Skip to content

Forecast fiasco: The wrong comparator?

Browse this blog post

The Court of Appeal has looked at a warranty that there had been no material change in the prospects of a target. It also looked at the notice given for breach of warranty and found it wanting. 

High Court – what were the prospects?

Decision, which specialises in financial software, purchased shares in a company from two individuals, Mr Stephen Garbett and Mr Anis El-Mariesh. The share purchase agreement contained this warranty: “Since the Accounts Date there has been no material adverse change in the turnover, financial position or prospects of the Company”. 

Decision claimed that Garbett and El-Mariesh had inaccurately reflected the company’s prospects and were in breach of warranty. 

This is how the High Court approached the question: 

  • First it determined what the expected “prospects” were at the effective date of the contract. The judge said that if anyone had asked Decision what the “prospects” of the company were any point prior to completion “the resulting discussion would have been conducted entirely in terms of expected levels of EBITDA”. 
  • Having worked out the EBITDA on the effective date, the next question, according to the judge, was what the actual expected profits were. 
  • Then the court had to compare the two and decide if the difference was material. Ultimately the judge said it was. 

Appeal – you’ve used the wrong comparator  

The Court of Appeal said the judge had approached the question incorrectly: 

  • The first question was what the “prospects” actually were (not what they were expected to be) and the relevant date was the accounts date (not the effective date).
  • “Prospects” did not mean EBITDA (something neither of the parties had submitted and the judge should not have ventured without allowing the parties to respond) rather it meant “chances or opportunities for success” in a more general way. 

As a result Decision’s claim failed. 

Take notice! 

The validity of notices sent for breach of warranty are frequently challenged, and this case is no exception. The notice provision said: “The Sellers shall not be liable for a Claim unless notice in writing summarising the nature of the Claim (in so far as it is known to the Buyer) and, as far as is reasonably practicable, the amount claimed, has been given by or on behalf of the Buyer to the Sellers…” 

The notice given by Decision contained claims under three warranties but the amount claimed was a single figure.  The Court of Appeal held that “a Claim” meant that Decision needed to set out the “amount claimed” for each Claim. It had little sympathy for arguments about what was reasonably practicable. As Decision had not done this, the notice was invalid. 

Judgment: Decision Inc Holdings Proprietary Ltd v Garbett    

Related blog topics