Company law – contracts

Agreements: consideration: dispute resolution: earnouts: sales: share: shares: construction of share sale agreement: disputes referable to independent accountant: earn-out consideration

A share sale agreement had not provided that disputes over accounts were referable to an independent accountant.

The claimant buyer (B) sought declarations as to the powers of an independent accountant.  By a share sale agreement B had bought and the defendant (S) had sold all the issued share capital in a company.  The agreement provided that earn-out consideration payable to S was to be calculated from particular audited accounts and that certain disputes between the parties were to be resolved by an independent accountant.   B sent copies of draft accounts to S stating that the auditors had confirmed that those accounts were in their finalised form.  B proceeded to calculate the earn-out consideration on the basis of those accounts.  Later B forwarded accounts signed by the auditors for the same period that revealed a material difference in profit to the first accounts.  S argued that it was within the independent accountant’s remit to resolve the dispute over the two accounts and that the finalised accounts for the purpose of calculating earn-out consideration were the first set of accounts.

HELD: Disputes as to the audited accounts were not included in the agreement as matters referable to the accountant.  The terms of the agreement provided for a remedy in damages where there was such a dispute.  Accordingly the accountant did not have jurisdiction to deal with alleged errors and irregularities in the audited accounts.

Declaration granted.

Brambles Foods Group Ltd v Pearce & Ors (2005)

Ch D (Judge Raynor) 22.2.2005