When does a breach of warranty mean dough?

When you buy or sell a business, each warranty is very important.  If the seller gets even one warranty wrong, it can cost a lot of money!

A warranty is a contractual representation made by the seller to the buyer as to the specific quality of the goods or services being sold.  If it is wrong or misleading, the buyer may well have a claim for breach of contract or misleading conduct and will seek damages.

For example, the seller of a bakery business might warrant that: –

  • following the agreed accounts date, there were no agreed price reductions or discounts which would materially affect the profitability of the seller; and
  • there had been no material adverse change in the trading position of the seller since the accounts date.

Neither of these warranties is unusual.

However, if certain circumstances were brought to the attention of the buyer before the warranties become live and those circumstances would be reasonably likely to give rise to a warranty claim, the ability of the buyer to make a successful breach of warranty claim is removed.  This is known as the knowledge exception.

In the English case of Finsbury Food Group Plc v Axis Corporate Capital UK Ltd [2023] EWHC 1559 (Comm) (26 June 2023), very similar warranties to the ones above were considered at length. The buyer of a bakery business said that there had been recipe changes and product price reductions by the seller which it said were in breach of the first warranty above and that this also amounted to a material adverse change in the trading position of the seller.

The High Court of England found that there had been recipe changes and price reductions, BUT:-

  1. these had occurred before the accounts date and so the warranty could not have been breached;
  2. changes to recipes and consequent price changes were part of the ordinary course of business and were not an adverse material change; and
  3. the buyer was being untruthful in what it said it knew, and the knowledge exception applied.

What is a “material adverse change” will depend on context and the specifics of the situation – so there are no hard and fast rules.  What is material for one business, may not be material for another.

Of course, the decision in the Finsbury Food case was more complex than stated above – but the some lessons from it are clear:-

  1. The seller and the buyer must be specific in the way in which the warranties are expressed (e.g. what is a material adverse change?).
  2. The seller must disclose anything which might lead to a successful warranty claim by the buyer (no matter how “embarrassing” that might be) both in the due diligence period and afterwards if the warranty so requires.
  3. The seller must keep a record of everything that is disclosed so that the knowledge exception can be proved.
  4. The buyer must read everything that is provided to it.

    And

  5. There is value in having limiting the buyer’s ability to make a claim so that no claim can be made unless the damage suffered exceeds an agreed amount.

Is any of this new?  Not really – but it is a reminder of how disclosure of information should be done if you are in the process of buying or selling a business or company.

If you have any questions at all, call us or contact us by email.

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