Post Transaction Disputes: Bringing Warranty Claims ' Key Considerations

• Published date: 09 February 2023
• Subject Matter: Corporate/Commercial Law, Corporate and Company Law, Contracts and Commercial Law
• Law Firm: Lewis Silkin
• Author: Mr Mark Lim and Nigel Enticknap

The current economic climate may mean that recent purchasers of companies are looking to achieve an after-the-event price reduction, especially where the value of the company they have purchased may have fallen. One way of doing this may be to make a claim under the warranties in the share sale and purchase agreement ("SPA").

What is a warranty?

A warranty is an assurance or promise given in a contract by one party to another. In the context of an SPA, the buyer will typically seek various warranties from the seller regarding the company that it is purchasing, for example:

"The Accounts show a true and fair view of state of affairs of the Company as at the Accounts Date"

"The plant and machinery is in reasonable repair and condition".

Breach of a warranty may give rise to a claim in damages (see further below "What is the value of the claim?").

Has a warranty been breached?

A buyer will first need to consider if any warranties have been breached. This may require some factual investigation and/or input from a suitably qualified expert (often an accountant).

For example:

• If the seller warranted that they were not aware of a particular fact or facts (e.g. they were not aware of any claim being threatened against the company, or a customer indicating an intention to cease trading with the company), the buyer is likely to need to carry out some investigations of the company's emails and other documentation to see if there was a breach.

• If the buyer considers that there has been a breach of a warranty relating to the accounts, they are likely to benefit from the input of someone with expertise in accountancy.

Did the seller make a relevant disclosure against the warranty, or did the buyer otherwise have relevant knowledge?

SPAs typically provide that the buyer shall not be entitled to claim that a warranty has been breached if the matter, fact or circumstance giving rise to that breach of warranty has been "disclosed". Typically, matters are "disclosed" in a disclosure letter given with the SPA.

It is also standard practice for a buyer to be barred from making a breach of warranty claim if the buyer had (actual) knowledge at the time of entering into the SPA of the facts or circumstances giving rise to the claim it is now seeking to make.

The buyer should therefore consider whether the seller made a (sufficient) disclosure against the relevant warranty, or if it could be said that the buyer had relevant knowledge of the facts or circumstances giving rise...