When liability “crystallises” under warranty
limitation provision in share sale agreement – David Lascelles acts for
successful vendors on £2million claim.
In Viridor Waste Management Limited v Cutts[2016] EWHC 435 (QB) David Lascelles acted for the successful Defendants and
Part 20 Claimants.
The claim arose out of the sale of a waste management
company (“the Company”) by David’s clients to the Claimant, a subsidiary of the
FTSE 250 company Pennon PLC.
At a time when David’s clients owned the Company it entered
into a high value contract with Milton Keynes Council which provided for an
annual payment by the Company to the Council. Following on from the sale
of the Company to the Claimant, the Council alleged that there had been an
error in the drafting of the contract. In particular the Council argued
that it ought to be rectified to provide for the annual payments to be index
linked. The Council alleged that the effect was that the Company owed it
£2million.
On the basis of the Council’s claims, the Claimant and
Pennon PLC refused to pay the Defendants the outstanding deferred consideration
and brought proceedings for alleged breaches of accounting warranties contained
within the share sale agreement. David’s clients in turn counterclaimed
for the deferred consideration.
The share sale agreement included clauses which limited the
liabilities of the sellers for a claim for breach of the
warranties. The key clause provided:
“If any potential Relevant Claim …arises as a result of a
contingent or unquantifiable liability of the Company, the Sellers will not be
obliged to pay any sum in respect of the potential Relevant Claim until the
liability either ceases to be contingent or becomes quantifiable.
This paragraph shall not operate to avoid a Relevant Claim or claim for breach
of the Second Warranties made with reasonable supporting details in respect of
a contingent liability subject to such contingent liability crystallising
within 3 years of Completion”.
During the course of proceedings, and following on from the
expiry of 3 years after completion, David’s clients brought a summary judgment
application based upon this clause.
At that stage, although proceedings had been threatened by
the Council against the Company, there had been no determination by the Court
that any sums were due from the Company to the Council.
The Claimant and Pennon PLC contended that summary judgment
ought not to be granted. They contended that a claim against the Company
had crystallised when the Council had sent a letter of claim stating that a
claim would definitely be brought. They also contended that the
liability had become quantifiable at that stage and that this sufficed for the
purpose of the clause.
The High Court rejected the Claimant’s and Pennon PLC’s
arguments in favour of those advanced by David on behalf of the
Defendants. The Court accepted that the key question was whether a
liability had crystallised, rather than whether a claim had crystallised or a
liability had become quantifiable. It agreed with David’s clients that a
liability had not crystallised in circumstances where the question of whether a
liability was in fact owed was the subject of a separate as yet undetermined
dispute. The Court further agreed that there was a good commercial reason
for the construction advanced by David, namely the wish of the Defendants to
limit their ongoing liability for claims in relation to a company which they
had sold some time ago.
A copy of the judgment is available HERE.
David
is recommended by the independent directories as a leading junior in
commercial litigation and contentious company disputes. He acts in share
and business sale disputes including claims by vendors for failure to pay
consideration and claims against vendors for breach of warranties, breaches of restrictive
covenants, fraud and for indemnification. He has also acted on numerous
commission claims in respect of such sales.
