents sufficient to enable him to advise [BML]: nor was I told or shown what advice he gave or comments he made.’
19.	On about 7 January 2008, Dr Al-Anizi approached ‘his trustees’ for funding for the acquisition, his approach being supported by a presentation prepared by Mr Sutherland. The presentation referred (inter alia) to Waveform’s past and estimated profit performance and stated that Waveform had been awarded one of eight contracts of its kind under the NHS programme and that ‘an equal market share could be worth up to £1.5 billion.’ On about 21 January 2008, Dr Al-Anizi received approval for the provision of funding for the acquisition. On 29 January 2008, he entered into a conditional funding agreement with Credit Suisse (Yousfan Trust). Also in January 2008, the Waveform development team undertook an assessment of the work required to achieve the NHS milestones and concluded that they were perfectly achievable.
The signing of the share purchase agreement and the subsequent events
20.	Mr and Mrs Sutherland signed the share purchase agreement (‘SPA’) on 1 February 2008, together with other documents. BML, by Dr Al-Anizi, signed it on 11 February 2008, when the purchase was completed, although the price for the shares was only paid over on 15 February 2008. Under the SPA, BML purchased from each of Mr and Mrs Sutherland three of the five shares in Waveform they respectively held (amounting therefore to a purchase of 60% of Waveform’s issued capital). The total price for the shares was £2m payable equally to Mr and Mrs Sutherland. Of the £1m paid to Mr Sutherland under the SPA (as later varied), Mr Sutherland agreed to lend Waveform (a) £600,000 under the terms of a Convertible Loan Note, and (b) £400,000 interest free. BML also agreed to provide an interest free loan to Waveform of £600,000. Mrs Sutherland retained the £1m paid to her. The net result of the transaction was that Waveform was recapitalised but that the Sutherlands lost their control of it, becoming substantial minority shareholders; and Mr Sutherland became a major creditor. 
21.	The NHS Framework Agreement had not been signed by the time of the completion of the SPA on 11 February 2008 as Dr Al-Anizi knew. It was signed on 29 February 2008. The first planning meeting following completion of the SPA was on 19 February 2008, the minutes of which recorded that Waveform was working towards its NHS ‘milestone achievement certificates’, with a subsequent note recording that some 2,800 man-days’ work was required in order to do so. Waveform also continued with its non-NHS work, with some 100 new jobs being entered on the system between February and December 2008. The judge recorded (paragraph 78) that Mr Sutherland kept the progress of the NHS agreement under review, and that Waveform undertook some further milestone estimates in order to review and challenge earlier estimates and to test the assumptions on which they were based. The exercise led Mr Sutherland to the view that the NHS milestones were still achievable but that there was now a risk that they might not be achieved. The understanding had been that Mr Sutherland, as managing director, would render regular reports to Dr Al-Anizi, as chairman, but the judge’s finding (paragraph 79) was that Mr Sutherland was reluctant to commit himself to paper; and the judge’s reading of the situation was that ‘by May 2008 [Mr Sutherland] really did not want to grapple with all the hard facts lest that demonstrate that his optimism was unfounded. Further, he now feared that … Dr Al-Anizi would take a more pessimistic view.’ 
22.	There was, however, a meeting between Mr Sutherland and Dr Al-Anizi on 3 July 2008. The latter was unhappy with the position, which the judge summarised thus (paragraph 80):
‘About £800,000 of the £1.6 million injected had been spent. I consider a very substantial portion of this was caused by Waveform having taken on 13 extra staff to work on the NHS contract. But the position of Waveform was not good, either in terms of achieving the NHS “milestones” or in maintaining its original cash-generative business. Indeed the NHS had written to Waveform “to express … concern at the lack of evidence of progress towards the meeting of a number of … key obligations under the Framework Agreement”. The true position was that whilst Waveform already had clinical IT systems and the beginnings of the NHS core requirements (such as appointment booking and general patient management) it was, as Mr Sutherland put it to one potential source of help “the higher specifications and achieving Level 2 compliance that is potentially eluding us”. In an endeavour to meet the NHS contractual “milestones” Mr Sutherland had diverted all of the employees to that task so that the regular business of the company had all but disappeared, thereby depriving it of income.’
