Handling warranty breaches in M&A deals: insights from a recent High Court case

Background

This case involved a buyer claiming damages of £10,180,040 for breaches of warranties under a share purchase agreement (“SPA”) after the Education and Skills Funding Agency (“ESFA”) clawed back funding due to the target company’s non-compliance with ESFA rules.  The SPA included timescales within which any breach of warranty claim had to be notified by the buyer, along with details of the information to be provided as part of the claim notification (“Claim Notification”).

The sellers argued that the buyer’s claim for damages was invalid on multiple grounds, including the buyer’s failure to specify every warranty claim in its Claim Notification and adhere to the initial estimate of loss provided in that document.  They also contended that the buyer could not bring a warranty claim because an indemnity covered the same issue and the court claim was time-barred.

However, the court disagreed with the sellers’ arguments, holding that the buyer did not need to list every alleged breach of warranty in its Claim Notification and was entitled to revise its loss estimate later.  The court also clarified that the SPA prevented double recovery, not double claims, allowing the buyer to pursue both warranty and indemnity claims.

So, what should buyers and sellers take away from this decision?

1. Timing and service: precision matters

The court confirmed that “service” of a court claim means, in accordance with the Civil Procedure Rules, that “by” a specified date means on or before that date.  For buyers, do diarise deadlines early to ensure court claims are served properly.  For sellers, don’t assume technical defences around timing will succeed if the buyer has followed the rules.

Different timescales and service requirements for the Claim Notification may apply.  It is key to ensure that the terms of the SPA are complied with.

2. Notice requirements: substance over specificity

The SPA required the buyer to provide details of the nature of the claim, the facts and circumstances, and a bona fide estimate of loss in its Claim Notification.  The sellers argued the buyer had not specified every alleged breach of warranty in its Claim Notification or stuck to its initial estimate of loss contained within this document.  The court held that the buyer didn’t need to list every breach of warranty in its Claim Notification, and it could revise its loss estimate at a later date.

This is a helpful clarification for buyers: do focus on the substance of your notice rather than perfection.  As sellers, don’t rely too heavily on technicalities when assessing the validity of a claim.  However, the specific requirements of each SPA is always key.

3. Indemnities vs Warranties: know the boundaries

The sellers also tried to argue that the buyer could not bring a warranty claim because an indemnity in the SPA also covered the same issue.  Again, the court disagreed.  The SPA prevented double recovery, not double claims.  Each route has its own liability cap and purpose.

Do understand how warranties and indemnities interact within the SPA, and ensure the SPA is drafted to reflect commercial intentions clearly.  This is something we have written about previously, including recently in the context of WhatsApp messages (see our article on ‘Contract formation: Can WhatsApp messages create a legally binding contract?’).  Don’t assume that a claim under the warranties will preclude a separate claim under the indemnities, or vice versa.

4. Valuation of damages: stick to the agreed method

The court applied the parties’ original valuation method, in this case a multiple of maintainable EBITDA (“Earnings Before Interest, Taxes, Depreciation and Amortisation”), but adjusted it to reflect the clawback by the ESFA and the increased risk profile caused by the clawback.  This approach reinforces the principle that damages should reflect what the buyer would have paid had it known about the breach/the true position with the finances of the target company before the sale was completed.

Do ensure your valuation methodology is robust and well-documented.  Don’t underestimate the impact of minor breaches and/or inaccurate information on valuation.

5. Drafting matters: clarity is king

The sellers tried to reinterpret several SPA provisions, including liability limitations and composite warranties, but the court stuck to the plain meaning.  Where one limb of a warranty was qualified by “awareness” and the other wasn’t, the court treated them as distinct.

This is a drafting lesson for all parties: clarity trumps creativity.  Do draft with clarity to ensure provisions operate as intended.  Don’t try to rely on interpretation later.

Final thoughts

This case is a masterclass in how courts approach SPA disputes (of which we have done many Company & Shareholder Disputes) and a reminder that well-drafted agreements, clear processes, and timely action are essential.  Whether you’re buying, selling, or advising, do be proactive, precise, and prepared.

If you’re navigating an acquisition or preparing for one, our Corporate & Commercial team can help you structure your deal with clarity and confidence.

Already in a dispute?  Our Disputes team is ready to support you in protecting your position and resolving matters strategically.