Infiniteland Ltd & Anor v Artisan Contracting Ltd & Anor

Factual and Procedural Background

This appeal arises from an order made by Mr Justice Park on 28 May 2004 concerning proceedings related to a share sale agreement dated 24 May 2001 between the first respondent, Company A (Vendor), and Company B (Purchaser). A second respondent, Company C, was joined to give warranties under the agreement. On 24 July 2001, the Purchaser’s rights and obligations were assigned to the first appellant, Company D, owned by the second appellant, Mr Aviss, who also guaranteed payment of deferred consideration under the agreement.

The agreement involved the sale of the entire issued capital of three companies (referred to collectively as "the Group Companies"). The purchase price was initially stated as £1,233,411 but was varied by a subsequent agreement on 14 June 2001 to £1,402,948, reflecting an adjustment based on the net asset value of the Group Companies as at 31 March 2001 (the "Last Accounts Date"). Completion occurred on 14 June 2001.

The purchase consideration was payable in instalments, with the final balance due on the first anniversary of completion. The Purchaser failed to pay the final instalment, giving rise to claims by the Vendor for breach of warranties, claims under the share sale agreement, and claims for damages or rescission for misrepresentation. The Purchaser also went into liquidation during the course of the dispute.

Legal Issues Presented

1. Whether the warranties given by the Vendor and Company C in relation to the Principal Accounts were breached, given the treatment of an exceptional accounting item of £1,081,000.
2. Whether the Purchaser’s reporting accountants had actual knowledge of the true nature of the exceptional item and whether that knowledge should be imputed to the Purchaser, affecting warranty claims under clause 7.4 of the agreement.
3. Whether the Purchaser was entitled to invoke the price adjustment mechanism under clause 4 of the agreement in respect of alleged overvaluation of contracts.
4. The effect of the timing and existence of the Principal Accounts at the time warranties were given.
5. The proper construction and application of clauses 7.1.8, 7.1.9, 7.4, and related disclosure provisions in the agreement.

Arguments of the Parties

Appellants' Arguments

• The appellants contended that the Purchaser’s reporting accountants, Mr Jones, did not fully understand the nature and effect of the exceptional item of £1,081,000, and thus the Vendor could not rely on his knowledge as actual knowledge of the Purchaser.
• They argued that the warranty given on 24 May 2001 was given before audited Principal Accounts existed, so the warranty was ineffective ("no Principal Accounts" argument).
• The appellants submitted that the disclosure in the Disclosure Letter was inadequate to qualify the warranties.
• Regarding the price adjustment under clause 4, the appellants argued that the contractual machinery for determining Net Asset Value had broken down and the court should substitute its own valuation mechanism, relying on the House of Lords decision in Sudbrook Trading Estate Ltd v Eggleton.
• They challenged the judge’s finding that the Purchaser’s reporting accountants’ knowledge should be imputed to the Purchaser for the purposes of clause 7.4.

Respondents' Arguments

• The respondents maintained that Mr Jones, the Purchaser’s reporting accountant, had actual knowledge of the exceptional item’s true nature, including its distorting effect on the profit and loss account.
• They argued that the Disclosure Letter, when read with the Disclosure Bundle and documents supplied to the reporting accountants, adequately qualified the warranties.
• The respondents contended that the Purchaser failed to comply with the contractual procedure for price adjustment under clause 4, and thus could not claim an adjustment.
• They submitted that actual knowledge includes the knowledge of an agent (the reporting accountant) acting on behalf of the Purchaser, and that clause 7.4 should be construed accordingly.
• The respondents rejected the "no Principal Accounts" argument, noting that the variation agreement confirmed the terms of the sale and the existence of audited accounts at completion.

Table of Precedents Cited

Court's Reasoning and Analysis

The court carefully analysed the share sale agreement, focusing on the warranties concerning the Principal Accounts and the disclosure letter's role in qualifying those warranties. It found that the audited Principal Accounts did not give a true and fair view of Bickerton’s profits due to the inclusion of an exceptional credit of £1,081,000 improperly treated as a reduction in cost of sales, which distorted operating profit figures.

The court examined the knowledge of the Purchaser’s reporting accountant, Mr Jones, who conducted due diligence. It accepted the judge’s factual findings that Mr Jones was aware of the exceptional item, its nature as a one-off cash injection by the parent company, and its distorting effect on the accounts. This knowledge was acquired through extensive investigation, including discussions with auditors and Company C’s finance director.

However, the court rejected the judge's conclusion that the Purchaser’s actual knowledge included Mr Jones’s knowledge. It held that "actual knowledge" in clause 7.4 does not extend to imputed knowledge (knowledge of an agent not passed on to the principal). Thus, the Vendor could not rely on Mr Jones’s knowledge to defeat the warranty claim if the Purchaser itself did not have that knowledge.

Regarding the adequacy of disclosure, the court held that the Disclosure Letter, read with the Disclosure Bundle and documents supplied to the Purchaser’s reporting accountants, objectively qualified the warranties. It was reasonable to expect the reporting accountants to discover the exceptional item and its effect during due diligence, and the Purchaser accepted disclosure on that basis. Consequently, there was no breach of warranty as qualified by disclosure.

On the price adjustment claim under clause 4, the court found that the Purchaser failed to initiate the contractual procedure for determining Net Asset Value. The court distinguished the case from Sudbrook Trading Estate Ltd v Eggleton, holding that the contractual machinery had not broken down but rather was not invoked by the Purchaser. The court declined to substitute its own valuation mechanism and dismissed the claim for price adjustment.

The court also rejected the "no Principal Accounts" argument, holding that the variation agreement of 14 June 2001 confirmed the terms of the sale and that audited Principal Accounts existed at completion, thus supporting the warranties.

In summary, the court dismissed the appeal, holding that the warranties were qualified by disclosure, that the Purchaser’s actual knowledge did not include that of its reporting accountants unless communicated, and that the Purchaser failed to comply with contractual procedures for price adjustment.

Holding and Implications

The appeal is DISMISSED.

The court upheld the dismissal of warranty claims on the basis that the warranties were qualified by disclosure provided to the Purchaser’s reporting accountants, who had actual knowledge of the relevant facts. The court clarified that actual knowledge for the purposes of clause 7.4 does not include imputed knowledge from agents unless communicated to the Purchaser itself. The Purchaser’s failure to follow the contractual procedure for price adjustment under clause 4 precludes any claim for adjustment. The "no Principal Accounts" argument was rejected due to the effect of the variation agreement.

No new precedent was established beyond the interpretation of the specific contractual provisions in this case and the application of existing principles on actual knowledge, disclosure, and contractual valuation mechanisms. The decision reinforces the importance of following contractual procedures and the role of due diligence and disclosure in share sale agreements.