High Court in England: indemnity claims in a Share Purchase Agreement – no implied term of accuracy

In a recent case, Bir Holdings Ltd v Mehta [2014] EWHC 3903 (Ch) it was held in the context of a Share Purchase Agreement (SPA) that indemnity claims were not subject to an implied term of being “accurately calculated and based on factual substance” (as had been argued).

The judgment highlights the importance of expressly setting out the mechanics and requirements in an SPA in relation to making an indemnity claim.  If there is a requirement for all claims to be supported by written evidence, this should be expressly stated as should any mechanics for the seller to dispute a claim.

Facts:

The case arose from the sale of shares in a company, Quinton House Ltd, which ran a nursing home near Stratford on Avon.  Under the terms of the SPA, the buyer paid part (£250,000) of the purchase price (£687,500) into a retention account in respect of any Relevant Claims (defined as: “a claim under clause 5 [warranties], 6 [tax covenants] or 7 [specified indemnities] or Schedule 6 [completion accounts] of the contract”.)  There was no requirement in the SPA for the buyer to substantiate any such claims, nor was there a mechanism for the seller to dispute the claims made from the retention account.

The buyer subsequently obtained payments from the retention account in relation to claims.  The seller disputed these payments, alleging that in order to give efficacy to the agreement, there was an implied term that any payment from the retention fund had to be substantiated by the buyer.  Therefore, unusually, the claimant in this case was the seller and the defendant was the buyer.

Held: The judge (HHJ David Cooke) rejected the argument about there being any implied term.  He held that the mechanics of the retention account in the SPA were intended to be favourable to the buyer by allowing him to deduct amounts without prior justification.  Since this put the buyer in a commercially advantageous position, it would be inconsistent to imply a requirement on the buyer to accurately substantiate its claims.  He noted that this was especially so since a court has no power to improve the bargain the parties actually made, or to decide what it would have been reasonable for them to agree in the circumstances.

For the case click here (requires subscription).  See especially paragraphs 7 and 24 to 27.

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