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Update: Indemnities In A Business Sale

DATE: 21.06.2011

 

The English Court of Appeal has held that an indemnity clause was validly assigned to the purchaser of a business under a business sale agreement in the case of Shaw v Lighthouseexpress(1) even though the relevant contract containing the indemnity had been terminated.

Background

Shaw was an independent financial advisor appointed under a representative contract (the “ARC”) with a partnership, BWA. Shaw resigned in December 1999 and BWA was acquired by Lighthouseexpress in 2001. Under the ARC, Shaw provided an indemnity to BWA in respect of costs and expenses, including any excess, charged by BWA’s professional indemnity insurers in connection with the provision of services.

In 2006, Lighthouseexpress had to pay compensation to a client for unsound advice provided by Shaw before his retirement. It sought to recover the amount from Shaw under the indemnity provision.

Issues

  1. Is an indemnity assignable?

    The Court held that there is nothing inherent in the nature of an indemnity which calls for it to be unassignable. There was no reason to construe the indemnity as personal to BWA or that it should remain frozen to the existing partnership.
  2. Was the indemnity assigned?

    The next question to be answered by the Court of Appeal was whether the terms of the business sale agreement operated to assign the right of indemnity. The business sale agreement provided as follows:

    “The Vendor shall sell and the Purchaser shall purchase the Business as a going concern comprising the Intellectual Property and the Goodwill and the benefit (so far as Vendor can assign the same) of the Contracts at the Purchase Price”.

    The Court held that the reader of this clause would know that the basic purpose of the business sale agreement was to take over the entire business and assets of the partnership and they would not expect anything (including a right of indemnity) to be left behind. The term “Contracts” was defined in the agreement as the “current contracts” of the Vendor at the completion date of the acquisition. The Court held that, despite the fact that the ARC had terminated over a year before the acquisition, it remained alive at least as far as the indemnity clause was concerned. The Court construed “current contracts” to include live contractual obligations owed to or by the partnership.
  3. Was the indemnity subject to the six year contractual period of limitation? 

    The ARC provided that Shaw was liable for his debts and liabilities for a period not exceeding six years following resignation or termination of the ARC. The Court interpreted the limitation clause as meaning that Shaw would not be liable unless Lighthouseexpress had notified it of a claim within six years following his resignation. As more than six years had passed before the claim was notified to Shaw, he was protected by the limitation clause.

Conclusion

This case highlights that contracts that have expired or terminated at the time of a sale of a business may nevertheless be relevant to the extent that there are contingent liabilities or surviving rights arising under such expired or terminated contracts.

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