This appeal from a decision of the Federal Court illustrates that a Court may not readily imply a term to the effect that the vendors will disclose all information which may be relevant to the calculation of EBIT for the purposes of an earn out payment, particularly where there are already detailed provisions in the agreement relating to the provision of, and reporting on, financial information, and where the alleged implied term is open ended and broad in its scope.  Where a purchaser wishes to impose such an obligation, it should ensure that it is included as a clearly and tightly drafted express term in the written agreement. 

Mr Barnes and Mr Hawksley (Barnes and Hawskley) sold their shares in Forty Two International Pty Limited (Forty Two) to BlueFreeway Limited (BlueFreeway), and remained directors after the sale.  The share purchase agreement relating to the sale (SPA) provided for certain earn out payments, specifically, an Additional Payment if the earnings before interest and tax (EBIT) of Forty Two was at least $2.5 million.  Forty Two ultimately reached the EBIT target, but only because of a licence fee of approximately $4.1 million payable to Forty Two under an intellectual property licence.  Barnes and Hawksley deliberately concealed the fact that they (and not a third party as originally represented to BlueFreeway) secured the financing for the licence fee.

This case was an appeal from a decision of Griffiths J on a number of grounds, including the finding that there was an implied term in the SPA that Barnes and Hawksley “would disclose to BlueFreeway all information known to them which might become relevant to the calculation of the Forty Two EBIT 07” (Implied Term).  While it was unnecessary for the Court to address this ground of appeal (given that it had already found that Griffiths J should have dismissed BlueFreeway’s claim for damages as the finding was based on an alternative causation and damages basis that was not pleaded), Beach J did so in case the decision about the alternative causation and damages basis was incorrect.

Beach J rejected Griffiths J’s finding that the Implied Term was necessary to give the SPA “business efficacy” on the following bases:

  • there were already detailed provisions in the SPA dealing with the provision of, and reporting on, financial and accounting information;
  • the fact that Barnes and Hawksley had greater access to information and enjoyed a large degree of independence in running the business explained the existence of the detailed provisions and did not justify the need for the Implied Term - ie there was no “gap”;
  • the Implied Term was concerned with the “calculation” of EBIT and whether the licence fee was a genuine amount.  The underlying financing did not change its genuineness, character or accounting treatment; and
  • the SPA and the transactions contemplated and performed under it were clearly effective without the Implied Term.

Beach J also found that:

  • given the scope and subject matter of the express terms, the Implied Term would not have been so obvious that “it goes without saying”; and
  • the open-ended breadth and scope of the Implied Term made it oppressively broad and unnecessary in light of the express provisions.  On this basis, the Implied Term was neither “so obvious” nor capable of clear expression.

Siopis J agreed with Beach J that in the face of the detailed contractual regime for the provision of financial and accounting information in the SPA, the Implied Term was not necessary to give it business efficacy, and that the Implied Term was in sufficiently vague terms that it was not “so obvious”.

Flick J preferred not to resolve the questions relating to the alleged of the Implied Term, but considered that:

  • whether the express terms of the SPA provided a sufficient reason to bar the implication of any further term may be questioned;
  • there was indeed a “gap” in the information required to be provided by the express terms and the information that would be caught by the Implied Term; and
  • on one view of the facts, it may well have been considered necessary to give “business efficacy” to the SPA to imply a term which precluded one party from engaging in undisclosed conduct which prejudiced the commercial position of the other.