Gardner Leader

Breach of Warranty Claims

Chris Felton, Business Dispute Resolution Partner at Gardner Leader Solicitors, explains in the following case study how valuable warranties are in disputes concerning commercial transactions. 

I recently acquired a company that supplies children’s bibs to five major UK retailers. I purchased the company for £5m, which I believed to be a fair price based on all the information I knew at the time. I have since discovered a number of things which have led me to believe I have paid too much. What can I do?

What have you discovered?

The company had an agreement with a manufacturer and supplier in China. The company gets all of its bibs from here. However, it was my intention to phase in an additional supplier in Sweden who I know can provide them at half the price. Unfortunately, the Chinese contract appoints them as the company’s exclusive supplier for the next five years. There are hefty damages provisions for early termination.

Did you ask to see any of these contracts during the due diligence stage?

I can’t remember, it all happened very quickly as the seller wanted to sell in a short time frame and before the end of the last tax year. I do, however, seem to recall that my solicitor took a long while negotiating a number of warranties from the seller. Would these help me – how do they operate?

Warranties are assurances as to the state of the company at the time of sale. They provide a method by which the purchase price can be adjusted if a buyer finds that he has not bought what he thought he was getting.

So it should be straightforward to get recompense and adjust the price to a fair amount?

Not necessarily; it depends on whether there are any warranties to cover this situation and whether they are enforceable. Ideally you would be looking for the following:

• All material contracts are disclosed
• No contracts would be terminable as a result of change of control
• No contract is likely to be terminated or contains onerous terms.

And if there were such warranties?

Then arguably those warranties would be untrue and you would have a potential claim for breach of contract. No claim will arise however if these matters were brought to your attention during the disclosure process and in the Disclosure Letter.

Well I don’t think we were ever provided with the contracts to look at before the purchase completed, but isn’t that just my hard luck – buyer beware!?

Not if there is a specific warranty that could cover it, such as those set out above.

Well that seems good news. What do I do next?

You will need to consider a claim for breach of warranty. This may entitle you to damages including the difference between the actual price paid, less the true value you would have paid had you been aware of the problematic contracts at the time of purchase.

Anything else I need to be aware of?

Yes - some warranty provisions are drafted very narrowly so that they may have to be brought within a short space of time. You should check this carefully to make sure your claim does not become time-barred. Also there may be a de minimus amount at which a breach of warranty claim can be made. This is often to discourage minor disputes where nuisance sums are involved. Conversely, there may be upper limits on the amount you can claim written into the contract.

Details: Chris Felton
Gardner Leader Solicitors
Tel.: 01635 508080

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