English M&A counsel are often heard telling their clients that breach of warranty claims will likely settle out of court. This certainly seems to have been the case in the past, and we are all aware of the paucity of binding authority on a number of commercial and legal issues related to warranties and disclosures. However, a recently decided case demonstrates that there is an exception to every rule. One of the issues stemming from this case was recently considered by the Court of Appeal, but it is the first instance judgment that should remind M&A practitioners of the legal issues that buyers should keep in mind when considering bringing a claim for a breach of warranty. It is a rare case involving breach of warranty claims under a share purchase agreement that reached the trial stage, was appealed, and proceeded to the determination of damages.
In March 2013, Triumph and Primus entered into a share purchase agreement (SPA) whereby Triumph purchased the share capital of three Primus companies that manufactured composite and metallic components for the aerospace industry. The agreement contained a number of business warranties, including in respect of the target’s industry accreditation, operational matters and (somewhat unusually) financial projections. The parties also agreed certain limitations of liability, such as a U.S. $1.5 million deductible and a U.S. $15 million overall cap for warranty claims. The buyer brought a claim for breach of certain of the warranties and related provisions in the SPA.
Notice of Warranty Claims
In its reply, the seller first claimed that the buyer had failed to give adequate notice of the claims. There have been quite a few cases in the past several years in which sellers successfully avoided liability because of the buyer’s failure to strictly comply with the notice of claims provisions in the relevant agreements.1 This judgment provides a helpful summary of the relevant cases and principles set out therein:
- every notification clause turns on its own individual wording, and it should be interpreted by reference to the commercial purpose that the clause was to serve.
- in the case of breach of warranty claims under a share purchase agreement, such commercial purpose includes that the seller should know at the earliest practical date in sufficiently formal written terms that a particularised claim for breach of warranty is to be made so that they may take such steps as are available to them to deal with it, including to enable discussions to take place between the parties.
- where the clause stipulates that particulars “of the grounds on which a claim is based” need to be given, 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.
- however, no more than a general description of the nature of the alleged breaches is needed to allow the process of investigation / negotiation to begin.
- where notice is in effect a condition precedent to liability, it is for the party bringing a claim to demonstrate that it has complied with the notification requirements.
- 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.
Under the SPA, Triumph was required to summarise the nature of the claims as far as known and the amount claimed. Mrs Justice O’Farrell concluded that this would not include full details or particulars of the claims, such as required in a pleading. However, the description and quantification of the claims should be such as to give formal, unambiguous notice as to the basis of the allegations, so that the seller could investigate, respond to and make financial provision for the claims.
On the facts of this case, the judge held that the purchaser had given adequate notice of its warranty claims. However, the judge also found that the notice did not include details of Triumph’s other claims, which were ancillary to the breach of warranty claims and which it sought to make in its pleaded case. [RMW1] This finding was crucial to the question of the overall liability cap appliable to Triumph’s claims. Since the warranty claims were capped at $15 million in aggregate (but other claims were not capped), the recoverable amount by the buyer was reduced by approximately $50 million. This should serve as a reminder to potential claimants to consider both the alleged breaches and the applicable notice requirements as early in the process as possible.
Disclosure Against Warranties
As is the case with the limitations of liability provisions, seller warranties and related clauses in acquisition agreements (e.g., seller’s knowledge and what constitutes fair disclosure) are often heavily negotiated, and the parties’ respective counsel would typically take a lead on them. However, even though warranties are key to giving buyers post-completion protection against both known and unknown risks associated with the target business, in practice reported cases dealing with breach of warranty claims in the English courts are few and far between.
This judgment provides a good example of the detailed factual and legal analysis that the court is likely to conduct when considering such claims, including sellers’ defence that the relevant facts and circumstances have been adequately disclosed. It reiterates the key principle that when it comes to the adequacy of disclosures against the warranties, 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 (i.e., that such disclosures are used to exonerate the seller from its breach of warranty by fairly disclosing the matters giving rise to the breach).
Since the Court of Appeal’s decision in Infiniteland,2 it is established that the courts will apply the specific standard agreed by the parties and will not imply into a contract a standard of disclosure from another case. However, where the parties fail to agree to a specific standard (e.g., by simply stating that seller’s warranties are subject to matters “disclosed”) or rely on the well-established concept of “fair disclosure,” the courts will have regard to the principles developed in past cases. The judgment in Triumph Controls contains a useful summary of the relevant cases and such principles.3
In this case, the SPA permitted Primus to qualify the warranties by matters “fairly and clearly disclosed in writing in or under the Disclosure Letter (with sufficient detail to identify the nature of the matter disclosed)”. It was further agreed in the Disclosure Letter that all matters identified in the documents made available to the buyer in the online data room would be deemed disclosed. Such general disclosures of the contents of a data room are usually resisted by well-advised buyers, at least as a starting position, but a lot depends on the bargaining positions of the parties.
