In the recent case of Tradegro (UK) Ltd v Wigmore Street Investments Ltd and Others [2011] EWCA Civ 268, the Court of Appeal judges, Lord Neuberger of Abbotsbury, Lord Justice Laws and Lady Justice Arden held that in respect of the interpretation of an undertaking, terms will only be implied where necessary.  Furthermore, a trust or security interest is only created between parties with clear words to show that this was the intention of the arrangement.


Under a share purchase agreement (SPA), Wigmore Street Investments Limited (WSI) (then called Real Estate Property Corporation Limited) acquired the majority shareholding in a company from Tradegro (UK) Limited (Tradegro). Two key terms of the SPA were that:

  1. Tradegro provided WSI with a tax indemnity; and
  2. WSI agreed to pay Tradegro “Additional Consideration”.

In 2008, the SPA led to three separate court proceedings between the parties to determine the amounts due from one party to the other.  So far as the two main ones flowing from the SPA are concerned, Tradegro was found liable to WSI in the sum of nearly £650,000 (Tax Indemnity Sum) and the Additional Consideration was determined at £2.4 million.  The Tax Indemnity Sum was determined first and Tradegro’s solicitors wrote to WSI’s solicitors stating that each order must be strictly complied with, but Tradegro was uncomfortable with paying the Tax Indemnity Sum to WSI.  It was conscious that while the Additional Consideration had not been agreed, WSI would be due to pay to Tradegro a sum considerably higher than the Tax Indemnity Sum.  Also, there was a perceived risk that WSI would dissipate the funds and not be in a position to pay the Additional Consideration to Tradegro.

This situation led to Tradegro's solicitors threatening to seek a freezing order in respect of the Tax Indemnity Sum.  However, the solicitors ultimately agreed that the Tax Indemnity Sum should be paid into WSI's solicitors' client account "on the basis of an undertaking".  The solicitors were to hold the Tax Indemnity Sum and not transfer or deal with it without the consent of Tradegro or an order of the court, until such times as the Additional Consideration was paid in full.

In September 2009, WSI went into administration. In October 2009 an expert determined the Additional Consideration.  WSI was never going to be in a position to pay the Additional Consideration.

Tradegro applied to the High Court seeking to recover the Tax Indemnity Sum. The High Court held that in the absence of a provision setting out what should take place if the Additional Consideration was not paid in full, a term should be implied such that the Tax Indemnity Sum should be paid to Tradegro in full or partial settlement of the Additional Consideration. A separate creditor of WSI appealed this decision.

Court of Appeal

The Court of Appeal unanimously allowed the appeal and ordered that the Tax Indemnity Sum should be paid to WSI's administrators for distribution to WSI's creditors.

The Court of Appeal found that Tradegro had paid the Tax Indemnity Sum to WSI's solicitors to be held for WSI until the Additional Consideration had been determined and payment made. This meant that it was WSI and not Tradegro who were due the Tax Indemnity Sum.  The actual wording of the undertaking, although it allowed the payment of the Tax Indemnity Sum as part payment of the Additional Consideration, did not oblige the solicitors to use it in this way.

Any argument that the Additional Consideration and the Tax Indemnity sum were inextricably linked was rejected.  Further, the Court of Appeal noted that the undertaking was not intended to secure an interest over the Tax Indemnity Sum.

As regards the lack of written instruction as to what should happen in the event of the Additional Consideration not being paid, the Court of Appeal explained that it had been wrong for the High Court judge to imply a term into the undertaking. It was sufficient that the undertaking expressly provided for the court to make a decision as to the payout of the Tax Indemnity Sum.

It was noted also that the implied term gave Tradegro greater protection against WSI dissipating the Tax Indemnity Sum than had been envisaged at the time of agreeing the undertaking.  The earlier judgements in Palmer v Carey [1926] AC 703 and Flightline [2003] 1 BCLC 427 were cited to highlight that it would be wrong to treat the undertaking as effectively giving, or intending to give "Tradegro’s claim for the Additional Consideration a special secured status as against all WSI’s other creditors" or to create a trust. Clear words contained in the undertaking would be required for such an outcome.

Salutary lesson

The Court of Appeal was critical of the drafting of the undertaking.  The undertaking was deemed to be inconsistent as to its definitions and deficient in not expressly dealing with what was intended to happen if the Additional Consideration was not paid in full to Tradegro.

Solicitors grant undertakings in strict compliance with their professional Code of Conduct.  A solicitor is required to ensure performance of the undertaking is entirely within its control prior to granting the undertaking.  The binding nature of such undertakings makes them a reliable method in the control of transfer of funds, however, what this case reveals is that they will be interpreted according to their ordinary interpretation.  The exactness in the drafting of the desired outcome is paramount at the negotiation stage.