Case No: BM30606
Neutral Citation Number: [2013] EWHC 3561 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
BIRMINGHAM DISTRICT REGISTRY

Birmingham Civil Justice Centre
The Priory Courts, 33 Bull Street
Birmingham 
B4 6DS

Date: 15/11/2013

Before :

MR JUSTICE MORGAN
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Between :

	(1)	WAYNE BARRATT
(2)	CAMPBELL WALTER
(3)	BRIAN HILL
(4)	ANDREW WALTER	

Claimants	
	
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TREATT PLC	
Defendant	

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Mr Mark Anderson QC (instructed by Keelys LLP) for the Claimants
Mr Paul Mc Grath QC and Mr James Cutress (instructed by Eversheds LLP) for the Defendant

Hearing dates: 7 and 8 November 2013
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Judgment
Mr Justice Morgan: 
Introduction
1.	On 10 April 2008, the four Claimants (“the Sellers”) entered into a Sale and Purchase Agreement (“the SPA”) with the Defendant (“the Buyer”). Pursuant to the SPA, the Sellers sold their shares in two companies to the Buyer. The SPA provided that the consideration for the shares was to equal a sum to be calculated in accordance with the SPA. This sum was called the “Earn-out”. The Buyer was required to serve an “Earn-out Notice”, specifying the amount of the Earn-out. The SPA provided for certain disputes as to the calculation of the Earn-out to be determined by an independent accountant, acting as an expert. 
2.	On 17 February 2012, the Buyer sent an email to the First and Second Claimants attaching a notice which the Buyer said was an Earn-out Notice. The SPA contained provisions as to the service of an Earn-out Notice. Service by email was not good service under those provisions. The Buyer says that it also sent the notice by first class post and that amounted to good service of it. The Sellers say that such a notice was never received and they put the Buyer to proof that the notice was sent, as alleged. If the notice had been sent as alleged but not received, it is agreed that nonetheless the notice is deemed to have been validly served.
3.	If the notice of 17 February 2012 was validly served, the Sellers say that the notice was not a valid Earn-out Notice because it did not comply with the requirements of the SPA in relation to such a notice.
4.	The issues which have been argued before me and with which I deal in this judgment are:
(1)	was the notice of 17 February 2012 duly sent by first class post to the home address of the Second Claimant? and
(2)	if so, was the notice of 17 February 2012 a valid Earn-out Notice?
5.	If the notice of 17 February 2012 was a valid Earn-out Notice and was validly served on the Sellers then, because the Sellers did not timeously invoke the dispute resolution provisions of the SPA, the amount of the Earn-out is the amount specified in the notice of 17 February 2012. Conversely, if the notice of 17 February 2012 was not a valid Earn-out Notice or was not validly served on the Sellers, then the Buyer is no longer able to serve a valid Earn-out Notice and the amount of the Earn-out will be determined by an independent accountant, acting as an expert.
6.	Mr Anderson QC appeared on behalf of the Sellers and Mr McGrath QC and Mr Cutress appeared on behalf of the Buyer.
The background to the SPA
7.	Before 2007, the Sellers owned all of the shares in Earthoil Plantations Ltd (“Plantations”), a company registered in the UK and all of the shares in Earthoil Kenya EPZ Pty Ltd (“Kenya”), a company registered in Kenya. Plantations had two wholly owned subsidiaries, Earthoil (India) Ltd (“India”), a company registered in India and Earthoil South Africa (Pty) Ltd (“South Africa”), a company registered in South Africa. Kenya had one subsidiary, Earthoil Extracts Ltd (“Extracts”), a company registered in Kenya. In February 2007, the Buyer acquired from the Sellers 50% of the shares in Plantations and 50% of the shares in Kenya.
8.	Before the SPA, Plantations, India, South Africa, Kenya and Extracts all prepared individual company accounts. The accounts were audited in accordance with the law of the country in which the relevant company was registered. The year end for all of these companies (except India) was 31 December; for India, it was 31 March. Plantations and Kenya did not prepare consolidated group accounts for themselves and their subsidiaries or subsidiary.
The SPA
9.	The SPA contained a number of relevant definitions, as follows:
“ …
“Companies” mean each of Earthoil Plantations and Earthoil Kenya and “Company” means either of them;
…
“Earn-out Notice” means a notice from the Buyer to the Sellers in accordance with clause 3.2;

