Showcasing the Best of Welsh Business

Breach of Warranty – The Dangers of Non-Disclosure

SHARE
,

Greenaway Scott have previously reported upon the upon the key differences between warranties and indemnities and their uses.

Here, they consider the importance of adequate disclosure against warranties contained in a share purchase agreement (SPA). The importance of which has been highlighted in the recent High Court decision of Liberty Partnership Limited v Tancred [2018].

Breach of warranty

A claim for breach of contract can arise if any warranty given by a seller can be proved to have been untrue.

A seller will (or should) try to avoid liability by disclosing relevant information that, if left undisclosed would put the seller in breach of warranty.  The standard of disclosure that a seller is required to meet in its specific disclosures against the warranties is normally defined in the SPA.  If a seller fails to meet the contractually agreed standard of disclosure, then they are at risk of a claim.

Depending on the warranty that has been breached, and the value of the target company, damages may be payable to put the buyer in the position it would have been if the contract had not been breached.  Loss is usually calculated as the difference between the value of the shares if the warranty had been true and their actual value, i.e. the difference in value of the shares with and without the breach.

In normal circumstances, any claim for breach must be made within the time period specified in the Limitation Act 1980, which is within 6 years from the cause of action for breach of contract claims, or within the time period specified in the contractually agreed limitation period.

Liberty Partnership Limited v Tancred [2018]

In Liberty, the SPA was executed as a deed in November 2007. The SPA contained warranties given by the seller and a contractually agreed limitation period for the bringing of claims for breach of those warranties. The contractual limitation period agreed was 18 months, save for instances of “wilful concealment”.

The buyer later alleged breaches of warranty and issued proceedings in November 2013, just within the 6 year limitation period.  Given the contractual limitation period of 18 months, the buyer would have to show “wilful concealment” to proceed with those claims.  The buyer sought to make amendments to its case to bring in additional claims.  The seller asserted that any new claims would be outside the 6 year limit and statute barred.

The Court considered whether a longer limitation period was applicable, on the basis that the SPA was executed as a deed.

It concluded that a deed “executed under seal” is a “specialty”, which, for the purposes of the Limitation Act, means that a 12 year limitation period would apply.  The Court went on to consider all allegations of wilful concealment, but decided only three of them fell outside the 18 month contractual limitation period.

This case highlights the importance of a seller adequately disclosing against warranties that it is giving to the buyer.  If the seller fails to disclose certain matters, it not only leaves them open to warranty claims within the contractual limitation period in the SPA, but potentially a period of 12 years, if the SPA was executed as a deed.

Summary

So with that in mind, what are the takeaways here?

There are no specific reasons for a SPA to be executed as a deed.  Usually, the terms which would be required to be executed as a deed (such as power of attorney) can also be achieved in a separate document.  However, a SPA properly executed as a deed may offer a buyer some protection under the Limitation Act for a period of 12 years, rather than 6 years for a simple contract.  From a seller’s perspective, it is preferable for the SPA to not be executed as a deed because of these implications.

As a seller, it is generally better that you disclose properly against the warranties and also ensure that the SPA contains adequate contractual limitations.  A seller will not wish to be at risk of warranty claims for a maximum period of 12 years.

As a buyer, you will of course seek to push these points firmly in the reverse direction to resist restrictive contractual limitations, or at least seek adequate exceptions based upon knowledge and concealment, to protect yourself against any potential surprises down the line.

Proper legal advice should be sought when considering your position on an acquisition or disposal of shares, to ensure that potential pitfalls surrounding disclosure, from both a buyers and sellers position, are avoided.

The information contained in this article is for information purposes only and is not intended to constitute legal advice. If you require further information, our corporate team would be more than happy to assist you. Please contact us at [email protected] or call us on 029 2009 5500 to speak to one of our team.

Alternatively, please submit a quote through our website at www.greenawayscott.com/get-a-quote.