The first and second defendants were the directors and shareholders of a company that the first claimant was interested in buying. During the sale negotiations, which turned significantly on the company’s ability to generate future revenues, the defendants provided the first claimant with profit forecasts and documents relating to business opportunities “in the pipeline”. The first claimant also had information relating to the company’s financial position up until July 2018. The parties entered into a sale and purchase agreement for the company, which became effective in October 2018. The first claimant was subsequently provided with the company’s accounts for August and September 2018, which showed that the turnover figures for those months were significantly lower than the long-run average. Moreover, in the months after the acquisition, the company performed considerably worse than expected. The claimants contended that the defendants were in breach of contractual warranties that (1) there were no material inaccuracies or discrepancies in the company’s “records” (which they submitted included every document created in the course of the conduct of the company’s operations), and (2) there had been no material adverse change in the turnover and/or prospects of the company at the time the contract became effective. On the claim for breach of warranty the judge, allowing the claim in part, held that (1) the forecast and pipeline documents relied on by the claimants were not within the records warranty, since statements about a future transaction into which a company intended to enter could not be classed as “records”, which implied a retrospective element; (2) in order to establish whether there had been a breach of the turnover and prospects warranties in issue, the court had to determine the difference between the baseline figure (the expected or forecast level of the relevant factor at the time of the contract which a reasonable buyer would have expected or forecast given the information available) and the actual figure (which a reasonable seller should have expected or forecast given the information available), and whether that difference was material. The correct way of testing whether a change was material was to ask whether it was so significant that a reasonable buyer, had they known of the change, would not have entered into the transaction at all, or would have entered into it on significantly different terms.
On the defendants’ appeal—
Held, appeal allowed and claim dismissed. Firstly, when considering how a breach of a warranty of that kind should be established, the judge erred in holding that “the expected or forecast level of the relevant factor at the time of the contract” should be compared with “the actual position as at the date of the contract”. The contractual warranty called instead for the actual position in October 2018, the first completion date, to be compared with the actual position at 31 December 2017, the date when the sale and purchase agreement was signed. It was necessary to evaluate the “prospects” of the company on those two dates. The judge therefore erred in assessing the “actual” position in October 2018 and contrasting that, not with that on 31 December 2017, but with the “expectation which a reasonable buyer would have had”. Secondly, the allegation of breach of the warranty called for a comparison between the same thing (viz “prospects”) on different dates (31 December 2017 and October 2018), not a comparison between different things (“the expectation that a reasonable buyer would have had” and the “actual” position) on the same date. The judge was thus mistaken not only in failing to address the position as at 31 December 2017, but in the importance he attached to “the expectation that a reasonable buyer would have had”. The warranty was concerned with what the company’s “prospects” in fact were (at two stages), not with what a buyer would have expected them to be. Finally, the judge erred in assessing whether the warranty had been breached by reference to what had already happened, not how the company might fare in the coming period. By whatever criterion “prospects” were to be determined, the concern surely had to be with what might happen after the relevant date. The word “prospects”, read naturally, connoted “chances or opportunities for success” in a general way (paras 47–50, 52–53).
(2) The basis on which the judge held the warranty to have been breached differed substantially from how the claimants had put their case in the formal notice of claim, their pleadings and their submissions. The notice and pleadings contained no suggestion that “actual” “prospects” in October 2018 should be compared with what would reasonably have been expected at that date. Instead, the notice and particulars of claim contrasted forecast “Consulting Services Revenue” with “actual Consulting Services Revenue recorded in FY2017”. Further, at trial counsel for the claimants was explicit both in his written closing submissions and orally that what was called for was a comparison “at two points in time”. Accordingly, the approach which the judge took to the warranty differed radically from any that the claimants had espoused and even supposing that the judge’s reading of the warranty had been correct, he could not properly have adopted it. The defendants were not forewarned even during closing submissions that there was any question of the judge determining whether the warranty had been breached by reference to “the expectation that a reasonable buyer would have had” in October 2018 as to the earnings for that calendar year. The point would certainly have had a major impact on how counsel for the defendants framed his submissions. In fact, it would have been reasonable for counsel for the defendants (a) to insist that the claimants should apply to amend their particulars of claim if they wished the judge’s idea to be taken into account and (b) to ask for time in which to consider the implications of the new case. As matters proceeded, the defendants did not have a fair opportunity to address the basis on which the judge later held the warranty to have been breached. Furthermore, the wording of the relevant clause of the sale and purchase agreement provided that, for the claimants to be entitled to pursue a claim for breach of the warranty, the notice of claim had to include the “amount claimed” in respect of that breach. The fact that it did not do so meant that the notice was defective and the defendants could not be held liable for any such breach (paras 54, 57, 65, 75, 81, 82, 83).
David Lowe (instructed by Wallace LLP) for the defendants.
Mark Warwick KC (instructed by Child & Child Law Ltd) for the claimants.