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Business Purchasers Beware – to Due Diligence and Beyond

9 Aug 2017

When purchasing a business, however small, it is important to carry out due diligence. The level of due diligence required will depend on the size and type of the business but mostly on the purchase price. Whatever the price though it is important that due diligence is carried out to some degree.

 

It is common for the agreement which transfers the business to the buyer to include a clause stating that the seller assigns all the contracts in place for the business to the buyer. The logic behind this is so that the buyer can ‘hit the ground running’ and carry on the business where the seller left off.

 

The first stage is to make sure that the contract purported to be assigned, can, in law be assigned. If it is unassignable, then the buyer cannot take the benefit of it. Most contracts are, though, assignable.

 

If it can be assigned then to be a valid legal assignment, the other party to the contract must be informed that the seller has assigned the contract to the buyer. A failure to do so will mean that it is not a valid legal assignment.

 

It is therefore important that the buyer knows what contracts it will take an assignment of and that it deals with the assignment correctly otherwise the buyer may encounter difficulties down the line as in the recent case of General Nutrition Investment Company v Holland and Barrett International Ltd (2017).

 

Facts

 

In this case, the original party (“X”) entered into a contract with Holland and Barrett (“HB”). X then purported to assign the benefit of the contract to GNIC when GNIC took over several aspects of X’s business.

 

After the assignment took place, GNIC failed to notify HB of the assignment.

GNIC eventually came to the conclusion that HB had failed to comply with the terms of the contract and served notice on HB to terminate it.

 

HB challenged the termination notice on the grounds that the assignment was not legal because it had not been given notice of it at the time.

 

If HB was correct, it meant that GNIC was unable to bring the contract to an end and was still liable for the amounts due under it.

 

Decision

 

The court agreed with HB that the termination notice served by GNIC on HB did not validly bring the contract to an end because, when GNIC was assigned the contract by A, HB was not made aware of the assignment.

 

It is worth noting that the court did not take issue with the form of notice GNIC used to terminate the contract. Even though the form of notice was correct, at law, GNIC did not have the right to terminate the contract.

 

Comment

 

This case shows that, even after the transaction appears to have completed and the business is transferred to the buyer, the buyer (or more likely its legal advisers) still have work to do so that all third parties are made aware of the assignment of the business contracts to the buyer as part of the business transfer.

 

A failure to attend to this could mean that the buyer does not have the rights it appears to have under the contract and that it could find itself liable sometime after the contract, even if the other party to the assigned contract may be in breach.

 

Short Richardson and Forth solicitors receive instructions in respect of all types of business purchases and sales, including those valued in the multi-millions of pounds. If you are considering purchasing a business or have any related queries please contact Chris Morgan, a solicitor in our commercial and corporate department on 0191 211 1515 or at chris.morgan@srflegal.co.uk to discuss further.

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Short Richardson & Forth, 4 Mosley Street, Newcastle upon Tyne, NE1 1DE

Tel: +44 (0)191 232 0283  ·  Email: info@srflegal.co.uk

 

Short Richardson and Forth Solicitors Limited is a private limited company registered in England and Wales under company number 10572065, authorised and regulated by the Solicitors Regulation Authority No 637150.

Short Richardson and Forth Solicitors Limited is a private limited company constituted and run in accordance with the provisions of the Companies Act 2006. The term “partner” has been used to denote individual senior solicitors employed by Short Richardson and Forth Solicitors Limited.