Ruling highlights importance of clear drafting and prompt claim notification

Out-Law News | 12 May 2021 | 2:48 pm | 2 min. read

Efforts by the buyers of a company to avoid a payment on account after alleging fraud against the sellers have been rejected by the English High Court after a judge ruled the contract between the parties was still effective.

The High Court upheld the sellers’ claim under a share purchase agreement (SPA) for a retention payment of £2 million, and rejected the buyers’ claim for breach of warranty and fraudulent misrepresentation as it was out of time and had not followed the contractual requirements on the level of detail of the claim to be given.

However, the court said the sellers’ claim for fraudulent breach of warranties could continue, as the prescribed time limits and notice requirements did not apply.

Litigation expert Jim Richards of Pinsent Masons, the law firm behind Out-Law, said: “Although only a decision made at a summary judgment hearing, this ruling is still of significance, particularly to purchasers of businesses.

“It highlights the importance of meeting the deadline for the notification of claims and ensuring that any notice given is sufficiently detailed to enable the sellers to understand the basis of the claim being advanced. It also makes clear that a clearly drafted set-off clause can still be effective even when fraud is alleged,” Richards said.

The case concerned the sale of shares in fleet management software company Cordic. In 2018 the buyers signed an SPA with a number of shareholders to buy their stake in the company for £10.2m. The SPA stipulated that £2m of the purchase price should be paid into a retention account and released to the shareholders 16 months after the sale’s completion, unless a claim had been notified before that date in accordance with the contract’s provisions.

The buyers did not make the payment by the 1 March 2020 deadline. The day after, they wrote to the sellers alleging that Cordic did not have a commercial licence to use the Royal Mail data which powered its systems, and this was in breach of warranties made in the share purchase agreement.

After the sellers filed a claim for payment of the retention money, the buyers counter-claimed for breach of warranty and misrepresentation.

The court refused to disapply the set-off clause in the agreement because a claim for fraud was being made. The judge, Andrew Hochhauser QC, said that the provision was not an exclusion clause which fell away in such circumstances, but a provision which defined a payment obligation.

In his ruling, the judge said contractual warranties do not amount to representations and statements made in the disclosure letter were not pre-contractual representations, but part of the transactional documentation. The disclosure document itself expressly stated that such statements did not constitute representations.

“The ruling is interesting not so much for making new law. Instead it reveals the likely judicial attitude to the enforcement of contractual provisions governing the bringing of claims in closely negotiated agreements such as SPAs. The courts, in such circumstances, strive to achieve outcomes which are consistent with commercial certainty and will therefore seek to enforce vigorously such provisions when clearly drafted,” Richards said.

Civil fraud expert Andrew Herring of Pinsent Masons said the case illustrated the importance of effective pleading of fraud allegations in civil damages claims and some pitfalls for the unwary.

“In particular, the judge emphasised that parties alleging fraud must allege and prove primary facts which justify the inference of dishonesty and merely relying on contractual clauses would not amount to primary facts for this purpose,” Herring said.

“In this case, the judge did allow the defendant to advance an amended claim for fraudulent breach of warranty to trial despite it being commenced after the contractual limitation periods had expired for non-fraudulent breach of warranty claims. However, the judge did not permit some other fraud allegations made by the defendant including fraudulent misrepresentation claims to proceed to trial,” Herring said.

“This outcome highlights that it is essential for parties to marshal their evidence and advance fraud claims quickly to maximise their chances of success, and alleging fraud is unlikely to be a panacea in defence of civil damages claims,” Herring said.