How can a Breach of Warranty be pursued when purchasing of a business?

When the buyer agrees to purchase share capital from a business, the buyer usually seeks protection therefore it is important for the seller to disclose all relevant information to the buyer. The transaction is often complex, involving a range of legal documents and terms that define the responsibilities and expectations of both the buyer and the seller. One of the most important components includes warranties, this is where the seller makes a promise to the buyer regarding the state of the business that is being sold confirming the representations of the business are true and correct to the best of the seller’s knowledge. These warranties are designed to protect the buyer by ensuring that they are purchasing the business under agreed conditions. However, the seller will be in breach of warranty if they fail to uphold these promises which will most likely lead to legal disputes and potential financial losses. The buyer will then have a contractual claim for breach of warranty against the seller.

What is a warranty?

When purchasing a business, a warranty is known as a statement or a guarantee made by the seller regarding certain facts and conditions related to the business which is usually included within the body of a share purchase agreement. These conditions will usually cover aspects such as the financial health of the business, the accuracy of the financial statements, legal compliance and the absence of liabilities. It is crucial for the seller to provide the buyer with all the warranties as this will provide the buyer with confidence that they are acquiring a business to meet the agreed conditions before proceeding with the purchase. However, if the conditions are not met then it will constitute a breach of warranty. The buyer must carry out ‘due diligence’ on the business by investigating and verifying the business and all other aspects of the business before purchasing the same.

How do I know there is a breach of warranty?

A breach of warranty ordinarily occurs when one of the parties, usually the seller, fails to meet the terms and conditions outlined within the warranty agreement made during the sale. A breach of warranty can happen if the seller promises or represents something specifically about the business which is proved to be misleading, false or incomplete. For example, if the buyer discovers that the seller mislead the buyer by confirming that the business is profitable, there are significant debts or other undisclosed financial issues or if the seller claims the ownership of the patents or trademarks that were owned by other third parties, then this would constitute as a breach.

How can I make a breach of warranty claim?

By serving a notice on the seller, this will provide the seller with an opportunity to remedy the breach. However, if the breach cannot be remedied then the seller must offer to reach an agreement and resolve the dispute. The process of making a claim for a breach of warranty usually follows as below:

1. To review the Purchase Agreement – It is important to thoroughly review the purchase agreement which will detail all provisions regarding the warranties as well as remedies available to the buyer in the event of a breach of a warranty. It will most likely also include a procedure for making a warranty claim, time limits and any other exclusions or limitations on liability. Furthermore, the sale agreement should also contain some provisions in relation to dispute resolution, arbitration or litigation.
2. Gather all evidence – It is essential to gather all of the evidence to support the claim such as financial records, legal documents and communication records. The more evidence there is the more likely the buyer will be able to prove the breach and the damages suffered as a result of the breach.
3. Notify the seller of a breach – The majority of sale agreements will require the buyer to notify the seller of any breach of warranty within a specific time period. This is usually done in writing by outlining the nature of the breach, the facts supporting the claim and any damages or losses the buyer incurred.
4. Seek resolution – Once the buyer notifies the seller of the breach, the buyer can then attempt to resolve the matter directly with the seller. This could involve negotiating a settlement such as a reduction in the purchase price or an indemnity payment from the seller. It is often that the seller agrees to offer a compensation to resolve the issue. If the resolution cannot be reached through negotiation, the buyer will be able to escalate the matter involving litigation or arbitration. The court or arbitrator will then evaluate the evidence and determine whether the warranty was breached and what remedy if any the buyer is entitled to.

For further advice and assistance please contact our Litigation and Dispute Resolution team on  01604 344562 / 01908 916096 or email info@franklins-sols.co.uk.