Share purchase agreements: validity of Earn- out Notice

Treatt plc v Barratt and others [2015] EWCA Civ 116

The Facts

The respondent sellers (B) sold all their shares in two companies, Earthoil Plantations Ltd (Plantations) and Earthoil Kenya PZY Ltd (Kenya), to the appellant buyer (T). The purchase price of this sale agreement was in the form of an earn-out, specifically the gross profit or loss of Plantations and their subsidiary undertakings (Plantations Group) and Kenya and their subsidiary undertakings (Kenya Group) for the two calendar years ending 31 December 2011, subject to conditions detailed in the Share Purchase Agreement (SPA).

Following completion of the acquisition, T changed the financial year end of Plantations Group and Kenya Group to 30 September, bringing it in line with its own financial year end. This meant that there were no audited accounts available for the purposes of the Earn- out Notice period. As an alternative, T calculated the Earn- out period by using the two calendar years ending 30 September 2011 and the accounts of Plantations Group in the years ending December 2009, 2010 and 2011.

B did not challenge the calculation of the Earn- out Notice by invoking dispute resolution, as required by clause 3.5 of the SPA. T claimed that this therefore bound the calculation of the Earn- out Notice in accordance with clause 3.4.

B subsequently sought a declaration for the invalidity of the Earn- out Notice, in which they claimed that it had not been calculated in accordance with the SPA and that the calculation had not been set out in sufficient detail.

The Decision

The Court of Appeal confirmed the High Court’s decision that the Earn- out Notice period was in fact invalid, as it had not been calculated with reference to the audited accounts as detailed in the SPA.  The form of calculation specified afforded B contractual protection of real importance, rather than being a mere formality. The Court of Appeal held that there were differences between a mathematical error which would not invalidate an Earn- out Notice, and those errors which wholly failed to comply with contractual obligations. T had failed to comply with their contractual obligations when calculating the sum and refusing to accept its validity when challenged by B, rendering the Earn- out Notice invalid.