Kitcatt & Ors MMS UK Holdings Ltd & Ors

A contractual warranty concerning awareness of facts likely to cause a material adverse impact may be construed by comparing reasonable expectations based on the information supplied with the expectations that would have existed had the relevant facts been disclosed. The warranty may therefore be enforceable even where the contract’s accounting definitions do not state an express baseline.

A warranty may be partly subjective and partly objective: actual awareness of the relevant facts is required, but their likely impact is assessed objectively. A later agreement varying an earn-out formula may be binding if, viewed objectively and in the context of the parties’ communications as a whole, the parties intended legal relations and had agreed the essential terms.

The claimants sold their shares in Kitcatt Nohr Alexander Shaw Ltd to MMS UK Holdings Ltd under a share purchase agreement. The consideration included deferred consideration calculated by reference to the performance of a merged advertising agency. The agreement contained buyer warranties concerning awareness of facts capable of materially affecting future revenue and operating income.

The claimants alleged that the defendants had failed to disclose the vulnerability of Procter & Gamble work obtained through the Brand Agency Leader model. They claimed an adjustment under the warranty provisions and, alternatively, relied on an agreement reached in 2012 to adjust the earn-out calculation. The issues concerned construction and enforceability of the warranty, breach, the existence and effect of the 2012 agreement, and the liability of Publicis Groupe SA.

1. Warranty construction. Clause 10.11(a) was not a guarantee of future performance. It allocated the risk of relevant facts known to MMS or the named individuals but not disclosed to the claimants. The warranty was subjective as to awareness and objective as to whether the known facts could reasonably be expected to cause the specified material adverse impact.
2. The relevant comparison was between the reasonable expectations at completion on the information actually supplied and the reasonable expectations if the relevant facts had been disclosed. This construction gave the clause meaningful effect and accorded with its commercial purpose.
3. The Brand Agency Leader model created a vulnerability materially different from the ordinary risk that an advertising client might be lost. The named individuals were aware of the vulnerability and the developing strategy of other Publicis agencies to retain the work. The matters were not adequately disclosed and could reasonably have been expected to cause the required reductions in revenue and operating income. MMS therefore breached clause 10.11(a).
4. 2012 agreement. Applying the objective approach to contractual formation, the correspondence and telephone discussion had to be considered as a whole, including subsequent communications. No binding agreement was made in October 2012, because the claimants had not accepted the proposal. A binding agreement was nevertheless concluded in December 2012 on the adjustments to be applied to the 2012 and 2013 earn-out calculations. The agreement was approved by or made with the authority of Maurice Lévy and bound MMS.
5. The December agreement compromised any separate warranty claim. In any event, the appropriate adjusted deferred consideration was £2.6 million. Publicis was not a party to the SPA or to the variation and had undertaken no binding obligation to procure payment. There was judgment for the claimants against MMS, and the claim against Publicis was dismissed.