Infiniteland Ltd & Anor v Artisan Contracting Ltd & Anor

The adequacy of disclosure against warranties in a share sale agreement depends on the parties’ contractual language. Where an agreement permits general disclosure by incorporating documents supplied to the purchaser’s reporting accountants, disclosure is sufficient if accountants could fairly be expected to identify the relevant matter during ordinary due diligence.

A party that fails to initiate agreed machinery for determining a price adjustment cannot require the court to substitute a different process. This differs from a genuine breakdown of non-essential machinery.

In professionally drafted contracts, “actual knowledge” ordinarily means a person’s own knowledge. It excludes knowledge attributed through an agent unless the contractual language or context displaces that established meaning.

The appellants appealed from the decision of Park J, [2004] EWHC 955 (Ch), dismissing claims arising from the purchase of a group of companies under a share sale agreement. The audited accounts overstated one company’s operating profit by treating a £1.081 million exceptional credit as a reduction in its cost of sales.

The principal issues were whether the matter had been adequately disclosed so as to qualify the accounts warranty; whether knowledge acquired by the purchaser’s reporting accountant constituted the purchaser’s “actual knowledge”; and whether the purchaser could claim a net asset value adjustment despite failing to invoke the agreement’s prescribed calculation and expert-determination procedure.

1. Appeal dismissed. The warranty that the principal accounts gave a true and fair view was qualified by the disclosure letter, read with the incorporated disclosure bundle and accompanying documents. The purchaser had accepted general disclosure by reference to documents supplied to its reporting accountants. The correct objective question was whether accountants could fairly be expected, during ordinary due diligence, to discover that the £1.081 million credit had overstated operating profit. The supplied material amply satisfied that test.

2. The disclosure standard stated in New Hearts Ltd v Cosmopolitan Investments Ltd [1997] 2 BCLC 249 reflected the particular contractual requirement in that case for fair disclosure with sufficient detail. Park J had erred by importing that standard into materially different wording.

3. The purchaser could not obtain a net asset value adjustment after failing to initiate the contractual calculation and expert-determination machinery. This was not a breakdown of machinery of the kind considered in Sudbrook Trading Estate Ltd v Eggleton [1983] 1 AC 444. A party that chooses not to permit agreed machinery to operate cannot impose on the other party a substitute process to which that party never agreed.

4. The absence of audited principal accounts when the original agreement was signed did not defeat the warranty claim. The later variation agreement confirmed the original terms after the audited accounts existed, so the warranties were construed as given or renewed on that later date.

5. Clause 7.4 did not affect the result because the qualified warranty had not been breached. Chadwick and Carnwath LJJ nevertheless considered that, in a professionally drafted contract, “actual knowledge” ordinarily excludes knowledge imputed from an agent. Clearer language was required to enlarge a qualification restricting a saving provision introduced for the purchaser’s benefit. Pill LJ disagreed on that non-dispositive question, considering the accountant’s knowledge attributable to the purchaser in the contractual context.

1. Court of Appeal (Civil Division): The appeal was dismissed. The court upheld dismissal of the claims, although its reasoning differed in material respects from that of Park J.

2. High Court, Chancery Division: Park J dismissed the warranty, misrepresentation and net asset value adjustment claims in [2004] EWHC 955 (Ch).