“Earn-out” means the amount which is the average of the aggregate pre-tax profit or loss of the Earthoil Plantations Group and the Earthoil Kenya Group as shown in the audited accounts of the Earthoil Plantations Group and the Earthoil Kenya Group for the two calendar years ending 31 December 2011 (and adding back the aggregate value of (i) all or any claims, expenses, liabilities paid by the Companies to any of the Sellers arising directly in connection with the unfair or wrongful dismissal of such Sellers prior to 31 December 2011 which is determined by an employment tribunal or at a court of competent jurisdiction and (ii) all professional or other fees and expenses incurred by the Companies in connection therewith to the extent that such payments affect the Earn-out) multiplied by 11, divided by two PROVIDED THAT all profits and/or losses generated pursuant to transactions between Group Companies shall be disregarded in determining the aggregate pre-tax profit or loss; PROVIDED FURTHER THAT the value of the Earn-out shall not be less than zero;
…
“Earthoil Kenya Group” means Earthoil Kenya and any Group Company;
…
“Earthoil Plantations Group” means Earthoil Plantations and any Group Company;
…
“Group Company” means any direct or indirect subsidiary undertakings (or (sic) defined by section 258 of the Companies Act 1985) from time to time of Earthoil Plantations or (as the case may be) Earthoil Kenya;”
10.	Clause 3 of the SPA was headed “Consideration” and was in these terms:
3.	Consideration
3.1	The total consideration for the sale of the Sale Shares shall be such amount as is equal to the Earn-out provided that:
(a)	the Earn-out shall be apportioned equally between the Earthoil Plantations Sale Shares on the one hand and the Earthoil Kenya Sale Shares on the other hand;
(b)	the total consideration attributed to the sale of the Earthoil Plantations Sale Shares shall not exceed £2,500,000; and
(c)	the total consideration attributed to the sale of the Earthoil Kenya Sale Shares shall not exceed £2,500,000.
3.2	At any time during the five months prior to 31 May 2012 the Buyer shall deliver to the Sellers an Earn-out Notice. The Earn-out Notice shall specify the Earn-out and, setting out in reasonable detail, the basis on which the Earn-out has been calculated.
3.3	If the Buyer has not delivered the Earn-out Notice to the Sellers by close of business on 31 May 2012, the Earn-out Notice will be deemed to have been served on that date and the matter shall be deemed to be a dispute and referred to accountants in accordance with clause 3.5 and the following provisions shall apply.
3.4	In the absence of referral of any dispute to accountants in accordance with clause 3.5 within 30 Business Days after delivery to the Sellers of the Earn-out Notice, the amount of the Earn-out shall be as specified in the Earn-out Notice and the Buyer shall pay the Earn-out to the Sellers in accordance with clause 3.7.
3.5	If, within 30 Business Days after delivery to the Sellers of the Earn-out notice, there remains an outstanding dispute in respect of the audited accounts of the Earthoil Plantations group or the Earthoil Kenya Group or the calculation of the Earn-out, the dispute may be referred by either the Buyer or the Sellers (acting together) to a firm of chartered accountants, nominated jointly by the parties or (failing nomination within 10 Business Days after request by either party) nominated at the request of either party by the president of the Institute of Chartered Accountants in England and Wales.
3.6	The chartered accountant so nominated shall:
(a)	be instructed by the referring party to determine as soon as practicable the matters in dispute having regard to the relevant accounts;
(b)	for the purpose of making his determination under paragraph 3.6(a) determine any issue as to interpretation of this agreement, his jurisdiction to determine any matter or his terms of reference;
(c)	adopt such procedures to assist with the conduct of the determination as he reasonably considers appropriate including instructing professional advisers to assist him in reaching his determination; and
(d)	act as an expert and not as an arbitrator,
and his decision will be binding on the parties except in the case of manifest error. His fees will be payable be the Sellers and the Buyer in such proportions as he reasonably decides. If either party fails to give him any required undertaking or advance contribution as regards its fees it will be open to the other party to give such undertaking or make such contribution and to the extent the chartered accountant so decides such party shall be entitled to be reimbursed by the other parties. No party shall be entitled to make any objection to the appointment of the accountant on the ground that he imposes limits on his liability in relation to the carrying out of his instructions under this agreement.
3.7	The Buyer shall pay to the Sellers in the Agreed Proportions the Earn-out no later than 5 Business Days after;
(a)	the expiry of the 30 Business Day period referred to in clause 3.4; or
(b)	(if there is a referral of any dispute to accountants in accordance with clause 3.5 within 30 Business Days after delivery to the Sellers of the Earn-out Notice) the date of determination of the amount of the earn-out in accordance with clause 3.5.
less (in either case) the sum of £250,000 advanced in accordance with clause 4.2 (the “Completion Cash Advance”).
3.8	… 
3.9	…
3.10	For the avoidance of doubt, the Earn-out shall be calculated by reference to the profits and/or losses of the Earthoil Plantations Group and the Earthoil Kenya Group for the calendar years ending 31 December 2011 notwithstanding that the financial period(s) to which such Group Companies prepare accounts may not end on such date(s).
3.11	…
3.12	… ”
11.	Clause 6 of the SPA was headed “Earn-out Protections”. It is relevant to refer to some of the provisions in clause 6.1, as follows:
“6		Earn-out Protections
6.1	Subject to clause 6.2, the Buyer undertakes with the Sellers that, during the period prior to the Earn-out Notice being served, it will (save with the consent in writing of all the Sellers such consent not to be unreasonably withheld or delayed):
(a)	ensure that the business of the Group Companies shall be carried on in the ordinary course;
(b)	not sell the Company or otherwise transfer or otherwise dispose of the whole or any substantial part of the business, undertaking and assets of the Organic Product Business whether by a single transaction or by a series of related transactions, or cease carrying on a significant part of the business of the Organic Product Business;
(c)	…
(d)	procure that the Group Companies keep separate books of account from those of the Buyer and the Buyer’s Group and therein makes true and complete entries of all its dealings and transactions of and in relation to its business;
(e)	…
(f)		… 
(g)	…
(h)	save in respect of the accounting reference dates (or equivalent) of the Group Companies not change the accounting policies, principles, bases and practices as applied by the Group Companies prior to the date hereof other than where such policies principles, bases and practices are inconsistent with those of the Buyer in which case the policies of the Buyer shall be applied;
(i)		…
(j)		carry on the business of the Group Companies through the Group Companies and not divert any such business from the Group Companies and not divert from the Buyer’s Group to the Group Companies any order which the Buyer ought to know are or may become a loss making order; and
(k)	…
(l)		will not deliberately take any actions with the intention of artificially reducing the amount of the Earn-out;
(m)	…
and
(n)	procure that the Company prepares monthly unaudited management accounts in a form suitable for presentation to the Boards and provides a copy of such management accounts to the Sellers not later than the end of the calendar month following the month to which the accounts relate.”
12.	Clause 15 of the SPA provided for the service of a notice such as the Earn-out Notice. It is not necessary to set out the detailed provisions of clause 15 as the parties are agreed as to what they mean and how they operate. It is agreed that sending an Earn-out Notice by email to one or more of the Sellers did not constitute good service of such a notice. One way in which an Earn-out Notice could be served was by sending it by pre-paid first class post to the home address for the time being of the Second Claimant. It is also agreed that if such a notice were sent by post in that way, it was deemed to have been served at 9.00 a.m. on the second Business Day next following the posting even if the notice was never received by the addressee.
The Buyer’s Notice
13.	The notice which is relied upon by the Buyer as a valid Earn-out Notice was in these terms:
“EARN-OUT NOTICE

