The UK courts recently considered the extent to which a buyer can potentially recover from a seller for breach of warranty, notwithstanding knowledge of an issue before completion. Although they are UK cases, they may well be followed by an Irish court.

In Infiniteland, a warranty claim was made that the accounts did not show a 'true and fair' view on the basis that a capital injection from another company had been used to reduce the cost of sales and so increased profits by the same amount. The question arose as to whether the capital injection had been effectively disclosed, in which case the relevant warranty was qualified and the warranty claim would fail. The test applied by the judge was whether it could fairly be expected that reporting accountants would become aware, in the course of carrying out due diligence, that the relevant breach would be identified. The court held that there was ample material in the disclosure documents to satisfy the test, and in fact the accountants did spot the matter, although they did not pass on the information to the buyer.

The case emphasises that it is crucial for a buyer and its advisers in a transaction to ensure that a due diligence exercise is fully carried out, with all issues identified and brought to the attention of the buyer before any contracts are signed.

Any provision in the sale agreement to the effect that the buyer's rights and remedies in respect of any breach of warranty are not affected by any pre-completion investigation into the affairs of the target is not particularly effective. Rather, it is the buyer's ultimate right to sue for breach of warranty in the absence of express wording prohibiting any such claim and in the absence of disclosure. The seller's claim that, as a rule of law, the buyer's knowledge of a breach of warranty barred the claim was rejected.

While a buyer may be in a position to bring a warranty claim even if it knew of the relevant breach before completion, it may be in difficulty if it represented orally or by its actions that it was not aware of any such claims but in fact did know of them. A buyer who buys a company in the full knowledge of a breach of warranty and which then subsequently sues will not be viewed favourably by the courts, and is unlikely to be in a position to recover adequate damages. A seller will also want some assurance that in giving warranties and completing the transaction a buyer is not holding a warranty claim up its sleeve. As such, a buyer will often give an assurance to the seller that it is not in the process of formulating a claim under the warranties at the time the deal completes.

Due Diligence Issues

If there are specific issues raised in the due diligence or the disclosure process that are disclosed and cannot as a result be properly covered off by a warranty, a buyer should consider seeking a specific indemnity to cover them. Alternatively, a buyer should seek to retain a certain amount against the purchase price against any future claims in respect of the relevant issue. It is also important for a buyer to ensure that its expert advisers review the disclosure letter to ensure that any issues are identified.

For further information, please contact Richard Curran or Zelda Deasy.


Winter 2006.