A recent High Court case sounds a note of caution for both buyers and sellers within corporate transactions seeking to limit their liability in respect of warranty claims:
sellers must draft clauses with sufficient certainty to ensure the protection is effective;
both parties risk liability for acts carried out by their employees – and must give consideration to their own internal affairs, as well as seeking protection through warranties from other parties.
The Hut Group Ltd v Nobahar-Cookson and another concerned a share purchase, where the buyers bought the entire share capital of the company, paid for partly in cash and partly by way of an allotment of shares (which would be based on the company’s accounts going forward).
The High Court considered two claims - a claim by the buyer, and a counter-claim by the seller, both for a breach of warranty.
As is general in such transactions, the seller sought to limit warranty claims made against it by tightly defining the circumstances in which a claim could be brought. The warranty provided that in order to be valid, the buyer had to serve notice of the claim:
"...(specifying in reasonable detail the nature of the claim and, so far as practicable, the amount claimed in respect of it) as soon as reasonably practicable and in any event within 20 Business Days after becoming aware of the matter".
The buyer brought a claim, which the seller challenged as (a) being out of time, and (b) insufficiently defined.
As regards the timing, the seller claimed that the 20 day period would start to run when the buyer became aware of the facts that could lead to a warranty claim, whereas the buyer maintained the clock would start to run when it became clear there was an actionable claim.
The court agreed with the buyer – making it clear that, given the wording of the warranty in this case, simple awareness of facts or irregularities would not have been enough to start time running; that started when the buyer became aware of an actionable claim.
- As regards the lack of information provided within the notice, the court also held that the warranty, as drafted, did not require any particular details to be given – and therefore the buyer had provided sufficient information and the notice was valid.
Sellers should therefore be cautious about relying on specific warranties for protection, unless these have been worded sufficiently clearly. Parties should consider when the clock starts running, and what details or formalities are required for a valid notice.
The seller then counter-claimed regarding errors it had identified in accounts prepared by the buyer prior to the deal, about which (given those accounts would affect the share price element of the consideration) the buyer had also given warranties. It transpired that the buyer’s accounts were affected by a fraud carried out by the buyer’s financial controller, inflating the accounts by over £5m.
The buyer accepted liability for the breach, but the parties continued to argue over the quantum of the claim. The SPA contained a cap on liability for breach of warranty, save in cases involving fraud. The seller alleged this was just such a case, but the buyer disagreed, saying the financial controller did not act on behalf of the company.
The court held that even though the financial controller was neither a director nor a ‘forward-facing’ member of the buyer’s staff, the controller “held a critical role within THG's finance department, and was heavily involved in the acquisition” and also that “this was not a case where an employee had gone off "on a frolic of his own"; it is one where the fraud was the result of the working culture and practices of the company as a whole.” The fraud was therefore attributable to the company, and the warranty claim cap did not apply.
Whilst it is to be hoped that a fraud such as this would be rare, this is a useful reminder to sellers to ‘check your own house is in order’ and to examine the information which will be provided to the buyer with a critical eye.