Dr Al-Anizi said at the meeting that he was considering pulling out his money and closing Waveform.
23.	By the end of August 2008, it was apparent that Waveform was not going to meet the deadline of releasing a compliant product by February 2009. A rescue plan for Waveform was formulated, which projected a further working capital requirement of some £2.5m.
24.	On 16 September 2008, the NHS rejected Waveform’s Supplier Release Plan because the projected release dates were not viable in the light of the term of the Framework Agreement. This did not have the effect of terminating that agreement, but it did trigger an obligation upon Waveform to submit an amended plan.
25.	On 17 September 2008, BML wrote to the respondents demanding payment within 14 days of the £2m it had paid for the Waveform shareholding and asserting breaches of various warranties in the SPA. This marked the start of what the judge called Dr Al-Anizi’s campaign leading to the demise of Waveform.
26.	On 29 September 2008, Cattles Invoice Finance Limited (‘Cattles’), which had provided a loan of £50,000 to Waveform under an invoice discounting facility secured on Waveform’s sales ledger, demanded repayment of its loan. On 28 October 2008, the NHS requested an amended Supplier Release plan within seven days, indicating that a failure to provide it would constitute a material breach that would enable the NHS to consider terminating the Framework Agreement. 
27.	Waveform did not survive long enough to meet Cattles’ demand. On 31 October 2008, BML obtained a freezing order against the Sutherlands. The order was discharged on 10 November 2008 for material non-disclosure, and the Chancellor refused to grant a fresh injunction; but Mr Sutherland had intended to satisfy Cattles’ demand out of his personal resources and the injunction had prevented him from doing so. On 5 November 2008, Cattles appointed administrators in respect of Waveform. The administration continued until February 2009, when Waveform entered into creditors’ voluntary liquidation. Mr Sutherland had in the meantime bought the business of Waveform, such as it was, from the administrators; but the credibility of the business in the eyes of its principal customer – the NHS – had by then been destroyed.
The relevant provisions of the SPA and other sale documentation
28.	It may be helpful first to clarify the nature of the NHS framework agreement. As appears from the above summary, Waveform had not, prior to the signing of the SPA, entered into a binding contract with the NHS. It was by then, however, one of just eight companies that had been awarded the opportunity to sign a framework agreement. Such an agreement would, subject to an important qualification, give Waveform the opportunity, as part of a restricted market, to bid for contracts with the NHS primary care trusts, being contracts which had the potential for yielding considerable returns. The qualification is that such opportunity was not one that would be open to Waveform upon the mere signing of the agreement. Such signing would, however, trigger specific time periods for compliance with NHS requirements, the relevant one in Waveform’s case being a requirement to achieve GP Level 2 within 12 months of signing. Achievement of such level was not itself a competitive exercise, although if Waveform could achieve it, its consequential opportunity to pitch for contracts from the primary care trusts would be competitive. 
29.	The attainment of Level 2 within the prescribed 12-month period was therefore all important to Waveform: it would open the door to the opportunity to compete in a valuable market. Although Waveform had had the opportunity since the summer of 2007 to sign the NHS framework agreement, it wanted to defer doing so until such time as it had the investment and working capital in place that would enable it to comply with the requirements of the agreement, including in particular the attainment of Level 2 within the 12-month period: and it was its proposed transaction with BML that would provide it with that investment and capital. 
30.	There was no issue before the court about any of this. It was common ground, as both counsel expressly agreed before us, that the opportunity represented by the NHS framework agreement was at the heart of the deal negotiated with BML from August 2007 down to February 2008.  There was also no issue that both sides approached the signing and completion of the SPA on the assumption that, as happened, Waveform would then promptly sign the NHS framework agreement and so become entitled to proceed to qualify itself (if it could) to bid for the valuable primary care trust contracts. Once the agreement was signed, the 12-month period for Level 2 attainment would start to run.
