A recent High Court decision serves as a useful reminder of the test the court will apply when deciding whether to imply a term into a share purchase, or other, agreement.

Facts

In May 2011 the claimants (the Sellers) sold to the defendant (the Buyer) the entire issued share capital of Cend Ltd (the Target). The share purchase agreement included a mechanism for determining whether there had been an over-provision for tax and related matters in the accounts, with a view to the Sellers being given credit for any over-provision. The agreement provided for the issue to be determined in the first instance by the Target's auditors acting as experts, with the ability of either party to request a review of the determination and ultimately refer it to an independent expert.

In October 2018, following the request mechanism in the agreement, the auditors provided a determination that there had been a net over-provision of £18,435. That determination was contained in a report which the auditors provided to the Buyer. The Buyer, in turn, provided the Sellers with the sections headed "Background" and the "Executive Summary", but not the remainder of the report.

The Sellers applied to the court for an order that the Buyer supply them with a full copy of the report and any further work output provided by the auditors to the Buyer, together with copies of all written communications between the Buyer and the auditors. The Sellers contended that, until they knew the full basis on which the auditors came to their conclusion, they could not decide whether to incur the expense of a review of the determination. They argued they were entitled to this material either on the basis that it was an implied term of the share purchase agreement or that the defendant had acted as their agent in instructing the auditors.

The Buyer denied that any further material was due, saying that the only material to which the Sellers were entitled under the agreement was that which identified the actual amount of the over-provision and that it was not acting as the Sellers' agent in instructing the auditors.

Decision

The court applied the test for implying a term into a contract as formulated by the Supreme Court in 2015, namely:

  • a term may only be implied if it is either (a) necessary to give the contract business efficacy such that the contract lacks commercial or practical coherence without it or (b) sufficiently obvious to go without saying;
  • any term must be reasonable and equitable, capable of clear expression and compatible with the express terms of the contract; and
  • the requirements for implying a term are not to be watered down and it is not sufficient that the court concludes that a particular term would be sensible, reasonable or desirable.

On the facts, the court decided that it was both necessary and sufficiently obvious that a term should be implied into the share purchase agreement requiring the Buyer to provide the Sellers with a full copy of the report containing the auditors' determination. The court concluded that the process for reviewing the auditors' determination could not have business efficacy unless the Sellers had more information, as the review process required the party to understand the basis of the original determination, not just the monetary amount of the determination. The court also found that it would be unusual if the Sellers could not see the full report when they had been the party to request it and had to pay for it under the terms of the agreement and this made it obvious that a term should be implied.

Although the court was prepared to imply a term in relation to the full copy of the auditors' report, it was not satisfied that a term requiring the provision of the supporting documentation should be implied. The court accepted that it may have been sensible, reasonable and appropriate for the parties to have agreed that the Sellers would be provided with the sundry further documentation. However, it was not satisfied that the implication of such a term was necessary for business efficacy, nor that it was to be implied on the grounds of obviousness.

The court also rejected the Sellers' agency argument. The relevant provision of the agreement had provided:

"The Buyer shall at the request of the Sellers require the Auditors to determine (as experts and not as arbitrators and at the expense of the Sellers) whether…"

There was nothing in this wording – which is commonly used in contracts of various kinds - to suggest that the Buyer would be acting on the Sellers' behalf, i.e. as the Sellers' agent, in obtaining the determination.

The distinction that the court made between the report itself and the supporting documentation highlights that a court will only imply terms to the extent that they are necessary to give an agreement business efficacy or are sufficiently obvious. It will not go beyond that and imply a term simply because it appears fair or reasonable or because it is likely that the parties would have agreed it if it had been suggested to them. Although in this case, the court was able to imply a term which gave the Sellers the key document they were requesting, in other situations the result may not be so favourable to a party seeking to rely on an implied term. To avoid such uncertainty and expensive and time-consuming litigation, the parties to an agreement should ensure that their respective rights and obligations are clearly spelt out in the agreement.

Zedra Trust Company (Jersey) Ltd v. The Hut Group Ltd [2019] EWHC 2191 (Comm)