What is a warranty?
A warranty is statement of fact provided by a seller that a particular statement is true. A warranty is a contractual term, which is secondary to the main purpose of a contract.
Where there has been a failure to disclose important information where a warranty was provided – there is scope for a breach of warranty claim.
What is a breach of warranty?
Simply, a warranty is breached when a statement or set of facts is untrue.
Claiming damages is the most common resolution for breach of contract. A breach of a warranty will only give rise to damages if the buyer can show that:
- there was a breach which resulted in a loss; and
- they mitigated their loss or that the loss was not too remote i.e unforeseen by the parties.
Breach of Warranty Case Study
116 Cardamon Ltd v MacAlister & Anor  EWHC 1200 (Comm)
May 2014, the claimant (“Cardamon”) entered into a Share Purchase Agreement (SPA) with the defendant (“the MacAlisters”) under which it bought a 100% shareholding in Motorplus Limited (“Motorplus”) for the price of £2,386,247.50.
During this time the management of Motorplus were considering a management buyout. To progress with the purchase process quickly Cardamon did not perform any due diligence on Motorplus before completion.
The SPA contained, amongst other thing, warranties by the MacAlisters relating to the truth, fairness, accuracy and proper preparation of Motorplus’s accounts and the following limitation provisions:
- a cap on warranty claims up to the amount of the purchase price;
- a provision which provided that the first £500,000 of any claim was irrecoverable;
- a clause stating that warranties were subject to matters “fairly disclosed” by the sellers; and
- a requirement to give notice of warranty claims by a particular cut-off date and a clause stating that any claim so notified would be deemed withdrawn six months later unless legal proceedings had been issued and served by that point.
Cardamon alleged that the MacAlisters had breached various warranties as Motorplus was effectively insolvent at the time of sale, and the accounts did not truly reflect the financial condition of Motorplus.
The High Court (Mrs Justice Cockerill) upheld Cardamon’s claim in relation to an under provision for liabilities in Motorplus’s accounts, but dismissed all other claims as they were barred by the limitation clauses in the SPA as detailed above.
In assessing damages for the sellers’ breach, the judge applied the ‘diminution in value measure’ and found that the difference between the value of the shares “as warranted” and their value “as is” exceeded the purchase price by more than the threshold for warranty claims contained in the SPA. The SPA also contained a cap on liability (equal to the purchase price), so the judge therefore awarded the full purchase price as damages.
Cardamon asserted that its losses were higher than the difference between the value “as warranted” and “as is” because Cardamon had been forced to fund Motorplus through its financial difficulties. The judge did not make any findings on this issue, probably, because the entire liability cap had already been exhausted.
How we can help
Else Solicitors have a team of expert commercial litigators who can represent you and your business by either defending or claiming against breach of warranties. For more information or to discuss your particular circumstances, please email Andy Rudkin, Partner and Head of Dispute Resolution via firstname.lastname@example.org or call him directly on 01283 526239.