Jordan v One 2 One Personal Communications Ltd

An interlocking contractual price-adjustment mechanism must be construed in the circumstances contemplated by the parties. Where a buyer immediately replaces the seller-appointed directors, obligations requiring the sellers to procure and deliver completion accounts may fall away because they can no longer perform them. Provisions premised on seller-prepared accounts, including a notice-of-non-acceptance and negotiation procedure, should not be distorted to govern that situation. The independent-accountant clause may then operate on any dispute between the parties concerning the draft accounts, even though no notice of non-acceptance was given. A net asset statement issued without determination of that dispute through the agreed procedure is not binding.

The appeal arose from the sale of the whole issued share capital of The Pocket Phone Shop Limited. The share acquisition agreement contained a price-adjustment mechanism based on the company’s net asset value, with completion accounts and a possible reference to an independent accountant.

Following completion, the buyer replaced the sellers’ directors and procured the preparation of draft accounts. The buyer accepted those accounts, and the company’s auditors and the buyer’s accountants issued a net asset statement showing a substantial shortfall. Mr Justice Neuberger held that the appellant had no right to invoke the independent-accountant procedure. The central issue was whether the dispute provisions applied where no notice of non-acceptance had been given under clause 5.3.

Appeal allowed unanimously. Lord Justice Chadwick delivered the judgment, with Lord Justice Ward and Lady Justice Arden agreeing.

1. The agreement contemplated two situations. In the first, the sellers remained in management control until draft completion accounts were prepared and delivered. In that situation, clauses 5.3 and 5.5 operated as part of the contractual scheme, and the reference in clauses 5.4 and 5.6 to a dispute was confined to a dispute arising through the buyer’s notice of non-acceptance.
2. In the second situation, which occurred here, the buyer replaced the sellers’ directors immediately after execution. The sellers could no longer procure the preparation of statutory accounts or completion accounts by the company, nor deliver draft accounts. Their corresponding obligations under clause 5.2 therefore fell away, and the buyer was responsible for procuring the accounts if it wished to rely on the price-adjustment provisions.
3. Clauses 5.3 and 5.5 were premised on accounts delivered by the sellers and therefore did not apply in the second situation. Clause 5.4 nevertheless had to retain practical effect, since it provided the means by which a net asset statement could be issued. In that context, the words “any dispute, difference or question” meant any dispute between the parties concerning the draft completion accounts. That dispute was within clause 5.6, which required final determination by an Independent Accountant.
4. The net asset statement issued without determination of Mr Jordan’s dispute under clause 5.6 was issued in disregard of the agreed procedure and was not binding on the sellers. The order below was consequently reversed.

1. Court of Appeal (Civil Division): Unanimously allowed the appeal and held that the net asset statement was not binding on the sellers.
2. Chancery Division: On 24 July 2001, Mr Justice Neuberger held that the appellant was not entitled to invoke the independent-accountant procedure.