Growth in UK M&A appetite – a risky business?
KPMG forecasts published in September 2015 projected that appetite for M&A deals in the UK over the next 12 months would outstrip both the US and the rest of Europe (with appetite in the UK, based on forward price/earnings ratios, expected
to increase by 13%, compared to just 6% in the US and 8% in the rest of Europe).
KPMG forecasts published in September 2015 projected that appetite for M&A deals in the UK over the next 12 months would outstrip both the US and the rest of Europe (with appetite in the UK, based on forward price/earnings ratios, expected to increase by
13%, compared to just 6% in the US and 8% in the rest of Europe).
With deal teams often working to incredibly tight schedules to “get the deal done”, we look at the risks associated with accelerated negotiations from a UK contract law perspective, focusing particularly on recent case law which suggests that courts have little
sympathy for parties trying to step back from a bad bargain post-completion, and the practical steps that parties should take in order to minimise these risks.
The risks of a rushed deal: a UK contract law perspective
When faced with recent disputes over the terms of commercial contracts, the courts have proved unwilling to sympathise with parties who have been unwise in their negotiations, instead making it clear that they will not apply commercial common sense simply to rewrite a bad bargain (Arnold v Britton [2015] UKSC 36; Wood v Sureterm [2015] EWCA Civ 839). This marks a subtle but significant shift by the courts, who traditionally stressed the importance of commercial common sense as an aid to contractual interpretation, leading some commentators to criticise what they perceived to be the erosion of the line between merely interpreting a contract and effectively altering it (Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896; Chartbrook Ltd v Persimmon Homes Ltd [2009] 1 AC 1101; Rainy Sky SA v Kookmin Bank [2011] UKSC 50).
Specifically, in the case of Arnold v Britton, the Supreme Court held that when interpreting a contract, commercial common sense must not undercut the importance of the actual words used and cannot be invoked retrospectively. The court’s view was that “the mere fact that a contractual arrangement, if interpreted according to its natural language, has worked out badly, or even disastrously, for one of the parties is not a reason for departing from the natural language”.
This is not to say that commercial common sense will not be applied by the courts, but that lesser weight may be given to it, with the courts favouring the natural meaning of the words used, regardless of whether or not this results in a bad bargain.
Similarly, the courts have re-enforced in recent cases their reluctance to imply terms into a contract simply to make it a fairer one, instead choosing to uphold the principle of freedom of contract, implying terms only where necessary, rather than reasonable Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10; Rosserland Consultants Ltd v Credit Suisse International [2015] EWHC 384 (Ch)).
Minimising the risks: practical considerations
1. Heads of terms to be reviewed by parties’ legal counsel at an early stage
Parties will often involve their lawyers in a deal once the heads of terms have been negotiated and agreed. However, the advantages of involving legal counsel at an earlier stage, whilst these discussions are still taking place, should not be overlooked. Involving lawyers (or at least enabling them to have sight of the draft heads of terms) will help to ensure that the key contractual provisions are considered and dealt with at the outset, particularly those most likely to result in future dispute, for example the nature of the warranties given (and how these relate to any relevant warranty and indemnity insurance, to the extent taken out) and any termination rights to be granted between exchange and completion.
2. Beware of “agreements to agree”
Where parties enter into fast-paced negotiations with a view to completing a deal within a tight timeframe, key provisions can sometimes be left “to be agreed on later”. Particular care needs to be taken with this approach as “agreements to agree” are generally unenforceable under English law (Walford & Others v Miles & Another [1992] AC 128). However, where parties can identify certain specific aspects of a deal that are to be negotiated post-completion, it may be possible to draft the relevant contractual provisions so as to minimise the risk that they will be unenforceable. For example, the following provisions were found by the
courts to be sufficiently certain to be enforceable: (i) an undertaking to negotiate in good faith the amount of certain “reasonable costs” payable (Petromec Inc Petro Deep Societa Armamento Navi Appoggio SpA v Petroleo Brasileiro SA [2005] EWCA Civ 891); (ii) a time limited obligation to seek to resolve a dispute by “friendly discussions” prior to referring the dispute to arbitration (Emirates Trading Agency LLC v Prime Mineral Exports Private Ltd [2014] EWHC 2104 (Comm)).
3. All contractual terms should be clear on the face of the document
When it comes to drafting the relevant transaction documents, parties and their lawyers should opt for clear, simple drafting, rather than multi-layered, heavily-negotiated wording. Given (i) the recent shift away from commercial common sense as an aid to contractual interpretation, (ii) the difficulty in persuading a court to imply a contractual term, and (iii) the fact that previous negotiations between the parties are generally inadmissible when courts are asked to consider a contractual dispute, the parties should ensure that all of the relevant terms of the contract are clear on the face of it.
Joanne Maitland is an associate at international law firm Mayer Brown.