Alain Levy Gwenaëlle de Kerviler September 30 2015 Can purchaser make claim under warranties while being aware of risk? AYACHE | Corporate Finance/M&A - France Alain Levy, Gwenaëlle de Kerviler Corporate Finance/M&A FactsDecisionCommentOn May 12 2015 the Supreme Court confirmed that, in the context of a share purchase, the beneficiary of seller's warranties is entitled to make a claim under such warranties even if, prior to the transaction, it was aware of certain facts affecting the warranted assets.FactsThe case concerned the transfer of a software company, Financière place Saint Charles (FPSC), to another software company, DP logiciels. In the warranties agreement, the seller had stated that the information listed therein was accurate and genuine, and that the purchaser and its shareholders had been informed in writing of all facts that could substantially affect the assets, goods, activities, operations and operating conditions of the group. When the purchaser later made a claim under the warranties to be indemnified for the malfunction of software commercialised by the target, the seller refused the claim, arguing that the purchaser had been aware of the risk of malfunction before the completion of the transfer.The Paris Court of Appeal rejected the purchaser's claim because:DP logiciels was aware that FPSC had conducted a due diligence review before the transaction;DP logiciels claimed to specialise in information technology and could have identified the software malfunction; andthere was no evidence of deceptive practices by FPSC's shareholders which were intended to mislead the buyer.DecisionThe Supreme Court rejected the Paris Court of Appeal's decision, considering that the seller had warranted the information provided to the purchaser without any qualification regarding the fact that the purchaser was aware of certain risks that could result in claims under the warranties. Regardless of whether the risk was known and accounted for or whether the likelihood of its occurrence was substantial, the Supreme Court took into account only the terms of the warranty agreement. The relevant prior knowledge and experience of the buyer were not sufficient to challenge the terms of the contract.CommentThe Supreme Court's decision confirms its previous case law regarding the performance of seller's warranties. It upheld the strict application of the law of contracts pursuant to Article 1134 of the Civil Code, which is in line with the seminal les Maréchaux case.(1) In this case, the Supreme Court clearly affirmed that a judge may sanction the use of a contractual provision in bad faith by a party, but cannot amend the substance of the contractual rights and obligations. As such, the Supreme Court dismissed the Paris Court of Appeal's decision, which had denied the specific performance of the guarantee seller's warranty because the buyer – who was the director and majority shareholder of the company sold – could not have ignored the accounting irregularities at stake.With this decision, the commercial section of the Supreme Court clearly reasserted purchaser protection on the basis of the governing law of the parties, pursuant to Article 1134 of the Civil Code. Regarding seller's warranty issues – which are mainly a conventional mechanism – the Supreme Court applies the provision strictly and does not take subjective considerations into account.For further information please contact Alain Levy or Gwenaëlle de Kerviler at AyacheSalama by telephone (+33 1 58 05 38 05) or email ([email protected] or [email protected]). The AyacheSalama website can be accessed at www.ayachesalama.com.(1) Cass Com, 10 juill 2007 06-14768.