Sellers v Buyer

On 10 April 2008, the Sellers entered into a Sale and Purchase Agreement (“the SPA”) with the Buyer. Pursuant to the SPA, the Sellers sold their shares in two companies to the Buyer. The SPA provided that the consideration for the shares was to equal a sum to be calculated in accordance with the SPA. This sum was called the “Earn-out”. The SPA provided for the Buyer to serve an “Earn-out Notice”, specifying the amount of the Earn-out. The SPA laid down a timetable for certain disputes as to the calculation of the Earn-out to be determined by an independent accountant, acting as an expert.

On 17 February 2012, the Buyer served a notice on the Sellers. The notice specified a figure for Earn-out of £25,000. The Sellers disputed that figure. However, they did not refer that dispute to an independent accountant in accordance with the timetable in the SPA. The Buyer contended that the result was that the Sellers were bound by the figure of £25,000 stated in the Buyer’s notice.

The Sellers brought the present proceedings on 4 December 2012, seeking various heads of relief. They claimed a declaration that the Buyer’s notice was not a valid Earn-out Notice with the result that the amount of the Earn-out could be still referred to an independent accountant. The Sellers also claimed declarations as to the issues which could be determined by the accountant. In addition to these claims arising out of the dispute resolution procedures in the SPA, the Sellers put forward a further claim. They referred to certain provisions in the SPA as to how the Buyer was to deal with various matters after the sale of the shares by the Sellers to the Buyer and before the time when an Earn-out Notice was to be served and the Earn-out paid to the Sellers. The Sellers contended that the Buyer had broken these provisions in various respects with the result that the amount of the Earn-out, even when correctly calculated in accordance with the SPA, would be less than it should have been. The amount of that reduction in the Earn-out payable was claimed by the Sellers as damages for breach of contract. The Buyer served a Defence in relation to all of the Sellers’ claims and counterclaimed a declaration that the sum payable as Earn-out was £25,000.

On 17 May 2013, I conducted a case management conference in these proceedings. The principal matter which was considered was the sequence to be followed in deciding the various issues arising. Many of the issues between the parties were issues for determination by the court. However, if the Sellers were to succeed in establishing that the Buyer’s notice was not a valid Earn-out Notice then the amount of the Earn-out would be determined by an independent accountant. Following that determination, it might then be appropriate for the matter to return to court for the court to deal with the issues arising in the Sellers’ damages claim.

On 17 May 2013, I identified the sequence which was appropriate. I held that the court would, first of all, deal with the issue as to the validity of the Buyer’s notice and also deal with the arguments as to the issues (if any) which were to be decided by the expert. I indicated that if I held that the Buyer’s notice was not a valid Earn-out Notice, then the next step would be for the matter to go to the independent accountant for determination of the amount of the Earn-out. Following that determination, there then remained the possibility that the Sellers would wish to pursue their claim to damages and that matter would be dealt with by the court. Accordingly, I ordered that the Sellers’ claim for damages should be stayed pending the determination of the other issues in the proceedings and pending any decision by the accountant, if in the light of the court’s decision there were matters to be determined by the accountant.

The first part of the proceedings was dealt with at a hearing on 7 and 8 November 2013. In a judgment delivered on 15 November 2013, I held that the Buyer’s notice dated 17 February 2012 was not a valid Earn-out Notice. The result was that the Sellers were entitled to refer the amount of the Earn-out to an independent accountant and, indeed, an accountant had already been appointed on this basis. On 6 February 2014, I decided further issues between the parties as to the matters to be determined by the accountant. I also gave the Buyer permission to appeal to the Court of Appeal against my decision that the Buyer’s notice was not a valid Earn-out Notice.

On 6 February 2014, the Sellers applied for an order that the Buyer do pay the Sellers’ costs of the issues on which the Sellers had succeeded and so that the Sellers’ costs in relation to their claim for damages would be dealt with as and when that claim was dealt with. The Buyer’s position was that the costs of the proceedings to date should be reserved.

