By a sale and purchase agreement the claimants purchased all the shares in a company from the defendants. The agreement contained two warranties; (i) that all financial and other records of the company were accurate and (ii) that there was no material adverse change in the turnover or prospects of the company at the time the contract became effective. The company performed substantially worse than expected in the months after the acquisition and the claimants felt that they had been misled. They brought a claim for breach of the contractual warranties. The claimants claimed that there were material inaccuracies or discrepancies in the company’s records. They argued that the term “records” extended beyond the records included in a company’s statutory duty to keep accounting records and included documents created by a business in the course of the conduct of its operations. They further claimed that there had been a material adverse change in both the turnover and the prospects of the company at the time the contract became effective.
On the claim—
Held, claim allowed in part. That by no means were all documents produced by a company in respect of its business “records of the company”. The term itself implied a retrospective element. It was hard to see how any statement about a future transaction into which a company intended to enter, or financial projections in relation to the expected future profitability of a company, could be classed as a “record”. The documents which the claimants sought to rely upon as inaccurate records were not “records of the company” within the meaning of the first warranty. As to the second warranty, the correct test of materiality in the context of a contractual term of this kind was that a breach was material if, had it been known to the other party in advance, the other party would either have declined to proceed with the transaction at all, or agreed to proceed only after a renegotiation of the financial terms. That had the defendants given full and frank disclosure as to the true position of the company on the effective date and of their true opinions of the likely profits of the company at the year-end, the claimant would have required a further renegotiation of the purchase price. That, accordingly, at the date the contract became effective the defendants were in breach of the second warranty (paras 92, 98, 105, 112, 130, 158).
Mark Warwick KC (instructed by Ince Gordon Dadds) for the claimants.
David Lowe (instructed by Wallace LLP) for the defendants.