In the recent case of Onecom Group Ltd v Palmer [2024] EWHC 867 (Comm), the High Court ruled that a buyer was not time-barred from bringing breach of warranty claims, under the time limits set out in a share purchase agreement (“SPA”).
Background
The case related to the purchase of the entire share capital of a company. The price for the shares in the target company was negotiated on a multiple of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation). The consideration included a cash sum paid to the seller on completion, along with a post completion earn-out arrangement.
In respect of the earn-out, the buyer and the seller were not able to reach an agreement in respect of valuation. Therefore, in accordance with the SPA, the matter was referred to an independent expert who would ultimately determine the earn-out figure in the event of a dispute.
The SPA also provided that the buyer must notify the seller within 24 months of completion of the purchase, if it intended to bring any claims for breach of warranty.
The buyer subsequently identified several breaches of warranty in the SPA due to: –
- The alleged overstatement of gross profit in the management accounts of a member of the target group.
- Ongoing employment costs that had not been disclosed prior to completion or reflected in the assumed EBITDA from which the purchase price was calculated.
The buyer also noted that it had six months from giving notice of a warranty claim (“litigation period”) to begin legal proceedings for breach of warranty. However, numerous matters relating to the breach were also connected to the earn-out payment calculations. Therefore, the buyer asserted that its claims for breach of warranty were at the time unquantifiable until the independent expert had reached a decision and could provide absolute figures.
As a result, the buyer proposed to the seller that the litigation period should be extended to give the independent expert time to determine the earn-out calculation. The parties were not able to reach an agreement on the extension period.
The buyer notified the seller of its intention to bring claims for breach of warranty on 22 June 2022. On 21 December 2022, the buyer commenced legal proceeding, providing best estimates on the claim form as the earn- out payments were not determined at this time.
On 7 June 2023, the independent expert made their determination. Subsequently, the buyer issued a further claim form with absolute figures.
The seller claimed that the buyer was time barred because the legal proceedings, which were based on the absolute figures, had not been commenced within the litigation period. However, the buyer maintained that the claim was made within the litigation period as this began when the independent expert’s determination was complete.
Court decision
The High Court ruled in favour of the buyer. The court stated that the claims were contingent and unquantifiable until the outcome of the independent’s expert had made their determination and therefore the litigation period had not begun under the terms of the SPA.
The seller argued that the SPA required the buyer to be able to make an assessment of how the claim would be quantified, instead of waiting for a determination from the independent expert but this was dismissed by the court.
The court also stated that the figures from the independent expert’s determination were important when assessing damages for loss in respect of the breaches.
Importance
The decision reached by the High Court illustrates the importance of clear drafting. In this case, the court had to consider the meaning and effect of the warranty and consideration provisions and how they interacted with one other. The wording of those provisions was a key factor in the court’s decision.
The court stated that if the parties had intended that a mere estimate of the quantum of a warranty claim would make that claim actual and quantifiable, then the parties would have included terms to this effect in the SPA. However, no such wording was included in the agreement.
If you would like any advice on selling or purchasing shares or assets, then please do not hesitate to contact our Corporate and Commercial Team by completing the form at the bottom of this webpage or calling 01295 204000.
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