Pursuant to Clause 3.2 of the Sale and Purchase Agreement dated 10 April 2008 between The Sellers, Treatt plc, Earthoil Plantations Limited and Earthoil Kenya Proprietary EPZ Limited, Treatt plc hereby serve notice of the amount of the Earn-Out, as defined in Clause 1 of the Sale and Purchase Agreement.

	Note	£’000	
Earthoil Group Loss for the financial year ended 30/9/10	1	(334)	
LESS: Loss for three months to 31/12/09	2	(59)	
ADD: Profit for three months to 31/12/10	3	145	
			
Earthoil Group Loss for the calendar year ended 31 December 2010		(130)	
			
Earthoil Group Profit for the financial year ended 30/9/11	1	237	
LESS: Profit for three months to 31/12/10	3	145	
ADD: Profit for three months to 31/12/11	4	47	
			
Earthoil Group Profit for the calendar year ended 31 December 2011		139	
			
Aggregated Profit for the two calendar years ended 31 December 2011		9	
			
Average profit for the two years ended 31 December 2011	A	4.5	
			
EARNOUT = “A” multiplied by 11 divided by 2		25	

Notes

1 As per audited accounts incorporated in consolidated audited group financial statements for Treatt Plc
2 As per Earthoil Group management accounts for three months to 31 December 2009
3 As per Earthoil Group management accounts for three months to 31 December 2010
4 As per Earthoil Group management accounts for three months to 31 December 2011

Dated 17th day of February 2012”

[The line which began “EARNOUT” and ended with the figure “25” was in red ink.]

