Abbey Catering Ltd v Saunders

An earn-out provision in a business sale agreement is construed in its contractual and commercial context, not as though it were an agency commission clause. “Business introduced by the Vendor” can include post-transfer business generated by the vendor’s work as an employee promoting and extending the transferred business, as well as business arising from pre-transfer contracts and bookings. The vendor need not be the effective cause of the eventual contract. Whether particular business was introduced is a question of fact. Business conducted under the purchaser’s separate trading name is excluded, while business obtained under the transferred business’s name falls within the earn-out unless the agreement indicates otherwise.

Abbey Catering Ltd purchased the plant, equipment, contracts and goodwill of Elegant Cuisine from Julia Saunders. The agreement provided for a further payment if the transferred business achieved a specified level of Gross Sales Turnover. Abbey sought repayment of £37,500 already paid, arguing that the turnover threshold had not been met. Saunders defended the claim and counterclaimed for the remaining £12,500.

The Newbury County Court held that business could be introduced by Saunders without her being the effective cause of the eventual contract. It included two disputed invoices but excluded a third. Abbey appealed on the construction of the earn-out clause, and Saunders cross-appealed in respect of the excluded business. The central issue was the meaning of “business introduced by the Vendor”.

1. Disposition. The Court of Appeal unanimously dismissed the appeal and allowed the cross-appeal. The respondent was awarded costs on the standard basis, agreed at £1,100.
2. Construction of the earn-out clause. The relevant provision was an earn-out clause in a business sale agreement. It was not an agency contract. The additional payment became due if the defined Gross Sales Turnover exceeded £350,000. The vendor therefore did not have to be the effective cause of the eventual transaction. The question was whether the relevant business had been introduced by her: per Longmore LJ, introduction could be the first or preliminary step in a sequence culminating in the performance of a relevant contract (paras [13]-[18]).
3. Temporal scope. “Business introduced by the Vendor” included turnover from pre-transfer contracts and bookings. It also included post-transfer business generated by Saunders’s activities under the related service agreement, including promoting, developing and extending Elegant Cuisine. There was no requirement that contact with the customer, or prior customer status, pre-date the transfer (per Chadwick LJ, paras [22]-[30]; per Longmore LJ, paras [9]-[10]).
4. Scope of the business. The clause distinguished Elegant Cuisine business from Abbey Catering’s original business. The parenthetical exclusion applied to catering functions carried out under Abbey’s separate name or as part of its other business activities. The commercial context, including the purchase of goodwill and the service agreement, supported including business obtained under the Elegant Cuisine name (per Pill LJ, paras [32]-[38]).
5. The disputed contracts, including the business treated as introduced on the cross-appeal, fell within the clause. The relevant turnover was therefore to be included in determining entitlement to the additional payment.

1. Court of Appeal (Civil Division) — In [2005] EWCA Civ 398, the appeal was dismissed and the cross-appeal was allowed.
2. Newbury County Court — HHJ Catlin construed the earn-out clause and included two disputed invoices in the turnover calculation but excluded a third.