A recent High Court (Cardamon v MacAlister[1]) case has awarded damages to a buyer amounting to the entire purchase price paid on a share sale following a breach of warranty. Whilst this is a rare outcome, the case highlights the importance of having three things:

  • well drafted limitation clauses;
  • precisely drafted warranties; and
  • undertaken due diligence on company sales.

The Cardamon v MacAlister in brief

  • Cardamon Limited (Cardamon) purchased the company Motorplus Ltd in 2014
  • Agreed purchase price was £2,386,247.50
  • Cardamon agreed that no due diligence would be required and the seller, MacAlister, agreed to ‘blind warranties’ without having been involved in the day to day running of the company since 2002, so that the purchase could proceed swiftly
  • Following completion, it was discovered that the liabilities were substantially under stated in the accounts
  • Cardamon filed a claim for breach of accounting warranty as a result of underprovision in the accounts
  • Cap on liability was purchase price
  • De minimis clause of £500,000 (i.e. this amount would be written off from any claim)
  • Court ruled in favour of Cardamon and awarded damages of entire purchase price

What is a warranty?

When purchasing a company, the legal principle of ‘caveat emptor’, or buyer beware, applies. As a result, it is important that a potential buyer undertakes investigations on the target company to ensure the buyer is fully aware of all its liabilities. To catch any potential issues, the buyer will ask the seller to warrant certain matters are true. In essence, the seller is providing a promise to the buyer that the information they have supplied is correct or that specific statements set out in the formal share purchase agreement are true. In the above case, the warranties in question were that :

  • the company’s accounts had been properly prepared and were true, fair and accurate; and
  • the management accounts fairly represented the assets and liabilities and the profits and losses of the Company as at the date when they were prepared.

This was found not to be the case.

Limitations on liability

A seller wants to limit any claims against them by the buyer. This is done in 2 ways:

  • Disclosures
  • De minimis / cap clauses

Disclosures are explanations given by the seller to the buyer to set out any exceptions to the warranties and are contained within a Disclosure Letter. For example, if the seller warrants that title will pass to all land occupied by the business but knows that one parcel of land occupied by the business isn’t included, this would be listed in the Disclosure Letter.

De minimis clauses and caps are put in place to limit the financial impacts of a claim against the seller. A de minimis clause provides that claims must be above a minimum value for the buyer to make a claim. In the case above, the seller had a de minimis clause of £500,000. Usually this would simply mean that no claim can be brought unless its value was over £500,000. In this instance however, the de minimis was worded such that that there was no minimum claim amount, however, the first £500,000 of any claim would be the buyer’s responsibility. Conversely, a seller’s liability can also be capped so that they will only be liable for claims up to a certain amount. Again, in the case above, the cap was the final purchase price.

Why is due diligence important?

Had Cardamon undertaken legal and financial due diligence at the outset the outcome would have been very different. The purchase price could have been adjusted and accurate warranties and disclosures could have been given. Cardomon may have even decided not to purchase Motorplus Ltd!

Whilst Cardamon was awarded the entire purchase price, the company’s actual losses far outweighed this. Had there not have been a cap included, the MacAlister’s liability would have been substantially more. Equally, damages in this case were not limited by the de minimis clause due to its unusual wording. As the total losses in the case were £500,000 more than the purchase price, the judge was able to award entire purchase price.

[1] 116 Cardamon Limited v MacAlister and another [2019] EWHC 1200