Buyer could not recover part of price for assets that were never transferred

08 September 2021

The Court of Appeal has held that the buyer under a share sale agreement could not recover part of the purchase price that had allegedly been allocated to other assets that had not been transferred.

What happened?

Dargamo Holdings Ltd v Avonwick Holdings Ltd [2021] EWCA Civ 1149 concerned the sale of shares in a company by one seller to two buyers. The sale of the shares was set out in a share sale agreement (SPA) governed by English law.

It was common ground that the purchase price in the SPA represented not only payment for the shares in the company to be transferred under the SPA, but also an advance payment for other assets (specifically, shares in other companies) to be transferred to the buyer companies or their beneficial owners at a later date under contractual documentation to be agreed in due course.

The share sale was completed and the entire purchase price was paid over. However, for one reason or another, the additional assets to be transferred to one of those buyers were never transferred to it.

That buyer brought a claim against the seller to recover part of the purchase price under the SPA on the basis that it was attributable to assets that it never received. It brought its claim on the basis that the seller had been “unjustly enriched” by virtue of not parting with those additional assets.

The High Court dismissed the buyer’s claim, and the buyer appealed to the Court of Appeal.

What is “unjust enrichment”?

Under the law of unjust enrichment, a person (the “claimant”) may claim money or assets back from another person (the “recipient”) by way of restitution if the claimant has been enriched at the recipient’s expense and that enrichment is unjust.

Scenarios where enrichment might be unjust include where the parties have made a mistake of law or fact, where one party has come under duress or undue influence, or where there has been a total failure of the basis on which the enrichment occurred.

Failure of basis (which underpinned the buyer’s claim in this case) occurs where the recipient receives a benefit on the basis of a joint understanding that the recipient’s right to keep that benefit is conditional. If the condition is not fulfilled, the recipient must return the benefit.

Importantly, a claim in unjust enrichment cannot be used to override the express terms of a contract. If parties negotiate, sign and perform a contract, the court will not allow a claim for unjust enrichment unless it is consistent with the parties’ express allocation of risk in that contract.

What did the court say?

The Court of Appeal upheld the High Court’s decision and dismissed the buyer’s claim.

Lady Justice Carr (who delivered the lead judgment and with whom the other judges agreed) acknowledged that the parties had in fact intended to allocate part of the purchase price in the SPA to assets other than the shares in the company.

However, the SPA did not refer at all to those assets. Instead, it said very plainly that the purchase price was the consideration for the sale of the shares in the company. The parties had negotiated for a great deal of time over the allocation of the price across the shares in the company and the other assets. But, when it came to embodying this contractually, they made a conscious decision not to include those assets in the SPA or to allocate a specific portion of the purchase price to them.

The seller had fulfilled its obligations under the SPA and that was the end of it. It was not open to the buyer in question to subvert the express terms of the SPA through a claim in unjust enrichment.

What does this mean for me?

The court’s decision may at first seem austere, particularly given that the seller had expressly acknowledged that part of the purchase price in the SPA was originally earmarked for assets that were never ultimately transferred.

However, the judgment has to be seen as an expression of one of the fundamental principles of English law: that parties are free to negotiate the terms of their commercial arrangements, and the courts will not willingly step in to undermine or alter those express terms.

The situation may have been different had the SPA been less unequivocal (for example, if its terms had been unclear or if it had specifically noted that part of the price was attributable to other assets). In that case, the court might have allowed a claim in unjust enrichment to proceed alongside, and complementary to, the terms of the SPA, although this is by no means a given.

The case does highlight certain practical steps that parties can take.

  • Make sure the contract covers all assets. If any assets are left unaccounted for, it may be difficult to recover any monies paid. There will be circumstances where there is a good reason not to include all assets within a specific contract, but, in these cases, those assets should be dealt with in some other instrument or agreement.
  • Specifically apportion the price. Where multiple assets are to be bought and sold, it is usually sensible to provide a breakdown of the purchase price and apportion specific amounts to specific assets. This is common, for example, where the sale of a business is structured as the transfer of assets and goodwill, rather than shares in a company.
  • Clarify what happens if assets are not transferred. Generally, it is wise to ensure title to assets is transferred at the time payment is made, but this is not always possible. (A common example is where contractual rights are being assigned and consent may be required.) Consider setting out what happens if the purchase price is paid but certain assets are ultimately never transferred. It will be easier to enforce an express contractual right to be repaid part of the purchase price than to bring a claim for unjust enrichment.