Implied ‘duty to co-operate’
TAKEDA PHARMACEUTICAL COMPANY v FOUGERA [2017]
The Court considered whether the seller was subject to an express or implied obligation under the terms of an SPA to provide certain information to the buyer. This case suggested that if a contracting party wants co-operation from another party, it needs to draft an express provision into the agreement.
Facts:
- Takeda (“T”) acquired from Fougera (“F”) the share capital of a pharmaceutical company incorporated in Denmark under a share purchase agreement (“SPA”’). F was a subsidiary of an investment fund which had many international investors.
- When the SPA was entered into, there was an unresolved issue as to whether the company was liable under Danish law for withholding tax (“WHT”). The Danish tax authorities previously issued an assessment indicating what they believed the company should have paid.
- The company lodged an appeal against the WHT assessment on two separate grounds, one of which was dependent upon the country of residence of the investors in F.
- The appeal remained outstanding when the share sale completed. The SPA therefore included an indemnity in clause 10.5 under which F agreed to pay to T:
“… an amount equal to any liability of [the company] to make a payment of tax … provided that [F] shall cease to have any liability under this clause 10.5 after the sixth anniversary of [the deal] closing …”.
- F's liability under this indemnity was also capped at €75million against an original assessment of unpaid WHT of €53million. At that level T had no obvious financial risk associated with the claim because it was entirely covered by the €75million indemnity. However, subsequently the WHT assessment by the Danish tax authorities was increased substantially to €123million and so T then immediately had a large and obvious financial incentive to reduce the claim to below that figure. Of course, as the party giving the indemnity for the first €75million, F had its own financial incentive for reducing the size of the claim as far as it could.
- Clause 10.16 governed the conduct of the WHT claim under which T as the indemnified party and the party effectively in day to day charge of defending the claim agreed:
- not to settle or compromise the WHT claim without F’s prior written consent (not to be unreasonably withheld or delayed) (clause 10.16(a));
- to take such action as F may reasonably request to avoid, dispute, resist, appeal, compromise, settle or defend the WHT claim (clause 10.16(d)).
- Clause 16.1 included a provision that sought to ensure that the parties carry out any additional acts necessary to give effect to the SPA, including the procuring of such acts by third parties (a so-called ‘further assurance’ clause). Under this provision, the parties agreed to:
“… do or procure the doing of all such acts and/or execute or use reasonable endeavours to procure the execution of all such documents as are reasonably necessary for giving full effect to [the SPA] …”.
- Clause 22 contained an entire agreement provision in the following terms:
“This Agreement … sets out the whole agreement between the parties in respect of the [share sale] and supersedes any prior agreement ... It is agreed that: (a) no party shall have any claim or remedy in respect of any statement, representation, warranty or undertaking made by or on behalf of the other party … which is not expressly set out in this Agreement … ; (b) any terms or conditions implied by law in any jurisdiction … are excluded to the fullest extent permitted by law … ”.
- Clause 10.10 expressly acknowledged that to assist with fighting the WHT claim:to:
“the ultimate owners of F have provided certain information about the shareholders to KPMG [acting on behalf of the acquired company] on a strictly confidential basis and KPMG are not permitted to disclose such information to any person (including F, T and/or the company) other than the Danish tax authorities”.
- Advisors to T requested further information to assist with fighting the tax claim. Time was of the essence as the six year time limit on the indemnity was getting close to expiring (on 30th September 2017). After a protracted period of correspondence, F denied any obligation to provide the requested additional information.
- T then started Court proceedings against F. It argued that the SPA imposed obligations on F to provide the additional information either because this was the meaning of the further assurance provision taken together with the indemnity, or because there were implied terms to that effect.
- F disputed that it was subject to any obligation concerning the additional information.
Decision:
- The Court decided that nothing in the SPA actually required F to provide T with the requested additional information. In particular:
- the indemnity itself said nothing whatsoever about the provision of information by F to T;
- the only provision in the SPA which dealt with information about the ultimate owners of F was clause 10.10, and this prohibited both parties from having access to that information. It could not be interpreted as requiring F to provide additional information to T;
- the conduct of claims provisions in clause 10.16 imposed a series of obligations on T for F's benefit. There was nothing in the clause imposing an obligation on F to provide information to T. T could comply with its obligations under the clause by abstaining from entering into a settlement unless F consented, and by pursuing the appeal against the assessment by maintaining an alternative argument, for which the additional information was not required; and
- several other clauses in the SPA expressly catered for the provision of information by one party to the other, such as an obligation on F to provide T with “any necessary information and documents reasonably required” in respect of competition clearance and an obligation on T to allow F to inspect, review and make copies of such of the company's records “as are reasonably necessary or required from time to time solely for its tax, accounting or regulatory compliance purposes”.
- According to the judge, this meant that there was nothing for the further assurance clause ‘to bite on’.
- The Court rejected T's contention that by refusing to provide the requested information, F was depriving T of the full benefit of the six year period before F's liability under the indemnity expired. This argument assumed that the parties had agreed to ensure the WHT liability was resolved within the six year period, but the effect of the limitation in clause 10.5 was precisely the opposite. Clause 10.5 expressly envisaged that the matter might not be resolved within the six year period and allocated the risk of that occurring exclusively to T.
- The Court did not accept that F had a duty to co-operate by providing the additional requested information. It said it was not necessary to imply such an obligation in order to render the SPA ‘workable’. In addition, there was no room to imply a term dealing either directly with the provision of investor information when that question was already expressly addressed by clause 10.10, or indirectly by an implied duty of co-operation when duties of co-operation were expressly provided for in other parts of the SPA. This finding was also supported by the strong form of entire agreement clause in the SPA (although the Court held that the provision did not positively preclude the implication of such a term).
Points to note:
- On the face of it, since F was giving the indemnity it is perhaps not surprising that the express provisions governing the conduct of the appeal against the claim were primarily aimed at protecting F rather than T who had the benefit of the indemnity. However, given that the indemnity was limited in two crucial respects, both financially and in point of time, T retained a residual financial interest and it was therefore important to consider what assistance it might require as the party in control of the appeal.
- This case illustrates the difficulty involved in persuading Courts to imply terms into a long agreement that has been professionally drafted on behalf of sophisticated parties.
- It is also a reminder of the importance of giving careful consideration to any matters which may require the input or co-operation of the other party and, wherever possible, including express terms in the agreement which spell out the extent of that co-operation.
- This decision represents a useful comparison with one we reported on in the last TRG Update, namely Wild Duck v Smith [2017] where the Court was, on the specific facts of the case, prepared to imply a ‘minimalist’ duty to co-operate where that was thought essential to make the contract workable.