Warranty claims solicitors

Warranty disputes arising from the sale or purchase of a business can involve substantial sums and complex issues concerning the transaction documents, disclosure, causation and valuation. JMW advises purchasers, sellers, shareholders, investors and corporate groups on high-value warranty claims arising from share purchase agreements and business or asset sale agreements.

Sale and purchase agreements commonly impose strict and relatively short time limits for notification of  claims for breach of warranty and for issuing court proceedings. The precise notice and other procedural requirements must be followed carefully.  If you have concerns about a potential warranty claim, it is important that you act promptly.  

To seek specialist legal advice on a potential breach of warranty claim, call JMW on 0345 872 6666, or complete our online enquiry form to request a call back at a convenient time.

How JMW can help

JMW’s commercial litigation solicitors have substantial experience of warranty claims.  We advise on the merits of claims, compliance with contractual notice provisions, disclosure issues, limitations on liability, and causation. Where required, we work closely with our colleagues in JMW’s Corporate and Employment departments and with trusted external forensic accountants and specialist valuation experts to advise on the valuation of businesses and the financial loss arising from a breach. We also work alongside tax specialists where the claim involves tax issues.  This enables us to provide coordinated, technical and bespoke advice on the transaction and the dispute.

Our approach is strategic, robust and commercially focused. We take the time to fully understand the nature and purpose of the underlying transaction and its structure, the relevant documentation and evidential position and our clients’ wider commercial objectives.  This enables us to pursue or defend substantial warranty claims with a clear focus on the strongest possible course of action to secure the best outcome.

JMW's commercial litigation team is led by Steve Morris, who has been recognised by both the Legal 500 and Chambers and Partners for his technical knowledge and ability. Claire Brown is recognised as a leading partner by the Legal 500 and successfully represented the claimant in the case of BIP Chemical Holdings Ltd v Blundell, a leading warranty claims legal case. Our experienced solicitors represent clients throughout the UK and can confidently handle even the most complex litigation where necessary.

Meet our team

The warranty claims team at JMW provides expert guidance and tailored solutions to resolve disputes efficiently. While our approach will vary depending on the transaction, the evidence and your commercial priorities, we always work with our clients to explore a resolution without the need for litigation.

What is a warranty claim?

When a business is sold, whether by a sale of shares or assets, the seller will often make contractual statements or representations to the purchaser in respect of the company’s affairs. These statements and representations are known as warranties and are intended to allocate risk between the parties.

A purchaser of a business will usually carry out due diligence in advance before completion but that exercise does not remove every risk or uncover every issue or potential issue. Warranties supplement the due diligence process by giving the purchase a degree of formal contractual protection in the event a warranted state of affairs proves to have been untrue or undisclosed at the relevant time. 

If a warranty was untrue when provided and the purchaser could not have been aware and ultimately suffers financial loss as a result, the purchaser may be entitled to pursue a claim for damages, subject to the terms of the contractual agreement as well as the disclosures made by the seller and any contractual limitations on liability, in order to recover their losses.

When are warranties provided?

Warranties can be provided in respect of any number of matters, but, typically, warranties are provided in relation to the following:

• The seller’s authority to sell the shares or assets in question
• The accuracy of the information provided to the purchaser
• The accuracy of the company’s accounts
• The financial status and conduct of the company’s business since the last published accounts
• The ownership of company assets
• The company’s compliance with relevant laws
• The company’s contractual arrangements
• The existence of any claims against the company
• The payment and calculation of tax by the company

Your solicitor can review the circumstances of the target company and advise you on the warranties you may need to allocate risk appropriately.

What happens if warranties given are false?

Following a purchase, if it transpires that any warranties provided by a seller were untrue, the purchaser will, generally, be in a position to bring a claim against the seller for ‘breach of warranty’.

When a warranty is given falsely, a purchaser can claim ‘damages’ for breach of warranty. The calculation of the damages payable can be complex, but, as a general principle, the intention is to put the purchaser back in the position that they would have been in had the warranty or warranties in question been true.

For example, where a seller warrants that, as at the date of a share sale, there has been no material adverse change in the company’s financial position since the latest published accounts, but it later transpires that the company’s financial position had in fact deteriorated significantly, damages may be assessed by comparing the value of the company ‘as warranted’, which will generally correspond to the price paid, with the true value of the company (having regard to the change in fortunes) at the relevant date.

What is the difference between warranty claims and indemnity claims?

Warranty claims are to be distinguished from indemnity claims. Indemnities generally provide pound-for-pound compensation in respect of a specifically identified loss, i.e. there is no assessment of the impact upon the value of the price paid for the business.

What is the warranty claims process?

When a warranty claim arises because a purchaser discovers that a statement made by the seller in the sale and purchase agreement was untrue when the business was sold, the process that follows will be governed primarily by the wording of the agreement.

Check the contract

Review the sale agreement, disclosure letter and the precise wording of the warranties to determine whether a breach has occurred. A solicitor should check the contractual deadline for notifying the claim, any prescribed form and content for the notice, the person on whom it must be served and the prescribed method of service, as well as any dispute resolution procedure.

These provisions must be followed carefully, as a claim may fail where notice is late, served incorrectly, does not identify the relevant warranties or fails to provide the level of detail required by the agreement. 

