Devine v Torex Group Plc

A profit-before-tax warranty in a share sale agreement must be assessed at the contractual date and in the agreed accounting manner. Where the warranty refers to assessment on Completion, the relevant date is Completion or 31 December of the warranted year, whichever is later. The warranty does not require repeated reopening of the accounts until every liability referable to that year has been finally settled. A properly made provision affects the relevant year's assessment, while later changes generally affect later years. A liability first asserted after the relevant assessment date cannot reduce the warranted profit. A probable and reliably estimable present obligation covered by a proper provision is no longer merely contingent for this purpose.

The appellant sold shares in BIT Holdings Limited under a share sale agreement containing a warranty that BIT would achieve specified profits before tax for 1996. After Completion, Housing Units Limited cancelled its contract with BIT and claimed damages for repudiation. BIT later made a £150,000 provision in its 1996 accounts, and Housing ultimately obtained judgment for a substantially larger sum.

Torex claimed under the PBT warranty. The trial judge held that the Housing liability was referable to 1996 but left several issues, including the effect of the provision, possible reopening of the accounts and the claim-control provisions, for later determination. The appeal concerned whether the provision or ultimate liability affected the warranted 1996 PBT, and whether the Vendor Protection provisions supplied a defence.

Rix LJ delivered the leading judgment. Sir Martin Nourse and Mantell LJ agreed, so the appeal succeeded unanimously to the relevant extent.

1. Assessment date. The reference to assessment in the same manner as the 1995 statutory accounts did not create an open-ended process continuing until every liability connected with 1996 had been finally settled. The contractual words on Completion were retained and construed as meaning Completion or 31 December 1996, whichever was later. This gave the wording a sensible commercial meaning.
2. Effect of the Housing claim. Completion occurred on 8 January 1997. Housing's repudiation claim was first made on 13 January 1997 and had come out of the blue. It therefore could not have been the subject of a provision affecting the 1996 PBT assessed at Completion. Mr Devine had no liability under the PBT warranty in respect of BIT's liability to Housing, whether measured by the later judgment or by the provision in the 1996 accounts.
3. Alternative accounting analysis. Even if 24 October 1997, when the accounts were signed off, had been the relevant date, Torex's claim could not exceed the £150,000 provision. Subsequent changes in a provision should affect later accounts rather than being carried back to the original year's profit and loss account. The court did not need finally to determine the reasonableness of that provision.
4. Contingent liabilities. The court considered that a potential liability covered by a proper provision for a probable and reliably estimable present obligation ceases, for accounting purposes, to be merely contingent. Schedule 7 clause (6)(b)(x) did not directly alter the operation of the PBT warranty. These observations were unnecessary once the Completion date was selected.
5. Disclosure and other issues. Earlier contractual difficulties had been disclosed, but they did not disclose the later repudiation claim, which had not been made and could not have been disclosed at the contract date. The court left open whether disclosure could ever defeat a PBT warranty claim. The remaining issues and the respondent's notice were moot, with consequential orders to be addressed separately.

• Court of Appeal (Civil Division): Appeal from the decision below allowed to the extent that the appellant had no liability under the PBT warranty for BIT's liability to Housing.
• Queen's Bench Division, Manchester District Registry, Mercantile List: His Honour Judge Kershaw QC held in judgments dated 28 July 2000 and July 2001 that the Housing liability was a 1996 liability, leaving further issues for later determination.