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Court confirms that limitation of liability clauses in acquisition documentation will be interpreted strictly

A 20-day time limit within which claims for breaches of warranty as part of a share purchase agreement (SPA) had to be raised only began running once the buyer was aware of the “proper basis for a claim”, the Court of Appeal has ruled.29 Mar 2016

The seller had attempted to argue that the 20-day time limit began running once the buyer became aware that there was a problem. Both the original judge and the appeal court judges disagreed, finding instead that the buyer only had the ‘proper basis’ to bring a claim after seeking advice from a forensic accountant.

Litigation law expert Richard Twomey of Pinsent Masons, the law firm behind Out-Law.com, said that the case was the latest in a line of recent judgments confirming that courts would adopt the narrowest possible interpretation of limitation of liability clauses.

“This is on the basis that, in the absence of clear words, parties will not lightly be taken to have limited their liability to remedies provided by the law,” he said. “In other words, parties are assumed to wish to maintain all their rights unless they clearly agree the contrary.”

“In this case, the ‘proper basis’ threshold was only met following the receipt of advice from a forensic accountant. In many other cases, however, the threshold may be reached following the receipt of legal advice or even internal investigations. If the claim is not then notified in accordance with the contractual terms, the right to later pursue the claim may well be lost,” he said.

The dispute related to the sale of Cend, an online sport nutrition business, by its shareholders to retail group The Hut Group by way of an SPA. Both parties provided detailed warranties to the other as part of the sale, which in the case of the sellers included comprehensive warranties about the accounts, business, assets and affairs of Cend.

At some point after the sale, both the buyer and sellers made warranty claims against the other, which were both successful in the High Court. The sellers appealed The Hut Group’s successful claim on the grounds that it fell foul of the 20-day time limit set out in the SPA. The claim was that the sellers were in breach of their warranties that Cend’s management accounts gave a true and fair view of the company’s financial position, and had been prepared on a basis consistent with that used for its statutory accounts.

Both parties agreed that if the buyer had become “aware of” the accounting issue within the meaning of the limitation clause by 9 January 2012, then the claim would have been time-barred. The judge found that, although it had become aware of enough facts about the issue to prove its breach of warranty claim by this date, it was not aware of the particular claim identified in the clause until it received professional advice, which took place after this date. The appeal court agreed with this analysis.

Lord Justice Briggs said that the purpose of the clause appeared to be “to prevent the buyer from pursuing claims previously kept up its sleeve, rather than to goad him towards analysis and the obtaining of advice about known facts sufficient to enable him within 20 business days to notify a claim”.

“The being the purpose, it seems to me that it is better served by an interpretation which focuses upon awareness of the claim than upon awareness of the underlying facts,” he said.

“My analysis thus far leads me, but with less assurance than the judge, to the same conclusion that he reached … I have been considerably assisted by my perception that the undoubted ambiguities in this exclusion clause are properly to be resolved by having recourse to the narrower of two available interpretations … [The clause], interpreted as contended for by the sellers, would make such a large inroad into the buyer’s entitlement to compensation for breach of warranty, for no sensible purpose, that it would have taken clearer words than the parties have chosen to use to achieve that result,” he said.

Litigation law expert Richard Twomey said that parties involved in M&A activity where potential warranties were under consideration should “assess warrantied, with input from legal advisors, and to regularly review those claims in a timeframe that enables the requisite notifications to be made in a timely manner”.

“The costs and effort required to submit a notification will be minimal when compared to the loss of the right to subsequently pursue the claim itself,” he said.