John Asher v Jaywing Plc

Hearing dates: 28 February, 1, 2, 3, 4, 7, 8 and 11 March 2022

Approved Judgment

I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.

This judgment was handed down by the Judge remotely by circulation to the parties' representatives by email and release to BAILII. The date and time for hand-down is deemed to be 12 April 2022 at 10.30am.

Introduction

These proceedings concern a dispute about the entitlement of the Claimants to earn-out payments in respect of the sale of shares in Bloom Media (UK) Limited (“Bloom”) to the Defendant, Jaywing Plc (“Jaywing”).

Bloom is a digital marketing business. The five Claimants between them held approximately 82.5% of the shares. The remaining shares were held by five other individuals who are not parties to these proceedings.

The shareholders in Bloom sold their shares to Jaywing under the terms of a Sale and Purchase Agreement (“SPA”) in August 2016 in return for an immediate cash payment plus deferred consideration consisting of three possible earn-out payments depending on the performance of Bloom between the date of the sale and 31 March 2018. The maximum earn-out payment for the financial period ending 31 March 2017 was paid in July 2017.

Jaywing's position is that the conditions relating to the payment of the second and third earn-out payments have not been met. However, the Claimants say that, as a result of an oral agreement reached at a meeting on 15 January 2018 at which new conditions for the payment of the earn-out were agreed, they are entitled to a second earn-out payment of £1,212,500 and a third earn-out payment of £40,760.

The Claimants also say that, even if no binding agreement was reached on 15 January 2018, Jaywing is estopped from relying on its strict legal rights under the SPA. Alternatively, they claim that Jaywing is in breach of the terms of the SPA and that, as a result of this, they are entitled to damages of the same amount or, possibly a greater amount, depending on the court's assessment of the amount of the earn-out based on the terms of the SPA.

One factor which provides a significant hurdle for the Claimants is that, like many commercial agreements, the SPA contains a provision requiring any amendment to its terms to be in writing and signed by the parties (which I shall refer to as the No Oral Modification or NOM clause).

Issues

The key point for the court to determine is whether a valid and binding agreement was reached at the meeting on 15 January 2018. As well as denying the existence of the agreement, Jaywing also relies on uncertainty, lack of consideration and lack of authority as well as the NOM clause. In relation to this last point, there is a separate issue as to whether Jaywing is estopped from relying on the NOM clause.

If there is no valid agreement, there is a further issue as to whether Jaywing is estopped from denying that the earn-out payments are due. In practice, what the Claimants are arguing is that, as a result of representations it has made, Jaywing cannot require the entitlement to the earn-out payments to be assessed by reference to the strict terms of the SPA. In his closing submissions, Mr Harper QC, appearing on behalf of the Claimants, did not pursue this point with much vigour, recognising that it would be difficult to establish such an estoppel in circumstances where the Claimants had failed to establish a new agreement or a valid variation to the existing agreement and where the estoppel contended for would, in substance, have the same effect.

In the absence of any agreement or estoppel, the next question is whether Jaywing was in breach of the terms of the SPA; in particular, whether it failed to follow the process laid down in the SPA for calculating and agreeing the amount of the earn-out payments. If so, the court will then need to go on to determine the appropriate measure of damages which is likely to involve the court assessing the amount of the earn-out payments based on the terms of the SPA although, as will be seen, the Claimants have invited the court to take a rather more broad brush approach to the assessment of damages.

Oral agreements and the approach to evidence

The comments made by Leggatt J (as he then was) in Gestmin SGPS SA v Credit Suisse (UK) Limited[2013] EWHC 3560 at [15–23] and in Blue v Ashley[2017] EWHC 1928 (Comm) at [65–70] about oral agreements and the unreliability or fallibility of human memory are well known and do not need to be repeated.

There is no doubt that, in these sorts of cases, the right approach is, to the extent possible, to base factual findings primarily on the documentary evidence taking into account any light shed on those documents during the course of cross-examination, including in relation to the motivation of the parties. In this respect, as noted in Simetera Global Assets Limited v Ikon Finance Limited[2019] 4 WLR 112 at [48], it may well be that internal documents rather than documents passing between the parties are more illuminating as such documents may be more likely to reveal what was really in the minds of the parties or the witnesses.

Having said that, it is clearly not the case that the witness evidence should simply be ignored in favour of the documentary evidence and the inferences which can be drawn from those documents. The evidence given by the witnesses both in their witness statements and under cross-examination is important but does need to be tested carefully against what the documents show and the inferences which can be drawn from those documents.

The terms of the SPA and the earn-outs

It is necessary to set out in some detail the provisions of the SPA relating to the earn-out payments.

The purchase price for the shares is set out in clause 3.1 of the SPA. As I have already mentioned, this comprised an initial cash payment together with three potential earn-out payments. These earn-out payments are referred to as the “First Earn-out Amount”, the “Second Earn-out Amount” and the “Excess Earn-out Amount”.

The detailed provisions relating to the earn-out payments are contained in schedule 9 to the SPA. There were two earn-out periods. The First Earn-out Amount relates to Bloom's performance between 31 August 2016 (the date of completion of the sale) and 31 March 2017 (the end of Bloom's financial year). The Second Earn-out Amount is calculated by reference to Bloom's performance during the following financial year starting on 1 April 2017 and ending on 31 March 2018. The Excess Earn-out Amount is calculated by reference to Bloom's aggregate performance over both of these periods.

Bloom's performance is measured by reference to what is defined as “Contribution”. I shall come to the precise definition in due course but the Contribution is, broadly speaking, revenue less costs.

As far as the First Earn-out Amount and the Second Earn-out Amount are concerned, a payment becomes due if a certain minimum level of Contribution is achieved. This is referred to in the SPA as the “Base Plan Amount” although it is generally referred to in the documents as “Burton Base”. The earn-out payment increases the higher the level of Contribution subject to a cap if the Contribution reaches an upper threshold referred to in the SPA as the “Burton Plan Amount”.

The Excess Earn-out Amount becomes payable if the aggregate of the Contribution in the two earn-out periods exceeds the aggregate of the Burton Plan Amount over those two periods. One effect of this is that if the Contribution in the First Earn-out Period is significantly in excess of the Burton Plan Amount for that period (as it was), there could be an Excess Earn-out Amount payable even if the Contribution in the Second Earn-out Period falls short of the Base Plan Amount for the Second Earn-out Period and no Second Earn-out Payment is due.

For the Second Earn-out Period, with which we are primarily concerned, the Base Plan Amount (Burton Base) was £899,657 and the Burton Plan Amount was £1,019,611.

There is a complicated formula for calculating the Second Earn-out Amount. However, the minimum payment, if the Base Plan Amount (but no more) is achieved, is £1,212,500. The maximum amount (if the Burton Plan Amount is achieved) is £2,025,000.

The Excess Earn-out Amount is rather simpler to calculate, being twice the amount by which the Contribution for the two earn-out periods exceeds the Burton Plan Amount for the two periods, subject to a maximum of £1,500,000.

The key definitions in calculating the amount of Contribution in each earn-out period are as follows:

“ Contribution:

Sales less Cost of Sales less Direct Costs. In relation to an Earn-out Period, the Contribution to the profit or loss of the Company for that period calculated in accordance with Schedule 11 as shown in the Reference Accounts for that Earn-out Period, but only to the extent that such Contribution arises from ordinary trading performance and is not affected by exceptional items and/or accounting releases, and adjusted so that the costs of Alex Craven, Neil Lockwood, Dave Wood and Peter Laflin shall be deducted on a fair and equitable basis depending on time...