Sale and Purchase Agreements – the devil is in the detail and knowledge is king

A sale and purchase agreement (SPA) is one of the most important documents in a business owner’s life.

A tactic commonly used by a seller to keep its representations and warranties relating to the condition of a target company as narrowly drawn as possible is to include a knowledge qualification against certain warranties. However, the scope of knowledge must be determined. Whose knowledge is relevant for the purpose of the qualification?  Is the knowledge only what that given person actually knows or is it constructive or imputed knowledge i.e. what they should have known after some reasonable level of investigation or in their particular capacity ?

In the recent case of BIP Chemical Holdings v Blundell [2021] EWHC 2590 the Court addressed relevant awareness in respect of a number of warranties given, and whether disclosure had been adequate.

What happened ?

In March 2019, Mrs Blundell sold Centec to BIP Chemical Holdings Limited (“BIP”), whose core business was the recycling of waste solvents, for £1.4m.

Centec had been the business of Mrs Blundell’s late husband. Following Mr Blundell’s death in June 2017, Mrs Blundell was left as sole owner of Centec, but she had never had a substantial involvement in Centec’s business, and remained focused on her real love, which is music.

The accounts to 31 May 2018 had shown a profit after provisions had been made; but internal management information packs showed consistent losses thereafter down to the completion date. Furthermore, it was alleged that Centec had been subjected to a prolonged and systematic fraud by a former director in conspiracy with Refuels Limited, a customer of Centec.

BIP sued Mrs Blundell for damages for breach of warranties contained in the SPA and for misrepresentation. Mrs Blundell counterclaimed for the outstanding balance of the purchase price.

What was decided?

The Court focused on warranties within the SPA that: (i) there had been no material adverse change in the financial or trading position, or turnover of Centec and no fact or circumstance which might give rise to such a change; and (ii) Centec had not been, or had not been in negotiations to become, bound by or entitled to the benefit or any agreement or arrangement, or subject to any liability, of an unusual, onerous or abnormal nature or not of an entirely arm’s length nature. Both warranties were also qualified by reference to the seller’s awareness.

Expert evidence concluded that there had been a material change between May 2018 and completion, the question was whether Mrs Blundell had the relevant awareness, and whether disclosure had been adequate.

The disclosure letter was found to be wholly inadequate. It referred to the possible loss of one or two contracts, the implementation of cost saving measures, and the fact that it might have lost one or two other customers during the time, but that Mrs Blundell was unable to verify it.  It gave no particulars at all, not even brief ones. It gave no clarity whatever to allow an assessment by the buyer of what was being disclosed.

Even though Mrs Blundell might not actually have been aware of the relevant matters, by virtue of the SPA she was deemed to have such knowledge, information and belief as she would have obtained had she made enquiries into the subject matter of that warranty with the board of directors of the company.  Enquiries were not made of the board of directors. Had it been asked the information in respect of the adverse material change was available.

Neither Mrs Blundell’s actual ignorance nor that of the board as such, gave rise to a defence to the claim for breach of warranty. Nor did make a difference that BIP, knew of and at least accepted that approach, because BIP was entitled to rely on the contractual warranty which they obtained through the SPA.

BIP established that Refuels had defrauded Centec in conspiracy with the former director of Centec. The Judge commented “It is telling that they have apparently decided to let sleeping dogs lie, and have not themselves pursued outstanding invoices,”

In respect of the counterclaim, Mrs Blundell’s claim to be paid the balance of the contract sum was independent of BIP’s claim for damages for breach of warranty. BIP had the shares (and the benefit of the claim for breach of warranty with them) and had to pay the agreed price for them. This sum was set-off against the damages awarded in favour of BIP.

What does this case show?

Common features and provisions of SPAs need to be approached with care and rigour (albeit that the process of collecting and assessing information and documentation relating to the condition of the target company may not uncover a fraud by a third party in conspiracy with a director).

Any seller needs to appreciate the dangers of a hands off approach to the preparation and nature of the information being given to the buyer in the form of due diligence materials and warranties in the SPA, particularly those with a knowledge qualification, and the risk the Court may impute knowledge that the person was aware facts stated were incorrect. Perhaps Mrs Blundell may have been spared from becoming embroiled with business litigation so soon after the loss of her husband of many years.

Our team of corporate lawyers have considerable experience of advising on and negotiating SPAs to ensure that, as a seller, you are in the best possible position to avoid a claim arising.  If you are already in the difficult position of being involved in a dispute in relation to an SPA then our commercial litigators are experts in advising you on how to deal with the issues. Contact one of our specialists to find out more.