Time limits for bringing unquantifiable breach of warranty claims in share purchase agreements: Onecom Group Ltd v Palmer

The High Court recently held in Onecom Group Ltd v Palmer [2024] that a buyer was not time-barred for bringing breach of warranty claims by a contractual time limit set out in a share purchase agreement (“SPA”) where the claims were deemed contingent and unquantifiable until the amount of earn-out consideration payable could be determined by an independent expert.

Background

The case concerned the acquisition of the entire share capital of F2P (Group) Ltd (the “Target”) from Mr Palmer (the “Seller”) by Onecom Group Limited (the “Buyer”).

The consideration for the sale shares was calculated as a multiple of EBITDA, and the consideration included a cash sum paid to the Seller on completion along with a post-completion earn-out arrangement.  Under the earn-out, for every £1.00 by which the Target’s EBITDA exceeded £6.55 million in the 12 months following completion, the Seller would receive a further £11.11. This was subject to an agreed maximum amount of £15 million.

Post-completion, the Buyer and Seller were unable to reach an agreement as to the value of the earn-out payment and per the terms of the SPA, the matter was referred to an independent expert.

The SPA contained a suite of warranties relating to the Target and its business. The SPA also contained corresponding time limits for bringing any claim for breach of warranty. Any legal proceedings relating to a claim were required to be commenced by the Buyer within six months of its having notified the claim to the Seller.

There was an exception for claims relating to contingent or unquantifiable liabilities. The deadline for commencing legal proceedings in those cases was six months from the date on which “…such claim becomes an actual liability or becomes capable of being quantified”.

In June 2022, the Buyer notified the Seller of several breaches of warranty. Under the SPA, the Buyer then had six months to commence legal proceedings against the Seller for such claims (i.e., the six-month litigation period had begun).

However, certain of the matters which formed the basis of those claims were also related to the quantum of the earn-out payment. Those included alleged breach of warranty for undisclosed ongoing employment costs and the alleged overstatement of gross profits in the Target group’s management accounts.  Accordingly, the Buyer stated that its warranty claims were contingent and unquantifiable until the independent expert reached its decision as to the earn-out figure and thus revealed the quantum of the Buyer’s claims under the warranties.

The Buyer proceeded to commence legal proceedings one day before the end of the litigation period (21 December 2022), following which it subsequently applied for an extension of time to serve the claim form on the Seller to 31 August 2023.

The independent expert subsequently reached a decision and issued its report in June 2023, following which the Buyer confirmed to the Seller that it was then able to quantify the claims and as a result served its claim form on the Seller.

The Seller then claimed that the Buyer was time-barred from commencing legal proceedings as the claim form had been served after the end of the litigation period (i.e., after December 2022) and therefore applied for strike out or summary judgment (or both).

Conversely, the Buyer claimed that the claims fell within the litigation period as they were contingent and unquantifiable until the point at which the independent expert delivered its report. The Buyer argued that the litigation period instead began on the date of the independent expert’s determination as to the earn-out payment and therefore was not time-barred.

The High Court’s decision

The High Court agreed with the Buyer and dismissed the Seller’s applications for summary judgment and strike out of the claims. It was held that the claims were contingent and unquantifiable until the independent expert’s decision had been reached, and therefore the litigation period had not begun per the terms of the SPA.

The Seller had tried to argue that the SPA required the Buyer to make an assessment of how the claim would be quantified following the end of the dispute, rather than it requiring actual determination from the independent expert, though the High Court dismissed this argument.

In coming to its decision, the High Court considered the possibility of “double-recovery” for the Buyer, which it thought might have been possible if legal proceedings had been commenced and concluded prior to the independent expert’s determination as to the value of the earn out payment.

Further, the High Court considered what information would be required when assessing for damages for loss in light of the breach of warranty claims. Such damages could not be calculated without knowing what the Buyer’s actual position was following the breach and therefore required the independent expert’s determination of the earn-out payment before being able to calculate such damages.

Concluding thoughts

While the High Court’s decision has not set any precedent going forward (as it was made following a strike out and summary judgment application, not at full trial of the action), it has highlighted the importance of having clear wording included in sale and purchase agreements and investment documents so as to legislate for the interaction between breach of warranty claims and the payment of deferred or contingent consideration, whether in the form of an earn out or otherwise.   As the decision makes clear, careful thought must be given to issues of quantification of losses, limitation periods, double-recovery and their interaction across the warranties and any price adjustment mechanisms.

This piece was written by Sanya Bhambhani with input from Henry and Robert Humphreys.  Do please reach out to a member of the team if you would like to discuss matters relating to M&A generally.

All the thoughts and commentary that HLaw publishes on this website, including those set out above, are subject to the terms and conditions of use of this website.  None of the above constitutes legal advice and is not to be relied upon.  Much of the above will no doubt fall out of date and conflict with future law and practice one day.  None of the above should be relied upon.  Always seek your own independent professional advice.

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