This week:
A carve-out from seller limitations for fraud or wilful concealment merely suspended those limitations, rather than disapply them
The Scottish Court of Session has interpreted a provision in a share sale and purchase agreement (the carve-out) which stated that a limitation on the sellers’ liability did not apply to the extent that the claim in question arose as a result of fraud or wilful concealment by any of the sellers.
The court found that, where there was fraud or wilful concealment, the effect of the carve-out was not to disapply the limitation entirely, but rather to suspend it during the period of fraud or concealment.
In reaching its conclusion, the court had to interpret the words “to the extent that”, a phrase that has received some scrutiny following the decision of the High Court of England and Wales in Zayo International Group Ltd v Ainger [2017] EWHC 2542 (Comm) (Zayo), in which the court commented that the phrase “to the extent that” was equivalent to “if” and so introduced a binary condition.
What happened?
Jigsaw Bidco Ltd v Allan and ors [2026] CSOH 96 concerned the sale of shares by various individuals in an engineering and construction company.
As is common, the share sale and purchase agreement (SPA) included warranties given by the sellers as to the state of the target business.
The SPA also included limitations on the sellers’ liability, setting out circumstances in which the sellers would not be liable for (among other things) breaches of the warranties.
One such limitation imposed a deadline on the buyer to notify warranty claims to the sellers, otherwise the sellers would not be liable for the claim. It read:
“The Sellers shall not be liable for a Claim [i.e. a warranty claim] unless notice in writing providing reasonable details as to the nature of the Claim … (in so far as it is known to the Buyer) and, as far as is reasonably practicable, the amount claimed, has been given by or on behalf of the Buyer to the Sellers … within the period of eighteen months commencing on the Completion Date.”
In other words, unless the buyer notified a warranty claim to the sellers within 18 months of the transaction closing, the sellers would not be liable for the breach of warranty in question.
Alongside this, the SPA contained the carve-out, which read:
“Nothing in this Clause 8 [i.e. the clause containing the limitations] applies to exclude or limit the liability of the Sellers if and to the extent that a Claim arises or is delayed as a result of fraud or wilful concealment by any of the Sellers, their agents or advisers.”
The buyer alleged that the sellers had breached certain warranties, and that those breaches had arisen as a result of wilful concealment by the sellers. The buyer served notice of its claims after the 18-month deadline. However, it argued that the deadline did not apply because the carve-out disapplied the time limit where the claim arose from wilful concealment.
The sellers argued that the effect of the carve-out was not to disapply the time limit completely, but rather merely to suspend it while the wilful concealment was ongoing. As a result, they argued, the time limit would still apply, but it would simply be delayed or extended to address any concealment.
What did the court say?
The court agreed with the sellers.
The judge noted that the purpose of the time limit was to provide a period after which the sellers can fully sever their ties with the target business and utilise the sale proceeds. It was a provision that recognised that the information balance between the buyer and the sellers that existed before the transaction completed would, under the buyer’s ownership, diminish over time and disappear.
The carve-out had to be seen in that light. Where there had been fraud or wilful concealment, this might cause the information imbalance to continue for longer, as it would take longer for the buyer to become aware of problems with the target business.
It was therefore “natural” for the contract to provide that, where a seller is fraudulent or deliberately hides matters, the seller should not be able to insist on the strict contractual time limit.
It did not follow that, in those circumstances, the time limits should cease to apply at all. On that basis, even a brief period of concealment should result in the sellers’ negotiated protections falling away completely.
The buyer had claimed that suspending the 18-month notification period for an undetermined period was arbitrary and could lead to uncertainty, and it was highly improbable that the parties had intended that. But the court found that the contract was capable of operating in this respect with “undue difficulty”, drawing parallels with an equivalent stipulation in the Scottish legislation that governs time limits for bringing legal claims (the Prescription and Limitation (Scotland) Act 1973).
By contrast, extending the time limit by the period in which the sellers had “kept [the buyer] in the dark” was not arbitrary and ensured the buyer was given back “time lost” as a result of the fraud or wilful concealment.
The judge noted that the entire concept of time limits of this kind is that “claims should be communicated at the earliest opportunity and without delay”. Where the buyer became aware of a claim towards the end of the 18-month period, or even after it, the “obvious action would be to give notification at once”.
Finally, in reaching its conclusion, the judge had to consider the meaning of the words “to the extent that” in the carve-out.
The buyer had argued that these words introduced a strict binary condition, equivalent to the word “if”. In other words, if there had been fraud or wilful concealment, the time limit would not apply (at all). The sellers, by contrast, argued that the words implied a continuum of impact, such that there could be partial disapplication of the time limit commensurate with the fraud or wilful concealment.
