In a recent High Court case (Bir Holdings v Mehta  EWHC 3903), it was held that there was no implied term of accuracy for an indemnity claim under a share purchase agreement.
On share and asset sales, the parties will often agree that some of the purchase funds will be retained in a retention account upon completion for an agreed period. This practice ensures that there are funds readily available should the buyer later have any
post-completion warranty or indemnity claims against the seller. Clearly, it is in the buyer’s interests to negotiate the use of a retention account.
If no claims are made by the buyer during the agreed period, the retained sum will be paid to the seller. Similarly, if claims are made during such period, but the value of such claims does not exhaust the amount in the retention account, the balance will be
returned to the seller.
On deals where the parties have agreed to use a retention account, a well drafted sale and purchase agreement will specifically outline the circumstances in which the buyer may be entitled to set-off the value of any substantiated warranty or indemnity claim
against the monies in the retention account. In this case, “substantiated” will (broadly) mean a claim in respect of which the seller admits liability or where a court has ruled in favour of the buyer.
In this recent case, the agreement between the parties did not require the buyer to substantiate any claims and contained no mechanism for determining disputes over claims before monies could be paid out of the retention account. When the buyer made a claim
for breach of warranties and indemnities, the whole amount of the retention account was paid to the buyer.
The seller contested the amount of the claims and sought restitution of the withdrawn money, arguing that there was an implied term that any relevant claim needed to be accurately calculated and based on factual substance.
The court held in favour of the buyer and refused to imply a term that there was a requirement for the claims to be accurately calculated and supported by facts. The court did not have the power to either improve the bargain the parties made nor decide what
would have been reasonable to agree in the circumstances. Here, the terms allowed the buyer to deduct amounts from the retention account without justification or consent from the seller.
This decision is a reminder of the need for parties to agree detailed set-off provisions in the sale and purchase agreement (whether that be a share purchase agreement or an asset purchase/business transfer agreement), to deal with the release of monies from
a retention account in the event of a warranty and/or indemnity claim. BERG’s corporate team are experienced in negotiating such provisions from the point of view of both buyer and seller.
Should you have any queries regarding the subject matter of this article, please contact
Keith Kennedy, Partner in the Corporate and Commercial Department, at
firstname.lastname@example.org, or by telephoning 0161 833 9211.
The information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Berg or any of its partners or employees. Professional legal advice should
be obtained before taking, or refraining from taking, any action as a result of this article.