In Abbot Investments (North Africa) Ltd v Nestoil Ltd  EWHC 119 (Comm) a dispute arose concerning alleged representations relating to an oil rig owned by the target company prior to the sale of that target company to a new owner. A party guaranteeing the funding of the purchase refused to make payment under the guarantee due to an alleged misrepresentation concerning oil rig liabilities.
Although the decision of the Commercial Court is short, it provides a useful reminder on the importance of dealing with all issues concerning ‘outstanding’ liabilities at the time of sale and the difficulties of establishing the existence of representations that are not contained in the sale and purchase agreement.
On 15 August 2014 Abbot Investments (North Africa) Limited (“AIL”) sold a company, KCA Tender Barges Pte. Limited (“KCA”), to Momentum Far East Pte. Limited (“Momentum”), by way of a sale and purchase agreement dated 15 August 2014 (“SPA”).
It is alleged that prior to execution of the SPA, AIL, as seller, were said to have represented to Momentum, as buyer, that it would pay all expenses and discharge all liabilities in respect of an oil rig owned by KCA, but which did not form part of the sale.
The funding of the purchase under the SPA was provided by a group of companies, which included Nestoil Limited (“Nestoil”). The funding included a loan note provided by Momentum Far East Pte. Limited in the sum of US$2m plus interest for a period of 12 months. Nestoil guaranteed payment of the loan note pursuant to the terms of a guarantee dated 4 November 2014 (“Guarantee”).
The sale was completed on 20 October 2015. Following completion, Momentum assigned its rights under SPA to a third party, Scorpio Mauritius.
- The loan note was note repaid when due.
- As a consequence, AIL initiated a claim against Nestoil under the Guarantee.
- Scorpio Mauritius purported to rescind the SPA for fraudulent misrepresentation on the basis that the representations made concerning the rig were false because, at completion, KCA in fact had over US$400,000 of liabilities in respect of the oil rig.
- Momentum also purported to rescind the loan note.
Nestoil contended that the effect of these rescissions was to discharge it from liability under the Guarantee. However, AIL claimed that Nestoil had no reasonable prospect of establishing either the alleged fraudulent misrepresentation or the right to rescind the load note.
- The misrepresentation claim had no prospect of success.
- If the misrepresentations were made, there was no evidence they were made fraudulently.
- There was no real prospect of Nestoil establishing an effective rescission because the common law remedy of rescission was not available where the SPA had been affirmed and where restitution was not possible. The SPA had been affirmed by Scorpio Mauritius continuing to act as owner of the company and to demand payment pursuant to the contract which they say has been rescinded.
- It also argued that restitution was impossible because the vessels had been used and could not be returned in the same condition in which they had been transferred pursuant to the SPA.
Nestoil, however, contended that if fraud were established then, as a matter of construction of the Guarantee, it could not be obliged to indemnify AIL in respect of a liability arising out its fraud.
The Commercial Court, though it considered Nestoil’s defence to be weak, dismissed AIL’s application for summary judgment.
As to the misrepresentation point, the Commercial Court noted that, at the date of the summary judgment application, there was no witness statement on behalf of AIL denying that the alleged misrepresentations were made. Whilst it found that the points raised by AIL were “powerful points to put… in cross-examination” of the relevant Momentum witness and that Nestoil’s defence was “particularly weak and very vulnerable to attack”, the Court was unable to decide on an application for summary judgment that the misrepresentation case had no real prospect of success. For example, the Commercial Court noted that it was possible that the relevant witness might, under cross-examination, provide an explanation as to why he did not mention the alleged misrepresentation when the invoices first came to light.
As to the rescission point, the Commercial Court agreed with Nestoil that there was a real prospect that the Guarantee would not be construed as applying if a fraud was established.
However, the Commercial Court required that Nestoil make a payment into court of US$2 million if it wished to defend the action.
The decision of the Commercial Court sets out limited factual background, as it was merely a decision concerning a summary judgment application.
However, it is apparent that there is a substantive difference between the parties concerning the treatment of liabilities and expenses relating to an oil rig, previously owned by the target company (KCA), that was disposed of prior to sale. In the absence of clear terms concerning the issue in the SPA, a dispute has erupted concerning alleged ‘representations’ made concerning during the sale concerning the oil rig. The case highlights, in respect of drafting and negotiating sale and purchase agreements, it is important that:
- Issues concerning all ‘outstanding’ liabilities of the target company are clearly dealt with in the sale and purchase agreements, whether by way of a completion mechanism or otherwise.
- All representations should be contained in the sale and purchase agreements, such that they are clearly recorded by the parties and there is no dispute as to their existence.
Absent clarity in drafting concerning outstanding liabilities and representations, there will be the opportunity for disputes in the event that the parties have a different recollection of the ‘deal’ or the deal moves financially against one of the parties and it wishes no re-negotiate through commencing a dispute.
In addition, M&A sale agreements will normally include an “entire agreement” clause that will be drafted widely to seek to prevent statements or representations that are not set out in the sale agreement from having contractual force and, additionally, to prevent claims for misrepresentation. Such clauses will not, however, prevent claims for fraudulent misrepresentation of the kind alleged in this case (whilst the judgment in this case does not expressly mention whether the parties to the sale agreement agreed an entire agreement clause, it seems likely this is the case and possibly explains why Scorpio Mauritius purported to rescind the SPA on the basis of a fraudulent misrepresentation, where such a claim is more difficult to prove than other types of misrepresentation).
The case also provides litigation lawyers with a useful reminder of the tactical advantages that may be gained by seeking summary judgment of a claim. In this case, the Commercial Court did not award summary judgment but required that, in order to proceed, the defendants, Nestoil, pay the full US$2 million into court as security for continuing its defence. Whilst the bar is high for a successful summary judgment application, even an unsuccessful application may result in gaining security over the defendant that will increase the prospects of enforcement in the event of a final success. In doing so, it will force the responding party to carefully consider the evidence and the underlying merits of its case at an early stage. This may bring about a tactical advantage in relation to any settlement discussions, particularly where (as in this case) the Court agrees that the responding party’s claim is particularly weak.