Don't Breach A Warranty Through Failure To Fulfil A Third Party Contract

When entering into a contract, one party may be asked to give warranties to the other party relating to a number of different aspects of the state of the company, including the status of and ability to perform any third party contracts that party may be involved in. The recent decision of the Court of Appeal in the case of Belfairs Management Limited v (1) Matthew Sutherland (2) Christie Jane Sutherland [2013] EWCA Civ 185 should be a warning to parties that they need to be careful when entering into such warranties in order to protect themselves from being found in breach of warranty at a later date.

The Belfairs case involved the sale in February 2008 of 60% of a company Waveform Solutions Limited ('Waveform'), by the husband-and-wife defendants Mr and Mrs Sutherland, to a company called Belfairs Management Limited ('Belfairs') for the sum of £2 million. Waveform, of which Mr and Mrs Sutherland were the only shareholders, was a supplier of communications and information technology, as well as a software developer that sold its own products.

In late 2006 Waveform became involved in the NHS National Programme for IT. Its application was successful notwithstanding the fact that Mr Sutherland knew that some of Waveform's existing programmes were not up to the relevant NHS criteria. Mr Sutherland was keen to get additional investment for Waveform in order to enable it to fulfil its obligations under the NHS contract, and a share purchase agreement ('SPA') was entered into with Belfairs on 11 February 2008. The NHS contract itself was not signed until 29 February 2008, however it was referred to throughout 2007 in correspondence with Belfairs. Indeed, Waveform's valuation of £2 million was founded on the basis that, in the words of Belfairs' accountant, "the NHS contract is solid and continues".

By August 2008 it was apparent that Waveform was not going to meet the deadline of releasing the compliant product. In November 2008 Waveform entered into administration, followed by a creditors' voluntary liquidation in February 2009. Belfairs sought damages from the defendants for alleged deceit and breach of warranties in the SPA.

The judge dismissed Belfairs' claim for deceit and held that the defendants were not in breach of the warranty in paragraph 16.1.5 of Schedule 3 of the SPA, which stated as follows:

16.1.5 The Company [Waveform] is not a party to any agreement, arrangement or commitment which ... cannot readily be fulfilled or performed...