Chalabi & Ors v Jaffar & Anor

Where parties structure payments under separate agreements for a distinct commercial purpose, the court must construe the transaction in that form, provided the structure is genuine and lawful. A payment may form part of the wider economic consideration for a transaction without being a sum received for the sale of identified shares, assets or a business. The contractual wording and the structure actually adopted remain decisive. Genuine tax indemnities therefore do not become sale consideration merely because the transaction would not have proceeded without them. A contractual warranty concerning remuneration also requires the payment to fall within the specified employment, services or working-capital arrangements.

The claim arose from the two-stage sale of a family-owned technology business. The claimants sold shares in several companies to the defendants, who immediately sold shares and assets to TSYS. The defendants received $54.5 million for the sales and a further $3.17 million under separate tax deeds intended to indemnify them and two companies against additional tax arising from the changed transaction structure.

The claimants sought damages for breach of contractual warranties and misrepresentation, contending that the tax payments were additional sale consideration. They also sought to amend their claim to rely on a remuneration warranty in a separate share sale agreement. The issues were whether the tax payments were sums received for the specified sales and whether they were remuneration within the relevant warranty.

1. Claim dismissed. The tax deeds and payments were genuine arrangements intended to compensate the defendants and the relevant companies for estimated additional tax liabilities. They were not shams or devices, and the defendants’ purpose in structuring them separately did not determine the construction issue.
2. The relevant question was not whether the payments formed part of the wider consideration moving from TSYS for the overall transaction. It was whether they were sums received for the sale of the particular shares, business or assets identified in the warranties. The express sale agreements separately stated the total consideration. The tax deeds had a different purpose and were separate contractual instruments. The warranties were therefore not properly described as general consideration warranties.
3. In construing a transaction, the court normally gives effect to the method adopted by the parties where it is genuine and lawful. The court applied the approach stated in Spectros International plc v Madden [1997] STC 114. The TSYS regulatory and accounting descriptions did not alter the contractual analysis.
4. For the remuneration warranty, a payment had to be remuneration of whatever nature, other than consideration, received within the relevant three-year period and in respect of the contracts or arrangements identified in the agreement. Those arrangements concerned employment, services, working-capital settlements or documents of a similar nature relating to employment or services. The tax indemnities were neither remuneration nor payments under such arrangements.
5. Permission to amend the Particulars of Claim to rely on the remuneration warranty was refused because the proposed point had no real prospect of success. The claim was dismissed.

First-instance judgment in the High Court (Commercial Court). No appellate history is stated in the judgment.