Defendant cries Wolf (of Wall Street) to successfully defend claim

The Court has recently ruled in favour of an individual seller, Tom Crombie, in a breach of warranty and fraud claim brought against him by a corporate buyer, Inspired Education Online Limited (“Inspired”). The claim arose primarily from emails sent by Mr Crombie using his company email account, which Inspired described as “highly offensive, obscene, vulgar, racist, sexist and discriminatory” but which Mr Crombie said were simply an imitation of the lead protagonists in the film Wolf of Wall Street.

The background

Mr Crombie was originally a teacher. In 2016, he founded My Online Schooling Ltd (“MOS”) to meet the needs of pupils who were unable to attend school due to mental health or special educational needs. MOS flourished, helped by the COVID-19 pandemic which forced learning online during the various lockdowns. By mid-2022, MOS had approximately 1,000 pupils from around 80 different countries. 

On 15 November 2022, Inspired – which owned 111 schools across 26 countries - agreed to buy MOS for £9 million, with a view to incorporating MOS into the Inspired group. In the usual way, Mr Crombie provided various warranties to Inspired, including those detailed below. 

Inspired’s claim

Following the sale and purchase, Inspired discovered emails exchanged between Mr Crombie and Ewen Burgess, the Chief Operating Officer of MOS, which it considered to amount to gross misconduct. Inspired said that the emails made Mr Crombie liable to being dismissed and that Mr Crombie had intentionally concealed the emails from Inspired during the due diligence phase.

For the same reasons, Inspired also alleged that Mr Crombie was in breach, and had fraudulently misrepresented the truth, of two warranties given to Inspired in the Share Purchase Agreement (the “SPA”). These warranties related to compliance with laws and Mr Crombie having no knowledge of any dispute, claim or litigation involving MOS, or circumstances likely to give rise to the same. Inspired sought damages from Mr Crombie equivalent to the difference in value between MOS’ shares as warranted and their true market value, at the time the SPA was entered into.

Mr Crombie denied all of MOS’ allegations and said that the emails were “obviously jokey” or “banter”, and were based upon the film Wolf of Wall Street. Mr Crombie also pursued a counterclaim against Inspired, seeking an order which required Inspired to complete the Completion Accounts process and to agree the deferred cash owed to Mr Crombie under the terms of the SPA.

The judgment

The Court did not consider Mr Crombie’s emails to amount to gross misconduct, instead finding that whilst the emails were unprofessional and inappropriate, Mr Crombie and Mr Burgess honestly and realistically believed that their email exchanges were private and the emails were simply two close friends ‘letting off steam’. As a result, the Court found that there was not any real likelihood of embarrassment or damage to MOS. Accordingly, Inspired’s allegations that the emails amounted to gross misconduct and that Mr Crombie had acted in breach of the two warranties failed.

The Court also determined that there was no scope to find an allegation of fraudulent misrepresentation proven against Mr Crombie, relying in particular upon Inspired not having cross-examined Mr Crombie on these allegations at trial. 

As to the Completion Accounts and deferred cash issues, the Court found that Mr Crombie had validly challenged the draft Completion Accounts and Purchase Price Statement (the “Draft Documents”). Under the terms of the SPA, Inspired was required to deliver to Mr Crombie the Draft Documents within 40 business days of the SPA being entered into and Mr Crombie was required to notify Inspired within 20 business days of receiving the Draft Documents whether he agreed with them. If he did not, the SPA required Mr Crombie to set out the alterations to the Draft Documents that he considered necessary. The Draft Documents were sent by Inspired on 3 February 2023, with Mr Crombie notifying Inspired that they were not agreed and his reasons why not on 3 March 2023.

Inspired contended that Mr Crombie had failed to provide the notification by the contractually agreed method set out in the SPA, by sending his notification to the incorrect recipient and not providing Inspired with the alterations he considered necessary within the Draft Documents. The Court found in favour of Mr Crombie, finding that on its specific wording, the clause in the SPA which required notification to be given was to be read more widely than Inspired had proposed and that a wider interpretation was consistent with the commercial purpose of the clause, along with what business people would treat as reasonable. Whilst Mr Crombie had not set out the alterations he considered necessary within the Draft Documents, it was sufficient for him to have set these out in his email. The Court emphasised that it considered this to be the ‘just result’.

Conclusion

Fraud allegations are serious and can have very damaging consequences for those accused. For this reason, fraud claims should not be pursued without proper evidence and the Court subjects fraud allegations to particularly close scrutiny. This case is notable, as Inspired alleged that Mr Crombie had made fraudulent misrepresentations in relation to the warranties that he had given, but Inspired then did not cross-examine Mr Crombie as to whether the warranties were false. The Court determined that “it is a basic principle of fairness that if a party is being accused of fraud, and is then called as a witness, the particular fraud alleged should put specifically to that party so that he/she may answer it”. This is a stark reminder that fraud allegations should be properly considered at the outset of a claim and, if pursued, should be addressed fully at trial.

This case also provides helpful guidance as to how the Courts will interpret ‘notice of claim’ clauses in respect of Completion Accounts and the interaction of these clauses with more general notice clauses within SPAs. In this case, the Court adopted a flexible approach to the language, taking into account the commercial purpose of the relevant clause within the SPA and what business people would treat as reasonable, as well as what would be the ‘just result’.