Although the parties did not initially agree whether I could be told anything about the existence of a Part 36 offer which had been made by the Buyer to the Sellers, it was eventually agreed that I could, and should, be told that the Buyer had made, on 5 March 2013, an offer which (it was agreed) complied with the requirements of CPR Part 36. In summary, the terms of the offer were that the Buyer offered to settle all the issues between the parties including the Sellers’ claims to be paid Earn-out and damages for a specified figure and so that the amount of the Earn-out would not be determined by the independent accountant. I have been asked not to identify the offered figure in this judgment and I do not do so. It can be taken, however, that it was in excess of £25,000, the figure which was stated in the Buyer’s notice. The letter containing the offer stated that if the Sellers did not accept the offer and failed to beat the offer at trial, then the Buyer would seek an order pursuant to CPR 36.14 for the Sellers to pay the Buyer’s costs from the end of the relevant period, referred to in CPR 36.3(1)(c).

Because I need to refer to the existence of the Part 36 offer in this judgment and because my earlier decision may be considered by the Court of Appeal (who ought not to be made aware of the existence of that offer) I have been asked by the parties to anonymise this judgment, which I have done.

The Sellers submit that the issues which have now been decided by the court concerned the Sellers’ right to have the amount of the Earn-out determined by an independent accountant. The Buyer had contended that the Sellers had no such right and the Buyer’s contention had failed. The matter would now leave the jurisdiction of the court and be dealt with by the accountant. The Sellers had succeeded on the issues so far determined and costs should follow the event of that success. The Sellers had not asked the court to determine the amount of the Earn-out. The Sellers had always proceeded, correctly, on the basis that the amount of the Earn-out was for the accountant and not for the court to determine. The actual figure which is later determined by the accountant would not be material for the purposes of assessing who should be regarded as the successful party on the issues which have now been determined. The Sellers also drew attention to the differences in procedure, in particular as regards the liability for costs, between proceedings before the court and a reference to an expert. It was not necessary to defer the question of costs until the Sellers’ claim to damages was determined. The claim to damages was stayed. That meant that issues as to the costs of the damages claim would not be dealt with at this stage. The stay of the damages claim did not prevent the court dealing at the present stage with the costs of the issues which the court had determined. Ultimately, the Sellers submit that the question at this stage is whether there is a real possibility that a comparison between the ultimate outcome of the expert determination and of the damages claim and the Part 36 offer could affect the position as regards the costs to date. The Sellers submit that there is not such a possibility (although they accept that I necessarily must proceed at this stage on the basis that their ultimate total recovery might be less than the figure in the Part 36 offer). The Sellers further submit that the litigation has been expensive for them and that an award of costs in their favour at this stage would be much more worthwhile than an order that the costs be reserved. In the former case, but not in the latter, the Sellers would be entitled to apply for a substantial payment on account of their costs. To deny the Sellers a payment on account of costs would prolong the financial pressure of this litigation on them and give the Buyer a tactical advantage.

The Buyer submits that it is not possible to tell at the present time, taking into account the Part 36 offer, which party has been successful in this litigation. If the Sellers recover less than figure in the Part 36 offer at the end of the process, when the amount of the Earn-out and the amount of any damages have been determined, then the Sellers will have failed to obtain a result more advantageous than the Buyer’s Part 36 offer: see CPR 36.14. In that event, the Buyer will be regarded as the successful party from the end of the relevant period after the Part 36 offer. The Sellers are not asking the court to deal separately with costs incurred before the Part 36 offer of 5 March 2013 but are asking the court to deal with costs up to 6 February 2014. The present case is analogous to a case where the court has ordered a split trial so that it determines liability first and then, if appropriate, determines issues as to quantum. If the court knows, following a finding of liability against a defendant that the defendant has made a Part 36 offer dealing with liability and quantum, then the court will normally reserve the costs of the liability stage until it is able to compare the overall result achieved by the claimant with the Part 36 offer. The Buyer relied on HSS Group plc v BMB Ltd [2005] 1 WLR 3158 at [35] and Shepherds Investments Ltd v Walters [2007] EWCA Civ 292 at [19] for the last proposition. I was also referred to a number of cases at first instance, in particular, AB v CD [2011] EWHC 602 (Ch) and Ted Baker plc v AXA Insurance UK plc [2012] EWHC 1779 (Comm), although much of the discussion in those cases concerned whether the court could be told, following the trial of a preliminary issue or a split trial, of the existence of a Part 36 offer. That particular difficulty went away in the present case when it was agreed that I should be shown the Part 36 offer.

