Warranties: Know Their Limits

• Law Firm: Cooley LLP
• Subject Matter: Corporate/Commercial Law, Corporate and Company Law
• Author: Andrew Love and Alex Radcliffe
• Published date: 28 May 2023

In its judgment in Decision Inc Holdings Proprietary Limited v. Garbett and El-Mariesh,¹ the High Court of England and Wales provided guidance on the interpretation of two types of warranties commonly found in sale and purchase agreements (SPAs): warranties as to the accuracy of a company's records and warranties as to no material adverse change in respect of turnover and/or prospects.

The claimant in the case was ultimately successful. However, buyers should take note that, despite being provided with misleading information about the company's financial performance, the claimant was not able to make out its claims for breach of warranty as to the accuracy of the company's records or as to no material adverse change in respect of turnover. The sometimes surprisingly narrow interpretation of the scope of warranties must be appreciated, so that buyers can ensure they actually have the recourse they think they will.

Factual background

In October 2018, Decision bought the entire shareholding in Copperman Consulting from the defendants.

Copperman is an IT consultancy specialising in the design of enterprise performance management software. The nature of the business is that it will have a small number of large projects ongoing, with relatively little flow work. Accordingly, the continual winning of large contracts is essential. Inevitably, therefore, the negotiation between Decision and the defendants focused heavily on the future business that Copperman might be expected to win.

In May 2018, the defendants provided Decision with a forecast containing the following predictions:

• Earnings before interest, taxes, depreciation and amortization (EBITDA) for the whole of 2018 would be '1.6 million.

• Turnover for August 2018 would be '630,000.

• Turnover for September 2018 would be '627,000.

This forecast was not updated prior to the effective date.

In support of the forecast, the defendants provided Decision with documents in May and July 2018 setting out the expected 'pipeline' of future business. These documents also were not updated prior to the effective date.

In respect of Copperman's actual performance leading up to the sale, the defendants provided Decision with the following (surprisingly scant) information:

• Management accounts up to the end of July 2018, which showed monthly turnover for January to July 2018 as fluctuating between '315,000 - '515,000.

• A schedule of invoices for August, showing revenue for the month of '581,000.

• Despite the paucity...