The devil's in the detail
The recent case of Hut Group Limited v Nobahar-Cookson & Anor does not introduce any new law but deals with a number of interesting issues that…
The recent case of Hut Group Limited v Nobahar-Cookson & Anor does not introduce any new law but deals with a number of interesting issues that can arise when purchasing the shares of a company.
Mr Cookson and his trust agreed to sell their online sports nutrition business, Cend Limited, to The Hut Group Ltd (THG) for £58m of which £30m was to be satisfied in cash and the remaining £28m by the issue of shares in THG. The arrangements were encapsulated in a share purchase agreement dated 31 May 2011.
Following completion things started to unravel. First it became apparent that the management accounts of Cend were not as warranted since they had not been prepared on a basis consistent with previous management accounts nor fairly represented Cend’s financial position. As a consequence, THG made a breach of warranty claim for £8.5m. Secondly, as a result of a fraud uncovered at THG, the shares in THG issued to the Sellers turned out to be worth considerably less than the £28m valuation placed on them by THG. This culminated in the Sellers making a counterclaim of £12.5m in damages for a breach of warranty claim (THG had warranted the accuracy of its own accounts to the Sellers) and a claim for deceit in the sum of £13.5m.
The case raises issues of interpretation. The sale agreement in this case included the following provision:
“The Sellers will not be liable for any Claim unless [THG] serves notice of the Claim on the Sellers (specifying in reasonable detail the nature of the Claim and, so far as practicable, the amount claimed in respect of it) as soon as reasonably practicable and in any event within 20 Business Days after becoming aware of the matter.”
In order to try and defeat the breach of warranty claim the Sellers endeavoured to argue that THG had not complied with the above clause, in so far as it had not given sufficient detail of the claim to the Sellers within the required timeframe.
At first blush one might consider the requirements of the clause to be fairly clear. However upon closer scrutiny a number of issues arise:
- what is meant by “becoming aware of the matter”?
- who within the Buyer has to become aware of the matter?; and
- the level of detail required in the notices.
THG submitted that the word “matter” was a reference back to the word “Claim” and that mere awareness of a potential issue was not sufficient. They would only be aware of the claim once professional advice had been taken. Conversely, the Sellers submitted that “the matter” meant knowledge of the factual grounds for the breach of warranty claim and not that those grounds may constitute an actionable claim. The Judge found that “matter” meant “Claim” not just by reason of the wording of the clause but also on the basis that “without knowing that a claim has a proper basis, a party to a share purchase agreement would not expect to (or wish to) have to notify the other party of it.”
The Judge then addressed who within THG had to become aware of the matter. The Sellers accepted that the matter had to come to the attention of somebody with knowledge of the share sale agreement. The Judge found that the trigger point for notice was the initial view of professional advisers that there may be reasonable grounds on which to proceed with a claim under the agreement.
Finally, the Judge considered the level of detail required in the notices. The Sellers’ case was that the notice was defective because: it massively understated the amount ultimately claimed; it contained no information about the basis of the calculation; and it inaccurately described the nature of one of the adjustments that THG considered was necessary to be made to the management accounts.
The sum initially identified in the notice was £828,441 whereas the ultimate amount claimed was £8.4m. The Sellers argued that the quantification was deferred as a tactical measure anticipating the claim in respect of THG’s own breach of warranty. Whilst the Judge accepted that there may have been merit in this allegation, he found that at such an early stage the notice provided all that was practicable by way of quantification. The Judge also touched upon the amount of detail required in the notice and stated that “At this stage, not much was contractually required in my view, and details would quite likely follow”.
The case is a salutary reminder that however clear one may consider the wording of a clause when drafted, with the benefit of hindsight ambiguity can creep in.
As far as the outcome of the case as a whole was concerned the Sellers were awarded £10m in damages for breach of warranty, their claim for deceit failed and THG were awarded £4m of damages for their breach of warranty claim.
If you are interested in finding out more about the issues raised in this article, please contact Gareth Griffiths, a partner in our Corporate department, on 0121 200 3475 or email email@example.com.