Purchasing a Company- Didn’t Get What You Were Expecting?

Thursday, January 25th, 2018

Before purchasing a company, to ensure they know what they are getting, a buyer will carry out due diligence on the target company. Based on that due diligence they will ask the seller to make contractual statements that certain facts in relation to the company are true. These contractual statements are known as ‘warranties’. Normally a seller will seek to limit their liability under the warranties in the sale contract by including clauses known as ‘limitations’.

One such limitation that is normally included in the sale contract is the ‘notification of claims’ limitation, under which the buyer must notify the seller in writing of a breach of warranty within a specified period following completion (usually 7 years for tax warranties and 2 years for other warranties) failing which, the warranty claim will be time-barred.

In the recent case of Teoco UK Ltd v Aircom Jersey 4 Ltd [2018] EWCA Civ 23, the Court of Appeal considered the content of the written notice sent in accordance with a notification of claims limitation. The Court dismissed the buyer’s warranty claim on the basis that their notification to the seller did not adequately set out the grounds of the claim. In this case, the court found that the buyer’s notification should have referred to the specific warranty in the contract of sale which the buyer believed the seller had breached. As a result of this finding, the buyer’s warranty claim was time-barred.

Whilst much is dependent on the specific wording of the notification of claims limitation in the contract of sale and each case will turn on its own facts, this case demonstrates that specialist legal advice should be sought before drafting and sending notice of a warranty claim to the seller of a company.

If you are buying or selling a company or business and require further advice please contact a member of our Company & Commercial team on 0207 228 0017.