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Defending post M&A warranty claims: A recent analysis

  • United Kingdom
  • Litigation and dispute management
  • Mergers and acquisitions


1.   Summary of Key Points

In the recent decision of MDW Holdings Limited v James Robert Norvill and others [2021] EWHC 1135 (Ch), the High Court has delivered a judgment in a post-acquisition breach of warranty and misrepresentation claim which provides useful analysis on some of the key defences that Defendants/Sellers often run when defending SPA claims made by Claimants/Buyers. In particular:

Disclosure – The Seller argued that it was not liable for breach of warranty because the matters constituting the claim were “fairly” disclosed in accordance with the terms of the SPA. The Court made short work of dismissing this defence. Snippets of incomplete information contained in a disclosure bundle did not fairly disclose a long history by the target of non-compliance with environmental laws and regulations.

  • key points for buyers: Buyers should take comfort that the disclosure of snippets of information contained in a large bundle of documents (or a data room) is unlikely to constitute “fair” disclosure of a wider or systemic issue. 
  • key points for sellers: To ensure that warranties are qualified by disclosures, sellers should take care to ensure that the relevant information can be ascertained directly from disclosed documents (and not pieced together or extrapolated from a patchwork of different documents).

Buyer’s knowledge – The Seller argued that it was not liable for breach of warranty because the Buyer had knowledge of the matters constituting the claim. The Court also gave this argument short shrift. While the Buyer may have known about some one-off historic breaches by the target, it did not know the extent (or systemic nature) of the breaches or that they were continuing at the date of the SPA.

  • key points for buyers: Significant questions remain in the law as to whether a buyer could pursue a warranty claim in relation to known defects, even if there is not a relevant qualification in the SPA. However, the Court is unlikely to be critical of a buyer that is provided with some, but not all, relevant information. Partial knowledge which may be indicative of a matter later giving rise to a claim is unlikely to constitute “knowledge” for these purposes.
  • key points for sellers: Sellers are likely to need strong documentary evidence to be able to prove that a buyer had sufficient knowledge of a particular defect.

Time bar/notification – The Seller argued that it was not liable for breach of warranty because the Buyer had not complied fully with the notification requirements in the SPA and therefore its claim was time-barred. The Court rejected this defence, finding that the content requirement in the notification clause in the SPA set a “low threshold” and that the Buyer had complied with it. In any event, given that the Court concluded that the Seller’s conduct was dishonest, the Seller could not use this as a defence. 

  • key points for buyers – Time bar defences are very often run by sellers, if only to drive a settlement strategy. This case shows that the Court is prepared to take a sensible and pragmatic approach towards the buyer’s compliance with the content requirements of a notification.
  • key points for sellers – Time bar limitations remain powerful defensive tools given that they usually place a buyer in an ‘all or nothing’ scenario. However, clear words will be needed in an SPA if the seller requires that a particular standard of information be provided in the notification. 

Misrepresentation claims – The Buyer also claimed misrepresentation. The Seller argued that such claims were excluded by the ‘entire agreement’ clause in the SPA. The Court held that the drafting of the entire agreement clause excluded things said or done before the date of the SPA from having contractual effect. But it said nothing about the Buyer’s reliance on pre-contract representations in respect of non-contractual claims and did not therefore exclude tortious liability for misrepresentations.    

  • key points for buyers – Buyers can utilise any ‘gaps’ in an entire agreement clause to leave open the possibility of making a claim in misrepresentation.
  • key points for sellers – To exclude liability for misrepresentation effectively, the entire agreement clause must make clear that it excludes liability for pre-contract representations in respect of all potential claims, and that the parties have not relied on any such representations.

Quantum - The proper measure of damages for claims for breach of warranty as to the condition of an asset is the difference between (a) the value of the target on the basis that the warranties were true, and (b) the actual value of the target given that the warranties were false. Quantifying that diminution can be challenging and in this case the Buyer obtained judgment for in the region of just 30% of the amount claimed. 