Service of the Buyer’s Notice
14.	On 17 February 2012, the Defendant emailed to the First and Second Claimants a copy of the Buyer’s notice. There is no doubt that both these Claimants received and read the email on the same day. They also sent copies of the notice to the other Claimants. However, although all of the Sellers became aware of the contents of the notice, the Buyer accepts that it cannot rely on sending the notice by email in this way as good service for the purposes of the SPA. The Buyer’s case as to service is that it sent (by first class pre-paid post) a copy of the notice to the home address of the Second Claimant. It is agreed that if the notice was sent in that way, then it is deemed to have been duly served. This is so even if the notice was never received by the addressee. The Sellers say that the notice was never received by the Second Claimant and they put the Buyer to proof that it did send the notice in the way alleged.
15.	In support of its case that it sent the notice by post to the Second Claimant, the Buyer called Ms Anita Steer and Mr Jon Clements. Ms Steer is a lawyer and in February 2012 she was the Assistant Company Secretary to the Buyer’s group of companies. She gave detailed evidence as to her involvement with the preparation of and the sending of the notice in question. It is clear that she assisted with the drafting of the notice in the period from 14 February to 17 February 2012. She described what she did for the purpose of sending the notice by email to the First and Second Claimants and what she did for the purpose of sending a copy by post to the Second Claimant. In particular, she described how she printed a copy of the notice on a colour printer in her office. She was able to prove that a copy of the notice had been printed. That evidence did not itself reveal whether the printed version was in colour or in black and white but Ms Steer stated that she recalled printing a colour copy. The notice had been prepared in black and white save for one line which was printed in red (as noted above). That fact would suggest that Ms Steer would have wished to make a colour copy of the notice and she says that she recalls doing so. She also gave evidence that her file does not contain a colour copy of the notice. She explained that fact by saying that she sent the colour copy to the Second Claimant. She also gave evidence that having printed a colour copy, she photocopied that colour copy so that she would have a copy for her file. The black and white photocopy is still on her file. She said that the black and white version on her file could be seen to be a photocopy and it was not a black and white print version.
16.	Ms Steer gave further detailed evidence as to the printing of the Second Defendant’s address for the envelope to enclose the notice. She also explained that she placed the notice in the envelope without a compliments slip or a covering letter and she explained her reasons for that. She gave evidence that she knew that the notice should be sent to the Second Claimant by first class post. She did not consult the SPA on 17 February 2012 but she had consulted it a few days earlier when she was drafting the notice and she had seen that the notice was to be sent by first class post. She placed a post-it sticker on the envelope directing that it should be sent first class and she placed the envelope enclosing the notice in the post tray of the finance department of the Buyer in order that it could be collected and posted.
17.	Ms Steer was cross-examined on the detail of her evidence and her ability to recollect that detail and the possibility that she might have confused what she thought had happened with the notice with other letters which had been sent by her to the Second Claimant. It was also pointed out that in other respects her initial memory of matters of detail had turned out to be inaccurate. Further, she was taken to the contemporaneous documents which did not provide corroboration of the fact that she had posted the notice although, conversely, they did not contradict her evidence. It was also suggested to her that she had not consulted the SPA in any detail as to the manner of service of the notice and so she did not appreciate the importance of posting the notice to the Second Claimant and if she had not appreciated that, she would not have regarded it as appropriate to post the notice as well as sending it by email.
18.	Mr Clements gave evidence that on 17 February 2012, he was responsible for dealing with the outgoing post at the relevant office of the Buyer. He described the system for dealing with outgoing post and he said that he would have operated that system in relation to the letter which had been prepared by Ms Steer.
19.	The Second Claimant gave evidence that he had never received a copy of the notice through the post. It was put to him that he might have received it and then misplaced it and it was suggested that he was disorganised so that he was liable to misplace documents which he had received.
20.	As I indicated in the course of the trial, I accept the Buyer’s contention that it has proved on the balance of probabilities that the notice was sent by pre-paid first class post to the home address of the Second Claimant, as required by clause 15 of the SPA. In particular, I accept the evidence of Ms Steer. Her evidence was clear and detailed and I find that it was reliable. She remembered a number of details about this particular matter which make it easier to accept that she genuinely does remember what she did in relation to the notice. I did not find her evidence undermined by the various points that were properly put to her in cross-examination. I found her explanations in relation to those matters to be satisfactory. Mr Clements gave evidence of the system used for dealing with outgoing post. His evidence was not directly challenged. Having accepted Ms Steer’s evidence as to what she actually did taken together with Mr Clements’s evidence of system, it is more probable than not that the envelope containing the notice was sent by first class post. It is not necessary to make any finding as to whether the Second Claimant received the notice through the post. It is possible that he did and then misplaced it but even if he did not receive the notice, it is agreed that it is deemed to have been served if it were posted in accordance with clause 15 of the SPA, as I find that it was.
Events between the date of the SPA and the giving of the notice
21.	It is now necessary to summarise what happened in relation to the preparation of accounts for the various companies between the date of the SPA and the giving of the Buyer’s notice on 17 February 2012.
22.	Prior to the SPA, the accounts of the Earthoil companies were prepared with a year end of 31 December (except for India, the year end of which was 31 March). Prior to the SPA, the year end used by Treatt was 30 September. When the SPA was entered into, it was contemplated that the Earthoil companies which had been acquired by the Buyer would have their year end changed to 30 September. That contemplation can be seen from clauses 3.10 and 6.1(h) of the SPA itself which showed that the parties were addressing the possibility of a change in the year end for accounting purposes.
23.	Following the SPA, the accounts for Plantations, India, South Africa, Kenya and Extracts were prepared with a year end of 30 September. Each company prepared individual company accounts. Plantations and Kenya did not prepare group accounts on a consolidated basis. In particular, Plantations as a UK registered company, was exempt from any requirement to do so by virtue of section 400 of the Companies Act 2006, as it was a subsidiary of the Buyer and it was included in the consolidated accounts of the Buyer. The Buyer also prepared its accounts using a year end of 30 September. Its accounts were prepared on a consolidated group basis. I understand that all of the above-mentioned accounts were duly audited.
24.	By June 2010, it was considered that South Africa was not performing and, on 30 June 2010, it was sold to its management for £1. This event was reported in the accounts of the Buyer for the year ending 30 September 2010, where it was stated that the sale had resulted in a loss on disposal of £88,000.
25.	By clause 6.1(n) of the SPA, the Buyer was obliged to procure that Plantations and Kenya would prepare monthly unaudited management accounts in a form suitable for presentation to their boards and the Buyer agreed to provide a copy of such management accounts to the Sellers, not later than the end of the calendar month following the month to which the accounts related. Management accounts were prepared every month and were provided to the Sellers. These management accounts were in the form of individual accounts for Plantations, South Africa (until it was sold in June 2010), India, Kenya and Extracts and then a set of management accounts for what was described as the Earthoil Group, which was all five (four, after June 2010) companies together. Technically, there were two groups, the Plantations Group and the Kenya Group. Plantations and Kenya were not in the same group as neither of them was a subsidiary of the other. Nonetheless the so called group accounts reflected a combined position for the five companies. 
The validity of the notice
