This article was first published on LexisNexis In Brief.
The Claimants claimed for £9 million pursuant to a breach of warranty concerning alleged undisclosed knowledge on the part of various warrantors in a SPA agreement, alternatively, the sum of £3.6 million pursuant to a collateral contract claim.
What should dispute resolution lawyers take note of?
The case addresses the following principle points: first, the law concerning agreements made by correspondence and how earlier correspondence can be used to explain subsequent and, utterly inconsistent, documentation. In the context of the case a letter emerged from the Claimants dated 6 months after the date of the alleged agreement by correspondence which flatly contradicted the presence of an agreement. Second, the degree to which later agreements compromise contractual rights where those contractual rights have yet to crystallize at the date of the later agreement. At the date of the agreement, the Claimants alleged that the breach of warranty claim was not at the forefront of their minds and, accordingly, the Claimants could elect between the remedies sought in the two claims advanced. Third, the proper procedure for arranging video-link evidence from witnesses abroad. Put simply, it is very hard, if not impossible, to do so in civil cases when evidence is to be given from Japan – after voluminous correspondence with the Foreign & Commonwealth Office the Japanese Ministry of Justice informed the FCO that evidence may not be taken within their jurisdiction. Fourth the judge addressed imputed knowledge to companies.
What was this case about?
The case concerned a complicated set of warranties in a share-purchase agreement pursuant to which the First Defendant purchased the entire shareholding in a company called Kitcatt Nohr Alexander Shaw. The intention behind the SPA was to join KNAS with Digitas UK and payment for KNAS was part dependent on the performance of the combined company. The relevant warranty in the SPA was a risk-sharing warranty which concerned the state of knowledge of various individuals. Put simply, the warranty given by the First Defendant was that there were no facts or circumstances which would reasonably be expected at the date of the SPA to reduce the Revenue and Operating Income of the combined company by designated percentage thresholds at a date 2 – 3 years beyond the date of the SPA. In the event of a breach the terms of the SPA mandate certain adjustments to the deferred payment provision which provided for the further consideration to the Claimants based on the performance of the combined company. Following the SPA the combined company lost a large portion of its revenue. In light of that loss of revenue the Claimants sought to re-negotiate the terms of the SPA. The Claimants alleged that in the course of various emails an agreement was reached by way of re-negotiation with the First Defendant in which the First Defendant agreed to change the payment mechanism in the SPA, alternatively, with the Second Defendant in which the Second Defendant agreed to procure that the First Defendant change that mechanism.
What did the court decide?
The court held that:
- The First Defendant was in breach of warranty. There were facts and circumstances which would have been reasonably be expected to reduce the future income of the combined company known to the relevant individuals. However, there was no bad faith involved and no deliberate withholding of information. The undisclosed knowledge comprised a weakness in various client relationships and specifically certain streams of sub-contracted work of Digitas UK which, whilst they would continue for at least a year, were not likely to still be realized in 2 – 3 years being the contingent dates.
- By the terms of the SPA, the proper adjustment in the event of the breach gave rise to a deferred consideration of £2.6 million.
- There was a collateral contract between the Claimants and the First Deferred to alter the machinery in the SPA which gives rise to a payment of £2.6 million. The agreement arose in the course of various emails between representatives of both parties. Importantly, the later emails sent by the Claimants denying the existence of the agreement were sent in bad faith because they were trying to unravel the agreement to give them a greater prospect of a higher payment.
- Thus, irrespective of whichever claim you take, the First Defendant is to pay the Claimants £2.6 million.
- The claim against the Second Defendant was dismissed. There was no evidence that the Second Defendant was ever involved in the correspondence concerning the re-negotiation and it would have been regarded as ‘insulting’ had the Claimants even suggested that the Second Defendant might be involved.
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