  • key points - It is usually important for buyers and sellers to conduct early analysis on the calculation of damages in a warranty claim (often with input from valuation experts), particularly where financial caps in the SPA might preclude a claim if the value does not exceed a certain amount.  Buyers should seek to negotiate indemnities in respect of known risks.

2.   Background

By a share purchase agreement (“SPA”), the claimant, MDW Holdings Limited (“MDW”), purchased the entire share capital of G.D. Environmental Services Limited (“GDE”) from the three defendants (“Defendants”) for £3,584,224.

MDW alleged that GDE had systematically breached environmental law and unlawfully avoided the costs of environmental compliance, thereby increasing its profits to levels that could not have been achieved if it had acted lawfully; and that, in consequence, MDW had paid substantially more for the shares of GDE than they were worth.

MDW claimed damages on two different grounds. First, for breach of the warranties in the SPA. Second, for pre-contractual misrepresentations either on the basis of deceit or under section 2(1) of the Misrepresentation Act 1967.

3.   Warranty Claims

The Defendants were found to have breached numerous warranties under the SPA by reason of (amongst other things) GDE’s non-compliant practices and GDE having made false statements to regulators. The Defendants advanced three defences, none of which were successful:

3.1    Fair Disclosure

The SPA provided that “Disclosed” meant “fairly disclosed (with sufficient details to identify the nature and scope of the matter disclosed) in or under the Disclosure Letter.”

The Judge summarised the authorities on the subject of disclosure. In particular, he recounted the key principles from Triumph Controls UK Limited v Primus International Holding Company [2019] EWHC 565 (TCC):  

(i)   the commercial purpose of disclosure clauses is to exonerate the seller from its breach of warranty by fairly disclosing the matters giving rise to the breach.

(ii)   the disclosure requirements of the contract in question must be construed applying the usual rules of contractual interpretation, by reference to the express words used, the relevant factual matrix and the above commercial purpose.

(iii)   the adequacy of disclosure must be considered by careful analysis of the contents of the disclosure letter.

(iv)   a disclosure letter which purports to disclose specific matters merely by referring to other documents as a source of information will generally not be adequate to disclose fairly with sufficient detail the nature and scope of those matters. For that reason, disclosure by omission will rarely be adequate.

(v)   however, it is open to the parties to agree the form and extent of any disclosure that will be deemed to be adequate against the warranty.

(vi)   where disclosure is by reference to documents other than the disclosure letter, only matters that can be ascertained directly from such documents will be treated as disclosed.

In this case, the Court held that the disclosure clause did not exonerate the Defendants from liability for breach of warranty. Indeed, their submission that it did was described as “nothing if not bold”. On scrutinising the disclosure letter, it was clear that it did not detail the most significant breaches, including that GDE was routinely discharging leachate with contaminants in breach of permitted levels; had a history of non-compliance in this regard; and had provided false information to the regulator, who had threatened prosecution.

3.2   Buyers’ Knowledge

The SPA provided that the Defendants would not be liable for breach of warranty to the extent that MDW had actual knowledge of the matter, fact or circumstance giving rise to the claim.

The Defendants submitted that MDW knew that there had been breaches over a long period of time and thereby knew that there was a material risk that there would be breaches in the future. The result, they submitted, was that MDW had knowledge of all relevant matters, albeit not of all of the detail making up those relevant matters.

This defence was rejected. MDW (or its representative) knew that there had been some one-off breaches of contaminants limits. However, they had been informed (inaccurately) that those breaches were historic, not ongoing, and further that the regulator had agreed to double certain limits. Therefore, MDW’s limited knowledge could not be regarded as amounting to actual knowledge of the systematic and continuing breaches which were the subject of this dispute and had only later become apparent.

3.3   Time-bar / Notification

The SPA provided that the Defendants would not be liable for breach of warranty unless “notice in writing summarising the nature of the Claim (in so far as it is known to the Buyer) and, as far as is reasonably practicable, the amount claimed, has been given by or on behalf of the Buyer to the Sellers…prior to the expiry of the period 2 years commencing on the Completion Date”.

