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High Court considers multiple aerospace SPA warranty claims

High Court considers multiple aerospace SPA warranty claims

  • United Kingdom
  • Corporate - Deal alert
  • Aerospace, defence and security
  • Diversified industrials


What's happened?

The High Court has considered multiple warranty claims under an aerospace SPA. The case from earlier this year is interesting due to the range of warranty claims considered and the court’s interpretation of the relevant SPA provisions.

Of particular interest is the successful claim for breach of a warranty that forward looking projections (“FLP”) had been ‘carefully prepared’ and the test that the court applied in making its determination.

What did the case say about 'careful' preparation of FLPs?

The test to be applied was an objective one. The plain and natural meaning of the words was that the FLPs were prepared with care by those who had the required skills and knowledge. The FLPs should be credible and reliable by reference to evidence-based assumptions or subject to expressly identified risks and aspirations.

The experts in the case agreed the following steps to producing a ‘carefully prepared’ forecast (noting that there was no accounting definition or definition in the SPA):

  • consider the latest available financial and operational information up to the date of finalisation of the forecast.
  • consult with relevant members of management with appropriate operational and specialist knowledge.
  • reflect the forecasting practice in that particular business and industry.
  • document the basis of assumptions.
  • all assumptions should be subject to a process of review and challenge carried out by somebody independent of the preparer of the forecast

The judge found that the FLPs had not been carefully prepared as they failed to take into account, properly or accurately, key assumptions, with the result that they failed to adequately model the known operational and financial position of the target. Had the target’s long range plan been properly adjusted, the court concluded that the buyer would have lowered the purchase price. Accordingly the seller was found to be in breach of warranty.

What else did the case cover?

  • the target’s NADCAP accreditation was found to fall within the natural meaning of the words ‘permit’ or ‘licence’ and therefore within the scope of a warranty on holding and complying with licences and permits.  Evidence was provided of systematic non-conformity in parts of the quality processes and policies pre-completion which ultimately resulted in loss of the accreditation post-completion.  However, the seller escaped liability as the warranty was qualified by the word ‘material’ and the judge’s view was that ‘material compliance’ did not mean ‘strict compliance’ and the target was sufficiently in conformity to retain the accreditation at completion. 
  • the court upheld the SPA standard of disclosure, being ‘fairly and clearly disclosed in writing in or under the Disclosure Letter (with sufficient detail to identify the nature of the matter disclosed)’, finding that this had been met in relation to the disclosure of customer complaints in the data room.  The buyer argued that the true and full extent of the issues that resulted in the relevant warranty claims had not been disclosed.  However, the court found that the seller had fairly and clearly disclosed the nature of the issues.  The fact that the SPA definition did not include the words ‘extent’ and ‘scope’ and the buyer had accepted general disclosure of the data room meant that the disclosures made were sufficient to exonerate them from liability.
  • interestingly, the time limit on bringing warranty claims was held to apply to a split exchange and completion provision requiring the seller to notify breaches of warranty immediately prior to completion.  As the buyer had not notified the seller of the claim for breach of this provision within the time limit for bringing warranty claims it was precluded from pursuing that claim.
  • the court also considered whether adequate notice of the claims had been given and followed previous authority that it was not necessary to give full details or particulars as might be required in a pleading – a description and quantification of the claims which was formal and unambiguous as to the basis of the allegations was sufficient.

Damages related to the FLPs warranty claim were to be based on the difference between the price agreed and what the price would have been if the long range plan had been properly adjusted.  This was to be calculated on a discounted cash flow basis as the companies were sold as a going concern, remained active and their value was in revenues driven by production, rather than the value of underlying assets.  This was consistent with the financial model used by the buyer in agreeing the purchase price.

What to take away?

  • warranties on FLPs – sellers will not typically go as far as warranting the accuracy of FLPs but may be asked to give some comfort on the standard of preparation. The case provides some helpful guidance on what may constitute ‘careful’ preparation of FLPs which may help sellers evaluate whether they are able to warrant FLPs to this standard.
  • warranties on accreditations - where accreditations are core to the operation of the target’s business (eg in sectors such as aerospace), buyers should consider obtaining specific accreditation warranties rather than relying on the general compliance warranties (and beware of accepting amendments that dilute these to ‘material’ compliance), ensure that thorough due diligence has been undertaken on conformity and any issues identified are evaluated in the context of the impact that loss of accreditation could have on the business and ensure that any issues are dealt with swiftly post-completion.
  • standard of disclosure – the case is further evidence that courts will typically uphold the express wording of the standard of disclosure in the SPA. As ever, this is a matter for negotiation but omission of the words ‘scope’ and ‘extent’ combined with general disclosure of data room documents proved to be powerful tools for the seller to avoid liability in the case. This passed the burden of making a proper assessment of the issues disclosed in the data room onto the buyer which would have needed to seek further protection (eg indemnity or price reduction) to cover off these issues.
  • limitations on warranty claims – take care when drafting the SPA definitions of ‘Claim’ and ‘Warranty Claim’ to ensure it is clear precisely which types of claims the limitations apply to. On split exchange and completion deals, if there are gap provisions related to warranty claims, consider expressly carving them out of these definitions if the intention is that limits on warranty claims should not apply.

 Useful links

Triumph controls UK Ltd v Primus International Holding Company


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