Warranties are commonly found in a range of commercial agreements including within share purchase agreements (“SPAs”) and are one type of legal protection that a buyer may require to be included in an SPA. The essential reason for this is that in the absence of suitable warranties, any buyer may have little remedy in law regarding what is actually being bought.
Therefore it is usual for an SPA to contain detailed warranties that cover numerous aspects of the business wherein the seller makes detailed binding legal statements concerning the affairs of the company. By way of illustration such statements will include the following areas: its financial position, accounts, commercial contracts, property, employees etc. The warranties are usually tailored to the specific business.
Where the statements made by the seller have later proved to be false then the buyer will have a legal remedy and may be entitled to bring a claim for breach of warranty.
In order to illustrate how this works in practice, and the relevant considerations that will apply, let’s imagine that Company A has entered into an SPA with Company B to the effect that Company A has acquired the entire shareholding in Company C that was previously held by Company B. The SPA entered into contained various warranties given by Company B as referred to above but in particular a warranty that stated that, “the audited accounts of Company C give a true and fair view and comply with the Companies Acts and UK generally accepted accounting principles.” As part of the process, Company B will have provided such audited accounts to Company A prior to the SPA being entered into and the latter would have carefully considered and relied upon the same in deciding whether to proceed with the purchase. However, it later transpires that relevant information contained in the audited accounts was false or misleading and that the effect is that Company A has paid far too much to Company B for the shares in Company C.
In these circumstances, Company A will seek to rely upon the warranty given by Company B regarding the accuracy of the accounts of Company C and look to bring a claim in damages. This is likely to involve a calculation as to the difference between what Company A paid for the shares and their actual value and will necessitate expert accounting evidence. The burden of proof will rest upon Company A to show that: (1) Company B has breached the warranty i.e. that the contractual statement made in the SPA was false or misleading; and (2) that such a breach caused the loss suffered by Company A. Both of these issues can be subject to much dispute should a claim be brought.
There is though an additional factor which is often relevant and which also commonly appears in the SPA. It is likely that although the seller will have given warranties, it will also have sought to limit their effect by imposing certain financial and time restraints. These, like the wording of the warranties themselves, are often subject to much negotiation between the parties regarding the terms of the SPA.
The seller will seek to limit the value any claims for breach of warranty as much as possible in the SPA; usually it will look to limit any small claims altogether whilst at the same time place an overall maximum on the value of the total claim that may be brought.
Furthermore, the seller will look to include a provision in the SPA to the effect that any breach of warranty claims have to be notified by the buyer to the seller within a limited period of it becoming aware of the same and for any legal claim to be brought within a short period thereafter.
Advice for Buyers
Accordingly, if you are a buyer who suspects that the seller has breached the warranty terms, it is important that if you may wish to bring a breach of warranty claim in the future that you notify the seller as soon as possible and strictly in accordance with any timescale and procedure laid down in the SPA. If you fail to do this there is a real risk that you will not be able to bring any claim at all. Thereafter, you should calculate the likely loss, and consider how it is affected by any financial limits imposed in the agreement. Provided that any claim comes within the financial limit it is important that you obtain supporting evidence to prove the breach of warranty and loss sooner rather than later so that, if necessary, you are able to issue any proceedings promptly within the timescale laid down in the SPA.
Advice for Sellers
Alternatively, if you are a seller facing a prospective claim for breach of warranty, matters are largely in the hands of the buyer as to whether they intend to bring a claim. Tactically, if you are not concerned with seeking to settle the matter at an early stage, then it may be the case that you should simply await developments; buyers sometimes fail to appreciate the need to comply with any limits imposed by the SPA. If however, a buyer instructs a solicitor and you receive a letter of claim which sets out the factual and legal basis for the claim together with an explanation of the value, you should seek legal advice at the earliest opportunity.
Ison Harrison regularly advise and represent buyers and sellers in relation to all breach of warranty claims that arise out of SPAs and asset purchase agreements. Should you require assistance please contact Jonathan Robson or Ervin Shakaj by calling 0113 284 5000.