31.	To identify the issue arising in relation to the paragraph 16.1.5 warranty, I must now set out the relevant provisions of the SPA. Clause 1 contains various definitions, of which the two material ones are these:
‘1.1.12 “Disclosure Letter”: the letter of the same date as this Agreement in the agreed form from the Vendors or their solicitors to the Purchaser or its solicitors, together with any attachments, disclosing matters that are exceptions to the Warranties; …
1.1.34 “Warranties”: the warranties and representations referred to in clause 6 and set out in schedule 3 and Warranty means any one of them.’
32.	Clause 5, headed ‘Warranties’, provides:
‘The Vendors jointly and severally warrant to the Purchaser that each of the Warranties in Schedule 3 is true and accurate in all respects and not misleading at the date of this Agreement.’
33.	Schedule 3 sets out the warranties given by the vendors. They fell under several headings. The relevant warranties are those in paragraph 16 (the ‘Trading and contracts’ section), which provides:
‘16.1	The Company is not a party to any agreement, arrangement or commitment which:
16.1.1 has or is expected to have material consequences in terms of expenditure or revenue;
16.1.2 relates to matters outside its ordinary business or was not entered into on arms’ length terms;
16.1.3 constitutes a commercial transaction or arrangement which deviates from the usual pattern for it;
16.1.3 can be terminated in the event of any change in the underlying ownership or control of it or would be materially affected by such change;
16.1.5 cannot readily be fulfilled or performed by it on time; or 
16.1.6 cannot be terminated, without giving rise to any liabilities on it, by it giving three months’ notice or less, to which any former or current manager, director or shareholder, is a party or to which the Company is liable.’
It is the warranty in paragraph 16.1.5 that is the material one.
34.	The disclosure letter is a six-page document to which various documents were annexed. The overall scheme was, in general terms, that any circumstance that would in principle give rise to a claim for breach of warranty would not do so if it had been disclosed in the disclosure letter. That, I consider, is the combined effect of paragraph 1.1.12 of the SPA and of paragraph 3 of the disclosure letter. The relevant provisions of the disclosure letter are as follows:
‘3.	The Warranties on the part of the Vendors are given and made subject to the disclosures in this Disclosure Letter and no claim may be made by the Purchaser for breach of any of the Warranties if the fact omission or circumstance giving rise to or forming the basis of the claim has been disclosed to the Purchaser in this Disclosure Letter. …
8.	The disclosure of any matter or documents by this Disclosure Letter shall not, other than as specifically provided for in the Agreement, imply any further representation, warranty, undertaking or indemnity as to the same nor shall such disclosure be taken as extending the scope of any Warranty.’
Paragraph 11 incorporated by reference various documents that had made disclosures of one sort or another. The disclosure letter then continued, so far as material:
‘12.	There are further specifically disclosed (but without prejudice to [the] generality of the general disclosures above) the matters set out below which appear for ease of reference in connection with the paragraph numbers of those of the Warranties in relation to which the relevant disclosures seems most immediately applicable.
Warranty                                        Disclosure
13.	Schedule 3
          paragraph 
…
16.1.1	NHS Connecting for Health formally notified the Company of 30 August 2007 that it has been awarded a framework agreement on the National Programme for IT. This may have material consequences in respect of expenditure and revenue, as disclosed to the Purchaser.
16.1.4	See the disclosure to paragraph 16.1.1. The framework agreement, once fully entered into, may be terminated upon a change of control of the Company.
16.1.6	See the disclosure to paragraph 16.1.1. The framework agreement may give rise to liabilities if terminated by the Company. …’.
35.	The disclosure letter therefore assumed that the (as yet unsigned) NHS agreement was an ‘agreement, arrangement or commitment’ within the meaning of paragraph 16.1 of the SPA and it made specific disclosures in relation to that agreement insofar as paragraphs 16.1.1, 16.1.4 and 16.1.6 warranted matters that, but for such disclosures, would give rise to a claim for breach of warranty. The letter did not, however, make any disclosure in relation to paragraph 16.1.5. That is not surprising. Had it been suggested that the NHS agreement could or might not ‘readily be fulfilled or performed … on time’ it is quite likely that it would have brought the proposed share acquisition to a full stop. A central commercial reason for the acquisition was the opportunity that the NHS agreement would give Waveform to bid for contracts from the primary care trusts, an opportunity that was however dependent on Waveform attaining Level 2 status under the NHS contract within 12 months.
