A recent case has illustrated the scope for disputes arising from ambiguous drafting in share purchase agreements, according to a leading corporate lawyer.

“Warranties in share or business purchase agreements are usually subject to financial and time limitations,” says Philip Round, a partner in the corporate team at George Green LLP.  “A recent Court of Appeal judgement has demonstrated the importance of using precise language in framing the scope of such limitations.”

Mr Round continues, “The case of Nobahar-Cookson & Others v The Hut Group Ltd concerned a claim by the purchaser of a company for breach of the management accounts warranties in the sale agreement.  The seller argued that the buyer’s claim was time-barred because it was required to serve notice of the claim within 20 business days of becoming aware of the ‘matter’.  The case turned on whether awareness for this purpose should be interpreted as meaning awareness of the circumstances giving rise to the claim, or awareness of there being a proper basis for the claim.  If the former construction was preferred, the claim would be time-barred.”

According to Mr Round, the Court of Appeal held that the clause was open to several different possible interpretations.  “Given the ambiguity, the court decided to construe the clause restrictively, so that the limitation period ran from the point at which the buyer was aware that it had a proper basis for a claim, having sought advice from its accountants.  This served the purpose of ensuring that the buyer did not keep a claim up its sleeve, as opposed to imposing a deadline on the buyer to seek advice on the potential merits of a claim.  Such an interpretation was believed to make more commercial sense.”

Mr Round concludes, “The outcome of the case was by no means certain, the Court of Appeal noting that neither construction gave rise to such difficulty in application that it could not be considered to have reflected the intention of the parties.  It is therefore essential that the parties to a commercial transaction seek proper advice in order to ensure that the wording of the contract gives effect to their intentions.”

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