This time it's NOT personal

Judgments from south of the border can undoubtedly be a source of useful guidance in Scotland, even if the law in question is not quite the same.

One such decision came from the English High Court last year in Shaw v Lighthousexpress Ltd [2010] EWCA Civ 161.

Mr Shaw, an independent financial adviser, entered into an contract with a partnership called Berkeley Woodhouse Associates (“BWA”). He resigned in 1999 and BWA sold its business to Lighthousexpress Ltd (“LH”) in 2001.

The Financial Services Ombudsman later ruled that a client had been misadvised by Mr Shaw, acting as one of BWA’s independent financial advisers, and should be compensated. LH paid that compensation.

Under his contract Shaw had agreed to indemnify BWA in respect of any costs, charges and expenses in connection with his provision of services. On this basis LH raised an action to recover the compensation it paid to the client and succeeded at first instance.

While Shaw’s appeal was successful on other grounds, the real issue of interest concerned whether the right of indemnity Shaw had granted to BWA had been validly assigned to LH under the agreement for its purchase of the business from BWA.

Assignation and assignment

Before looking at the outcome, it is worth noting that the law in Scotland and England differs when it comes to assigning rights under a contract, and this should borne in mind when looking at any English business transfer agreements.

In Scotland an assignation need not be in writing, and intimation is all that is needed to give the assignee a right effective against all parties. Apart from the terminology, the principal differences in England are as follows. Under the Law of Property Act 1925 the assignment must be in writing, the entire benefit must be assigned, and notice must be given to the other contracting party. If any of these elements are missing there may still be an equitable assignment – under which an assignee would typically need to join the assignor as a party to any action under the contract. The burden of a contract cannot be assigned; it has to be novated – one contract is effectively rescinded and a new one entered into with different parties, so by its very nature consent is needed.

Valid assignation?

Since the potential assignment in this case was an equitable one, the specific right being assigned had to be clearly identified and Shaw argued this was not the case. What was being sold under the business sale agreement was framed in fairly typical language to the effect that BWA would be sold as a going concern comprising several elements, including the “Contracts”. The court felt that the reader of the contract would know from this that the basic purpose of the agreement was to take over the entire business and assets and “would not expect anything (including a right of indemnity) to be left behind”, and that the specificity requirement had been met.

The definition of “Contracts” referred to those current at completion. Shaw argued that as his contract had been terminated before the business sale agreement had been entered into, it was not a current contract. The court found that the indemnity was a clause which continued in effect following termination of other parts of the contract, and there was “every reason to construe the phrase [‘current contracts’] widely – that will achieve the obvious intention of the parties to get everything into the company”.

Indemnity not personal

Shaw claimed the indemnity given here was purely personal to BWA and not capable of assignment. However, the court found that there was nothing inherent in the nature of an indemnity which makes it unassignable and here there was every reason why it should be assignable, as it was very likely that the individual partners would change or the business be transferred to another entity at some point.

Lessons

As well as the case serving as a reminder of the differences between Scotland and England, it highlights some points which are very important for all solicitors dealing with business transfers, regardless of the jurisdiction they operate in.

Solicitors must be careful when drafting and revising parts of a business sale/purchase agreement which deal with the transfer of contracts, to see whether the agreement will have the effect of transferring assets and liabilities which may remain current even if other provisions under a contract have been terminated or completed.

A purchaser will want to agree as wide a definition as possible so that it includes all the necessary contracts, but solicitors advising them must be careful that their clients do not unwittingly acquire expired contracts which may still have substantial liabilities attached. It is crucial when conducting due diligence to identify all liabilities – including those in contracts which seem to be over.