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Published 9 March 2023
The Chancery Division of the High Court today delivered a judgment favourable to the Defendant (represented by DAC Beachcroft) on a preliminary issue of contractual construction. The decision affirms that parties are free to contract on whatever terms they please; the courts’ principal task is to ascertain the objective meaning of the language in which the parties have chosen to express their agreement.
The main question raised was whether the settlement of claims between two companies (“A” and “B”) amounted to “repayment” of an amount due from A to B so as to satisfy an obligation in a share purchase agreement.
The share purchase agreement defined the “Debt” as “150,000 (approximately) of indebtedness outstanding from [A] to [B]” and referred to the Defendant agreeing to indemnify the Claimant “up to a maximum of £150,000” and to the Claimant warranting that the Debt did “not exceed £150,000”.
Under the settlement agreement that followed, B’s liquidators expressly agreed to accept the payment of £200,000 by A to B, and the release of other cross-claims, in discharge of, among other things, the Debt.
The Claimant argued that “Debt” in fact signified whatever sum it turned out was due from A to B as a result of diverted payments, which the parties believed at the time to be around £150,000. The Defendant argued that the Debt meant: a sum in the region of (and no more than) £150,000 of indebtedness due from A to B arising from those diverted payments.
Mr Justice Zacaroli agreed with the Defendant; what matters is what the parties agree based on the terms of the agreement (where these are clear). The value of the total consideration provided by A under the settlement agreement was accepted by B as being in an amount sufficient to discharge the Debt. The risk that more money might turn out to have been diverted to A was, as between the Claimant and Defendant, assumed by the former (in light particularly of the warranty).
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