Rust Consulting Ltd v PB Ltd

In construing an asset purchase agreement, a liability attributable to the transferred business and accrued by the effective date may be reflected in the accounts by a general note concerning contingent liabilities, even if the liability was unknown, remote and did not require specific provision or disclosure under applicable accounting practice.

An indemnity for outstanding contractual obligations does not extend to obligations fully performed by the effective date merely because another obligation under the same contract remained. Assignment or novation consent is unnecessary where the purchaser can assume and perform the only outstanding obligation without transferring the contract.

Rust Consulting Limited provided geotechnical services for a shopping-village development and later entered into an asset purchase agreement with Kennedy & Donkin Limited, now PB Limited. The agreement transferred Rust’s business and assets and provided indemnities for defined liabilities and contracts.

After the development companies obtained a consent judgment against Rust, Rust’s liquidators pursued an indemnity from PB. Akenhead J ruled for Rust on whether the liability was reflected in the accounts, but for PB on the contractual indemnity issues and the effect of the consent judgment. PB appealed the first ruling, and Rust cross-appealed on two of the others. The central issues concerned the meaning and scope of the agreement’s indemnity provisions.

Lord Justice Tomlinson gave the leading judgment, with Lord Justices Richards and Ward agreeing. The appeal and cross-appeal were both dismissed.

1. Liabilities reflected in the accounts. The liability arising from Rust’s alleged breach of the November 1995 and November 1996 Agreements was attributable to Rust’s business and had accrued by the effective date. The expression “reflected in the accounts” did not require a specific provision or disclosure where the liability was a remote contingent liability unknown to the company and accounting practice required no disclosure. Note 17(d), referring generally to contingent liabilities in the ordinary course of business, was sufficient. The agreement did not say that liabilities were assumed only to the extent reflected in the accounts.
2. Clause 3.1. The indemnity concerned proceedings, claims and demands relating to outstanding contractual obligations. It did not extend to all obligations under a contract merely because one obligation remained outstanding. The court rejected the argument that the secondary obligation to pay damages, or an obligation to perform services with reasonable skill and care, constituted an outstanding contractual obligation for this purpose.
3. In reaching that conclusion, the court referred to the contractual analysis adopted in Ward v Bignall [1967] 1 QB 534 at 548 and repeated in Lep Air Services v Rolloswin Investments Ltd [1973] AC 331 at 350. It considered it unrealistic to assume that the parties had intended that technical analysis when using the words “not fully performed” or “outstanding”.
4. Clause 8.2. The only obligation under the Warranty that remained unperformed at the effective date was the obligation to maintain professional indemnity insurance. PB could assume and perform that obligation without an assignment or novation. Consequently, no relevant consent was required and no indemnity arose from failure to obtain consent.
5. The court did not need to determine whether the consent judgment relieved Rust of proving its liability to the Eagle One Companies, because Rust failed on the contractual indemnity claims under clauses 3.1 and 8.2.

• Court of Appeal (Civil Division) dismissed PB Limited’s appeal and Rust Consulting Limited’s cross-appeal.
• Queen’s Bench Division, Technology and Construction Court Akenhead J, in [2010] EWHC 3243 (TCC), ruled for Rust on whether the relevant liability was reflected in the accounts, and for PB on the contractual indemnity issues and the consent-judgment issue.