Corporate Law Update
- A buyer was unable to recover part of the purchase price for assets that were never transferred to it
- Changes under the Pension Schemes Act 2021 will come into force on 1 October 2021
- The Supreme Court examines the doctrine of “lawful means” duress and when a contract can be set aside
- The Trust Registration Service online portal is to open to newly registrable trusts from this September
- Legislation is introduced to Parliament that would require companies to appoint worker representatives to their boards
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.
Dargamo Holdings Ltd v Avonwick Holdings Ltd  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.
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.
- Pensions Act 2021 provisions to come into force in October. New legislation has been made to bring the changes in the Pensions Act 2021 into force from 1 October 2021. The changes will include new financial penalties and criminal offences for avoiding employer debt and conduct that risks accrued scheme benefits, as well as new bases on which the Pensions Regulator may impose contribution notices in respect of under-funded schemes.
- Supreme Court examines the scope of “lawful means” duress. In Pakistan International Airline Corporation v Time Travel (UK) Ltd  UKSC 40, the Supreme Court examined the scope of the doctrine of “lawful means” duress, where one party applies lawful actions to coerce another party to enter into a contract. The court confirmed that, in principle, the party coming under duress can set the contract aside, but only in limited and specific circumstances, meaning that, as a general rule, parties can take full advantage of a strong negotiating position to exert pressure in commercial negotiations. In this case, an airline operator did not exert duress on a ticket seller by refusing to renew a contract unless the seller waived claims for unpaid commission. For more information, see this blog by our colleagues, Ed Llewelyn-Evans and Lois Horne.
- Trust Registration Service expansion to go live by September. HM Revenue & Customs has announced that the Trust Registration Service (TRS) online portal has been upgraded and will open for registrations by non-taxable trusts in September 2021, giving a new deadline for registration of around September 2022. For more information on the expansion of the TRS, see this blog by our colleague, Iskra Doukova.
- Legislation introduced to require worker representatives on boards. Legislation has been introduced to Parliament which, if passed, would require companies to appoint worker representatives as directors on their boards. The Employment Bill would (among other things) amend the Companies Act 2006 to require companies with a minimum number of employees or pre-tax profit to ensure that at least a third of their board comprises directors who are responsible for “bringing the perspective of a worker to the boardroom”. The legislation has been introduced as a Private Members’ Bill by the Scottish National Party and so is not officially endorsed by the UK Government. It therefore has minimal chance of becoming law but is nonetheless interesting, given the increased focus on the consideration of workforce issues at board level.