Seller Beware of the High Court’s recent decision resulting in an £11,000,000 bill for the sellers’ breach of warranty

The facts

The buyer agreed to buy and the sellers agreed to sell the entire issued share capital of an energy company (“the target company”) and the sale was completed in August 2016. The target company supplied biomass boilers to one customer, a company called Greenergy. The SPA contained multiple warranties given by the sellers to the buyer. The ones in issue in this case included warranting that the target company had complied with its environmental permit, that its plant and equipment were in good condition, that its material contract with Greenergy was secure, and that the financial projections for the target company going forward were positive. Following completion it transpired that these warranties were untrue and in particular that there were issues with the target company performing its duties under the contract with Greenergy, such that Greenergy terminated the contract in 2017. The buyer issued a claim against the sellers for breach of these warranties.

The sellers denied the claim and in particular said that they had disclosed against the warranties and or that to the extent that any of the warranties were untrue, the buyer had actual knowledge of the relevant information prior to signing the SPA. The sellers put forward a further defence that the buyer had failed to mitigate its losses contrary to the express provision contained in the SPA requiring it to do so.

The Court considered whether the warranties were true and then whether they had been disclosed against or whether the issues were within the actual knowledge of the buyer. Having considered each of the warranties in turn the Court held that each of those referred to in the claim were untrue. The Court was also critical of the level of disclosure given by the sellers, for example, the prevention of a full inspection of the target company’s log books which would have enabled the buyer to see the full extent of the issues with the plant.

The Court then turned to whether the issues with the warranties were within the buyer’s actual knowledge. The level of disclosure required by the Court perhaps seems fairly onerous, which is exemplified when the possibility of termination of the contract with Greenergy was considered. The Judge stated that whilst the buyer was aware that Greenergy had:

As to the sellers’ argument regarding the buyer failing to take positive steps to mitigate its losses in accordance with a contractual duty set out in the SPA, there is a general implied duty on parties to mitigate their losses which applies under the common law, regardless of whether the same has been expressly stated in a contract or agreement. The Court referred to the implied duty and said that any such duty expressed in the SPA could not be said to impose a more onerous duty on the buyer than already existed in the common law duty. The duty imposed by the contractual provision put the onus on the party asserting a failure to mitigate, i.e. the sellers, to plead and prove the failure, it was not for the buyer to prove that it took all reasonable steps to mitigate its loss. This defence was therefore also rejected.

The Court held that the warranties were untrue when the buyer entered in to the SPA and that the sellers had no valid defence.

Seller beware lessons to learn

So what lessons can be learnt from this case to ensure other sellers do not find themselves in the same position? Firstly, it is important not only to disclose against warranties but also to ensure that this is done to a level that provides sufficient detail for the buyer to understand the true picture before entering in to the SPA. What this means in practice will differ from transaction to transaction, but ultimately it will be for the seller and their legal advisors to (carefully) consider what level of disclosure is appropriate.

It will also be prudent to make sure that you have an air tight liability cap in the SPA so that if as a seller you do find yourself in difficulty, there is a limit as to what you can be ordered to pay. In addition, in the unfortunate event you are the subject of Court proceedings for such a claim you should not be too quick to dismiss any Part 36 offers!

If after reading this article you would like advice on any of the issues raised, seller beware or other contractual disputes, please contact our Litigation and Dispute Resolution specialists.