26.	The Sellers contend that the Buyer’s notice was not a valid notice for the purposes of clause 3.2 of the SPA. They put forward two separate grounds of challenge. The first ground was that the calculation of the Earn-out in the Buyer’s notice was based on management accounts. That basis of calculation was not permitted by the definition of Earn-out which required the Earn-out to be calculated on the basis of audited accounts. The second point was that there was one respect (which I will identify in more detail later in this judgment) where the Buyer’s notice allegedly did not set out the basis of the calculation in reasonable detail.
The Sellers’ case as to the validity of the notice
27.	The Sellers’ case starts with clause 3.1 of the SPA which stated that the consideration for the sale of the shares was such amount as was equal to the Earn-out. It was then necessary to refer to the definition of Earn-out which stated that the basis of the calculation was to be the audited accounts for the two calendar years ending 31 December 2011. This definition required there to be audited accounts, as distinct from management accounts. Further, the period of the audit must be the two year period ending 31 December 2011. Even though, after the SPA, the accounts of the various companies were prepared and then audited with a year end of 30 September, it was perfectly possible after 31 December 2011 to prepare and then audit accounts for the relevant companies for the two year period to 31 December 2011. The SPA did not allow the Buyer to calculate the Earn-out by reference to management accounts. Nor could the Buyer calculate the Earn-out by reference to accounts (even audited accounts) for an accounting year ending on 30 September and then adding in figures from other accounts in an attempt to include the period from 1 October to 31 December.
28.	The Sellers say that the Buyer’s notice did not conform to the definition of Earn-out. The calculation set out in the notice was not based on audited accounts and the accounts relied upon were not prepared for years ending on 31 December, or a two year period ending on 31 December 2011. The calculation of the figure for the year to 31 December 2010 started with a set of accounts for the year to 30 September 2010, purported to adjust those accounts so as to remove the figures for the period before 1 January 2010 and then purported to adjust them again so as to add figures for the period from 1 October 2010 to 31 December 2010. A similar exercise was repeated for the year to 31 December 2011, starting with a set of accounts for the year to 30 September 2011 which were then adjusted twice, first to remove figures for the period before 1 January 2011 and then to add figures for the period from 1 October 2011 to 31 December 2011. There were four notes added to help explain the calculation. Notes 2, 3, and 4 stated that the figures in question, used to adjust the accounts for the years to 30 September 2010 and 30 September 2011, were taken from certain management accounts. Note 1 was a purported explanation of the figures for those two years. The figures for each year were stated to show the “Earthoil Group profit” and Note 1 stated that the figures were “As per audited accounts incorporated in consolidated audited group financial statements for Treatt plc”. Thus, on the face of the notice, it could be seen that the calculation was not based on audited accounts as it was, at least partly, based on management accounts. Indeed, the Sellers as recipients of the notice would know that Note 1 was wrong as the figures used for the years to 30 September 2010 and 2011 were based on management accounts for “Earthoil Group” which the Sellers had previously been sent. Even if the Sellers would not know that for certain, they would suspect it and the true position was that there were no audited accounts for the “Earthoil Group”. The result was that no figure used in the calculation in the notice was derived from audited accounts.
29.	The Sellers contended that the inevitable result of the notice not conforming to the definition of Earn-out was that the notice was not valid.
The Buyer’s case as to the validity of the notice
30.	The Buyer’s argument did not start with the definition of Earn-out but with the definition of Earn-out Notice, which referred to “a notice in accordance with clause 3.2”. Clause 3.2 stated that the Earn-out Notice was to: “specify the Earn-out and, setting out in reasonable detail, the basis on which the Earn-out has been calculated”. It was accepted that the calculation shown in the notice which had been served was not based on audited accounts. That was not a defect in the notice. The Buyer’s argument distinguished between the contractual requirements as to the validity of an Earn-out Notice and the contractual requirements as to the calculation of Earn-out. The requirements for a valid Earn-out Notice were contained in clause 3.2. Those requirements were not to be equated with the definition of Earn-out. An Earn-out Notice which complied with clause 3.2 would be valid even if the figure specified was not in all respects in accordance with the definition of Earn-out. If the Sellers wished to contend that the Earn-out as specified in the notice did not conform to the definition of Earn-out, then they were able to use the procedures of the SPA to challenge the figure in the Earn-out Notice. It could not be right that any difference between the figure specified in the notice and the figure which would be calculated by applying the definition of Earn-out meant that the notice was invalid and of no effect. In such a case, the Sellers were entitled to refer any dispute about the figure in the notice to an independent accountant. The position might be different if the function of the notice had been to impose on the Sellers the figure stated in the notice without the Sellers having any ability to challenge the figure. In such a case, it would not be expected that the Sellers could unilaterally depart from the definition of Earn-out and impose a non-conforming figure on the Sellers. The notice did not determine the rights of the parties but was part of a procedure leading to the resolution of any dispute about the figure in the notice. In this case, the figure in the Buyer’s notice did become binding on the Sellers but that was because they chose not to refer the dispute to an independent accountant.
31.	The point had been taken in the Buyer’s pleadings that the reference to audited accounts in the definition of Earn-out had to be construed in the light of clause 3.10 of the SPA. It was suggested that clause 3.10 expressly contemplated that after the SPA, the accounts of Plantations and Kenya would not be prepared with a year end of 31 December but the definition of Earn-out and clause 3.10 made it clear that the Earn-out would still be calculated by reference to a two year period ending on 31 December 2011. As there would not be, in the ordinary course of events, audited accounts for that two year period, it was suggested that the Earn-out could be calculated on the basis of accounts that were not audited accounts. 
32.	The Buyer also contended that the Sellers were wrong to suggest that the use of audited accounts was essential to the process of determining the Earn-out. If the Buyer had prepared audited accounts for the period required by the definition of Earn-out, those audited accounts would not be conclusive. It would be open to the Sellers to challenge the audited accounts and to refer the dispute to the independent accountant. Further, if the Buyer had not served an Earn-out Notice by 31 May 2012, then there would be a deemed dispute and the matter could be referred to the independent accountant who would decide the amount of the Earn-out. It was not suggested that the independent accountant would have to have audited accounts for that purpose. He or she could decide the amount of the Earn-out by determining what should be shown in audited accounts.
33.	The court should apply clause 3.2 to the notice in this case. Clause 3.2 required the notice to specify the Earn-out. The Buyer’s notice did so by specifying the figure of £25,000. Clause 3.2 required the notice to specify the basis on which the Earn-out had been calculated, setting out that basis in reasonable detail. The Buyer’s notice did so. If that basis were different from the basis of calculation identified in the definition of Earn-out, that was not a defect in the notice although it would entitle the Sellers to dispute the specified figure by referring the matter to an independent accountant. 
34.	The Buyer had a further submission. It was said that if the court held that it was a requirement of the SPA that an Earn-out Notice had to set out a basis of calculation which was in accordance with the definition of Earn-out, and if the notice served in this case did not satisfy that requirement, then that failure did not render the notice invalid. It was submitted that the validity of the notice depended on whether the requirement which had not been complied with was mandatory or directory. Failure to comply with a mandatory requirement would result in the notice being invalid; failure to comply with a directory requirement would not have that result. This distinction between mandatory and directory requirements for notices was well established in relation to notices served under statutory provisions but applied in the same way to contractual notices. The Defendant cited the recent decision of Siemens Hearing Instruments Ltd v Friends Life Ltd Chancery Division, 12 July 2013, a decision of Mr Strauss QC sitting as a Deputy High Court Judge. In his judgment, the Deputy Judge reviewed a number of authorities and he summarised the legal principles in this way:
“39. From these authorities, it seems to me that the position relating to non-compliant notices is as follows:-
  
