SUMMARY AND BACKGROUND
In or during May 2011, the claimants in the matter, namely Zedra Trust Company (Jersey) Limited and Oliver Nobahar-Cookson (collectively the “Claimants”) concluded a written sale and purchase agreement with The Hut Group Limited (the “Defendant”) wherein the Claimants agreed to sell their shares in Cent Ltd (the “Company”) to the Defendant for a consideration price of £31,171,782.00 (the “Consideration Price”) (the “SPA”). The Claimants and the Defendant shall collectively be referred to as the “Parties” herein and “Party” shall mean either one of them as the context may require.
The SPA included a mechanism for determining whether there had been an over provision in the accounts and, in the event that there had been, potentially entitled the Claimants to further payments. Further, the SPA provided that in the event that there had been such over provision, the over provision was to be determined by the accountants, acting as experts. The relevant terms thereof included the following provisions:
• an adjustment clause; by which the Defendant, at the request of the Claimants, would request that the Company’s auditors, namely Ernest and Young LLP (“EY”) determine (as experts and not as arbitrators and at the expense of the Claimants) whether any adjustment was due to the Consideration Price;
• a review mechanism; after EY had provided any report, they could be requested to review such determination, and to determine whether such determination remains correct and/or should be amended. Either Party could exercise the review clause, at its own expense; and
• a dispute resolution clause; under which any dispute, shall at the election of either/any Party be determined by an independent expert (acting as expert and not as arbitrator) and in the absence of manifest error, his/her determination shall be conclusive and binding on the Parties.
The Claimants exercised their right to request an auditor’s report, and the Defendant duly obtained one (the “Report”). The Report, duly prepared by EY, contained a review of the Company’s accounts which was used to determine whether there had been an over provision for tax and related matters. The Report concluded that there had been a small over provision of £18,435. The Defendant showed the Claimants the ‘background’ and ‘executive summary’ sections contained therein but refused to disclose the full Report to the Claimants on the basis that there was nothing in the SPA requiring it to do so. The Claimants argued that a term requiring disclosure of the complete Report should be implied into the SPA because, without the full Report, it could not know if it was entitled to exercise its right to ask EY, to review its decision. Accordingly, the Claimants brought a Civil Procedure Rules 1998, part 8 claim seeking an order that the Defendant disclose the full copy of the Report and all communications and documentation relevant thereto.
HIGH COURT HELD
In the England and Wales High Court (Commercial Court)(the “Court”), the Claimants argued that they were entitled to disclosure for two reasons: (i) firstly, because the adjustment clause created a relationship of agency, by providing that the appointment of EY was to be at the request of the Claimants and at their expense and that such agency entitled the Claimants to documents prepared in the course of such agency relationship; and (ii) secondly, under a term that needed to be implied in order to give efficacy to the contractual review mechanism and the dispute resolution clause. Unless the Claimants were entitled to the requested documents, they could not ascertain whether to invoke those clauses.
The courts in England and Wales will only imply a term into an agreement if the term satisfies the strict test that either: (i) it is necessary to give business efficacy to the contract (so, if the agreement works without that term in it, the term will not be implied); or (ii) it is so obvious it goes without saying. Further, a term should only be implied into an agreement if it is (i) reasonable and equitable, (ii) if it is capable of clear expression, and (iii) if it does not contradict any express term of the agreement.
While the business efficacy and ‘so obvious it goes without saying’ tests are alternatives – only one needs to be satisfied for a term to be implied, though the Court noted it would be a rare case where one was present without the other. In this case, the Court ruled that both tests were satisfied and the term argued for by the Claimants should be implied in the SPA. The Court found that the SPA clearly envisaged a review in which either Party, informed the auditors of the Company, EY, of the circumstances which it claimed warranted potential amendments therein. However, to engage effectively in that process the Party would need to know the basis of the original determination so as to be able to assess what circumstances were taken into account and so as to point to further relevant circumstances. Either Party could not know this without seeing the whole Report.
The Court held that this part of the SPA could only work properly if that was the case, so the term was necessary to give business efficacy to it. Second, the Court stated that the two Parties had opposing interests so it would be unusual if one was to have access to the Report, but not the other – especially given that the Party being denied access had paid for it. Ultimately, the Court held that a term is to be implied into the SPA providing for the Claimants to be supplied with full copy of the Report and any other documentation containing the determination prepared by EY.
VALUE
It is important to give careful consideration to any contractual adjustment mechanism of this nature when drafting a SPA. Parties may leave out the finer details, expecting the counter-party to cooperate throughout the process. This case is a clear illustration that this will not always be the case. Unless express provision is made to regulate the disclosure of information by one party to another, the general law may only provide limited assistance.
Written by Michal Asoulin Checked by Daniella Brocco
