Do M&A lawyers care about contract drafting?

Like all generalisations, it can be shot down in flames with counter-examples. But IP Draughts has seen enough evidence to suggest that many M&A lawyers don’t really give a monkey’s about the discipline of contract drafting.

What matters in that world is following a process, using standard templates, and “doing the deal”. The individual M&A lawyer, negotiating the agreement, is not expected to care too much about the words used. Standard contracts are so long and complex, and deals are done at such speed, that “academic” musing over the meaning of words is alien to the usual way of doing business. Drafting is for the back-room boys and girls (professional support lawyers). If the firm has to take a hit occasionally with a professional indemnity claim, well that’s what insurance is for.

This approach is not unique to M&A work. Finance lawyers are also said to be guilty – see this article about the “three and a half minute lawyer” who spends that amount of time on each transaction.

Of course there are exceptions, including Allen & Overy’s former head of banking, the very distinguished Philip Wood CBE, QC (Hon). A smuggled copy of his drafting notes from the 1980s helped to persuade IP Draughts to write his books on contract drafting and boilerplate clauses.

If these negative thoughts reflect a conscious bias on IP Draughts’ part, fuel for the bias is given by a recent case in the English Court of Appeal. Judgment in the case of Hopkinson & Ors v Towergate Financial (Group) Ltd & Ors [2018] EWCA Civ 2744 was published this week. The case was about a claim under an indemnity in a share sale agreement.

Several clauses of the share sale agreement were scrutinised in this case, but the one that received the most attention from the Court of Appeal read as follows:

6.7 The Purchaser shall not make any Claims against the Warrantors nor shall the Warrantors have any liability in respect of any matter or thing unless notice in writing of the relevant matter or thing (specifying the details and circumstances giving rise to the Claim or Claims and an estimate in good faith of the total amount of such Claim or Claims) is given to all the Warrantors as soon as possible and in any event prior to:

6.7.1 the seventh anniversary of the date of this Agreement in the case of any Claim solely in relation to the Taxation Covenant;

6.7.2 the date two years from the Completion Date in the case of any other Claim; and

6.7.3 in relation to a claim under the indemnity in clause 5.9 on or before the seventh anniversary of the date of this Agreement.

The dispute concerned whether the Purchaser had given valid notice of a claim under the indemnity in clause 5.9. In particular, did the notice comply, and did it need to comply, with the obligation to provide details and an estimate of the total amount – i.e. the words in brackets, quoted above?

In the view of the Court of Appeal, “…it cannot be said that …clause 6.7 was well-drafted nor that, as drafted, it fits well with related provisions elsewhere in the agreement.” The court identified several drafting mistakes, which made interpreting the clause difficult.

With some simplification, the mistakes included:

  1. The clause uses the defined term Claims. The definition is limited to warranty claims and doesn’t mention indemnity claims. So how do you interpret the word Claims in the quoted phrase in brackets, in relation to claims under clause 6.7.3? Does it mean the details need not be provided? Or that you read “Claims” as meaning “Claims and other claims”?
  2. The clause refers to not making claims against the Warrantors. But clause 5.9 (mentioned in clause 6.7.3) doesn’t refer to claims against the Warrantors. Instead it refers to the Vendors and their spouses. Does this mean that clause 6.7 doesn’t apply to people who are not within the definition of Warrantors?
  3. Clause 6.7.1 refers to the Taxation Covenant. This is not a defined term. Tax Covenant is defined. But the definition of Claim makes no mention of the Tax Covenant. So should Claim or Taxation Covenant be interpreted broadly?
  4. Clause 6.7.1 imposes a 7 year time limit for claims in respect of the Taxation Covenant, while clause 6.7.2 imposes a 2 year time limit for any other Claim. Schedule 4 defines Tax Covenant and separately defines Tax Warranty. One might therefore expect that clause 6.7.2 covers Tax Warranties. But Schedule 4 goes on to provide a 7 year time limit for any claims under either a Tax Warranty or the Tax Covenant. How can one resolve this apparent contradition? By assuming that Taxation Covenant includes Tax Warranties? This was David Richards LJ’s conclusion.

David Richards LJ identified further drafting errors and inconsistencies, in other clauses.

At issue was a letter that purported to give notice of claims. The letter was sent to the sellers within the 7 year time limit but didn’t include any details about the claims or an estimate of losses. The letter referred rather generally to two reviews that the target company had been required to make by the Financial Conduct Authority, and any payments that might be made to customers for misselling of financial services, arising out of those reviews.

In the end, David Richards LJ decided (agreeing with the judge at first instance) that the notice given in this letter was sufficient to bring it within the conditions in clause 6.7, and on this basis dismissed the appeal by the sellers and their spouses. The other two judges in the Court of Appeal agreed with Richards.


Two observations from David Richards LJ resonate with IP Draughts.

First, the judge speculated (and IP Draughts thinks this speculation is very plausible) that some of the mistakes arose because clause 6.7.3 was bolted onto clause 6.7 as an afterthought, and the drafter didn’t clean up the rest of the agreement to take account of this change.

Drafting detailed agreements is difficult. It requires painstaking care to ensure  clarity and consistency. It is not enough to bolt a clause on to an existing clause and hope it works. Other parts of the clause, associated definitions and other clauses may need to be considered to ensure that the new clause works properly.

Second, the judge discussed that the starting point for interpreting a contract clause was:

the court should assume, unless driven to a contrary conclusion, that the parties who have entered into a professionally drafted agreement in which terms have been elaborately defined intend to use such terms in accordance with the definitions.

In other words, in such circumstances, it may be appropriate for the court to limit its focus to a textual analysis of the words used. This is the traditional approach to contracts drafted by commercial lawyers as distinct from business people.

But just because the contract has been drafted by solicitors from a respectable commercial law firm, that doesn’t necessarily mean that this assumption will hold. In this case, the judge concluded that the relevant clauses were so strewn with errors that rigorous textual analysis was unlikely to reveal the parties’ intended meaning.

A sad indictment of the drafting of a share sale agreement.







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