Warranties: Caveat Emptor!
This short article outlines some of the main issues which arise when drafting warranties in a share purchase agreement. Warranties are crucial. In agreeing to acquire the target company, a purchaser will have relied upon various representations and warranties made by the seller about the company. In order to compensate for the lack of statutory protection and to ensure that the purchaser can recover its loss if they subsequently prove to be incorrect, the various representations and assumptions being relied on are included in the share purchase agreement as express representations and are known as “warranties”. A summary of some of the issues that arise in practice regarding certain warranties such as tax, general warranties and warranties made by the purchaser can be found in Beswick & Wine’s 8th edition.
Through its due diligence investigations, the purchaser will have amassed a great deal of information and knowledge about the target company. In giving warranties a seller will be concerned to ensure that the purchaser does not have knowledge of a matter which could give rise to a claim under the warranties and which has not been disclosed to the seller. For this reason, the seller may seek to include a limitation on its liability under the warranties of all matters within the purchaser’s knowledge.
On the other side the purchaser will insist on the warranties being qualified only on the matters disclosed in the disclosure letter and not matters within its knowledge.
Eurocopy plc v. Teesdale  BCLC 1067 and Infiniteland Ltd v. Artisan Contracting Ltd (UK) plc  EWCA Civ 758 are significant cases in this area (see Beswick & Wine for more detail on these cases). Following Eurocopy and Infiniteland, sellers would be wise to obtain a warranty that neither the buyer nor its advisers nor its agents have any actual knowledge of any breach of warranty.
Buyers have the opposite view and will want it made clear knowledge of their advisors is not knowledge they have. Strong buyers will want a clause along the lines of that in Eurocopy which allows claims for breach of warranty to be brought by the buyer even though the buyers or advisors have knowledge of the breach. However such a clause may not work given the uncertainty of the law in this area.
In the recent case of Macquarie Internationale Investments Ltd v. Glencore UK Ltd  EWCA Civ 697 the Court of Appeal held that the seller of a business was not in breach of a management accounts warranty where those accounts did not disclose a liability which was unknown to, and not reasonably discoverable by, the seller at the relevant time.
These cases show that when drafting the share purchase agreement and warranties the buyer and seller should think carefully about the wording that is used as it could prove vital in deciding any future warranty claims.
A full set of warranties can be found in Schedule 3 to the precedent share purchase agreement in Beswick & Wine: Buying and Selling Private Companies and Businesses 8th Edition.
Rebecca Singleton, Trainee Solicitor, Rebecca@singlelaw.com, Co-Author Buying and Selling Private Companies and Businesses (Beswick & Wine), www.singlelaw.com