Mind the Words: A Steep Learning Curve on the Importance of Wording in Share Purchase Agreements

The Buyer’s claims included two different pathways to recovery. The first was under an indemnity in the share purchase agreement (“SPA”), whereby the Vendors agreed to indemnify the Buyer for any “clawback, recovery, or repayment to ESFA”. The second was under several warranties in the SPA, with a central warranty being that the Company had, in the four years previous to the Buyer buying the Company, “complied…in all material respects with the [ESFA] Funding Rules”.

The Vendors had already agreed in October 2022 to indemnify the Buyer under the terms of the indemnity for an amount of £783,325. Having complied with this provision, the Vendors argued that because the Buyer could claim under this indemnity, it could no longer claim under a warranty and sought to rely on the language of a double claims provision in the SPA:

“If the same fact, matter, event or circumstance gives rise to more than one claim for breach of any of the Warranties, or to a claim both under the Warranties, an Indemnity Claim and/or the Tax Covenant the [Buyer] shall not be entitled to recover more than once in respect of such fact, matter, event or circumstance.”

However, the Court held that the language of the clause did not prevent the Buyer from pursuing one claim at the expense of another – it simply means that the Buyer could pursue any or all of the claims, but they could only recover under one of them.

The Court felt that this was reinforced by the indemnity being expressed as “without prejudice to any other rights or remedies available to the [Buyer]” and the warranties were expressed as “not limited or restricted by reference to or inference from…any other term of [the SPA]”.

As such, the Buyer was entitled to pursue claims under both the indemnity and the warranty for the same set of facts and, having succeeded in proving both its indemnity and warranty claims, was able to choose to recover £5,211,625 from the warranty claim instead of £783,325 from the indemnity claim – multiplying by more than 6.5x the amount recovered.

Corporate transactions typically include a set of warranties which are contractual statements of facts or assurance about important matters relating to the selling company and its business. The seller will then qualify these warranties in a disclosure letter to the buyer, setting out if any of the warranties are not true and accurate. This disclosure letter is important, as, if a matter is disclosed to the buyer before completion, then the buyer cannot then bring a claim against the seller on the basis that the warranty was not true and accurate, with respect to the specific matter that was disclosed. The SPA contained a clause excluding any liability for the Vendors if the facts that gave rise to the warranty claim:

“are Disclosed in the Disclosure Letter or Disclosure Documents; and

Were within the actual (and not, for the avoidance of doubt, imputed, constructive, implied or deemed) knowledge of the Purchaser at the date of this Agreement.”

However, a separate clause provided that the warranties were given “subject to matters Disclosed and to the limitations set out in Schedule 5” and did not refer to a need to demonstrate the Buyer’s actual knowledge (i.e., the Buyer had to have developed an actual awareness of the relevant facts). The Vendors argued this means that, for the purposes of the clause excluding liability, they only had to demonstrate a matter was either Disclosed or within actual knowledge of the Buyer.

The Court disagreed with the Vendors. It was held that the disclosure exercise should lead to the Buyer developing actual knowledge. As the exclusion of liability clause specifically required actual knowledge, the Vendors were not permitted to argue that a matter disclosed that could have resulted in constructive knowledge (i.e., what the Buyer ought to have discovered on enquiry of matters disclosed to them) was sufficient.

The Court also looked at the definition of Disclosed in the SPA, which was “fairly disclosed with sufficient detail to identify the nature and scope of the fact, matter or information concerned”. It was noted that this language, when read with the exclusion clause, imposed an obligation on the Vendors to bring matters to the Buyer’s attention through positive statements, rather than simply being able to disclose a matter to the Buyer and then let them work it out itself.

The key warranty relied on by the Buyer was that the Vendors had warranted:

“The Company:

(a) during the last four years has complied, and continues to comply, in all material respects with the Funding Rules; and

(b) so far as the Vendors are aware, is entitled to receive all funding under contracts in place between the Company and ESFA, the Welsh Government and ACT, and/or any other provider of funding for training delivered to schools.”

The Vendors argued that the use of “and” between limbs (a) and (b) of the warranty was conjunctive. As a result, the Vendors argued, (a) and (b) formed two parts of one composite warranty – both of which would need to have been breached for a successful claim under the warranty.

Again, the Court rejected the Vendors’ argument. It found the natural and ordinary meaning of the two limbs was that they were, in fact, two distinct warranties despite being heavily inter-connected and that the warranty containing the two limbs could be breached by either one of the two limbs being breached.