(a) The principles apply equally to statutory and contractual notices: see Newbold [2013] EWCA Civ 584, para. 69-70; York v Casey [1998] 2 EGLR 25, cited in Burman v Mount Cook Land Ltd   [2002] Ch 256, para. 23; Yates Building Co Ltd v Pulleyn (RJ) & Sons (York) Ltd (1975) 237 EG 183.
  
(b) Where the statute or the contract term provides that a non-compliant notice will be invalid or ineffective, that is of course the end of the matter: see for example section 26(3) of the 1954 Act.
  
(c) Where it does not, the court must assess the statutory or contractual intention by the usual objective criteria, including the background and purpose of the provision, and the effect if any of non-compliance.
  
(d) Where the notice is provided for by a statute or by a professionally drafted contract, and the draftsman has not provided, either way, for the consequence of noncompliance, one may reasonably assume that this is deliberate, and that it has been left to the court to decide; while it may go too far to say that there is a presumption, it is natural to conclude that it was intended that the notice should, at least in some circumstances, but not necessarily in all, survive non-compliance.
  
(e) The use of “must”, “shall” etc. is not decisive, as Millett L.J. indicated in Petch v Gurney [1994] 3 All ER 731. I do not think Lord Denning M.R. was going any further in Yates than to say that the provisions of that lease which were so worded were mandatory. The court will look to the substance, not the form.
  
(f) What is often decisive in practice is the effect of the non-compliance: see in particular the dictum of Lord Steyn in Soneji [2006] 1 AC 340, cited at para. 28 above. Was the omitted information material which it was essential for the other party to have? Has the noncompliance prejudiced the other party? For this reason, notice provisions may be what I have called hybrids, sometimes “mandatory”, sometimes not, depending on the nature and extent of the error, and its effect.
  
