Barri Mendelsohn London Office King & Wood Mallesons

Executive Summary

COVID-19 has resulted in many individuals and businesses making claims through the UK courts. With the courts having been closed from March to the end of June earlier this year and virtual hearings only just starting to be used, the pandemic has caused an unprecedented backlog in cases to be heard in the UK courts.

In the recent case of Scott v Singh [2020] EWHC 1714 (Comm), the High Court denied the Buyers (as defined below) permissions to add additional claims under a share purchase because the introduction of new claims would require a new trial date being listed during the pandemic. It was held as not in the interest of justice to allow the additional claims.

Whether COVID related or not, it is important for buyers to carry out a thorough due diligence process prior to acquiring any company or asset but to also assess the affairs of the business as soon as possible after completion, so as to identify all potential claims it may have against any seller before it brings a claim. In this case, the Buyers’ particulars of claim had not included all possible claims it may have had against the Seller, resulting in the High Court striking out additional claims raised by the Buyers after service of the particulars of claim but prior to the proposed trial date.

Facts

In 2018, Andrew Pervis Scott and Adam Lewis (the “Buyers”) entered into a share purchase agreement with Harbinder Singh (the “Seller”) to acquire the shareholding in two road haulage companies (the “SPA”).

Nine months after completion of the SPA, the Buyers commenced legal proceedings against the Seller for misrepresentation and breach of warranty. Following a case management conference held on 23 December 2019, the Buyers applied for permission to amend its particulars of claim on 20 March 2020 to include (i) additional details of the misrepresentation, (ii) a Schedule of Loss and Damage and (iii) a Schedule of Representations, Falsity, and Knowledge.

On 15 April 2020 (only six days before the date to determine the amendment application), the Buyers served further revised particulars of claim with revised schedules which included new allegations including negligent misstatement, negligent misrepresentation, breaches of the SPA (both express and implied), breach of directors’ duties and fraud. The Buyers submitted the revised particulars of claim because new information had come to light resulting in it suffering a greater loss.

The Seller requested the High Court to strike out the amendments on the grounds that the amendment of the Buyers’ claim would result in a new case where no new information had come to light.

High Court ruling

The Court only allowed some but not all of the amendments based on a two-stage test, namely:

  1. Did the new claims have a real prospect of success?
  2. If it did, would allowing the new claims cause the original trial date to be lost? If it would, was it in the interest of justice to allow the Buyers to bring their new claims?

The High Court found that some amendments were based on the existing misrepresentation claims in respect of the company finances. These amendments were held to have a reasonable prospect of success and would not affect the original trial date.

For the new misrepresentation claims, the Buyers could have included these in their initial particulars of claim but they had failed to do so. Consequently, it was held that it was not in the interest of justice to allow these late new amendments.

The fraud allegations had some prospects of success but they needed to be considered together with the negligent misstatement claims. The High Court dismissed the negligent misstatement claims on the ground that they had no real prospect of success.

Key Lessons

This judgment demonstrates the importance for claimants to set out their claims clearly in their particulars of claim, especially during the current COVID-19 lockdown, where the courts are under pressure to manage the increasing backlog of cases. Given the UK courts are still working remotely due to COVID-19, parties are to bear in mind the logistical difficulties for the courts caused accordingly.

As we can see from this case, whilst a party can amend a claim at a later date, the court has full discretion and will apply a two-stage test to determine whether the amendments serve the interests of justice.

With respect to acquisitions in particular, COVID-19 has had an unprecedented impact on businesses and their bottom line. Therefore buyers should always complete a throughout assessment of a target, both during the due diligence process, but also immediately after completion in order to identify any possible claims it may have against a seller within the time periods prescribed under the key transaction agreements (whether in respect of breach of warranty, fraud, misrepresentation, any indemnities or otherwise).  This analysis should form the basis for a full particulars of claim in good time.

It is also important to note that, once a buyer identifies a possible claim, prior to any applications to the court, it must ensure that it complies with the notice provisions of the SPA. We recommend that at this stage a buyer should, if not already done so, consult its legal advisors in order to (i) ensure that any notices are drafted and delivered to the other parties in accordance with the transaction documents; and (ii) obtain legal advice on the realistic prospects of success of any claim identified.

Please see our case summary [here], which reports on another 2020 case relating to the service of improper notices under a SPA.