Enforcing Your Protections - The Cost of Delay

Indemnities

Indemnities are the gold standard in protecting a buyer of a company.  A well drafted indemnity can offer a buyer a straightforward route to pound-for-pound compensation from a seller. A buyer will typically request an indemnity where it identifies a specific issue that may cause a financial risk to it after completion of the sale. In order to provide reassurance to the buyer and avoid collapse of the sale, a seller can agree to indemnify the buyer against losses it suffers as a result of the identified risk. Unlike the more common protection of warranties, indemnities can be framed as contractual 'debt claims', meaning recovery from the seller can be a lot quicker and easier.

For this reason, indemnities in share purchase contracts are often heavily negotiated, and a seller should aim to mitigate its potential liability by making any indemnity claim from the buyer subject to certain limitations and requirements.

A recent case in the Court of Appeal has highlighted the importance of adhering to such requirements for any buyer seeking to rely on an indemnity clause.  

An Indemnity Claim

The sellers sold a company whose business was to provide financial advice. The sale was documented in a share purchase agreement (SPA) that contained specific indemnity provisions, under which the sellers agreed to reimburse the buyer for any losses it suffered in connection with complaints of historic mis-selling of financial products by the company.

The relevant indemnity clauses in the SPA stated that the buyer would only be able to rely on the indemnity if it gave written notice to the sellers of the relevant matter or thing, which it knew or any reasonable person would know might give rise to a claim under the indemnity, as soon as possible and in any event on or before the seventh anniversary of the date of the SPA.

The Financial Conduct Authority (FCA) later notified the company that it would be conducting a review into the mis-selling of financial services by the company during the sellers' period of ownership. In anticipation of having to make an insurance claim, the buyer notified its insurers of the FCA's review. However, it did not notify the sellers of the FCA's review (ie a 'relevant matter or thing' giving potential rise to a claim under the indemnity) until less than two weeks before the seventh anniversary of the date of the SPA.  

The buyer claimed that the FCA's review fell within the scope of the SPA. Therefore, it was entitled to bring an indemnity claim against the sellers for losses it suffered in connection with the review as it had given notification 'before the seventh anniversary of the date of the SPA'. However, the sellers claimed the indemnity had not been triggered because the notice was not given 'as soon as possible'.

Delayed Notice

The court was unequivocally in favour of the sellers. The wording of the indemnity clauses in the SPA were, in the court's view, 'perfectly clear' and 'not ambiguous'.  There was a dual condition to relying on the indemnity:

• the notification must be made as soon as possible to the sellers; and
• in any event, before the seventh anniversary of the SPA

Time started running when the buyer became aware of the 'relevant matter or thing', which in this case was when it became aware of the FCA's review, a year before it notified the sellers.  This was evidenced by the fact it had notified its insurers far in advance of notifying the sellers. Clearly therefore, it could not be argued that the buyer had given notice to the sellers 'as soon as possible'.

Best Practice

This case highlights the importance of revisiting and carefully reviewing the provisions of your share purchase agreement when seeking to rely on (or in the case of a seller, defeat) an indemnity claim.  Such a claim is likely to be contended, and therefore the contents of the relevant clause and the conduct of the parties will be closely scrutinised. If you think any circumstances have arisen which could activate an indemnity clause, you should seek legal advice as soon as possible in order to carefully calculate your next steps. Alternatively, if you are either buying or selling a business and buyer protections are being discussed, careful thought should be given to what requirements are appropriate for each party to agree to in light of the specific circumstances of the transaction.

For more information on enforcing claims, or buying or selling a business please contact a member of our Corporate Law team on 020 7665 0969, or complete the form below.