Barratt & Ors v Treatt Plc

A contractual notice must comply with the substantive provision defining the matter to which it relates, as well as with the machinery for giving notice. A notice specifying an earn-out calculated on a basis not permitted by the agreement does not specify the contractual earn-out and is invalid. In deciding whether non-compliance is fatal, the court considers substance, contractual purpose, the importance of the requirement and prejudice. Audited accounts may constitute an important safeguard where the agreement requires them. A contractual time bar does not cure a notice which is invalid at the outset.

The sellers sold shares in two companies to the defendant under a sale and purchase agreement providing for an earn-out. The agreement required the buyer to serve an earn-out notice specifying the earn-out and the basis of calculation in reasonable detail. The earn-out was defined by reference to audited accounts for the two calendar years ending on 31 December 2011.

The buyer served a notice dated 17 February 2012. It had been sent by first-class post and was therefore validly served, but its calculation used management accounts and figures adjusted from accounting periods ending on 30 September. The sellers challenged the notice on that ground and also alleged that it lacked reasonable detail. The central issues were whether the notice was valid and, if not, what consequences followed.

1. Service. The buyer proved on the balance of probabilities that the notice had been sent by prepaid first-class post to the second claimant’s home address. Under the agreed contractual machinery, it was deemed served even if it had not been received.
2. Construction of the agreement. The definition of “Earn-out” was a substantive provision which fixed the basis for calculating the consideration. Clause 3.2 was procedural. It did not permit the buyer to choose a different basis of calculation. A notice had to explain the calculation using the basis required by the definition.
3. Effect of non-compliance. The principles concerning compliant statutory and contractual notices, as stated in Siemens Hearing Instruments Ltd v Friends Life Ltd, required attention to substance, contractual purpose and the effect of non-compliance. The requirement to use audited accounts was an important safeguard intended to improve the reliability of the figures. Using management accounts and reconstructing calendar-year figures from accounts ending on 30 September was materially different from using audited accounts for the specified period.
4. The departure was significant and prejudiced the sellers by depriving them of the contractual safeguards and exposing them to being bound by the notice if they failed to refer a dispute within the time limit. The notice was therefore invalid. Clause 3.4 did not apply; there was instead a deemed dispute under clause 3.3, to be determined by the independent accountant under clauses 3.5 and 3.6.
5. Reasonable detail. Alternatively, assuming management accounts could be used, the notice gave reasonable detail concerning the basis of its calculation. It was not required to explain every underlying discrepancy or why consolidated group accounts produced a different figure from individual company accounts.
6. A declaration was made that the notice dated 17 February 2012 was not a valid earn-out notice. The earn-out dispute was to proceed to expert determination. The previously ordered stay of the sellers’ damages claim continued.

First-instance decision. No prior appellate history is stated in the judgment.