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A cautionary tale of the importance of keeping track of changes

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Roberts Sian
Sian Roberts

Senior PSL

London

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06 December 2022

A recent Scottish case involving a dispute over the calculation of the purchase price under a share purchase agreement highlights the importance of ensuring that definitions (and other terms in an agreement) accurately reflect the commercial agreement between the parties.

Under the agreement, the purchase price included “Initial Deferred Consideration”. This was subject to adjustment if the actual net assets were lower than the amount already paid. The calculation was by reference to the net assets of “the Company”. This was defined as Kier Pharmacy. Keir Pharmacy had a subsidiary, AD Healthcare, whose assets were worth more than those of Kier.

The seller said the parties intended that the adjustment of the Initial Deferred Consideration take into account the net assets and liabilities of both companies. The purchaser argued the opposite.

Early drafts of the definitions made reference to both companies. However, towards the end of the negotiations, the purchaser’s solicitors had sent a revised draft to the seller’s solicitors in which the definition of “Net Current” assets and liabilities was replaced with a definition of “Current” assets and liabilities. This new definition referred only to “the Company” (i.e. Kier Pharmacy), and not “each Group Company” (i.e. Kier Pharmacy and AD Healthcare). The revised draft included tracked changes (although it seems that the seller’s solicitors had not noticed the exclusion of AD Healthcare’s assets).

The court held that the interpretation of the contract was straightforward and the crucial parts of the agreement were not ambiguous. To include AD Healthcare in the definition of “the Company” would involve rewriting the contract. This was impermissible.

Further, the court could not imply a term into the contract that the assets of AD Healthcare be included as that was not necessary to give business efficacy to the contract nor did it go without saying. The contract worked perfectly well without the suggested implied term.

Finally, the court could not rectify the agreement. There was no prior concluded contract to which the share purchase agreement had failed to give effect. There was no outward expression of accord to the effect that the parties understood one another to share the intention that AD Healthcare’s current assets were to be included. In fact the purchaser’s solicitors had altered the agreement using tracked changes to exclude them. It made no sense to say that there nevertheless remained a continuing common intention that they ought to be included.

Judgment: Paterson v Angelline

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