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: –
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  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:-
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:-
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.