Breach of Warranty Claim Can Go to Trial

After a company has been purchased, any allegations that the seller is in breach of warranties given to the purchaser are likely to require careful determination. That point was illustrated recently when the High Court refused a businessman's application to strike out a breach of warranty claim brought against him.

The businessman had sold the shares in his company to a telecoms provider for a total consideration of £60 million. A further sum was to be paid under an earn-out arrangement, based on the company's performance over the year following the sale.

A dispute over the amount due under the earn-out arrangement was referred to independent accountants, as required by the share purchase agreement (SPA). At around the same time, the telecoms provider served notice on the businessman of a claim for breach of warranty. Under the SPA, any legal proceedings had to be brought within six months of notice being given, or within six months of the liability becoming quantifiable, if later.

As some of the matters that had been referred to the accountants were linked to the breach of warranty claim, the telecoms provider sought the businessman's agreement to an extension of the six-month deadline: no agreement was reached and it brought proceedings shortly before the deadline, estimating its losses at nearly £4.6 million. After the accountants issued their report, it brought fresh proceedings, assessing its losses at £3.3 million.

The businessman sought summary judgment on the grounds that the new proceedings had been brought out of time, and that the telecoms provider was estopped from claiming otherwise, having previously taken the view that it had to issue proceedings within the six-month deadline. The telecoms provider argued that a later deadline applied because the claim was based on liabilities that had not previously been capable of being quantified.

The Court concluded that the clause in the SPA regarding quantifiable liabilities applied to the breach of warranty claim, and rejected the businessman's assertion that the liabilities had been quantifiable from the outset, before the accountants' report was issued. The new proceedings had therefore been brought in time under the provisions of the SPA. Turning to the issue of whether the telecoms provider was estopped from arguing that they had been brought in time, the Court concluded that this would need to be considered at trial.