Introduction

Heads of terms are a key step in any commercial transaction because they are indicative of the terms of the transaction that the parties are contemplating entering into. Heads of terms should be clear and accurately reflect the key commercial terms of the transaction to ensure that parties intentions are aligned from the outset. This is particularly important where the transaction contemplates terms that are deal specific as was discussed in the recent case of ATE Farms Limited v AW Estates Scotland Limited 2023] CSOH 73 which highlights the significance of heads of terms and implications of getting them wrong.

Background

AW Estates Scotland Limited (“AWESL”) and Arjowiggins Scotland Limited (“AWSL”), former owners of Stoneywood Mill in Aberdeen, fell into administration in September 2022. ATE Farms Limited (“ATE”) agreed to enter into a sale and purchase contract for the purchase of the mill site, together with any machinery and other movables that had been used in the everyday running of the business.

ATE entered into a deposit and exclusivity agreement (“DEA”) with the administrators. The terms of the DEA required ATE to pay a £300,000 deposit to the administrators’ solicitors, to act in good faith towards the administrators and to diligently progress the negotiation and conclusion of the sale and purchase contract by 19 May 2023, failing which, 16 June 2023. If the sale had not concluded by 16 June 2023, then the deposit was to be forfeited by ATE and paid to the administrator unless the settlement had not occurred as a result of a breach of the terms of the DEA by the administrators.

The principal point of contention during negotiations was the incorporation of a clause relating to environmental liabilities. The clause had been included by the administrators’ solicitors who maintained such a provision was “non-negotiable”. The effect of the clause meant that ATE would assume all environmental liabilities of the administrators, AWESL and AWSL. As a result, ATE would be taking on liability for an external landfill site which was not owned by AWESL or AWSL but had been used to dispose of by-products produced by the mill. While the heads of terms had referenced some environmental permits, they were silent in relation to the external landfill site and ATE were not prepared to assume liability that extended beyond the site being purchased.

Unable to reach an agreement, ATE’s solicitors formally notified the administrators that the sale and purchase contract would not be concluded by the deadline of 19 May 2023 and cited a breach by the administrators of the terms of the DEA in failing to act in good faith towards ATE as the rational for the sale not being concluded.

Court of Session Decision

The case came before Lord Sanison in the Court of Session who acknowledged that the environmental liabilities extending to the external landfill site had not been disclosed in the heads of terms. Although not found to be in breach of their duty to act in good faith, the administrators’ subsequent insistence on the inclusion of a provision requiring ATE to indemnify the administrators, AWESL and AWSL for any environmental liabilities in connection with this external landfill site was therefore a material breach of contract which ATE was entitled to accept as bringing the DEA to an end. It was held that the sale and purchase agreement was not concluded as a direct result of a breach by the administrators’ obligations under the DEA and the court ordered the deposit to be returned to ATE.

Conclusion

Often administrators cannot foresee the full extent of the potential liabilities of a sale and purchase in an insolvency. However, this case acts as a reminder that where there are certain liabilities, indemnities or key terms specific to a deal, then these must be clearly set out in the heads of terms from the outset.