On the facts of this case, the judge found that the seller had clearly and fairly disclosed the various operational failings of the target businesses against the various warranties on which Triumph relied in its pleaded case. She reached this conclusion because:
- the SPA permitted disclosure to be given “in or under” the Disclosure Letter. It did not require every breach to be set out expressly in the letter.
- the parties agreed that disclosure could be given by the documents in the data room. Given the volume of documentation involved, this was a sensible and practical approach.
- the agreed disclosure standard did not require details of the extent, or scope, of the matter to be disclosed, but only its nature.4
The last point emphasizes the weight that the courts will give to the specific wording of the disclosure standard agreed by the parties.
Warranties on Forward-Looking Projections
It should be noted that Triumph’s claim succeeded in respect of the breach of a non-operational warranty that, so far as the sellers were aware, the forward-looking projections (on which the purchase price for the shares was based) relating to the target companies had been honestly and carefully prepared. Acquisition agreements often contain express disclaimers of liability by the sellers in respect of the accuracy of the forecasts, estimates, projections, statements of intent or statements of opinion. Primus did not warranty the accuracy of the forward-looking projections made available to Triumph, but it did agree to stand behind the standard of their preparation.
The term “carefully prepared” was not defined in the SPA, and the judge applied the plain and natural meaning of the words, namely that the forward-looking projections were warranted to have been prepared with care by those who had the required skills and knowledge. The test is an objective one. Careful preparation required that the projections should be “credible and reliable, by reference to evidence-based assumptions or subject to expressly identified risks and aspirations.” The judge concluded that Primus had failed this test and Triumph was entitled to damages based on the difference between the price agreed on the basis of such forward-looking projections and what the price would have been, using the same method of calculation, if the properly adjusted projections had been made, subject to the contractual cap of $15 million.5
English law requires an injured party to take steps to minimise its loss and to avoid taking unreasonable steps that increase its loss. It cannot recover damages for any loss which could have been avoided by taking reasonable steps. That said, the burden of showing that an injured party failed to mitigate is a heavy one.
Primus claimed that Triumph overreacted when faced with the loss of the required industry accreditation by the target companies, following an audit. The temporary cessation of supplies to the customers was unnecessary, and any loss was limited to the modest, additional costs of re-accreditation.
However, it is well established that, provided that a claimant acts reasonably in adopting remedial measures to mitigate the impact of a breach of contract, it will be able to recover the costs of such measures even if an alternative course of action can be identified by the party in breach.6 Therefore, the judge held that Triumph was entitled to damages to reflect the loss caused by the immediate suspension of production, the additional conditions imposed by customers, the disruption to business and the additional costs of regaining accreditation.
Primus sought permission to appeal on a number of issues, including those outlined above, but were allowed to proceed only on one of them, the meaning of “goodwill” in the limitations of liability provisions in the SPA.
The Court of Appeal’s views can be summarised as follows. In the absence of some unusual, technical or non-legal meaning expressly assigned by the parties to this term in the relevant contract for the sale of a business, the ordinary legal meaning of “goodwill” would be interpreted to mean the good name, reputation and connections of a business. This is distinguished from the particular or specific meaning attributed to the term by accountants, e.g., a proportion of the purchase price not referable to the fair value of identifiable net assets on the acquisition of a business.
Even if the issues that are of most interest to English M&A lawyers have not been considered by the Court of Appeal, the first instance judgment will serve as an important reminder of how English courts are likely to approach breach of warranty claims in practice, especially in respect of notices of claim and the standard of disclosure against the warranties.
Mrs Justice O’Farrell’s judgment should also be read as a model of clarity and organisation, as was the view of the Court of Appeal, and will help M&A practitioners in drafting effective agreements.
- See, for example, Dodika Ltd v United Luck Group Holdings Ltd  EWHC 2101 (Comm) and Towergate Financial (Group) Ltd v Hopkinson  EWHC 984 (Comm)
- Infiniteland Ltd v Artisan Contracting Ltd (2005) EWCA Civ 758
At pp. -
Unlike the wording of the relevant provision in the agreement considered in New Hearts Ltd v Cosmopolitan Investments Ltd  2 BCLC 249 (Court of Session): “full, fair, accurate and clear, with sufficient details to identify the nature and scope of the matter disclosed.”
- Following exert determination, in her second judgment ( EWHC 2216 (TCC)) Mrs Justice O’Farrell held that Triumph would have reduced the purchase price by a total of US$5,701,570 to reflect the reduction in the forecasted performance of the companies, and that Primus would have accepted that reduced price. There was a deductible of US$1.5 million stipulated in the SPA, which left the damages awarded by the judge to Triumph in the sum of US$4,201,570.
- See, for example, Man Nutzfahrzeuge AG v Freightliner Ltd  EWHC 2347 (Comm) per Moore-Bick LJ at  &