The High Court has considered whether indemnity claims were subject to an implied term of being “accurately calculated and based on factual substance”.
Under the terms of a share purchase agreement, the buyer paid a proportion of the purchase price into a retention fund (held by its solicitors, on its order) on account of any ‘relevant claims’. There was no requirement in the agreement for the buyer to substantiate any such claims, nor was there a mechanism for the seller to dispute the claims made from the retention fund. The buyer subsequently obtained payments from the retention fund.
The seller disputed these payments, alleging that in order to give efficacy to the agreement, there was an implied term that any payment from the retention fund had to be substantiated by the buyer. The judge rejected this; the mechanics of the retention fund were intended to be favourable to the buyer by allowing them to deduct amounts without prior justification. As this put the buyer in a commercially advantageous position, it would be inconsistent to imply a requirement on the buyer to substantiate its claims.
This case emphasises how critical it is for sellers and their advisors to insist on the share purchase agreement containing detailed provisions requiring a buyer to substantiate losses before allowing it to set-off against monies contained in a retention account (or deferred consideration).
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