Breach of Warranty in a Share Purchase Agreement

The prospect of a new venture and becoming the owner of shares in a business is an exciting time for anyone in business whether new to acquisitions or an old hand at it.

Getting the deal done may sometimes come at a cost and relying upon warranties provided can be necessary when a company does not deliver all that was expected.

There are often clear time frames to bring a breach of warranty claim so getting to know the business quickly is important.

Is there a method of measuring damages for breach of warranty in a share purchase agreement? 

Yes, this is the diminution in the value of the company’s shares. This established method was put to the test in the case of Oversea-Chinese Banking Corporation Limited v ING Bank NV [2019] EWHC 676 (Comm).

In this case, there had been a failure to provide for a $14.5 million exposure in the accounts. Not an insignificant amount of money to miss out! Perhaps surprisingly, the omission had no impact upon the valuation of the company and so reduction in the value of the company’s shares. The question was therefore whether the diminution was just part of the loss that could be claimed and if it were also possible to include an element of damage based upon the loss of chance to negotiate a specific warranty or indemnity during the pre-contract negotiations.

The Judge decided that there was this type of secondary loss had no place in law and that the purchaser had no right to claim for damages associated to an amount that could have been claimed under what would have been an indemnity created post contract for the purposes of the claim. Such an indemnity did not exist and as such no claim was recoverable. Instead the correct approach under well-established case law was that the claimant was entitled to be put in the position it would have been in had there been no breach of warranty, or to recover damages for its “loss of bargain” as a result of the breach. In these specific circumstances, there had been no reduction in the value of shares and therefore no loss of bargain had been sustained. It was not possible for the claimant to recover the $14.5 million loss.

It can be a challenge to establish that there has been a drop in share value as a result of a breach of warranty but this is the basis of the court’s assessment of loss in such cases.

If you entered into a Share Purchase Agreement and believe that there has been a breach of warranty, seeking early advice can prevent extensive costs being incurred that later prove not to be recoverable.

Every case is decided upon its own facts and therefore it is important to secure advice about your own separate circumstances.

For further advice and assistance please contact our Private Client Team on 01604 828282 / 01908 660966 or email info@franklins-sols.co.uk

 

 

Disclaimer: The information provided on this blog is for general informational purposes only and is accurate as of the date of publication. It should not be construed as legal advice. Laws and regulations may change, and the content may not reflect the most current legal developments. We recommend consulting with a qualified solicitor for specific legal guidance tailored to your situation.