UK: In Or Out? Court Interprets An Indemnity In A Share Purchase Agreement

Last Updated: 28 August 2019
Article by David Collins, Richard Barham, Candice Chapman and Anna Janik

The High Court has considered whether certain buyer claims under a share purchase agreement (SPA) relating to the sale of Nottingham Forest Football Club were covered by the seller's indemnity in the SPA and a related misrepresentation claim.

Historic liabilities

Under the terms of the SPA, the seller agreed to indemnify the buyer against losses arising from the Club's "Liabilities" exceeding £6,600,000 as at 31 December 2016.

The agreement defined "Liabilities" as:

" ... the aggregate amount of all liabilities in respect of any fact, matter or circumstance on or prior to [31 December 2016] (and only to the extent such liabilities relate to such period) and whether or not due for payment at [that date] ... including, without limitation ... [various specific categories listed]".

The buyer argued that the term "Liabilities" should simply reflect the concept of liabilities in Financial Reporting Standard (FRS) 102, the accounting standard adopted by the Club for financial reporting purposes. This interpretation would mean that those liabilities recognised for financial reporting purposes on 31 December 2016 would come within the indemnity.  In support of its argument that an accounting term in the SPA should have the same meaning as in the accounting standard adopted by the Club, the buyer cited the Court of Appeal decision in Macquarie Internationale Investments Ltd v. Glencore UK Ltd [2010] EWCA Civ 697. 

The seller argued that the defined term was different from, and more restrictive than, the approach to the assessment of liabilities in FRS 102. While it was correct to start with the items that were liabilities for financial reporting purposes, it was also necessary to take into account the restrictions and modifications imposed by the SPA. Therefore, the liabilities in question must "relate to" the period up to 31 December 2016. This meant that any liabilities relating to a subsequent period, in the sense that the benefit in respect of which they were incurred was enjoyed or provided after that date, were not within the definition. They therefore fell outside the scope of the indemnity.

The court agreed with the seller. The definition of "Liabilities" was not the same as the wording of FRS 102. It would be "harder work" to say that the bespoke wording of the former had the same meaning as that of the latter. The SPA drew a clear distinction between "Liabilities" and "liabilities", with the latter appearing in several places within it. To equate the two would mean ignoring the words "(and only to the extent such liabilities relate to such period)" in the definition of "Liabilities". It would also not accord with the commercial rationale of the exclusion of liabilities after 31 December 2016.   

The court found that the Court of Appeal's decision in the Macquarie case had no bearing on the issue before it. That case had concerned the meaning of materiality in a warranty in an SPA as to the accuracy of management accounts. It did not lead to a conclusion that a defined term in an SPA must or should be given the same meaning as used in accounting standards. Relevant accounting standards may be the starting point when considering the defined term in question but were not determinative.  

Data room issues

The buyer also claimed under an indemnity against losses due to the inaccuracy of a statement in the SPA that all material contracts had been included in the transaction data room. 

Again, the buyer's claim failed. Although the court agreed with the buyer that certain material contracts had not been included in the data room, the buyer failed to establish that it had suffered a loss as a result.  

The court looked at the evidence showing exactly when the buyer had accessed the data room. This was before the relevant material contracts had been concluded. There was no evidence that adding the contracts to the data room would have resulted, as the buyer alleged, in it taking steps to renegotiate the SPA. Further, evidence that the buyer would have looked to renegotiate the SPA's commercial terms fell short, in the court's view, of demonstrating that the buyer had suffered a loss due to the absence of the contracts in question from the data room.  

The misrepresentation claim

One of the documents in the data room was a trial balance sheet as at 31 December 2016 which included a "Liabilities" figure of just under £6,600,000. The buyer argued that the trial balance amounted to a representation by the seller that had induced the buyer to enter into the SPA. As a result of the difference between the represented and the actual "Liabilities" figure, the buyer had suffered a loss which it was entitled to recover by way of a misrepresentation claim. 

The court disagreed with the buyer's analysis. It did not think the representation was a misrepresentation. The seller had reasonable grounds to believe that the representation was true, as the balance sheet had been derived from information provided by the Club's responsible officers. 

On the question of reliance, the court concluded that the buyer's reliance was only for the purpose of establishing the "Liabilities" figure for the purpose of the indemnity. It was not for any broader purpose, including whether or not to enter into the SPA.

Comment

The decision of the court on the interpretation of the scope of the indemnity is not surprising given that the buyer was asking the court to read it in a way which the language did not really accommodate.  Nonetheless, the decision is a useful reminder of:

  • the need to be careful when using the same words both as defined terms and in the body of an agreement (in this case, "L/liabilities"); and 
  • the importance of working with a client's financial/accountant advisers in relation to financial definitions within an SPA where appropriate.

Al-Hasawi v. Nottingham Forest Football Club Ltd [2019] EWHC 1287 (Ch)

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions