Case law: Court refuses to imply term in sale agreement that seller must co-operate with buyer to avoid potential liabilities after sale
Parties to an agreement under which one may become reliant on the co-operation of the other side to avoid, for example, a tax liability, after completion of the transaction, should ensure the agreement specifically requires that such co-operation must be given, as the courts may refuse to imply such a clause.
This update was published in Legal Alert - November 2017
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A company sold its shares in a subsidiary to a buyer. The sale agreement was described by the court as complex, detailed and professionally drafted on behalf of sophisticated and well-resourced clients. It contained a clause under which the seller agreed to provide an indemnity to cover the subsidiary against a potential liability to certain taxes, subject to certain conditions - including a time limit that expired on 30 September 2017.
When a potential liability arose, the buyer asked the seller for information to help them challenge any tax assessment. The seller, for commercial and confidentiality reasons, did not want to provide the necessary information. The agreement did not contain any specific obligation on the seller to provide such information, but the buyer argued that such an obligation should be implied.
The legal test to apply when construing or interpreting the terms of an agreement is the objective test of what a reasonable person, in possession of all background information reasonably available to both the parties at the time the agreement was entered into, would think those terms meant.
The starting point is to look at the natural and ordinary meaning of the words, taking into account the ‘documentary, factual and commercial context’ of an agreement when determining the natural and ordinary meaning of the words used. This includes any other relevant provisions of the agreement, and the overall purpose of the term and of the agreement. This may lead to words being given a different meaning from their ordinary and natural meaning, because of the context.
If the court decides the words used are ambiguous, it can then take into account the commercial outcomes of the different possible interpretations, and decide on the most commercially sensible outcome.
If a term is to be implied into an agreement, the implied term must satisfy the strict test that it is necessary to give business efficacy to the contract (so, if the contract works without it, a term will not be implied), or it is so obvious that it goes without saying.
In this case, the court refused to imply a term as requested by the buyer into the agreement. It was not necessary for business efficacy for the term to be implied – the agreement still worked without it – and it was not so obvious that it should be included that it went without saying.
- Parties to an agreement under which one party may be reliant on the co-operation of the other party to avoid, for example, a tax liability, after completion of the transaction, should ensure the agreement specifically requires that such co-operation must be given, as the courts may refuse to imply such a clause
Case ref: Takeda Pharmaceutical Company Limited v Fougera Sweden Holding 2 AB  EWHC 1995
Disclaimer: This article from Atom Content Marketing is for general guidance only, for businesses in the United Kingdom governed by the laws of England. Atom Content Marketing, expert contributors and ICAEW (as distributor) disclaim all liability for any errors or omissions.