In Onecom Group Ltd v Palmer [2024] EWHC 867 (Comm), the High Court determined that a buyer’s warranty claims were not time-barred by a contractual limitations within the SPA, which required claims to be filed within six months of notifying the seller. The court found that, when notified, the claims were neither definitive nor capable of being quantified, as they depended on the outcome of an expert process to establish the amount of earn-out consideration due.
This decision followed from a combined application seeking to dismiss the buyer’s claim or obtain a summary judgment. Although it does not create a binding precedent, it provides insight into the court’s perspective on the treatment of such claims.
Background
Mr. Palmer sold his company, F2P (Group) Ltd (F2P), to Onecom Group Ltd (Onecom) in February 2021 for approximately £60 million, with an additional earn-out potential based on F2P’s post-sale performance. This case centred on interpreting the notification requirements within the share purchase agreement (SPA) and determining if Onecom adhered to its obligations to notify Mr. Palmer of alleged warranty breaches in a timely manner.
The SPA outlined the sale’s terms, including business warranties and an earn-out structure, where additional payment would be due if F2P’s performance exceeded a set threshold within the year following the sale. If disagreements arose over the earn-out amount, the SPA stipulated that an independent expert would be called to assess the situation.
The dispute
The SPA limited the seller's liability for warranty breaches and specified notification requirements as follows:
- Notification period: The buyer had 24 months post-completion to notify the seller of any potential warranty claims.
- Litigation period: Upon notification, the buyer had another six months to commence legal proceedings.
- Contingent claims: The seller’s liability would only apply when the claim was actual and quantifiable.
In September 2023, Onecom alleged a breach of warranty, nearly nine months past the limitation period. Mr. Palmer sought to dismiss the claim as time-barred. Onecom countered that its claim qualified as a contingent claim because the earn-out calculations might reflect the alleged breach. Therefore, the Litigation Period would only start after the independent expert’s earn-out determination, making the claim timely.
Onecom filed its claim within six months after the expert’s earn-out determination.
Outcome
The High Court denied Mr. Palmer’s application to dismiss the claim, siding with Onecom for the following reasons:
- The alleged breach of warranty was relevant to the earn-out calculation, and the potential breach affected the earn-out payment.
- The claim was contingent and unquantifiable until the independent expert’s process concluded, which established Onecom’s actual position versus the hypothetical, non-breach position.
- Avoiding double recovery was necessary, as settling the warranty claim before the earn-out calculation could lead to recovery under both avenues.
Considerations
This case underscores the importance of precise language in SPAs, particularly in areas like warranty claims, notification timelines, earn-out clauses, and contingent claims provisions. Allowing Onecom to wait for the earn-out resolution highlighted practical difficulties in quantifying certain claims. However, this decision raises questions for cases with longer earn-out periods, where delayed claims could extend for multiple years.
The decision invites consideration of whether litigation period provisions should be included in SPAs, as they may create tactical delays and high costs, impacting both buyers and sellers. Balancing a seller's assurance against indefinite claim uncertainty with a buyer's need for claim flexibility remains essential in drafting comprehensive SPAs.
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