36.	I set out in paragraph 5 above the questions that the judge had to answer in deciding the issue as to whether the respondents had breached the warranty in paragraph 16.1.5 of Schedule 3 to the SPA. For convenience, I shall repeat them: (i) was the NHS Framework Agreement an ‘agreement, arrangement or commitment’ within the meaning of paragraph 16.1 of Schedule 3; if yes, (ii) what was the nature of the paragraph 16.1.5 warranty; and (iii) was the warranty breached? 
37.	The judge answered those questions as follows in his judgment:
‘165.	The fifth relevant warranty is that by clause 16.1.5 Mr Sutherland warranted that Waveform was not a party to any agreement, arrangement or commitment which could not readily be fulfilled or performed by Waveform on time. Two points of construction arise.
166.	First, Mr Booth QC submits that this is an absolute warranty as to outcome and the mere fact that Waveform did not (for whatever cause) perform under the NHS framework agreement readily or on time (so that notice was served by the NHS in September 2008) establishes that there was a breach of it.
167.	I disagree. The warranty required a present assessment of future performance. It required Mr Sutherland to ask himself: “As at 11 February 2008 has Waveform undertaken an obligation which I can see now it cannot readily perform in the future?” In clause 5 of the SPA Mr Sutherland warranted that that assessment was not misleading. There would be a breach of warranty if the statement that results from the assessment was misleading; but not otherwise.
168.	Second, Mr Booth QC submits that this warranty extends to the NHS Framework Agreement even though this was not signed until after the SPA. His argument is that there may not be an “agreement” but there was an “arrangement”, and the unsigned NHS Framework Agreement as an arrangement was obviously considered to fall within this warranty because it was the subject of disclosure in the Disclosure Letter. This last point is not a good one: paragraph 8 of the Disclosure Letter said that the disclosure of any matter “shall not … be taken as extending the scope of any warranty”. So if the NHS Framework Agreement is not within the scope of the warranty the fact that it is mentioned in the Disclosure Letter will not bring it within the warranty. On the main point I do not consider that the unsigned NHS Framework Agreement can be regarded as an “arrangement” or a “commitment” for the purposes of the warranty. At the transaction date Waveform had simply been selected as a party to whom an NHS Framework Agreement would be offered: it was not at that time subject to any obligation which had to be “fulfilled or performed by it on time”. I hold that there can be no breach of warranty.
169.	In case this construction is wrong I will consider the complaint made. Mr Sutherland is said to be in breach of that warranty simply because after the transaction date the existing core business ceased. That is to misread the warranty as an absolute warranty relating to outcomes. Then it is said that at the transaction date he knew that the existing core business would (or he intended that it should) cease or largely cease. I find that he neither knew nor intended that that should be the case. The existing business continued (and about 100 orders were taken in the last six months of the calendar year 2008, though the decline in receipts would suggest that they were not sizeable jobs). The process of allocating resources to the NHS contract had begun in the autumn of 2007, began in earnest following the injection of funds shortly after the transaction date, but only involved the diversion of all employees between May and July 2008. This was not Mr Sutherland’s intention at the transaction date, it was not what he actually foresaw, and I see no ground for supposing that any objective and honest chief executive would of necessity have predicted it. It came about through a reassessment of the timeline (in May 2008), combined with difficulties in staff retention and recruitment and problems in outsourcing. But the failure to predict the impact of these problems upon the existing core business does not amount to a breach of warranty.
170.	Then it was said that the problems with the NHS contract itself (to which I have adverted) themselves amount to a breach of this warranty. The problems themselves do not amount to a breach. The question is whether Mr Sutherland’s assessment of the NHS contract was misleading. I have already found as at the transaction date Mr Sutherland himself believed that the attainment of Level 2 within a 12 month period was achievable, and this was not an ungrounded or reckless belief.
171.	That concludes a consideration of the warranties. …’.
The appeal
(a) Was the NHS Framework Agreement one to which paragraph 16.1 applied?