(g) Although provisions relating to the exercise of an option are usually mandatory, any such rule is the court's servant, not its master, and is not inflexible. I agree with [counsel’s] submission that, whilst non-fulfilment in any respect of the conditions for the exercise of an option (in this case the pre-conditions to be fulfilled by 23rd August next), will be fatal, the same may not be true as to the form of an advance notice of the exercise of the option, which in this case was explicitly required to be timely, but not explicitly required to be in due form, to be effective.”
35.	The Buyer then sought to apply these principles in the present case. It was said that the SPA did not provide that any failure to adopt the basis of calculation in the definition of Earn-out would be fatal to the validity of the notice. To the contrary, the SPA contemplated that the figure in the notice could be different from the figure that ought to have been calculated in accordance with the definition of Earn-out, allowing the Sellers to bring a successful challenge to that figure before an independent accountant. It was also said that a strict requirement that the basis of calculation used in the notice be the basis set out in the definition of Earn-out would completely undermine the certainty that the time bar (for a reference to an independent accountant) was meant to achieve. The notice served in this case, even if it did not conform to the definition of Earn-out, did not cause any prejudice to the Sellers. They were free to dispute the figure in the notice and to refer that dispute to an independent accountant but they chose not to do so.
Discussion and conclusion as to the validity of the notice
36.	The submissions for the Buyer were well presented but in the end I do  not accept them. I consider that the outcome in this case depends on where one starts the analysis. If one starts (as the Buyer does) with clause 3.2, then the court could hold, on a literal reading of clause 3.2,  that it was open to the Buyer to specify a figure for Earn-out and to choose the basis for calculating that figure. However, if one starts (as the Sellers do) with the definition of Earn-out, which spells out the basis for calculating the Earn-out, it is not difficult to hold that a notice which does not adopt that basis is not an Earn-out Notice. A notice which specifies a figure on a basis which is not within the definition of Earn-out does not specify the Earn-out; instead, it specifies something which is not an Earn-out. Thus, it becomes all important to decide where to start the analysis. To make that decision, I consider that one has to take proper account of the nature of the two provisions (i.e the definition of Earn-out and clause 3.2). In my view, they are different kinds of provision. The definition of Earn-out is a provision of central importance. It is a substantive provision which defines the basis for calculating the price payable for the shares. Clause 3.2 is part of the machinery or the procedure designed to lead to the determination of that price. 
37.	When clause 3.2 states that the Buyer may serve an Earn-out Notice which specifies (and sets out in reasonable detail) the basis on which the Earn-out has been calculated, that provision is not designed to give the Buyer a choice as to what that basis is to be. The Buyer has no such choice as the basis of calculation is imposed on the parties by the definition of Earn-out. The purpose of clause 3.2 in requiring the Earn-out Notice to specify and set out the basis of the calculation is for the benefit of the Sellers in that the Buyer must explain how it has calculated the Earn-out using the basis in the definition of Earn-out, and not otherwise.
38.	I consider that a notice given pursuant to clause 3.2 must use the basis for calculation in the definition of Earn-out. This involves reading the words “shall specify the Earn-out and, setting out in reasonable detail, the basis on which the Earn-out has been calculated” in clause 3.2 as requiring the Buyer to set out the calculation on the only basis permitted by the definition of Earn-out. Another approach is to say that the Buyer is required by clause 3.2 to set out the basis of the calculation “in reasonable detail” and the basis of the calculation will not be “in reasonable detail” if it is a basis which is not permitted by the definition of Earn-out.
39.	I do not go so far as to say that the Buyer’s construction of the SPA is unworkable. It would have been possible, although very surprising, for the SPA to allow the Buyer to choose any basis for the calculation which the Buyer wished and if the Sellers were not prepared to accept a calculation on that basis then the Sellers could refer the matter to an independent accountant who would decide the dispute in accordance with the definition of Earn-out. 
40.	I also accept that the Buyer’s approach to clause 3.2 would avoid disputes as to whether the basis of calculation in the notice did or did not conform to the basis in the definition of Earn-out. I accept that there is some limited room for interpretation of that definition and I also accept the possibility that if the Buyer genuinely interpreted the definition one way and gave a notice on that basis, it might turn out that the Buyer’s interpretation was held to be wrong and the notice was held to be invalid. However, that would not be a serious set back for the Buyer. If the Buyer had not served any other notice before 31 May 2012, then there would be a deemed dispute and the matter would be referred to the independent accountant for decision on the correct basis.
41.	I also accept that clause 3.2 does not require the Buyer to specify the correct figure. For example, if the Buyer made an arithmetical error in the course of its calculation, that would not invalidate the notice. That is because the Buyer would have set out a basis for the calculation in accordance with the definition of Earn-out and clause 3.2 allows the Buyer to specify the figure which the Buyer  says is appropriate on that basis.
42.	Nonetheless, none of these matters persuades me that it is open to the Buyer to serve a valid notice which uses a basis for calculation which is not permitted by the definition of Earn-out. The Buyer accepted that if the function of the Earn-out Notice had been to determine the amount of the Earn-out in circumstances where that amount was not open to challenge by the Sellers, then one would approach the interpretation of the provisions in a different way. It was suggested that the Buyer’s approach to the operation of clause 3.2 should not cause the Sellers any difficulty because it was always open to the Sellers to dispute the figure in the notice and to refer the dispute to an independent accountant. I consider that the ability to refer the dispute to an independent accountant is a partial but not a complete answer. There will be cases, and the present is one of them, where the Sellers are caught by the time bar, having failed to refer the dispute in time, where the notice does operate to determine the amount of the Earn-out which is no longer open to challenge by the Sellers.
43.	As to the point taken in the Buyer’s pleadings that the effect of clause 3.10 was that it was not necessary to use audited accounts for the purposes of calculating the Earn-out in a case (as happened) where the year end was changed from 31 December, I do not accept this argument. The meaning of clause 3.10 is clear. It does not in any way vary the definition of Earn-out. Indeed, it emphasises that the period which is relevant to the calculation of Earn-out will not change even if the year end for the accounts after the SPA does change.
44.	On the above construction of the SPA, the basis of calculation in the notice in this case did not conform to the definition of Earn-out. The question then is whether the consequence is that the notice is invalid, or is nonetheless valid. The Buyer relied on the statement of principle in the Siemens Hearing case.  The Sellers did not suggest to me that this statement of principle was inappropriate. In accordance with that statement, I should look to matters of substance rather than to matters of form. Was compliance with the definition of Earn-out essential for the purposes of giving notice under clause 3.2? Were the Sellers prejudiced by the failure to use the basis of calculation in the definition of Earn-out?
45.	I consider the requirement in the definition that the parties use the audited accounts, rather than management accounts, was intended to be an important safeguard. The requirement of auditing was designed to improve the reliability of the figures in the accounts. This was for the benefit of both the Sellers and the Buyer. Further, the period of the intended audit was of importance. I consider that taking a set of management accounts for the year to 30 September 2010, subtracting figures for the period 1 October 2009 to 31 December 2009 and then adding figures (taken from other accounts) for the period 1 October 2010 to 31 December 2010 (and repeating this exercise for the following year) is significantly different from using audited accounts for the two years ending on 31 December 2011. 