The court agreed with the sellers.
What does this mean for me?
Decisions of the Scottish courts do not create law in England and Wales, although they are persuasive in English and Welsh proceedings and so it is useful to understand the Scottish court’s logic in this case.
The court’s analysis of the words “to the extent that” is particularly interesting given the decision of the High Court of England and Wales in Zayo. In that case, the court interpreted the same words where they appeared in a limitation on sellers’ liability (rather than a carve-out from such a limitation).
It found that the phrase indicated a binary condition, such that the limitation was either engaged or not. The court’s comments were obiter dicta (and so may have less persuasive force than they otherwise would), but they certainly emphasised the need to examine contractual wording carefully.
The Scottish court’s judgment does not mention Zayo, and it is unclear whether it was cited to it. However, the decision in this case shows that the meaning of words in a contract is always context-specific and cannot be taken for granted.
Perhaps the key takeaway for contract parties is that, when negotiating and drafting a commercial contract, it is important to ensure there is no doubt over how a clause will operate. Wording such as “to the extent that” may be insufficiently precise in some contexts to convey the parties’ intentions.
In the context of a share sale and purchase, if the parties intend for certain provisions of the SPA (such as limitations of liability) to be disapplied completely in certain circumstances (such as where there is fraud), the SPA should make this explicitly clear. On the other hand, if the intention is that a party should simply have more time as compensation for any fraud or wilful concealment, again this should be set out clearly.
The court’s comments that a buyer should notify a warranty claim “at the earliest opportunity” are more challenging. Sometimes, an SPA will state explicitly that a buyer must notify any warranty claim “as soon as possible” (or wording to similar effect) and, in any event, within a stipulated time limit.
This is a matter for negotiation and, if wording to this effect does not appear in the time limitations, the assumption is that the buyer can wait until the end of the notification period to communicate its claim. Again, much will depend on the text and context of the SPA and the parties’ intentions, as shown by all the evidence.
The Serious Fraud Office (SFO) has updated its cooperation guidance, which outlines its key considerations when deciding whether to charge an organisation with an economic crime offence or invite it to negotiate a deferred prosecution agreement (DPA).
Perhaps the key change is the introduction of a bespoke email address to allow legal advisers to organisations to speak directly with the SFO’s General Counsel about a potential self-report. The legal adviser will be invited to a meeting with the General Counsel to discuss questions on an anonymous basis, with a note being shared with the SFO’s Intelligence Division.
Other changes include the following.
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The SFO had previously pledged to conclude DPA negotiations within six months. This commitment has now been caveated to “wherever possible”, indicating negotiations are taking longer than anticipated. However, the SFO continues to commit to a six-month timeframe for deciding whether to open an investigation following receipt of a self-report.
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The Intelligence Division will inform an organisation promptly if they think another agency is better placed to deal with a self-report and, if there is multi-agency interest, work proactively with agencies to determine which is most appropriate for the referral.
Whilst a prompt self-report is a strong indicator of cooperation, the guidance continues to emphasise that cooperation does not end there and requires going “above and beyond what the law requires”. Absent a self-report, an organisation will need to show “exemplary cooperation” to qualify for a DPA.
It will be interesting to see how recent government proposals to incentivise whistleblowers will interact with the SFO’s assessment of “exemplary cooperation”, given the credit attributed to an organisation’s self-report may be diminished if a whistleblower makes the first referral.
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ESMA approved revised MAR disclosure guidelines. The European Securities and Markets Authority (ESMA) has published a final report with revised guidelines for delaying the disclosure of inside information under the EU Market Abuse Regulation (EU MAR), following the introduction of the EU Listing Act. Under EU MAR, an issuer must disclose inside information to the market without delay, unless it has a legitimate interest in delaying disclosure. The guidelines set out when this might apply.
The updated guidelines contain revised overarching guidelines for disclosure, although the specific questions are unchanged. They will now be translated into the official EU languages and take place from the date of publication. The ESMA guidelines do not strictly apply to disclosure under the UK Market Abuse Regulation (which derives from EU MAR), although generally the Financial Conduct Authority adopts a similar approach to ESMA.
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Reporting on intangible value drivers. The Financial Reporting Council (FRC) has published a thematic review on reporting on intangible value drivers. The report, which is based on a review of 10 companies’ strategic reports, covers both intangible assets and other intangibles, such as workforce and customer relationships. It sets out key recommendations to assist with reporting in this area.
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FCA review of brokerage market abuse surveillance. The Financial Conduct Authority (FCA) has published issue 86 of Market Watch, in which it sets out the findings of its review of retail brokerage firms’ surveillance arrangements for detecting market purpose (principally insider dealing, but also regarding market manipulation mitigation).
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