Contract Essay help please

This has got me really stumped - a lot different from the usual offer/acceptance nature of contract law.

Really struggling on this question, as are are a lot of people on my course, would appreciate if you have any idea on an approach here.

Patrick Nettlepatch is the majority shareholder in and managing director of PNT Ltd, which manufactures agricultural trailers. Capital Acquisitions plc (“CA”) wishes to acquire PNT.
Prior to the sale, Patrick explains to the managing director of CA, Derek Drivehard, that PNT is sited on very valuable land outside Norwich and is generally a very prosperous company. Derek agrees to pay £5 million pounds for PNT on the basis that this is a fair estimate of the value of PNT, but states that “this will need to be adjusted to reflect the true value in due course”.
Patrick and the remaining shareholders of PNT enter into a share sale agreement with CA under which:
• CA acquires immediate control of PNT;
• The vendor shareholders receive an initial payment of £5 million, which is said to represent an estimate of the net asset value of PNT;
• The parties agree to the preparation of post-completion accounts which will determine the net asset value of PNT at the time of the share sale;
• An upward adjustment will be made to the initial payment of £5 million if the net asset value of PNT is shown to exceed the value estimated at the time of completion;
• There is an ‘entire agreement’ clause limiting the parties’ rights to the contractual provisions set out in the agreement and excluding any other express or implied terms and any pre-contractual statements, which are to have no contractual or tortious effect; and
• There is no warranty by the vendors regarding the exact net asset value of PNT, as this was to be determined by reference to the post-completion accounts.
The post-completion accounts show that the net asset value of PNT is lower than Derek expected and that the price of £5 million represents a considerable overpayment. Derek would like to recoup some of the consideration paid by making a downward adjustment to the price. However, the share acquisition agreement only refers to upward adjustments to the price being made following the preparation of the post-completion accounts.
Prepare a memo of advice regarding Derek’s legal position.

thanks and regards.

Reply 1

jacketpotato

Original post by TorresIX

Patrick Nettlepatch is the majority shareholder in and managing director of PNT Ltd, which manufactures agricultural trailers. Capital Acquisitions plc (“CA”) wishes to acquire PNT.

£5m is over-payment

Prior to the sale, Patrick explains to the managing director of CA, Derek Drivehard, that PNT is sited on very valuable land outside Norwich and is generally a very prosperous company. Derek agrees to pay £5 million pounds for PNT on the basis that this is a fair estimate of the value of PNT, but states that “this will need to be adjusted to reflect the true value in due course”.
Patrick and the remaining shareholders of PNT enter into a share sale agreement with CA under which:
• CA acquires immediate control of PNT;
• The vendor shareholders receive an initial payment of £5 million, which is said to represent an estimate of the net asset value of PNT;
• The parties agree to the preparation of post-completion accounts which will determine the net asset value of PNT at the time of the share sale;
• An upward adjustment will be made to the initial payment of £5 million if the net asset value of PNT is shown to exceed the value estimated at the time of completion;
• There is an ‘entire agreement’ clause limiting the parties’ rights to the contractual provisions set out in the agreement and excluding any other express or implied terms and any pre-contractual statements, which are to have no contractual or tortious effect; and
• There is no warranty by the vendors regarding the exact net asset value of PNT, as this was to be determined by reference to the post-completion accounts.
The post-completion accounts show that the net asset value of PNT is lower than Derek expected and that the price of £5 million represents a considerable overpayment. Derek would like to recoup some of the consideration paid by making a downward adjustment to the price. However, the share acquisition agreement only refers to upward adjustments to the price being made following the preparation of the post-completion accounts.
Prepare a memo of advice regarding Derek’s legal position.

thanks and regards.

Patrick \
l \ contract
l
PNT ---------------- Share Purchase -----> CA

Patrick contracting w/ CA for sale of PNT's shares

CA pays £5m for PNT on the basis that this is a fair estimate of the value, "to be adjusted to reflect the true value in due course"

Patrick and shareholders enter into Share Sale Agreement by which:
- CA gets immediate control PNT
- Shareholders get £5m representing net asset value (no warranty as such)
- Post-completion accounts closed-box sale, upward only
- Entire Agreement clause

OK this isn't a offer/acceptance question. The shareholders of PNT have signed a written agreement so there is no doubt that there is a contract. Terms and misrepresentation are the most important aspects. The terms points are the kind of things which are important in practice but not given weight on a normal contract course.

First I think you need to look at Patrick's explanation that PNT is sited on very valuable land. This looks like a misrepresentation though you don't have enough information to go overboard with this. It looks like a "mere puff" rather than a fully fledged misrep (i have done detailed/systematic posts on misrep in the past if you want to search).

You also need to think about whether "this will need to be adjusted to reflect the true value in due course" is a term of the contract, a question of incorporation. Its arguably a "battle fo the forms" type-scenario, although given that this is a casual comment and not an exchange of written documents I think you shouldn't go overboard with this point. There have been several cases on "battle of the forms"-type scenarios this year.

Then you need to think about how the accounts clause might be interpreted. Is it possible to use evidence of the "adjusted to reflect true value" statement to argue for a different interpretation? The general rule is that you can't look at the parties' negotations to help interpret contracts, only the general business context, and this looks like a specific negotiating point rather than the general business context. Think about whether the general business context indicates that the clause should be interpreted to operate both downwards and upwards given that no prior valuation took place, but this would be quite a big leap given that the wording clearly refers to an upward adjustment.

Alternatively, think about whether there is a possibility for a warranty as to value to be implied into the contract, though the test for implied terms is very strict.

You also need to think about the Entire Agreement clause in the context of implied terms. There is specific case-law on these that you should develop a vague awareness of. EA clauses are of doubtful effectiveness but they can give rise to an estoppel.

For the avoidance of doubt, Derek's position is very weak on all the above points.

Its the kind of question that frankly shouldn't be touched with a bargepole in the exam since I don't think the above issues are the kind of thing most courses consider in any detail (whilst they will be on the syllabus, I think most people would be a bit silly to revise them over topics that are much more likely to come up)... but shout if you don't understand something

(edited 13 years ago)

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