Prescription and Acknowledgment of Earn-Out Obligations in Share Purchase Agreements: Helen Colquhoun v Clinical Research Solutions [2022] CSOH 96

Introduction

The case of Helen Colquhoun and others against Clinical Research Solutions ([2022] CSOH 96) dealt with a dispute arising from a Share Purchase Agreement (SPA) between the pursuers, who were the owners of Pleiad Devices Ltd., and the defenders, Clinical Research Solutions GmbH and CROMSOURCE SRL. The core issue revolved around the calculation and payment of the Earn Out Consideration (EOC) stipulated in the SPA. The defenders contended that their obligation to pay additional sums had been extinguished by prescription under the Prescription and Limitation (Scotland) Act 1973, while the pursuers argued that the prescriptive period had been interrupted by relevant acknowledgments of the obligation. The case explored the interplay between contract terms, expert determinations, and statutory prescription periods.

Summary of the Judgment

Lord Clark presided over the Outer House of the Court of Session, delivering a detailed opinion on the matter. The judgment concluded that the SPA's contractual terms did not condition the obligation to pay the full EOC on the independent expert's determination. Instead, the obligation was enforceable on specified dates, regardless of disputes. Furthermore, the court found that the defenders had made multiple relevant acknowledgments of the obligation to pay the EOC, thereby interrupting the prescriptive periods. As a result, the defenders' plea that the obligation had prescribed was dismissed. Additionally, the second defender (the parent company) was held liable under clause 24.2 of the SPA, which provided an unconditional and irrevocable guarantee of the defenders' obligations.

Analysis

Precedents Cited

The judgment referenced several key precedents to support its reasoning:

Scottish Equitable v Miller Construction 2002 SCLR 10: Highlighted the finality and binding nature of expert determinations.
Aspect Contracts v Higgins Construction [2015] 1 WLR 2961: Emphasized that a binding decision by an adjudicator starts the limitation period.
Jim Ennis Construction v Premier Asphalt [2009] EWHC 1906 (TCC): Reinforced that "binding" implies enforceability.
City of Glasgow DC v Excess Insurance Co Ltd (No 2) 1990 SLT 225: Discussed the interpretation of guarantees in contracts.
Huntaven Properties Ltd v Hunter Construction (Aberdeen) Ltd [2017] CSOH 57: Outlined the requirements for relevant acknowledgment under the Prescription and Limitation Act.
Royal Bank of Scotland v Brown 1982 SC 89: Explored the implications of "on demand" in contractual obligations.

These precedents collectively informed the court's understanding of contract interpretation, the enforceability of expert determinations, and the criteria for recognizing relevant acknowledgments that impact prescription periods.

Legal Reasoning

The crux of the court's reasoning hinged on interpreting the SPA's clauses related to the EOC and the impact of relevant acknowledgments on prescription periods:

Obligation to Pay EOC: The court examined whether the SPA made the EOC payment contingent upon the independent expert's determination. It concluded that the contractual terms clearly stipulated payment dates independent of expert determinations, thereby making the obligation enforceable on those dates.
Relevant Acknowledgment: Under Section 10 of the Prescription and Limitation (Scotland) Act 1973, relevant acknowledgment of an obligation resets the prescription period. The court found that the defenders' actions and communications, including admissions of partial payments and engagement with the independent expert, constituted relevant acknowledgments of the obligation to pay the EOC.
Guarantee Clause (Clause 24.2): The court analyzed whether the guarantor (the second defender) was liable independently of the primary obligation's prescription. It determined that the guarantee was a separate and primary obligation, ensuring indemnity even if the primary obligation ceased due to prescription.

Importantly, the court rejected the pursuers' argument that the obligation was solely contingent upon the expert's determination, upholding the principle that contractual obligations are enforceable based on their express terms unless clearly conditioned otherwise.

Impact

This judgment has significant implications for the enforcement of earn-out provisions in SPAs and the understanding of how relevant acknowledgments affect prescription periods:

Enforceability of Earn-Out Agreements: The decision reinforces that earn-out obligations are enforceable based on their contractual terms, independent of disputes or expert determinations, provided that payment dates are clearly stipulated.
Recognition of Relevant Acknowledgments: By identifying various forms of acknowledgment—such as admissions and partial payments—the judgment clarifies how parties can inadvertently reset prescription periods, thereby extending the time frame for claims.
Guarantee Clauses: The ruling underscores the robustness of guarantee clauses in contracts, highlighting that such guarantees can operate independently to ensure obligations are met even if the primary obligated party's capacity to pay is compromised.

Future cases involving similar SPA disputes will likely reference this judgment when assessing the enforceability of earn-out payments and the implications of any actions that may acknowledge existing obligations.

Complex Concepts Simplified

Earn-Out Consideration (EOC)

An Earn-Out Consideration is a provision in a Share Purchase Agreement where the seller is entitled to receive additional compensation based on the future performance of the company post-sale. In this case, the EOC was calculated as a percentage of the company's relevant sales over three years following the sale.

Prescription

Prescription refers to the legal time limit within which a party must bring a claim to court. Under the Prescription and Limitation (Scotland) Act 1973, most obligations will extinguish if not enforced within five years unless the prescriptive period is interrupted.

Relevant Acknowledgment

A Relevant Acknowledgment under the Prescription and Limitation Act occurs when the debtor takes an action that clearly indicates the obligation still exists, such as making partial payments or admitting the debt in writing. This acknowledgment resets the five-year prescription period, allowing the creditor more time to enforce the obligation.

Independent Expert Determination

An Independent Expert Determination involves appointing a third-party expert to resolve disputes regarding contractual obligations or calculations. The expert's decision is binding and can, in this case, influence when the prescription period begins.

Guarantee Clauses

A Guarantee Clause in a contract is a provision where one party (the guarantor) agrees to be responsible for fulfilling the obligations of another party if they fail to do so. In this case, the parent company guaranteed the defenders' obligations under the SPA.

Conclusion

The judgment in Helen Colquhoun and others against Clinical Research Solutions [2022] CSOH 96 provides clarity on the enforceability of earn-out obligations within Share Purchase Agreements and the significance of relevant acknowledgments in preventing the prescription of such obligations. By affirming that contractual payment obligations are enforceable based on their express terms and recognizing various forms of acknowledgment that reset prescription periods, the court reinforced the protection of sellers' rights in earn-out scenarios. Additionally, the ruling highlighted the effectiveness of guarantee clauses in ensuring obligations are met, even when primary parties seek to negate their liabilities. This judgment serves as a pivotal reference for future contractual disputes involving earn-outs, prescription periods, and guarantees, thereby shaping the landscape of commercial agreements in Scotland.