April 26, 2016

Contractual warranties – a warning on time limits

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Contractual warranties 

Commercial sale contracts, such as share purchase agreements ("SPAs"), usually contain a variety of contractual warranties which seek to give the buyer comfort and assurances about what it has bought.

On the sale of a business the seller would usually be required to warrant to the buyer, for example, that:

  • the business’ accounts give a true and fair view of the company’s financial position
  • any property belonging to the business is fully compliant with planning permissions and that there are no disputes with the neighbours or tenants
  • that none of the business’ commercial contracts have been terminated or will be terminated shortly after the buyer acquires the business
  • that there are no disputes with any suppliers, customers or employees.

When warranties are given, it is however common for the seller to negotiate contractual limitations to its liability under those warranties. Most usually the seller will seek to limit its liabilities by specifying financial and time constraints on the buyer’s ability to rely on them.

A common feature of a time constraint on a seller’s liability is that the buyer must notify the seller of a potential warranty claim promptly after it becomes aware of the breach or potential breach, and that any claim will be deemed waived unless the buyer issues and serves proceedings within a specified period following the end of the liability period. 

The meaning of awareness

In the recent case of Nobahar-Cookson v The Hut Group Ltd [2016] EWCA Civ 128 the Court of Appeal was asked to consider the meaning of "becoming aware" in the context of a warranty which contained the following limitation:

"The Buyer must notify the Seller of a potential claim under the warranty within 20 business days of becoming aware of the matter." 

The phrase “becoming aware” is unhelpfully vague, and the legal principles concerning the interpretation and construction of ambiguous contractual wording were considered in depth. Ultimately, the Judges unanimously agreed that the clause should be interpreted narrowly, in favour of the seller.

It was therefore concluded that the proper interpretation of the clause required the buyer to be sufficiently aware of the claim to the extent that it knew there was a proper basis for a claim under the warranty.

Practical points for consideration

Where parties have entered into an SPA containing warranties, the buyer’s right to claim under those warranties is likely to be subject to some limitations. Where those limitations are ambiguously drafted there is clearly scope for a dispute between a buyer who wants to rely on a warranty and a seller who wants to exclude their liability.

The lesson to take away is that when entering into commercial contracts, the drafting of clauses must be clear and unambiguous to limit the possibility of later disputes about their meaning. However, where a dispute does arise, the traditional legal principles of interpreting clauses narrowly in favour of the party who would suffer as a result of the clause being relied upon will apply.

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