38.	The first question is whether, contrary to the judge’s conclusion in paragraph 168, the NHS framework agreement (hereafter ‘the NHS contract’), a contract which had been awarded to Waveform in the summer of 2007 but was only signed after the completion of the SPA, was an ‘agreement, arrangement or commitment’ within the meaning of paragraph 16.1 of Schedule 3 to the SPA. If it was, paragraph 16.1.5 contained a warranty that related to it. If it was not, the paragraph 16.1.5 warranty did not relate to it. 
39.	It is worth noting first that, whilst probably irrelevant to the question of construction raised by this question, the respondents’ position in paragraph 137(8) of their amended Defence (settled by Mr Clarke’s predecessor) was that the NHS contract was an ‘agreement, arrangement or commitment’ to which paragraph 16.1.5 applied, although they also pleaded why there was said to have been no breach of the warranty. Mr Clarke adopted the same position in paragraph 78 of his opening skeleton argument for the trial. The point that the paragraph 16.1.5 warranty did not apply to the NHS contract at all was raised for the first time by Mr Clarke only at a later stage in the trial, at the latest in his closing written submissions. The other point to notice is that, not only was it the respondents’ original position in the proceedings that paragraph 16 applied to the NHS contract, that is also what they appear to have understood at the time of the signing of the SPA: paragraph 13 of their disclosure letter made disclosures in relation to the NHS contract as if it were an ‘agreement, arrangement or commitment’ to which paragraph 16.1 applied. It has of course always been BML’s position that the NHS contract is one to which paragraph 16.1 applied: they sued the respondents for breach of warranty in respect of it.
40.	The judge’s view was that a non-binding offer by the NHS to Waveform of the NHS contract was not such an ‘agreement, arrangement or commitment’. That was because, at the date of the SPA, that offer had not matured into the NHS contract itself, it did not subject Waveform to any obligation to do anything (let alone to any obligation that could not be ‘fulfilled or performed by it on time’) and so the paragraph 16.1.5 warranty could not apply to the NHS contract. As for the assistance, if any, to be derived from the assumption in paragraph 13 of the disclosure letter that the opportunity to enter into the NHS contract was such an ‘agreement, arrangement or commitment’, the judge held that such assumption provided no interpretative assistance. That was because if, as he held, paragraph 16.1 of Schedule 3 did not, as a matter of construction, extend to the NHS contract, it was illegitimate to have recourse to paragraph 13 of the disclosure letter by way of an interpretative extension of paragraph 16.1, because paragraph 8 of the disclosure letter expressly prevented recourse of that nature.
41.	I shall first approach the issue as to the construction of paragraph 16.1 without reference to the disclosure letter. As at the date of the completion of the SPA, Waveform had not signed the NHS contract and so there was no contract then in place of the nature that was put in place shortly after the completion of the SPA. On the other hand, it is not in question that both sides approached the signing of the SPA on the basis of a common understanding that Waveform had (in practice, if not in law) a right on demand to enter into an NHS contract of the nature that had been on offer to it since the previous summer; and that, upon such signing, it would become subject to the benefit and burden of that contract, the nature and terms of which both parties were fully aware before the signing of the SPA. That common understanding was well founded: shortly after the completion of the SPA, Waveform did sign the NHS contract, which was exactly what the parties had contemplated up to and as at such completion.
42.	The second factor to be borne in mind is that there is no dispute that the NHS contract was at the heart of the transaction with BML. The purpose of the transaction from the respondents’ viewpoint was to obtain investment in order to qualify under the terms of the NHS contract and so open up the opportunity for Waveform to negotiate valuable contracts with the primary care trusts. All this was made plain in the respondents’ pre-SPA overtures to BML. It is plain that BML also regarded its investment as dependent on the NHS contract. 
43.	The question of construction turns on whether the reasonable person, having all the background knowledge reasonably available to BML and the respondents at the time of the SPA with regard to the proposed NHS contract, would regard that contract as an ‘agreement, arrangement or commitment’ within the meaning of paragraph 16.1 (see Investors Compensation Scheme Ltd v. West Bromwich Building Society [1998] 1 WLR 896, at 912 to 913, per Lord Hoffmann). 
