Former shareholders who sold company succeed in commercial action for payment of disputed earnings

About this case:

• Citation:
  [2022] CSOH 96
• Judgment:
  External link
• Court:
  Court of Session Outer House
• Judge:
  Lord Clark

The pursuers, Helen Colquhoun (also acting as executor nominate of the late Sheila Parson), Edward Elworthy, and Iain Colquhoun, argued that the sum they were due to be paid was greater than that proposed by the defenders. Defenders Clinical Research Solutions GmbH and Cromsource SRL argued that the payment obligation had since been extinguished by prescription.

The case was heard by Lord Clark. Dean of Faculty, Roddy Dunlop KC, appeared for the pursuers, and Johnston KC for the defenders.

Period interrupted

In May 2012 the pursuers, who owned all of the shares in a company named Pleiad Devices Ltd, sold their shares to the defender under a Share Purchase Agreement. Under the SPA, the defenders were to pay an initial cash consideration of 400,000 USD, and additionally an Earn Out Consideration representing a percentage of certain monies earned by the company in the three years following the transaction.

After a dispute arose about the amount of EOC to be paid, an independent expert was appointed under the terms of the SPA to determine the full amount. In August 2021 the expert determined that further sums were to be paid. However, the defenders contended that the obligation to make payment of the further sums had extinguished, as the relevant obligations had become enforceable at various periods between April 2013 and 31 March 2016, the summons having been served on 19 October 2021.

It was the pursuers’ position that the five-year prescriptive period did not begin to run until the determination by the expert of the final sums due. Alternatively, if that was wrong, the period had been interrupted and restarted by various acknowledgements by the defenders that the obligation subsisted. In any event, the second defender was liable because it had guaranteed payment under the SPA even if the liability for payment of the EOC had ceased because of prescription.

Senior counsel for the defenders submitted that while the actual amount to be paid was conditional on determination by the expert, on the wording of the contract the obligation itself was not. On whether the defenders had relevantly acknowledged the obligations, what they had said pre-dated a final determination and so only amounted to an acknowledgement of payment under the contract rather than any additional sum said later to be due.

Accepted sums were due

In his decision, Lord Clark said of the running of the clock: “It is quite clear that the certificate prepared by the auditor in terms of paragraph 4 identifies the ‘amount due by way of [EOC]’. It is therefore plain that the accrued EOC, which shall be paid or be immediately due and payable, should be the full accrued EOC. That will, of course, result in payment of only the certified sum, which may be wrongly calculated. The correct amount of EOC due may come to be determined by the independent expert, but in the meantime, even if the true figure due remains in dispute, the obligation becomes enforceable and thus the clock for prescription begins to tick.”

He continued: “The question of whether there is a condition precedent for an obligation to make payment also depends upon the construction of the contract terms. Several cases were cited in which the contract terms did indeed create a condition precedent. But that conclusion cannot be reached in the present case. I agree with the submission for the defenders that these authorities involve specific contracts of a different kind, particularly in standard construction terms, whereas on any view the present terms are bespoke.”

On whether the defenders had relevantly acknowledged the obligation, Lord Clark said: “If all that the defenders had done was to say that the previous payments had been made and there was no further payment due then there would have been no such conduct or admission. However, to actually state that they still needed to pay the EOC under the obligation was an acceptance that it subsists. It is of no consequence that they did not specifically admit that any further sums found by the independent expert to be due were to be paid by them. They accepted that outstanding sums were due and later paid them.”

He went on to say: “It would not be right to distinguish liability from quantum for the purposes of identifying the obligation but then to treat later acknowledgements of sums remaining due under the obligation as only concerning quantum and not the obligation itself. The defenders were not able to merely acknowledge the obligation only to the extent that higher sums were due. Rather, they acknowledged the obligation to make payment of the full amount of the EOC, even though they considered that to be less than what the independent expert ultimately determined.”

Lord Clark concluded: “I have not accepted the pursuers’ contentions that the obligation to pay the EOC was enforceable only when the independent expert determined the amount due, for the reason that on a proper interpretation of the terms of the SPA the full amount of the EOC was due for payment on the dates referred to. However, while the pursuers did not achieve success in every respect in their submissions on relevant acknowledgement, they did succeed on several grounds, resulting in the obligation not being extinguished by prescription.”

Decree was therefore granted in favour of the pursuers.