Buyers wishing to make a claim under contractual warranty provisions must comply with those provisions to the letter; sufficient and timely information is key. In Arani v Cordic Group,(1) the buyer gave inadequate notice of its contractual warranty claim and could not bring a misrepresentation claim based on the warranties.
Warranties encourage sellers to disclose known issues in the due diligence process and provide buyers with a remedy if certain facts on which they have based their investment decision turn out to be untrue. However, claims arising from warranties can be brought only in the circumstances prescribed in the contract.
The buyer purchased a company which provided fleet management solutions for taxi and courier businesses. It claimed that the seller had breached various warranties in the sale and purchase agreement (SPA). In particular, the target company had been using an address database in breach of a single-user licence.
The SPA allowed the seller to release funds from the retention account unless the buyer provided notification of a warranty claim, including full particulars, within 16 months of completion. The buyer notified, reserving its rights and indicating that it was possible that a warranty claim might be brought. The buyer claimed that this notice, and its claim for misrepresentation for breach of the same warranties, prevented the seller from releasing the retention funds.
The commercial purpose of notification requirements is to give the seller the opportunity to make financial provision for any warranty claims and, if the requirements are not followed, the seller is not liable. In construing a notice, the court should ask how a reasonable recipient with knowledge of the context in which it was sent would have understood it. While minor defects will not invalidate notices if the recipient would have understood the message being conveyed,(2) notices must comply with formal contractual requirements in relation to timing, form and service.
The court decided that the buyer's notice did not comply with the SPA requirements because the notification did not include full particulars of the claim or specify that a claim was being made; it referred only to the possibility of such a claim. The notice was also sent one day late, over 16 months after completion. The judge concluded that the notice was an unsuccessful "last minute tactic" to prevent the release of funds.
The buyer argued that the notification requirements did not apply to its claim for misrepresentation arising from the alleged breach of the warranties and that its misrepresentation claim also prohibited the release of funds. However, the court decided that only validly notified contractual warranty claims could prevent the release of retention funds and that misrepresentation claims could not be set off against those funds.
The court also confirmed that, in any event, warranties cannot amount to representations and instead they are a contractual promise which provides buyers with a particular (contractual) remedy. Previous authorities which had suggested that warranties in transaction documents could provide a basis for a claim in misrepresentation should not be followed. As such, if a buyer wishes to bring a claim for misrepresentation, it must identify specific pre-contractual representations which are not captured by entire agreement or non-reliance clauses.
The case is a salutary reminder of the importance of complying with contractual warranty provisions and the difficulties of bringing a misrepresentation claim where warranties have superseded any pre-contractual discussions. As well as providing sufficient information about their claim, buyers should also be aware that there are other hurdles to bringing successful claims and it is recommended that buyers:
- follow provisions concerning the method, time and place of service. Notification should be made within prescribed time limits. If the SPA is outdated (eg, because the seller has moved offices), notice should still be served in accordance with the SPA, with a copy of the notice sent to the seller's current address so that they are aware of the claim;
- check whether information was disclosed against the warranty and whether there are any financial caps on claims;
- ensure that the seller was or should have been aware of the facts which form the basis of the warranty claim and that the relevant events do not post-date completion; and
- consider whether an indemnity from the seller covers the same loss. This may provide an easier route to recovery.
Endnotes
(2) Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] UKHL 19.
