The law affords buyers very limited protection against the risk that the assets that they have bought are worth less than they believed. This risk is generally mitigated during the due diligence process but it can also be addressed by way of warranties. Warranties in SPAs and other transaction documents therefore serve an important purpose, in that they provide the buyer with a remedy if statements made about the company prove to be incorrect.
SPAs often impose restrictions on bringing a claim for breach of warranty, for example, a shortened contractual limitation period or a provision specifying the timing of an initial notice of claim. In T&L Sugars Limited v Tate & Lyle Industries Limited  EWHC 1066 (Comm), the SPA required the buyer’s warranty claims to be issued and served within a certain period, failing which they would be deemed to be irrevocably withdrawn.
Despite the existence of other recent authority to the contrary in Ageas UK Limited v Kwik-Fit (GB) Limited  EWHC 3261 (QB), the High Court concluded that the phrase “issued and served” implied service in accordance with the Civil Procedural Rules and that service in accordance with the SPA’s general notice provisions was insuffi cient. Nonetheless, the warranty claims were found to have been served in time.
In many cases, the SPA will also specify the required content of the initial notice. In The Hut Group Ltd v Nobahar-Cookson & Anor  EWHC 3842 (QB), the SPA contained a standard provision requiring the buyer’s notice of a claim to specify “...in reasonable detail the nature of the claim and, so far as practicable, the amount claimed in respect of it...”. The sellers argued that the buyer’s notice of a breach of warranty claim relating to the accuracy of the target company’s management accounts was defective because it understated the amount and did not set out the basis of the claim. However, the High Court rejected this argument, noting that, at this stage, not much information was contractually required.
Even if the necessary procedural steps are complied with, there will often be a substantial evidential dispute as to whether the warranties in question have been breached. That was the position in Bikam OOD, where the key warranty specified the number of subscribers who had signed up to the target company’s digital television service at completion. It was also the case in Sycamore Bidco Limited v Breslin & Anor  EWHC 3443 (Ch), where a number of familiar warranties given by the seller were said to have been breached, for example, as to the accuracy of the company’s accounts and the absence of any material breach of contract.
Perhaps most interestingly, Sycamore Bidco also addressed the typically knotty issue of how the buyer’s losses fell to be valued. It is well established that where a warranty in an SPA has been breached, the measure of loss is the difference between the value of the shares as warranted and their true value. However, this hypothetical exercise of determining what a willing buyer would have paid to a willing seller in the absence of a market can be fraught with difficulty. For example, it may turn on what the buyer would have done had the true position been known, which is an inquiry that raises questions as to the factors relevant to the buyer’s approach and potentially requires expert evidence to be elicited.
The buyer in Sycamore Bidco argued that the warranties given in the SPA were also representations in an attempt to sidestep the possibility that the quantum of the claim would be reduced by a valuation exercise. If the High Court had accepted that the warranties had this dual quality, the effect on the measure of damages would have been significant, as it would have enabled the buyer to recover a sum equal to, or in excess of, the consideration paid, as opposed to the far lower sums available for breach of warranty. However, the argument was firmly rejected and the position now must surely be that clear words are needed for this improbable outcome to arise.
Valuation was also at the centre of the dispute in Ageas (UK) Limited v Kwik-Fit (GB) Limited & Anor  EWHC 2178 (QB), where the underlying point of principle was whether hindsight or subsequent events could be relied on in order to value a company at the date of the breach. Without the benefit of any clear authority, the High Court concluded that it was permissible, but that this approach can only be justified if the overriding compensatory principle requires it, and if the parties have not agreed that the risk of the contingency arising should fall on one party or the other.
On this occasion, it could not be shown that the buyer would obtain a windfall and it was implicit in the parties’ bargain, as the deal was structured on a locked-box basis, that any change of position following the locked-box date should take effect to the buyer’s benefit. The court therefore rejected the argument put by the seller, in tandem with the buyer’s insurers, that the quantum of the buyer’s warranty claim should be reduced.
Matters following breach
Since the 2014 decision in Ageas, the courts have seen at least two further attempts to limit loss by reference to matters following the date of breach. On each occasion, the attempt has been unsuccessful.
In The Hut Group, the transaction involved the seller receiving shares in the buyer as part of the price, with the buyer giving various warranties in relation to the shares. It was expected that an initial public offering (IPO) would take place shortly after the sale, giving the seller an opportunity to realise more cash.
Following completion, it emerged that an accounting fraud had been committed by the buyer’s finance director, with the result that the buyer’s management and draft statutory accounts did not fairly present the company’s profits and losses in the period before the sale.
The seller admitted a breach of warranty. However, it argued that the buyer had suffered no loss or, at most, a very modest loss because, although the anticipated IPO had not taken place for reasons relating to the seller’s breach of warranty, the chance of an IPO had not been lost.
Adopting the same approach as in the 2014 decision in Ageas, the court confirmed the general position that it is not possible to rely on hindsight evidence, except in exceptional circumstances, such as the existence of cancellation rights in the event of a future contingency or contractual provision for post-contract adjustment of the price.
The same conclusion was also reached subsequently in Bir Holdings Ltd v Mehta  EWHC 3903 (Ch), following a breach of warranty by the seller as to the nature of the licences held by the target company at the time of the sale. Again, the absence of a windfall for the buyer that would offend the compensatory principle, coupled with a clear allocation of risk under the transaction contract, proved fatal to the seller’s argument.
An important issue for negotiation in many deals will be the value of the cap to be placed on the seller’s liability for indemnity and warranty claims. While higher limits can be provided with the assistance of insurance, it may transpire that the buyer’s actual losses substantially exceed the agreed cap.
If so, the buyer will want to explore ways to lift the cap although, in most instances, this will only be possible if there has been fraud. While proving fraud is invariably difficult and fact dependent, The Hut Group is a recent example of a case where it was possible to do so. On this occasion, the seller was able to prove, on the facts, that the fraudulent intent of the buyer’s finance director was to be attributed to the buyer, given his heavy involvement in the transaction and the nature of the fraud. As a result of the buyer’s fraud, the cap therefore did not apply to the seller’s breach of warranty claim.