As is common in such clauses in an SPA, the notification requirement provided that a buyer would be barred from pursuing the claims, both if the buyer should fail to send the notification within the required time, and if the buyer should fail to satisfy the content requirements for the notification.

In this case, the Defendants made both arguments, submitting that certain of the claims were not notified on time, and, in respect of those that were, that the form of notification had not satisfied the content requirements of the SPA. In assessing this defence, the general principles summarised by Gloster J in RWE Nukem Ltd v AEA Technology plc [2005] EWHC 78 (Comm) were applied, namely that:

(i)   every notification clause turns on its own individual wording.

(ii)   due regard must be had to the fact that where such notification clauses operate as a condition precedent to liability it is for the party bringing a claim to demonstrate that it has complied with the notification requirement.

(iii)   that wording must, however, be interpreted by reference to the commercial intent of the parties.

(iv)   where the clause stipulates that particulars 'of the grounds on which a claim is based' are to be provided, the clause contemplates that the notice will be couched in terms which are sufficiently clear and unambiguous as to leave no such doubt and to leave no room for argument about the particulars of the claim.

(v)   in all cases, it is important to consider the detailed claim being made in terms of both the breach complained of and the remedy being sought, to ensure that it was a claim which was properly notified.

The SPA required that the notification “summarise…as far as is reasonably practicable, the amount claimed”. Difficulties often arise when the notification clause includes a requirement to include details of the amount claimed, which is notoriously challenging in a warranty claim. In this case, MDW’s notification specified a figure for the amount of the claim and made clear that such figure represented the diminution in the value of the shares when comparing the “warranty-true” and the “warranty-false” position. By the time it came to commence proceedings, MDW dramatically increased the value of its claim. However, in this case, the Court found that in doing the best it could at the time of the notification, MWD had met the content requirements in the notification letter.

In any event, the Court held that the time limit would not have precluded a because the relevant clause stated that it shall not preclude any claims which arise by reason of dishonesty and/or wilful concealment by the Defendants (which the judge considered the claims in this instance did). For this reason, the claims which were notified out of time were also allowed.

4.   Misrepresentation Claim 

The Defendants sought to argue that a misrepresentation claim was precluded by the ‘entire agreement’ clause contained in the SPA. The SPA provided that it “supersedes and extinguishes all previous … assurances, … representations and understandings between [the parties], whether written or oral, relating to its subject matter.” The Judge found that the purpose of such a clause was to make it clear that nothing said, written or done prior to the SPA creates contractual obligations or liabilities. It did not exclude reliance on prior statements or claims of a non-contractual nature (such as misrepresentation). In coming to this conclusion, the Judge recognised and approved of the remarks made in Axa Life Services v Campbell Martin Ltd [2011] EWCA Civ 133:

“…the exclusion of liability for misrepresentation has to be clearly stated. It can be done by clauses which state the parties' agreement that there have been no representations made; or that there has been no reliance on any representations; or by an express exclusion of liability for misrepresentation. However, save in such contexts, and particularly where the word 'representations' takes its place alongside other words expressive of contractual obligation, talk of the parties' contract superseding such prior agreement will not by itself absolve a party of misrepresentation where its ingredients can be proved" (emphasis added).

Accordingly, MDW was not precluded from bringing a claim for damages for misrepresentation and it was found that a number of pre-contractual written representations (which were contained in the due diligence index and responses) did give rise to actionable claims in misrepresentation. 

5.   Quantum

The proper measure of damages for breach of warranty claims is the difference between (a) the value of the target on the basis that the warranties were true, and (b) the actual value of the target given that the warranties were false. In this case, both sides adduced expert valuation evidence which the Judge considered in detail. The Court was immediately sceptical as to the value claimed by MDW, and, working through the analysis, determined that damages should be £382,600 and not £1,210,439 as claimed by MDW. The same measure was said to be appropriate for the (alternative) misrepresentation claim and so the claim in tort did not ultimately improve MDW’s position.