UK: Joint And Several Liability Following Settlement Of A Claim To Which Not All Of The Sellers Were Parties

Last Updated: 17 September 2012
Article by Mark Alsop

Demco Investments and Commercial SA v InterAmerican Life Assurance (International) Limited and Others [2012] EWHC 2053

The Court had to decide on the individual contributions to be made by a number of sellers where arbitration proceedings in relation to a breach of warranty claim under a share sale agreement was settled between the purchaser and one seller before settlement was reached with the other sellers.

A company had been sold pursuant to a share purchase agreement and deed of indemnity. The sellers were the eight shareholders in the company comprising some individuals and some corporate shareholders. Two of the individuals had management roles. The purchase price comprised a fixed sum of £1m with additional sums of £2.77m, although £700,000 was only ever paid by the purchaser. Under the SPA and deed, the sellers were jointly and severally liable for all breaches of the representations and warranties under the SPA and all losses under the deed. Liabilities arising from gross negligence were uncapped whereas non-gross negligence liabilities were capped for each of the sellers at a percentage of the purchase price which was not the same for each seller.

After completion, it transpired that the target company had been guilty of pensions misselling and incurred very substantial liabilities to policy holders. The sellers commenced arbitration proceedings against the purchaser for the unpaid portion of the purchase price and the buyer counter-claimed for the pension mis-selling liabilities. One of the sellers (G) sought to settle the arbitration, entered into a bilateral settlement agreement with the purchaser and paid £26.6m (representing the gross negligence liability and its own capped liability for non-gross negligence). The other sellers subsequently agreed to settle their liability for a higher figure. Proceedings were brought to determine, inter alia, (i) in what proportions the other sellers should contribute to the gross negligence element of G's settlement and (ii) whether G, having entered into the settlement, should be liable to any of the other sellers in respect of the additional liability they had to the purchaser.

The High Court (Christopher Clarke J) held:

  • Even though the caps in respect of non-gross negligence liabilities were not in proportion to percentage holding, the sellers should share the gross negligence liability in proportion to their shareholdings. The non-gross negligence caps represented a limit on the liability of the sellers to the purchaser but did not determine the just and equitable method of contribution as between the sellers themselves. Furthermore, management responsibility for the affairs of the target had no bearing on how the gross negligence liabilities should be divided. The liability to the purchaser arose from the fact that the sellers had given warranties under the SPA, not from the way they had performed their management duties.
  • G was not to be penalised for having settled the arbitration proceedings before the other sellers and so was not required to contribute to the extra liability incurred by the other sellers in settling their gross negligence claim. The other sellers had not mitigated their loss by joining in G's early settlement and had acted unreasonably in not doing so, leading to a greater loss for them.

Comment

If warranties are given on a joint and several basis, the buyer can choose to proceed against any one or more of the sellers for full performance of the obligation or for the loss or damage in question. Where this is the case, the selling shareholders should consider entering in a contribution agreement to apportion the liabilities arising under the SPA between them.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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