UK: In Or Out? Court Interprets An Indemnity In A Share Purchase Agreement

Last Updated: 28 August 2019
Article by David Collins, Richard Barham, Candice Chapman and Anna Janik

The High Court has considered whether certain buyer claims under a share purchase agreement (SPA) relating to the sale of Nottingham Forest Football Club were covered by the seller's indemnity in the SPA and a related misrepresentation claim.

Historic liabilities

Under the terms of the SPA, the seller agreed to indemnify the buyer against losses arising from the Club's "Liabilities" exceeding £6,600,000 as at 31 December 2016.

The agreement defined "Liabilities" as:

" ... the aggregate amount of all liabilities in respect of any fact, matter or circumstance on or prior to [31 December 2016] (and only to the extent such liabilities relate to such period) and whether or not due for payment at [that date] ... including, without limitation ... [various specific categories listed]".

The buyer argued that the term "Liabilities" should simply reflect the concept of liabilities in Financial Reporting Standard (FRS) 102, the accounting standard adopted by the Club for financial reporting purposes. This interpretation would mean that those liabilities recognised for financial reporting purposes on 31 December 2016 would come within the indemnity.  In support of its argument that an accounting term in the SPA should have the same meaning as in the accounting standard adopted by the Club, the buyer cited the Court of Appeal decision in Macquarie Internationale Investments Ltd v. Glencore UK Ltd [2010] EWCA Civ 697. 

The seller argued that the defined term was different from, and more restrictive than, the approach to the assessment of liabilities in FRS 102. While it was correct to start with the items that were liabilities for financial reporting purposes, it was also necessary to take into account the restrictions and modifications imposed by the SPA. Therefore, the liabilities in question must "relate to" the period up to 31 December 2016. This meant that any liabilities relating to a subsequent period, in the sense that the benefit in respect of which they were incurred was enjoyed or provided after that date, were not within the definition. They therefore fell outside the scope of the indemnity.

The court agreed with the seller. The definition of "Liabilities" was not the same as the wording of FRS 102. It would be "harder work" to say that the bespoke wording of the former had the same meaning as that of the latter. The SPA drew a clear distinction between "Liabilities" and "liabilities", with the latter appearing in several places within it. To equate the two would mean ignoring the words "(and only to the extent such liabilities relate to such period)" in the definition of "Liabilities". It would also not accord with the commercial rationale of the exclusion of liabilities after 31 December 2016.   

The court found that the Court of Appeal's decision in the Macquarie case had no bearing on the issue before it. That case had concerned the meaning of materiality in a warranty in an SPA as to the accuracy of management accounts. It did not lead to a conclusion that a defined term in an SPA must or should be given the same meaning as used in accounting standards. Relevant accounting standards may be the starting point when considering the defined term in question but were not determinative.  

Data room issues

The buyer also claimed under an indemnity against losses due to the inaccuracy of a statement in the SPA that all material contracts had been included in the transaction data room. 

Again, the buyer's claim failed. Although the court agreed with the buyer that certain material contracts had not been included in the data room, the buyer failed to establish that it had suffered a loss as a result.  

The court looked at the evidence showing exactly when the buyer had accessed the data room. This was before the relevant material contracts had been concluded. There was no evidence that adding the contracts to the data room would have resulted, as the buyer alleged, in it taking steps to renegotiate the SPA. Further, evidence that the buyer would have looked to renegotiate the SPA's commercial terms fell short, in the court's view, of demonstrating that the buyer had suffered a loss due to the absence of the contracts in question from the data room.  

The misrepresentation claim

One of the documents in the data room was a trial balance sheet as at 31 December 2016 which included a "Liabilities" figure of just under £6,600,000. The buyer argued that the trial balance amounted to a representation by the seller that had induced the buyer to enter into the SPA. As a result of the difference between the represented and the actual "Liabilities" figure, the buyer had suffered a loss which it was entitled to recover by way of a misrepresentation claim. 

The court disagreed with the buyer's analysis. It did not think the representation was a misrepresentation. The seller had reasonable grounds to believe that the representation was true, as the balance sheet had been derived from information provided by the Club's responsible officers. 

On the question of reliance, the court concluded that the buyer's reliance was only for the purpose of establishing the "Liabilities" figure for the purpose of the indemnity. It was not for any broader purpose, including whether or not to enter into the SPA.


The decision of the court on the interpretation of the scope of the indemnity is not surprising given that the buyer was asking the court to read it in a way which the language did not really accommodate.  Nonetheless, the decision is a useful reminder of:

  • the need to be careful when using the same words both as defined terms and in the body of an agreement (in this case, "L/liabilities"); and 
  • the importance of working with a client's financial/accountant advisers in relation to financial definitions within an SPA where appropriate.

Al-Hasawi v. Nottingham Forest Football Club Ltd [2019] EWHC 1287 (Ch)

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