Contract claims are ordinarily subject to a six-year statutory limitation period where the agreement is signed as a simple contract. However, business sale agreements commonly impose much shorter contractual periods for notification and the commencement of court proceedings, so the deadline in the agreement must therefore be checked immediately.

Gather evidence of the breach

The purchaser will need to gather evidence. This will include any relevant documents that establish what the seller warranted and why it was inaccurate. If you have evidence of when the problem first arose, when the seller knew about it or whether or not it was properly disclosed before completion, this will also support your claim.

The types of evidence you may need to collect include:

• accounts;
• contracts;
• tax records;
• correspondence;
• due diligence documents; and
• any information obtained after taking control of the business.

You will also need evidence to show any financial loss you have suffered as the result of the inaccurate warranty, which will form the basis of your claim. The usual remedy for breach of warranty is damages intended to put the purchaser in the position it would have been in had the warranty been true. This will likely involve comparing the purchase price of the business as warranted with its actual value at completion, and working with other professionals to reach a fair valuation for the business.

Your solicitor can specify the types of evidence that would support your claim and help you to build a strong case.

Notify the seller

The purchaser's solicitor begins the formal process by serving a warranty claim notice in accordance with the agreement. This will normally identify the relevant warranty, explain the alleged breach and provide an estimate of the resulting loss.

An initial notice may also need to be followed by formal court proceedings within a separate contractual period. Sending a notice does not preserve the right to claim indefinitely and if statutory time limits are set to expire, your solicitor can file the claim with the court to prevent it from being time-barred.

The seller's response

The seller will have some time to investigate, and then may accept liability, request further information or dispute the claim. Their response will depend on the wording of the agreement, the claim notice, the available evidence and any applicable pre-action process.  If the seller accepts liability, they may try to negotiate the losses claimed or proceed to alternative dispute resolution (ADR) as a way to reach a compromise.

The seller may reject the claim outright and deny that a warranty was breached or that any loss has been suffered as a consequence of any breach. They may argue that the relevant matter was disclosed or they may challenge causation or quantum, or rely on contractual protections such as exclusions, de minimis provisions and time limits to deny liability.  We will analyse those arguments against the transaction documents and evidential background to formulate a robust strategy for advancing or defending the claim.

Negotiate or use alternative dispute resolution

The parties will normally exchange information and attempt to settle the matter before proceedings are issued. The Civil Procedure Rules expect parties to set out their positions, exchange relevant information and consider settlement or ADR before litigation. Failure to follow reasonable pre-action conduct can affect costs, which incentivises the seller to settle or agree to ADR.

Begin court or arbitration proceedings

If the dispute cannot be resolved, the purchaser may commence court proceedings or arbitration, depending on the dispute resolution provisions in the agreement. JMW will advise you on the correct forum for dealing with dispute, as well as the relevant procedure, the evidence required (including any expert evidence), quantum and settlement strategy. 

A warranty claim may sometimes be accompanied by a claim for misrepresentation where the purchaser says it entered into the transaction in reliance on a false statement. That is a separate cause of action with potentially different remedies and defences, but the team at JMW can advise you of your options from the outset to enable you to decide how to proceed.

Q

Can I bring a warranty claim after buying a business?

A

You may have a claim if a warranty given by the seller in the sale and purchase agreement was untrue at completion and this caused you loss. The claim will depend on the agreement’s wording, the disclosures made by the seller and whether you comply with its notification requirements. Speak to a solicitor if you are concerned about a warranty document or share purchase agreement for advice on whether you are in a position to claim.

Q

What could I recover in a warranty claim?

A

The usual remedy is financial compensation for the loss caused by the breach. Depending on the agreement, the purchaser may also be able to recover money from an escrow account or set the claim off against deferred consideration.

Q

How is compensation calculated for a breach of warranty?

A

Compensation is commonly based on the difference between the value of the business as warranted and its actual value at the time of the sale. The calculation may also take account of specific liabilities or costs resulting from the breach, although the agreement may contain caps, thresholds and exclusions.

Q

Is there a time limit to bring a claim?

A

A claim under a simple contract is ordinarily subject to a statutory six-year limitation period, but the contractual deadlines must be checked first. A sale agreement will usually set strict deadlines for notifying the seller and starting proceedings, and these may be much shorter than the general statutory limitation period.

Q

What evidence do I need for a claim?

A

Your solicitor will help you to gather evidence if you are in a position to claim. Useful evidence may include the sale agreement, disclosure letter, due diligence documents, accounts, tax records, contracts, correspondence and documents showing when the problem arose. You will also need evidence linking the breach to the financial loss claimed.

Q

How long do breach of warranty claims take?

A

The timescale depends on the value and complexity of the dispute, and whether the parties reach a settlement. A straightforward negotiated claim may be resolved within months, while contested court proceedings can take considerably longer.

We will consider alternative dispute resolution such as negotiation and mediation and whether they are a realistic route to a commercially acceptable outcome.  However, where a fair settlement cannot be reached, we can pursue or defend the matter in court or arbitration and advise you of expected timescales and costs at the outset and at regular stages throughout your matter.

Q

What does it cost to pursue or defend a claim?

A

Costs will depend on the complexity of the issues, the amount of evidence, the extent of expert evidence required and whether the dispute proceeds to trial. The parties are expected to exchange information and consider settlement before and during proceedings, and the court can take their conduct into account when deciding costs.