Breach of warranty regarding projections as labour and other costs not included
09 May 2019
Triumph bought shares in three Primus companies for USD76.5m. They manufactured components for the aerospace industry. They were loss-making, but projected to become profitable in a few years. In the event, the financial performance of the target companies significantly worsened.
Triumph claimed breach of various warranties, including that there had been no breach of material contracts as at completion and that the forward-looking financial projections for the target companies had been honestly and carefully prepared. It also claimed that Primus had breached its obligation to notify Triumph immediately before completion of any breach of warranty. Triumph argued that this was, technically, not a claim for breach of warranty, and so not subject to the USD15m cap (or the other limitations, such as the USD1.5m deductible and 18-month time limit) on Primus’ liability for breach of warranty.
In its defence, Primus argued that the notice of breach had not been served on the right people, was not adequate and that any breaches of material contracts had been disclosed.
Inadequate notice of breach of warranty
It is very common in a warranty dispute for the seller to claim that the notice requirements have not been complied with. On this occasion the seller’s arguments were unsuccessful, but the case is a reminder that courts interpret notice provisions strictly, and compliance with the precise wording is key.
Avoiding the limitations
Another tactic, this time by buyers, is to try framing a claim so that it is not caught by the cap, time limit or limitations. Here Triumph’s approach failed. The court held that to say that a failure to notify immediately before completion of any breach was not a claim for breach of warranty under the sale and purchase agreement would defeat the commercial purpose of the limitations.
Adequacy of disclosure
The warranties were subject to matters “fairly and clearly disclosed … (with sufficient detail to identify the nature of the matter disclosed)”. The more usual formulation “nature and scope of the matter disclosed” was not used. Nor did the formulation “fully and fairly disclosed” appear. So disclosures about the nature of operational failings at the target companies were sufficient, even though they didn’t necessarily reveal the full extent of those failings or of their impact on the targets’ business.
In other words, the drafting really matters: the adequacy of disclosure will always be judged against the specific wording.
The warranty was not that the projections were accurate, only that they had been “carefully prepared”. But that still led to liability when additional labour and other costs were incurred but had not been built into the projections.
This article first appeared on Compact Contract, a blog where experts from Allen & Overy analyse the latest contract law themes and developments, and what they mean for your business.