Butcher and another v Pike and others – when is a buyer prevented from bringing a warranty claim due to being aware of the facts giving rise to the breach?

In a case recently decided in the High Court it was held that a disclosure had been made by a seller to a buyer of shares, notwithstanding that the matter was not mentioned in a disclosure letter.

Facts of the case

The case of Butcher & Anor v Pike & Ors [2020] involved a sale of the entire issued capital of a company between two sets of individuals, and the share purchase agreement (SPA) contained a warranty given by the sellers in favour of the buyers that the target company had not defaulted under any agreement or arrangement to which it was a party.

As is often the case in share sale transactions, the SPA stated that the sellers’ warranties were “subject only to any matter which is fully, fairly and specifically disclosed in the Disclosure Letter”. The intended effect of this wording was to ensure that, provided the disclosure is made in sufficient detail to be regarding as having been fully, fairly and specifically disclosed, any matter disclosed in the disclosure letter would not give rise to a warranty claim against the sellers.

The business of the target company was enabling private landlords to advertise properties for rent through on-line platforms, such as Rightmove and Zoopla. Following completion of the sale the buyers discovered that the terms and conditions of Rightmove and Zoopla only allowed the company to advertise a property using their platform if the instruction to market the property originated at one of the company’s branches. The buyers believed that this restricted the company from marketing properties on behalf of landlords and therefore the company was in breach of the terms and conditions.

The sellers had disclosed the Rightmove and Zoopla terms and conditions to the buyers, but the sellers did not specifically disclose that the company was acting in breach of them. The buyers made a claim against the sellers for a breach of the warranty, which was disputed by the sellers.

The SPA contained a common limitation on the period following completion during which a valid warranty claim could be made, being 6 months following completion, but this time limit did not apply in the event of any fraud or negligent non-disclosure. The buyers believed that, because there had been a “non-disclosure”, the time limit did not apply in this instance. The sellers response was that despite the requirement for disclosures to be set out in the disclosure letter, in relation to the time limit disclosure could take place outside the disclosure letter, and that the buyers were aware of the company’s business and the content of the terms and conditions. As a result of the disclosure of the terms and conditions and the buyer’s knowledge of the business, there was no merit in the argument that there had been non-disclosure.

High Court decision

The High Court decided in favour of the sellers, and distinguished between disclosure for the purpose of qualifying the warranties and disclosure for the purpose of determining if the time limit on claims was applicable to the claim. It was noted that the purpose of a disclosure letter is to allow a seller to demonstrate and explain that a warranty is not true and accurate, and for the buyer to acknowledge that such disclosure has been made.

In respect of how any non-disclosure affects the claims time limit, the judge ruled that the parties intended that the buyers would not be prevented from making a warranty claim after the expiry of the claims period if the sellers failed to disclose something which should have been disclosed. In this instance, the sellers had disclosed the terms and conditions and the buyer was aware of the nature of the business, therefore there had not been any non-disclosure which would allow a claim to be made outside the claims period.

Implications of the decision 

The High Court’s decision raises some uncertainties regarding whether or not a buyer can claim for a warranty breach despite being aware of any fact, matter or circumstance which would give rise to a claim when the SPA is entered into.

Precedent suggests that a buyer is not able to claim in respect of a matter it was actually aware of prior to entering into the SPA (Eurocopy v Teesdale [1992] BCLC 1067). However, it is possible to depart from this position if the terms of the SPA are drafted to include a provision stating that a buyer can make a claim despite being aware of the matter giving rise to the claim (Infiniteland Ltd v Artisan Contracting Ltd [2005] EWCA Civ 758).

In this instance it is unclear whether the wording “subject only to any matter which is … disclosed in the Disclosure Letter” was sufficient to ensure that the buyer would be able to make a valid warranty claim in respect of a matter the buyers were aware of, despite such matter not being mentioned in the disclosure letter.

This case therefore serves as a reminder that the drafting of an SPA in relation to a share or business sale must be undertaken with care with regards to the standard of disclosure required against the warranties, and if it is agreed that a buyer’s knowledge or awareness of any matter should not prevent the buyer from making a claim, it should be made sufficiently clear in the SPA.