M+A: Assets sold free of adverse interests of any kind

The recent case of Protector Glass Industries Pty Ltd v Southern Cross Autoglass Pty Ltd [2015] NSWCA 16 highlights the importance of a well drafted assets sale agreement and the inclusion of a robust warranty that the vendor is obliged to sell the sale assets with a clear and unclouded title.

In this case the buyer under an uncompleted contract for the sale of a business learnt prior to completion that the vendor could not comply with a contractual promise that the sale assets would at completion be sold free of all “charges, encumbrances, options and adverse interests of any kind.”

Prior to completion of the sale agreement a third party (a liquidator) wrote to the purchaser notifying it that the liquidator had a claim to some of the assets that the vendor was purporting to sell to the purchaser.  The purchaser was understandably concerned and recognised that if it did not take action it would effectively be buying “a lawsuit”.  Its lawyers took steps to address this concern. They informed the vendor as follows:

  1. that their client, the purchaser, had the desire and intention to see the contract completed according to its terms (thus no repudiation/anticipatory breach);
  2. emphasised that those terms contemplated giving clear and unclouded title to the sale assets and that the purchaser would not complete unless this right were recognised and accommodated; and
  3. it was for the vendor to find within a reasonable time the means of achieving this in the face of the clearly flagged claims by the liquidators of a third party.

The vendor did not take steps to address the purchaser’s concerns and ended up suing it for anticipatory breach of the sale agreement on the basis that the sale agreement did not permit the purchaser to seek to impose these requirements on the vendor and thus the purchaser had repudiated the contract.  Fortunately, for the purchaser the New South Wales Court of Appeal decided that the purchaser was not in breach and in the circumstances it never became subject to any immediate duty to complete the sale agreement.  It was a material consideration that the sale agreement contained a condition precedent to completion that could not be fulfilled but it was also relevant that the purchaser was not “obliged to buy a lawsuit”, and so accordingly it never became subject to any immediate duty to complete the sale agreement.  Finally, the Court concluded that the parties’ conduct, objectively construed, meant that by agreement they had abandoned the sale agreement and thus became free from it.

On 3 September 2015 the High Court of Australia dismissed an application for special leave against the orders of the Court of Appeal of the Supreme Court of New South Wales.