The parties are agreed that the offer of 5 March 2013 was a valid Part 36 offer. The Buyer says that it will wish to rely upon CPR 36.14 when the final outcome of this dispute as to the amount of the Earn-out and as to the amount of any damages is known. At that point, the Buyer will wish to compare the total recovery by the Sellers with the sum offered in the Part 36 offer in order to determine whether the Sellers’ total recovery is at least as advantageous to the Sellers as the sum offered. The Sellers say that rule 36.14 cannot be relied on in that way. The present claim is not a money claim, and the claim to declaratory relief is not a money element of a claim, within rule 36.14. Further, the result of these proceedings will not allow a comparison between a “judgment against the defendant” and the amount of the Part 36 offer. The judgment so far obtained against the Buyer is for declaratory relief. The determination of the Earn-out by the accountant will not result in a “judgment against the defendant” within rule 36.14(1)(b).

In this case, I consider that it is not necessary to resolve the differences in approach as to the possible application of rule 36.14. That is because the Sellers accept that, as a matter of principle, the Part 36 offer in this case could be a relevant circumstance to be taken into account within rule 44.2(4). This is subject to the Sellers’ argument, on the facts, that the offer is not in fact relevant. As to this point, I note that rule 44.2(4)(c) specifically refers to an offer which is not an offer under Part 36. The reason for this exclusion would appear to be that Part 36 has its own set of rules as to the court’s response to a Part 36 offer. Where an offer is within Part 36, then the Part 36 rules must be applied. When the offer is not within Part 36, then the Part 36 rules do not apply but the offer can be a relevant circumstance within rule 44.2(4). In the present case, the offer is agreed to be a Part 36 offer and so it does not come within rule 44.2(4)(c) but nonetheless, as I have stated, the Sellers accept that, in principle, the offer can be a relevant circumstance within the general wording of rule 44.2(4) referring to “all the circumstances”.

In the course of argument, the alleged relevance of the Part 36 offer was tested by posing alternative sets of facts and making suggestions as to what the answer would be in those different situations. For example, it was suggested that if the present claim had been simply for a declaration as to the invalidity of the Buyer’s notice, then the amount of the Earn-out ultimately determined by the expert would not be relevant to the decision as to who should pay the costs of the Sellers’ obtaining the declarations which they had obtained. Other examples of other types of case where a party sought only declaratory relief were also considered. Conversely, it was suggested that if the issues before the court had included the validity of the Buyer’s notice and the amount of the Earn-out and the claim to damages, then it would be obvious that the costs to date should be reserved until the final outcome was known so that the final outcome could be compared with the Part 36 offer.

During the course of argument, I raised the question whether it would be right, in a case where the court had decided all the issues raised in the court proceedings between the parties, to reserve the costs of those issues until a future event had come about, for example, the determination out of court by an independent expert of a sum payable by one party to the other. I think a court would hesitate before reserving costs in that way as the court had otherwise dealt with all the issues in the court proceedings so that the proceedings were otherwise at an end.

Some of the matters debated in the course of argument, if they were to arise, might prove difficult to decide. Happily, I only have to determine the position in relation to this particular case. In this case, the issues arising in the overall dispute were: (1) the validity of the Buyer’s notice; (2) issues as to the scope of the matters to be determined by the accountant; (3) the amount of the Earn-out; and (4) the amount of any damages payable to the Sellers. If all four of these issues had been issues in the court proceedings, then it would be clear that the terms of the Part 36 offer would be potentially relevant to the court’s decision as to costs, even if one were not applying rule 36.14. The present case is different from this hypothesis in that the third issue is not an issue in the court proceedings. Nonetheless, I consider that it is eminently arguable on behalf of the Buyer that the overall result as to costs should not be different on that account. Asking the question posed by the Sellers, namely, is there a real possibility that a comparison between the ultimate outcome of the expert determination and of the damages claim and the Part 36 offer might be relevant when considering who should pay the costs to date, I consider that there is such a real possibility. Because the present proceedings include a claim to damages (the fourth issue referred to above) which will, or may, need to be dealt with by the court in the future, this case does not present the suggested difficulty of the court being asked to reserve costs to a future time which is after all of the proceedings are otherwise disposed of and by reference to an event which is not itself determined by the court.

I conclude that the right order as to costs to make at this stage is that the costs should be reserved.