Warranty Claims, Be Careful What You Wish For!

Share on FacebookTweet about this on TwitterShare on Google+Share on LinkedInEmail this to someone

The Hut Group Ltd v Nobahar-Cookson and another

In a recent case the High Court has considered whether a limitation of liability clause in a share purchase agreement was effective in barring a Buyer’s claim for damages for breach of warranty.

Background

Pursuant to a Share Purchase Agreement (SPA), the Buyer had agreed to buy the entire issued share capital of a Target Company, which was owned by the defendant Sellers.  Following completion of the deal, the Buyer brought a claim for a breach of warranty in relation to the Target’s management accounts.

In their defence, the Sellers contended that the limitation clock started ticking once the Buyer was aware of the facts giving rise to a breach, and not when it became aware that it had grounds for a claim.  They argued, therefore, that the Buyer had failed to comply with its obligations under the SPA, to serve notice of the claim within 20 business days of becoming aware of the matter.

Further still, the Buyer sought to defend the claim on the basis that any notice of the claim was deficient because it lacked detail as to the claim and the likely quantum involved.

However, the Seller also issued a counterclaim, alleging breaches by the Buyer in relation to its own accounts warranties which had been given because Consideration Shares were issued as part of the purchase price.  It was accepted by the parties that the breach had arisen due to the fraudulent activities of the Buyer’s financial controller and as such, the Seller contended that the Buyer’s limitation of liability clauses were ineffective.  The Buyer submitted that the fraud could not be attributed to the Buyer, as the financial controller did not represent the Company in relation to the SPA.

Judgment

In its decision as to the timing of the Buyer’s notice of a claim, the Court held that the clause “becoming aware of the matter” could be construed as meaning “becoming aware of the claim,” and as such, the Buyer had sufficiently complied with its requirement to notify the Seller within 20 business days.

In addition, the Judge considered that the SPA did not impose an obligation on the Buyer to provide substantial detail and, in fact, the notice provided was sufficient for the purposes of the contract.

However, the Buyer’s victory went no further.  Instead, the Court upheld the Sellers’ counterclaim for a breach of warranty given by the Buyer in respect of its accounts.  The Court considered that the fraudulent was attributable to the Buyer itself: the financial controller had in fact taken a significant role in the deal since the information he provided was a precursor to the sale proceeding.  Further still, the Judge felt that the Buyer’s finance department had created an atmosphere “which allowed fraud to flourish.”  Consequently, the matter fell outside the financial cap on the Buyer’s liability for non-fraud breaches.

In summary, whilst the Buyer was awarded over £4.3m in damages, it was ordered to pay the uncapped sum of £10.8m to the Sellers.

Comment

The case serves as a welcome reminder as to the importance of precise contractual drafting.  In order to avoid costly litigation, parties should look to ensure that their agreement sets clear obligations for buyers and sellers.

Sellers will be keen to ensure that their liability is sufficiently limited by reasonable time restrictions and that an objective standard is required; a seller’s position is far more uncertain if the claim is subject to the buyer’s particular knowledge of facts, rather than what it ought to have been aware of.

At the very least, buyers will be wise to ensure that their precise knowledge of an actionable claim is the starting point for any time-related limitation clause.

Forbes Solicitors regularly advise on and act for both Sellers and Buyers in Corporate Restructuring deals.  For further advice and assistance please contact Nick Pickup in the Business Law Department on 0800 037 4628 or send us an enquiry via our contact form.

Nick Pickup

About Nick Pickup

Nick Pickup is a Solicitor within the Corporate and Restructuring team at Forbes Solicitors. Nick’s blogs cover his specialism of work on mergers and acquisitions, business start up’s, joint ventures, shareholder issues, company restructures and general company advice.
This entry was posted in Corporate & Restructuring and tagged , , , , , .

Leave a Reply

Your email address will not be published. Required fields are marked *