46.	I consider that the failure of the notice in this case to conform to the definition of Earn-out was a significant one. That failure deprived the Sellers of the benefit of the increased reliability of figures which had been audited. The departure from a year end of 31 December or a period end of 31 December 2011 deprived the Sellers of the benefit of many matters (which changed throughout an accounting year) being assessed at the right point in time. Although the Sellers could have referred any dispute to an independent accountant, the notice (if valid) exposed the Sellers to the risk that they would be bound by the notice if they, for whatever reason (including oversight), failed to refer the dispute within the prescribed time limit. Exposure to that risk caused prejudice to the Sellers.
47.	I conclude that the notice served in this case did not comply with the requirements of the SPA and that the consequence of that non-compliance is not to be overlooked but is fatal to the validity of the notice. The result is that the notice of 17 February 2012 was not a valid Earn-out Notice. As no valid Earn-out notice was served by 31 May 2012, the matter is not governed by clause 3.4 of the SPA but is instead governed by clause 3.3. There is deemed to be a dispute between the parties, which dispute may be referred to an independent accountant in accordance with clause 3.5. That dispute has now been validly referred to an independent accountant because the time bar in clause 3.4 did not apply to that reference.
48.	This above conclusion means that it is not necessary for me to deal with the second challenge, put forward by the Sellers, to the validity of the Buyer’s notice. However, for the sake of completeness, I will express my views on this second point also. 
49.	The Sellers relied on the requirement in clause 3.2 of the SPA that the Buyer’s notice should set out in reasonable detail the basis on which the Earn-out had been calculated. Assuming that an Earn-out Notice could set out a basis which relied upon management accounts rather than audited accounts, it was said that there was one respect (and this was the only respect identified by the Sellers) in which the Buyer’s notice did not set out that basis in reasonable detail.
50.	The Sellers pointed to the figure of minus £334,000 in the first line of the Buyer’s notice. This figure could be found in the management accounts for what had been described as the Earthoil Group for the period to September 2010. Those management accounts did show the figure of minus £334,000 as pre-tax profit (i.e a loss). The accounts showed considerable detail as to the calculation of that figure. It was arrived at by taking sales figures and deducting from those figures amounts for the cost of sales and for overheads. The result of several arithmetical steps was the figure of minus £334,000. One of the figures deducted from the cost of sales was £612,000 for overhead expenses. The figure of £612,000 was broken down showing one of the expenses, described as “Marketing, gifts, other”, in the sum of £175,000.  The management accounts for the period to September 2010 which had been sent to the Sellers in accordance with clause 6.1(n) of the SPA also showed management accounts for Plantations, India, South Africa, Kenya and Extracts. If one took the figures for pre-tax profit from the individual management accounts for these five companies and combined those figures, the result would be minus £248,000 and not minus £334,000, a difference of £86,000.
51.	The Sellers argued that the Buyer’s notice did not set out in reasonable detail the reason for the disparity between minus £248,000 and minus £334,000. Alternatively, it was said that the Buyer’s notice did not set out in reasonable detail the basis of the calculation of minus £334,000 in view of the fact that one ingredient in that calculation was the alleged overhead of £175,000 for “Marketing, gifts, other”. This was particularly the case when it later emerged that the difference of £86,000 was said to be attributable to the fact that South Africa was sold to its management for £1 on 30 June 2010 and, before that sale, the assets of South Africa were included in consolidated group accounts as worth a sum in the order of £86,000.
52.	The above criticism of the Buyer’s notice does not seem to me to involve any failure to set out in reasonable detail the basis of the calculation of the specified Earn-out figure of £25,000. Even if the management accounts which had previously been sent to the Sellers and which included the figure of minus £334,000 (referred to in the Buyer’s notice) did not give a proper explanation of the fact that a loss of £86,000 was included in the alleged overhead of £175,000 with the heading “Management, gifts, other”, that did not justify a conclusion that that the Buyer’s notice did not on that account comply with clause 3.2. The basis of the calculation of Earn-out (i.e. £25,000) was set out in reasonable detail in the Buyer’s notice even if the calculation relied on certain accounts and one of the figures in those accounts was not adequately explained. 
53.	The Sellers also sought to put their point on the £86,000 a different way. They said that if the Buyer had used the individual management accounts of the five companies rather than the management accounts for the so called Earthoil Group then the relevant figure would have been minus £248,000 rather than minus £334,000. The difference between the figures was attributable to the fact that the Earthoil Group management accounts were consolidated group accounts. These consolidated group accounts showed the loss on the sale of South Africa out of the group whereas the individual accounts for the five companies did not. It was not suggested that it was inappropriate to treat the loss on the sale of South Africa in this way if one prepared consolidated group accounts. The Sellers submitted that the definition of Earn-out did not contemplate the preparation of consolidated group accounts but I was not asked to rule on that point. Instead, the Sellers submitted that the Buyer’s notice had to contain an explanatory statement that the figures were based on consolidated management accounts for the group rather than on individual management accounts for the five companies and, in addition, explain why this produced a difference in the figures.
54.	I am not able to accept the Sellers’ submissions on this second point. Clause 3.2 required the Buyer to set out in reasonable detail the basis of its calculation of the Earn-out. Assuming (contrary to my actual finding) that the Buyer was entitled to use management accounts for this purpose and was entitled to use (as part of the calculation) management accounts for a period to 30 September 2010, then the Buyer’s notice that the Buyer had used the “Earthoil Group” accounts for that period and that they showed a loss of £334,000 contained reasonable detail as to the basis of the calculation. I do not consider that a notice under clause 3.2 of the SPA was required to break down in any greater detail the figure of £334,000 nor to explain that the figure of £334,000 was different from a figure of £248,000 (which was not used in the calculation) because it was derived from the accounts of the Earthoil Group rather than being derived from the individual accounts of the five companies. I conclude that in relation to the second point of challenge raised by the Sellers, the Buyer’s notice did set out in reasonable detail the basis of the calculation.
The result
55.	The result is that I will make a declaration that the notice dated 17 February 2012 was not a valid Earn-out Notice pursuant to clause 3.2 of the SPA. This means that the dispute between the parties as to the amount of the Earn-out will be determined by the accountant who has been appointed in accordance with clause 3.5 of the SPA.  It will be for the accountant to determine the matters in dispute. For that purpose, she is required and entitled to act in accordance with clause 3.6 of the SPA. The pleadings in this case set out various contentions which the Sellers or the Buyer wish to put forward in relation to the dispute as to the amount of the Earn-out.  At the hearing before me, the Sellers indicated that they might seek further direction from the court in relation to some of these matters. Following the hand down of this judgment, I will hear argument as to whether it is appropriate for me to give any such directions.
Other matters
56.	In its pleaded case, the Sellers allege that the Buyer acted in breach of certain of the provisions of clause 6 of the SPA and those breaches resulted in a reduction in the amount of the Earn-out, causing loss and damage to the Sellers. At an earlier hearing on 17 May 2013, I ordered that the Sellers’ claim for such damages should be stayed until after any expert determination of the amount of the Earn-out. The result of this judgment is that the amount of the Earn-out will now proceed to expert determination (in the absence of agreement) and the stay ordered on 17 May 2013 will continue to operate.