Barratt & Ors v Treatt Plc

The court decided two central issues: whether the Buyer validly served an Earn-out Notice dated 17 February 2012, and whether that notice was a valid Earn-out Notice under the Sale and Purchase Agreement (the SPA). The court found that the Buyer had proved on the balance of probabilities that a copy of the notice was sent by pre-paid first class post to the Second Claimant's home address in accordance with clause 15 of the SPA. However, the court held that the notice was not a valid Earn-out Notice under clause 3.2 because the calculation set out in the notice was not made by reference to the audited accounts and the two-calendar-year period ending 31 December 2011 as required by the definition of "Earn-out", so the notice did not in substance specify the Earn-out.

As a result, no valid Earn-out Notice was served by 31 May 2012, clause 3.3 (deemed dispute) applies and the amount of the Earn-out must be determined by an independent accountant under clause 3.5. The court also rejected the Sellers' secondary challenge about lack of reasonable detail in the notice.

The Claimants (sellers) and the Defendant (buyer) contracted by a SPA dated 10 April 2008 under which an earn-out mechanism determined part of the consideration. The SPA defined "Earn-out" by reference to audited accounts for the two calendar years ending 31 December 2011 and required the Buyer to deliver an "Earn-out Notice" under clause 3.2, setting out the figure and, in reasonable detail, the basis of calculation; service provisions were in clause 15.

The Buyer sent an email to two Sellers on 17 February 2012 attaching a notice and says it also posted a copy by first class post to the Second Claimant. The Sellers said they never received a posted copy and in any event the notice was not a valid Earn-out Notice because the calculation relied on management accounts and other adjustments rather than audited accounts for the two calendar years to 31 December 2011.

The issues for the court were (i) whether the notice was duly sent by first class post to the Second Claimant and (ii) if so, whether the notice complied with clause 3.2 and the definition of Earn-out. The Buyer led evidence from its assistant company secretary and the office post handler; the court accepted that evidence and found the notice had been posted (and therefore deemed served under the SPA). On validity, the court analysed the SPA and concluded the definition of Earn-out is a substantive provision imposing the exclusive basis for calculation, whereas clause 3.2 is procedural. A notice that does not adopt the calculation basis in the definition does not, in substance, specify the Earn-out. The court considered the Buyer’s arguments (including reliance on principles distinguishing mandatory and directory notice provisions and the Deputy Judge's decision in Siemens Hearing Instruments Ltd) but concluded that using management accounts and double adjustments was materially different from the contracted requirement of audited accounts for the two calendar years to 31 December 2011 and deprived the Sellers of the audit safeguard and of proper protection against being bound by an incorrect figure if they failed to refer in time. The court therefore declared the notice invalid and ordered that, in the absence of agreement, the matter proceed to expert determination by the independently appointed accountant under clause 3.5; related damages claims were stayed until after that determination.

The court declared that the notice dated 17 February 2012 was not a valid Earn-out Notice pursuant to clause 3.2 of the SPA. The judge accepted the Buyer had posted the notice by first class post (clause 15) but held that the notice was invalid because it did not calculate the Earn-out by reference to the audited accounts for the two calendar years ending 31 December 2011 as required by the defined term "Earn-out"; accordingly there was a deemed dispute under clause 3.3 and the amount must be determined by an independent accountant under clause 3.5.