What happens when a share purchase agreement (SPA) requires the buyer to pay for something that doesn’t exist?

In Nawaz-Khan v UAP, the High Court considered a disputed purchase price adjustment mechanism which, on the sellers' interpretation, would have required the buyer to pay additional sums for balance sheet liabilities as if they were assets. Rejecting that approach, the court provided important guidance on the interpretation of purchase price formulae, the limits of expert determination clauses, and the circumstances in which rectification may be available where one party seeks to benefit from a clear drafting or interpretative error.

The decision highlights the importance of precision in financial drafting and offers practical lessons for structuring and reviewing completion accounts mechanisms.

The dispute in brief

In Nawaz-Khan & Ors v UAP Ltd, the sellers sold the Alltrust Group (a pensions administration business) to UAP Limited under a share purchase agreement dated December 2022. The purchase price was to be determined by completion accounts, with adjustments for two items: (i) 'claims provision', defined as "the amount held by the Company in relation to the potential professional indemnity claims"; and (ii) 'deferred fee income', defined as “the amount held by the Company in relation to the deferred fee income of the Company and its subsidiaries".

The critical question was what the amount "held" meant. The sellers argued it referred to any entry on the balance sheet whether asset or liability. The buyer understood things differently: it believed ‘claims provision’ was a separate fund set aside to cover potential claims, distinct from the company’s general cash. In fact, no such separate fund existed. The claims provision was simply an accounting entry; the underlying cash was already included in the “Cash” figure the buyer was paying for. The same was true for deferred fee income. The result, on the sellers’ interpretation, was that the buyer would pay twice for the same money.

Expert determination

The dispute was referred to expert determination. The expert sided with the sellers, concluding that "held" was a recognised accounting term referring to any balance sheet entry. In fact, as the judge later found, "held" has no such technical meaning in accounting. Nevertheless, on the basis of his reasoning, the expert determined that the buyer owed additional consideration despite this meaning the buyer would pay twice for the same "cash".

High Court judgment

Sitting in the High Court, HHJ Keyser KC held that on the "plain meaning of the text" the company did not hold any assets corresponding to 'claims provision' or 'deferred fee income'. He regarded it as "irrational" for them to be interpreted as being "held" as "mere entries on a balance sheet". The sellers' construction would require the buyer to pay twice for entries, even though the entries had negative values, defying "commercial sense and indeed common sense", or, as the buyer’s CEO put it: "you don’t pay for fresh air". The judge considered that either the sellers shared the misunderstanding, or they knew of the Buyer's misunderstanding but did not wish to correct it.

The expert determination was set aside on the ground of manifest error. The court held that, on a proper construction of the SPA, 'claims provision' and 'deferred fee income' referred to assets, not mere balance sheet entries. Since no such assets existed, there was nothing to add to the purchase price. In the alternative, the court was prepared to grant rectification to the same effect.

What are the practical implications for M&A?

  1. Ensure purchase price components correspond to identifiable assets. If the formula adds items to the price, the definitions must make clear what the buyer is actually acquiring. Using accounting terminology without confirming there is a corresponding asset invites exactly this kind of confusion.
  2. Use worked examples at the drafting stage. Had the parties walked through the formula with actual figures, the problem would have been apparent before signing.
  3. Don’t assume accounting terms speak for themselves. The judge emphasised that "held" is not a technical accounting term, and that the ordinary meaning of words should prevail. If specific accounting standards are intended to apply, that should be explicit in the drafting.
  4. Consider a hierarchy clause. If accounting standards might conflict with the contract wording, make clear in the SPA which takes precedence.
  5. Expert determinations can be challenged. They are a useful mechanism for resolving completion accounts disputes, but a determination based on manifest error will not bind the parties (as this case shows).
  6. Rectification is a backstop rather than a solution. The fact the court was willing to rectify the agreement where one party knew of, or induced, the other's mistake, provides a safety net for parties in the event of unconscionable dealings. However, the court should not be relied upon to fix drafting that could have been clearer from the start.

Key takeaways

The judgment is a reminder that completion accounts provisions are construed like any other contractual term, by reference to what the words would mean to a reasonable person and not by reference to accounting conventions that were never expressly incorporated or defined. Courts will apply the established principles of contractual interpretation (Rainy Sky, Arnold v Britton, and Wood v Capita)  and experts who depart from those principles risk having their determinations set aside.

For those advising on SPA transactions, the key takeaway from Nawaz-Khan v UAP is that completion accounts are a contractual mechanism, and not an accounting mechanism. If a price adjustment mechanism operates to produce a result that no reasonable commercial party would have intended, the drafting needs revisiting before completion – not after.

With increased scrutiny on financial drafting and post-completion adjustments, now is a good time to revisit your approach. Our team can support you in ensuring clarity and reducing risk in future transactions. Get in touch with Will Glover, Alex Farrow or a member of the team to see how we can help.