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HCR Law Events

8 November 2021

Warranties, disclosure and awareness when buying or selling a business

The maxim caveat emptor (buyer beware) in English law is especially the case in the context of a corporate transaction, as the buyer has little statutory or common law protection regarding a target business or company.

What is a warranty?

It is therefore common for the buyer to seek warranties from the seller. A warranty of this type is a promise or assurance that something is the case – for example, that there are no disputes ongoing with employees. If the warranty proves to be untrue, the buyer may make a claim against the seller.

Can the seller limit its liability under the warranties?

Yes, and in a number of ways. The seller will typically want to be on the hook for a finite period of time and will limit their maximum liability (often to the amount of the purchase price). They may apply a threshold (a bit like an insurance excess), so that a claim can only be brought if it exceeds an agreed value. Importantly, the seller will also often say that the buyer should not be able to bring a claim in respect of matters of which the buyer is already aware.

How does the seller establish ‘awareness’?

Good question! At law, there is a distinction between actual, imputed and constructive awareness.

Constructive knowledge is notice of a fact that someone is presumed by law to have, regardless of whether they actually knew it. Essentially this covers facts that could have been discovered if the buyer had made the usual and proper enquiries.

Knowledge can be imputed to one person where it is known to another and there is a legal relationship between them. In a transaction, the seller may seek to impute the buyer’s advisers’ knowledge to the buyer – so that if information was disclosed to the buyer’s accountant, for example, the seller can assume that the buyer will be made aware of it.

Is actual knowledge straightforward?

You might think so. However, the recent case of Equitix EEEF Biomass 2 Ltd v Fox shows that nothing is entirely certain.

In that case, the High Court was asked to consider whether matters giving rise to breaches of warranty had been disclosed with sufficient details to enable to the buyer to make an informed assessment.

The court found that, although disclosure was made, the seller deliberately told the buyer less than it needed to know because of a concern that the buyer might withdraw from the transaction. The facts of which the buyer was aware were insufficient to amount to ‘actual awareness’ of the matters giving rise to the claim.

In this case, the buyer had confirmed to the seller that it was not aware of any matters giving rise to a claim, but then brought a claim.

The High Court considered that the relevant clause in the sale contract did not extend to the awareness of the buyer’s agents. This meant that even though the buyer’s agents may have been aware of the issues, it was only relevant if the seller could prove that the information had been passed on to key personnel of the buyer. The seller couldn’t do so: therefore, the buyer was not aware (and had not given a false confirmation).

Complexities like this can be avoided; in corporate transactions, it is crucial to have a well-drafted sale and purchase agreement that clearly identifies what ‘knowledge’ means. It is just as important, in practical terms, to have clear paper trails to prove who has seen what (and when).

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About the Author
Alison Scott, Partner, Head of Midlands Corporate

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