Recent Guidance on Warranty Claims in Business Sales and Acquisitions: Clarity and Procedure

Warranties and Claims

Warranties are statements from sellers to buyers in relation to the assets and liabilities of a business which, if untrue or inaccurate, could allow a claim against the sellers for damages. They are often numerous, and contained within a sale and purchase agreement for the business (SPA), along with various seller protections and limitations including, importantly, time limits for bringing claims and a procedure for notifying claims. For their part, the courts have tended to adopt a strict and impartial interpretation of an SPA, which has affected both sellers and buyers in ways which they did not anticipate, and is a reminder that great care should be taken when drafting both an SPA and a buyer’s notification of claim to the seller.

Recent Case Law Guidance

• In Triumph Controls UK Ltd v Primus International Holding Co [2018], it was held that a requirement in an SPA for the buyer, when bringing a warranty claim, to “summarise the nature of the claim, so far as it is known”, did not preclude the buyer from bringing additional or different claims to those notified, when legal proceedings were eventually brought. A “summary” (for these purposes) did not require full particulars of the claim, and did not require every relevant warranty to be listed, so long as the claim was, on the whole, clear and the notice contained sufficient detail to include other types of claims that might arise.

• In Arani v Cordic Group Ltd [2021], part of the purchase price payable to the sellers had been kept in an escrow account, either to be released to the sellers at a later date, or to be retained in escrow to cover any warranty claim properly notified by the buyer. The SPA required the buyer to give the sellers notice of any claim with “full particulars of the claim” on or before the date due for the release of the escrow sum, failing which, the sellers would have no liability. The escrow sum was not released by the due date and, instead, on the following day the buyer’s solicitors gave notification to the sellers of a number of alleged breaches of warranty.

The buyer was ordered to release the escrow sum to the sellers on the basis that the buyer’s notice of claim did not contain “full particulars of the claim”, did not specify the actual claim by reference to the relevant parts of the SPA, did not provide an estimate amount claimed (which was itself a requirement under the escrow mechanism), and was made beyond the deadline for claims in the SPA. 

• In Teoco UK Ltd v Aircom Jersey 4 Ltd [2018], the buyer failed to meet the notification requirement in the SPA to provide “reasonable details” of the claim (including the grounds, and an estimate) as soon as reasonably practicable after it became aware of the claim (and in any event, before the long stop date) because it had not identified the specific warranties and provisions on which the claim was based. Further, in a previous lower judgement in the case, it was held that the buyer had not given notice of the claim as soon as reasonably practicable after it had become aware of it and so, again, had failed to comply with the notification requirements in the SPA (even though the reason for the delay was to enable the buyer to consider whether it could, and would, avoid the liability through alternative means).

Takeaways

• Buyers should be wary about accepting onerous notification requirements within an SPA. The wider they are, the greater the flexibility for a buyer. Conversely, the more stringent they are, the greater the potential for a seller to challenge a buyer’s claim (irrespective of the merits of that claim).

• Notification of a claim should state clearly that it is notifying a warranty claim, refer to the possible warranties being breached, and give (at the very least) sufficient information to enable a seller to evaluate any potential liability and make provision for it. The extent of the information required will be driven by the notification requirements in the SPA (and generally, in cases of doubt, courts have tended to be more sympathetic towards sellers than buyers).

• Buyers should undertake an assessment of possible claims in advance of any deadline for claims in the SPA. 

For further information about this, please contact Corporate and Commercial Solicitor Nick Mayles. Nick is a highly experienced transactional corporate and commercial lawyer. If we can assist with any questions you may have in relation to your business, please get in touch by emailing nick.mayles@tsplegal.com or call 01206 574431.