SPAS and ‘Conduct of Claims’ Provisions
Warranties and indemnities are a vital part of a corporate sale for both the parties, operating to reallocate the risks of the transaction between them. Warranties are promises or assurances from a seller to a purchaser that a particular statement is true; while an indemnity is a promise to reimburse a party in respect of losses suffered.
Importantly, the sale and purchase agreement (SPA) will include ‘conduct of claims’ provisions governing how a third-party claim will be dealt with post-completion. The parties will need to ensure that they negotiate appropriate conduct of claims provisions, but reaching the right balance can be tricky.
The seller will typically seek to retain a degree of control in defending any third party claims made against the buyer following completion in return for giving indemnities to the buyer. This reflects the commercial reality that sellers want to have the upper hand if claims were to arise post-completion.
Buyers will typically want flexibility, but a seller on the other hand may insist on having the veto on any proposals to settle the third party claim.
But where does this leave the purchaser?
Purchasers will understandably be unwilling to give way to the seller to any significant extent by allowing it carte blanche to conduct negotiations with third parties, appoint expert valuers, and so on. However, the purchaser is often able to insist on indemnities (or, if appropriate, more robust protection) against the purchaser’s financial costs of complying with such requirements of the seller.
Common conduct of claims provisions that are triggered in the event of a claim post completion include:
• Limiting the seller’s potential liability in respect of third party claims specified in the warranties and indemnities under the SPA.
• The purchaser will usually be expected to notify the seller within a stated period (for example 10 days) on becoming aware of any third party claim, and must also give reasonable details of it to the seller.
• The seller may instruct their professional advisors at their own cost to deal with the third party claim (although the purchaser’s consent would normally be required) if conduct is delegated to seller under the SPA. However, the purchaser will usually remain the named party in proceedings.
• Litigation privilege is an important consideration. A 2008 ruling clarified that where sellers have the right under the conduct of claims provisions to control a third party claim, any documents generated for the purposes of that claim may well not be privileged against the buyer under the SPA indemnities. Such documents include advice and evidence; such as expert reports, and could therefore be disclosed to the purchaser.
What does this mean?
Time and care are needed to skilfully negotiate final terms that protect your business interests but are also acceptable to both parties. Balancing the rights, obligations and their respective commercial interests could be a fine balancing act for which expert legal advice is vital.
How can we help?
We advise business organisations of all sizes on the sale and purchase of a business and the related negotiations and legal documentation. We also advise businesses when there is a potential third party following completion. For strategic advice and representation, contact our expert corporate and commercial law solicitors at Herrington Carmichael as early as possible.
This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to a particular matter.