15 June 2015

Contractual warranties must be crystal clear to avoid disputes

Parties to a contract containing warranties should ensure the scope of the warranties, and any conditions on claims for breach - including time limits and the contents of any notice claiming there has been a breach - are clear and unambiguous, following a High Court ruling.

A warranty is a legally binding promise that a statement in the agreement is true. If the statement turns out not to be true the other party can claim compensation for breach of the warranty.

In this case, a buyer bought all of a company's shares from a shareholder seller. It paid partly in cash and partly by allotting shares to the seller. The seller gave certain warranties as to the financial state of the company in the agreement between them, but said the buyer could only claim compensation for a breach of the warranties if it specified the nature of the claim in reasonable detail and the amount claimed, as soon as reasonably practicable, and in any event, within 20 business days after 'becoming aware of the matter'.

When the buyer claimed breach of warranty, the seller argued the claim was out of time. It said the 20-day period began to run when the buyer became aware of the facts that could give rise to a claim, and this had expired when the claim was made. The buyer, however, said time only started to run when it became clear there was a legal claim.

The court agreed with the buyer. The wording of the agreement meant mere awareness of facts or irregularities did not start time running. It had to be clear there was a legal claim first.

The buyer also claimed there was insufficient detail in the notice of the claim. The court disagreed and said the wording of the agreement did not require any particular details to be given. The buyer had therefore given sufficient information.

Operative date

Now

Recommendation

Parties to a contract containing warranties should ensure the contract is clear as to the scope of the warranties, and any conditions to be satisfied when making claims for breach of warranty, including time limits and the contents of the notice claiming breach.

Case ref:

The Hut Group Ltd v Nobahar-Cookson and another [2014] EWHC 3842

If you wish to discuss this topic further, please contact Marcus Armstrong on 0113 297 7736 or at marmstrong@shulmans.co.uk.