Share Purchase Agreements and Liability Caps

21st December 2021

Woman working at her laptop

It’s all in the drafting

So often in life we think something is so obvious that it doesn’t need saying so we don’t. Unfortunately, there are limits to which the courts will interpret what someone might or might not have assumed was obvious. A case in point is a recent decision regarding the interpretation of a provision in a share purchase agreement, that was seeking to limit the potential level of claims that a buyer could make against the seller for breach of warranties (contractual promises). This is known as a liability cap.

Background

In 2016, a buyer, Equitix EEEF Biomass 2 purchased the entire share capital of energy company, Gaia Heat Limited (Gaia). Subsequently the buyer brought a claim against the previous owner of Equitix for breach of certain contractual promises which had resulted in the buyer suffering losses in the sum of £13.45 million. The buyer was however only awarded compensation capped at the figure of £11 million which was the liability cap included in that agreement.

The argument then followed whether the liability cap applied to the damages arising from breach of promises alone or whether it stretched to cover additional costs that arose from the claim being brought to court, for example legal costs and interest.

The liability cap

Like so many cases the decision of the court depended on the correct interpretation of the particular drafting in this case of the liability cap which talked about the cap applying ‘in respect of … any claim under this Agreement for breach of the Warranties’. On the face of it a pretty broad ‘catch all type’ of wording.

Although it was broad, the court thought that the intention of that drafting was to only cover the initial claim directly linked to the breach. The consequential costs arising from the further action and court proceedings required to pursue the claim was however separate and therefore could not be a claim under the actual agreement itself.

As a result, the court concluded that the liability cap of £11 million applied only to the damages awarded as this was what the SPA explicitly intended. It did not cap the separate claim for the costs incurred by the buyer in pursuing the claim.

Conclusions

This judgment is another reminder of the critical importance of clear and comprehensive drafting and the need to work through the likely implications and potential costs of a particular contractual situation. Maybe sometimes more is more?

If you are entering into a sale agreement or considering a corporate restructure, please contact Henry Maples by email at henry.maples@murrellassociates.co.uk for more information on how we can assist you.