44.	The judge was, I consider, obviously correct in saying that, as at the date of the completion of the SPA, Waveform was not subject to any obligation or commitment under any NHS contract. Waveform had not by then entered into such a contract, nor was it under any contractual obligation to do so. As I understand it, Waveform could, the day before the signing of the SPA, have washed its hands of the whole proposed NHS venture, without fear of any recourse from the NHS for doing so. 
45.	In these circumstances, there is obvious support for the judge’s view that the NHS contract was not within the grasp of paragraph 16.1. The, or a, natural interpretation of paragraph 16.1 is that it is focussing, or focussing primarily, on agreements, arrangements or commitments that are actually in place at the date of the SPA, whereas, as regards the proposed NHS venture, no NHS contract was yet in place. It might perhaps be said that Waveform had a non-binding ‘agreement, arrangement or commitment’ with the NHS to enter into the NHS contract. But even if that can be said, it takes BML’s case nowhere: it is not that non-binding ‘agreement, arrangement or commitment’ that was at the heart of the BML deal, but the NHS contract itself. It is only compliance with that contract that would give Waveform the beneficial opportunities for which the respondents were seeking to raise capital and into which BML wished to buy. BML’s warranty claim is not based on the proposition that any such non-binding ‘agreement, arrangement or commitment’ could not ‘readily be fulfilled … on time’, not least because it was promptly fulfilled, by the signing of the NHS contract. The only question is whether that contract was within the scope of paragraph 16.1.
46.	That such contract was only signed after the SPA is a reason in support of the view that it was not within such scope. In my view, however, in respectful disagreement with the judge, there is no sound reason why, in the context of the nature and purpose of the transaction between the respondents and BML, the NHS contract signed in February 2008 should not be regarded as an ‘agreement’ within the meaning of paragraph 16.1. Paragraph 16.1 is contained in a contract between BML and the respondents. What counts is whether or not the reasonable person would regard their reference in paragraph 16.1 to any ‘agreement’ as including the NHS contract that both parties expected to be signed promptly after the completion of the SPA and was in fact so signed. Everything appears to me to point to the conclusion that such contract would be regarded as so included. Its signing was at the very heart of the commercial deal between the respondents and BML. The parties proceeded towards, and completed, the SPA on the basis of a correct common assumption that, immediately afterwards, the newly capitalised Waveform would be able to, and would, sign up to the NHS contract. In these circumstances, it appears to me that, whilst the judge’s construction of paragraph 16.1 is one possible alternative, a commercially more sensible construction is that the parties must be taken to have intended the about-to-be signed NHS contract as falling within paragraph 16.1 (compare Rainy Sky SA v. Kookmin Bank [2011] 1 WLR 2900, per Lord Clarke of Stone-cum-Ebony, at paragraphs 24 to 30). Moreover, paragraph 16.1.5 would be a particularly important warranty in relation to such contract. BML was proposing to provide substantial capital so as to enable the NHS venture to be pursued. All the know-how in relation to the NHS contract, and the extent to which compliance with its requirements was technically achievable, was however with Waveform and the respondents rather than BML. In those circumstances, a warranty of the nature to be found in paragraph 16.1.5 in relation to the NHS contract is exactly what one would expect BML to want. 
47.	I accordingly respectfully differ from the judge as to the interpretation of paragraph 16.1. In my judgment, ‘agreement’ within that paragraph includes the NHS contract that Waveform signed in February 2008. Whilst I do not rely on this in support of that conclusion, it is to be noted that that interpretation is in line with the stance that the respondents themselves took in the disclosure letter and that, until a late stage of the trial, they also took in these proceedings. In adopting that stance, they interpreted paragraph 16.1 just as I would expect the reasonable person, possessed of all the knowledge that they had, to interpret it.
48.	Having come to the conclusion I have as to the interpretation of paragraph 16.1, I find it unnecessary to consider whether the contents of the disclosure letter can be invoked as part of the interpretation exercise. The judge considered that they could not because of the provisions of paragraph 8 of the disclosure letter, and Mr Clarke supported that approach. Mr Booth advanced submissions to the contrary effect, which I have to say I did not find obviously convincing, but I propose, however, to say no more about this issue.
(b) What was the nature of the paragraph 16.1.5 warranty?
