Background:

Mr Palmer owned F2P (Group) Ltd (F2P) which he sold to Onecom Group Ltd (Onecom) in February 2021. The purchase price for the shares of F2P amounted to circa £60m plus additional earn-out consideration. This case centred around the interpretation of the notification provisions within the share purchase agreement (SPA) and whether Onecom complied with its obligation to provide timely notice of alleged breaches of the warranties given by Mr Palmer.

The SPA detailed the terms of the sale, including warranties related to F2P and its business. The SPA also included an earn-out mechanism, under which an additional payment would be due to the seller if F2P’s business performed above a predetermined level during the year following completion of the sale. Pursuant to the SPA, if the parties couldn’t agree on the earn-out payment amount, they would refer the matter to an independent expert.

The Dispute:

As would be normal, the SPA specified that certain limitations would apply to the seller’s liability for breach of warranty and the notification requirements. The relevant sections can be summarised as follows:

• Notification Period: The buyer had 24 months from completion of the sale to notify the seller of any potential warranty claim.
• Litigation Period: After notifying the seller of a potential warranty claim, the buyer had a further six months to initiate legal proceedings for breach of warranty.
• Contingent Claims: If a warranty claim was contingent or incapable of being quantified, the seller wouldn’t be liable until his liability became actual and quantified.

Onecom brought a claim for an alleged breach of warranty in September 2023. Mr Palmer sought summary judgment and/or strike out of the claim on the grounds it was brought nearly 9 months after the agreed Limitation Period, thus the claim was time-barred. Onecom submitted that the claim fell within the definition of Contingent Claims because the circumstances giving rise to the claim might have been taken into account in the earn-out calculations, therefore the Litigation Period did not commence until the independent expert determined the earn-out amount, at which point the claims became actual and quantified.

Onecom served its claim form on Mr Palmer within six months of the independent expert’s determination.

Outcome:

The High Court dismissed Mr Palmer’s application for summary judgment and/or strike out. The Court found in favour of Onecom for a number of reasons, including but not limited to the following:

• There was a connection between the claim for alleged breach of warranty and the earn-out consideration calculations. Matters forming the basis of the warranty claims influenced the calculations for the earn-out payment;
• The claim for alleged breach of warranty was contingent and incapable of quantification until the outcome of the independent expert process was concluded. Given a breach of warranty claim involves a claim for damages for loss, the assessment of which required knowing both the claimant's actual position (given the breach) and the counterfactual position (absent the breach), Onecom’s actual position could not be known until the independent expert process was concluded; and 
• There was a risk of double recovery against the seller unless the warranty claim awaited the outcome of the independent expert’s determination. The buyer might recover under the warranty claim and receive redress under the earn-out calculations.

Considerations:

The High Court’s decision highlights the interplay between warranty claims, notification periods, earn-out provisions and contingent claims wording. Close attention should be paid to these provisions, ensuring that they are carefully drafted, understood, and adhered to.

By allowing the buyer to delay its warranty claim until the earn-out dispute was resolved, the Court recognised the practical challenges of quantifying warranty claims in such situations. However, whilst the Court’s findings were appropriate for the specific facts of this case, the ruling does pose further questions on what approach should be adopted in a situation where the earn-out period is longer than one year. It cannot be considered reasonable for a buyer to delay bringing a warranty claim until a dispute relating to an earn-out period of, for example, three years, is resolved.

The Court’s decision poses an interesting question of whether buyers should accept the inclusion of a litigation period provision within purchase agreements. The various provisions of an SPA and the interaction of those provisions can be complex and the facts of this case show that inclusion of a litigation period can result in game playing by the seller and lead to lengthy delays and significant costs. This must be balanced against a seller’s peace of mind that if a buyer notifies a warranty claim, it must at some point, bring the claim in front of a Court for resolution.