Any purchaser of a business would be well advised to ensure that their agreement with the seller...
Any purchaser of a business would be well advised to ensure that their agreement with the seller protects them against any failure to disclose information that may affect the business's value. Recently, the High Court rejected a claim for breach of warranty on the basis that the Sale and Purchase Agreement (SPA) stated that such a claim could only succeed if it arose from fraud or wilful misconduct on the part of the seller.
An investment firm had purchased a health business from a group of companies. The SPA contained a warranty that the business had been carried on in the ordinary and usual course, without any material alteration to its nature, scope or manner, since a particular accounts date. A further warranty stated that the business was not currently renegotiating any material term of any key contract, which upon conclusion would have an adverse or detrimental effect on the business.
The purchaser claimed that both warranties were false because, when the SPA was signed, the health business had been in the process of renegotiating a contract to supply pharmaceutical ingredients to a company that had invoked a price-match clause in the contract after receiving a much lower offer from another supplier. While the purchaser had been informed that the price was being renegotiated, it claimed that it had been misled as to the likely extent of the reduction. The seller argued that there had been no breach of warranty, that the warranties had in any event been adequately qualified by disclosures, and that there had been no fraud because none of its executives had had the required knowledge and intention.
The Court considered that, at the date of the SPA, nothing had occurred which was out of the ordinary course of the business. Negotiations about pricing were to be expected in the course of a long-term supply relationship. Nor could it be said that the price negotiations resulted in a change to the nature, scope or manner of the business. The 'ordinary and usual course' warranty had not been breached.
However, the Court was satisfied that the invocation of the price-match clause had marked the start of negotiations within meaning of the 'key contracts' warranty, and that the conclusion of those negotiations would have an adverse and detrimental effect on the health business. Fair disclosure under the SPA would have required disclosure that the price-match clause had been invoked and on what basis, and that the health business would need to approximately match the other supplier's offer in order to retain the contract. Those matters had not been adequately disclosed. There had thus been a breach of the key contracts warranty.
In the Court's judgment, for the purchaser to prove fraud or wilful misconduct, it needed to show that at least one of four of the seller's executives had had sufficient knowledge of the terms of the key contracts warranty and had also known the facts that made the warranty, as qualified by disclosures, false. After considering the position of each of the executives, the Court found that none of them had had the required knowledge.
Dismissing the purchaser's claim, the Court observed that it was undoubtedly entitled to feel aggrieved that there had been no disclosure of the other supplier's offer and the facts that, in the Court's view, should have been disclosed. However, the terms of the SPA precluded any claim in negligence or for simple breach of contract.
