#3266 - Breach Of Warranty Crib Sheet - Mergers and Acquisitions (Private Acquisitions)

Breach Of Warranty

1. Is there a breach of warranty?

   1. What did the seller warrant in the SPA?

      1. STATE CLAUSE & SUMMARISE IT

      2. If a warranted fact turns out to be untrue, the buyer has a claim for breach of contract regardless of whether he relied on the warranty in question

   2. Can seller argue that there has been no breach of the warranty as drafted as the claim did not have a “material adverse effect” on the business or financial condition of the target?

      1. Check terms of SPA to ascertain if material is defined

   3. Common breaches:

      1. Change of control

      2. Confidentiality

      3. Maintenance of plant & machinery

      4. Licence fee payments

2. Has there been a loss?

   1. Was provision made in the Completion Accounts for any liability in respect of the damage?

      1. If yes then this would have been taken into account when determining the price paid for the target and no loss would have been suffered

      2. If no then this would not have been taken into account when determining the price paid for the target and a loss will have been suffered

3. Was the breach disclosed in the disclosure letter?

   1. General disclosure

   2. Specific disclosure

4. What was the standard of disclosure in the SPA?

   1. HIGH STANDARD OF DISCLOSURE (buyer friendly)

      1. Levison v Farin

         1. “Save as disclosed”

         2. Disclosure must be fair; it is not enough to disclose a whole pile of documents and leave it to the buy to discover the truth

         3. Court held that this kind of clause was intended to require “A party who wishes by disclosure to avoid a breach of warranty to give specific notice for the purpose of the agreement, and protection by disclosure will not normally be achieved by merely making known the means of knowledge which may or do enable the other party to work out certain facts and conclusions”

      2. New Hearts v Cosmopolitan Investments

         1. “Subject to matters fairly disclosed”

         2. Sellers provide the buyers with all the information and draw the buyer’s attention to the matter

         3. Cited Levison v Farin that “the mere reference to a source of information, which is itself a complex document, within which a diligent enquirer might find the relevant information will not satisfy the requirements of this clause”

      3. Daniel Reeds Ltd v EM ESS Chemists Ltd

         1. “Save as fairly disclosed”

         2. Fair disclosure requires some positive position statement of the true position, so providing a list is not fair disclosure

      4. Edward Prentice v Scottish Power

         1. “There must be fair disclosure of the facts and circumstances sufficient in detail to identify the nature & scope of the matter disclosed and to enable the buyer to form a view”

   2. LOW STANDARD OF DISCLOSURE (seller friendly)

      1. Chadwick found that wording cannot be imported from another contract into an SPA and the standard of disclosure decided by the parties in the current agreement is what the parties should rely on and the commercial reality of the transaction

      2. Allocates the risk to the buyer

      3. It will be for the Court to determine whether the specific disclosure constituted full, fair and clear disclosure in the circumstances

5. Did the buyer have actual knowledge?

   1. Were the directors of the buyer aware?

      1. Seller could put forward defence that the buyer acquired actual knowledge of the breach from the circumstances and that it waived the breach by proceeding with the acquisition

         1. APPLY TO FACTS

   2. What was said in the SPA?

      1. (Buyer friendly) Does the SPA provide that the buyer’s knowledge will not preclude a claim for breach of warranty?

         1. “Except in relation to matters fully & fairly disclosed in the Disclosure Letter none of the Warranties shall be treated as qualified by any actual, imputed or constructive knowledge on the part of any member of the Purchaser’s Group or any agent or adviser of any such member and no such knowledge shall prejudice any Warranty Claim or operate so as to reduce any amount recoverable”

         1. Buyer seeking to ensure that even if aware of facts that constitute breach of warranty, unless seller disclosed facts, buyer can bring a claim for breach

      2. Eurocopy (interlocutory hearing)

         1. Buyer had a knowledge clause such that actual knowledge would not preclude a buyer bringing a claim for breach of warranty.

         2. It was held that the a purchaser may not be able to rely on such a clause where it has actual knowledge of matters not disclosed in the disclosure letter

            1. A buyer cannot limit actual knowledge to that which is disclosed and thereby rely on such a clause where it has actual knowledge of certain facts disclosed in the disclosure letter, as if buyer was aware of the circumstance in question then they would have paid the purchase price with that knowledge in mind and reduced it accordingly

            2. Cannot use this argument for constructed or imputed knowledge

         3. The inclusion of such a clause should not mean that the purchaser’s knowledge be struck out as a possible defence to the seller

      3. Infiniteland

         1. BUYER CAN STILL BRING A CLAIM BUT SHOULD BE MADE AWARE THAT...