49.	If, contrary to his view, the NHS contract was caught by the paragraph 16.1.5 warranty, the judge’s further view was that the determination of whether or not the warranty was breached required an investigation into Mr Sutherland’s subjective assessment as at 11 February 2008 as to whether or not the NHS contract could be fulfilled or performed on time. The judge said that, by clause 5, Mr Sutherland warranted that his assessment was not misleading. If his assessment was misleading, there would be a breach of warranty, but not otherwise. The judge found that Mr Sutherland’s assessment was not misleading. He repeated (paragraph 170) his finding that, as at 11 February 2008, Mr Sutherland ‘believed that the attainment of Level 2 within a 12 month period was achievable, and this was not an ungrounded or reckless belief.’ 
50.	The judge was probably influenced in his approach to the interpretation of paragraph 16.1.5 by the fact that he had apparently understood Mr Booth to have submitted that paragraph 16.1.5 was ‘an absolute warranty as to outcome’ (see paragraph 166 of his judgment). He expressed his disagreement with that and instead adopted his own expressed interpretation of it, which was in line with that advanced by the respondents at the trial. The judge, by inference, appears to have regarded that interpretation as the only available alternative to the ‘absolute warranty as to outcome’ interpretation.
51.	In fact, as he informs us, Mr Booth did not submit to the judge that the warranty was an absolute warranty as to outcome, nor did he do so before us. His submission at the trial and before us was and is that the correct sense of paragraph 16.1.5 is simply that, as a matter of objective assessment as at 11 February 2008, it was being warranted that the NHS framework agreement could ‘readily be fulfilled or performed … on time’. An inquiry as to whether the warranty had been breached neither requires, nor justifies, an inquiry into Mr Sutherland’s subjective opinion of the relevant matter. It requires, and requires only, an objective assessment of the achievability of the obligations of the NHS contract as at 11 February 2008.
52.	I propose to say little more about this issue, because I can see no answer Mr Booth’s submission and can, in particular, see nothing in the language of paragraph 16.1.5 that justifies the subjective interpretation that the judge attached to it. The paragraph says nothing about the respondents or their views as to the achievability of the contract. It says nothing about anyone’s opinion as being relevant to the inquiry. Moreover, I do not understand why the judge considered that clause 5 of the SPA added anything material to the interpretation of paragraph 16.1.5. Clause 5 is the clause by which the respondents vouched the truth and accuracy of (inter alia) the paragraph 16.1.5 statement. But it tells the reader nothing of the nature of that statement. That is to be derived from a consideration of the language of paragraph 16.1, read in its relevant context. In my judgment, an inquiry as to whether the paragraph 16.1.5 warranty has been breached requires an objective assessment, as at 11 February 2008, as to whether the NHS contract could readily be fulfilled or performed by Waveform on time. The judge neither asked himself, nor answered, that question.
(c) Has the paragraph 16.1.5 warranty been breached?
53.	The judge, having (as I would hold) misdirected himself as to the nature of the paragraph 16.1.5 warranty, proceeded to find on the facts that it had not been breached. He did not make any finding as to whether it had been breached if the warranty required an objective assessment as at 11 February 2008. Mr Booth developed submissions to us to the effect that, approaching paragraph 16.1.5 on such objective basis, this court could itself decide that the warranty was breached. He recognised, however, that the court might consider that for it to take on that task would be a step too far, and Mr Clarke, whilst also seeking to answer Mr Booth’s submissions on the merits of the point, submitted that it would. I agree, although I should at least record that Mr Booth’s submissions satisfied me that BML has an arguable case that the paragraph 16.1.5 warranty was breached. That said, it is not for this court to make a primary finding of fact on that issue. The case is anyway going back to the judge for the inquiry as to damages on the other breaches of warranty that he found. The issue as to whether, interpreting the paragraph 16.1.5 warranty on the objective basis that I would favour, there was a breach of warranty, is one that I consider must be remitted to the judge.
Disposition
54.	I would allow BML’s appeal in relation to the dismissal of its warranty claim based on paragraph 16.1.5 and remit to the judge for determination by him whether such warranty was breached and, if so, what (if any) damages are recoverable by reason of such breach.
Baron J :
55.	I agree. 
Rix LJ :
56.	I also agree.