Limiting liability and feckless fraud: the need for clear warranty claim clauses in your contract

17th June 2015

The recent case of The Hut Group Limited v Nobahar-Cookson concerned whether a buyer’s warranty claim under a share purchase agreement was barred by contractual limitation of liability.

The recent case of The Hut Group Limited v Nobahar-Cookson and another [2014] EWHC 3842 (QB) has highlighted the importance of using exact wording in limitation clauses to avoid any uncertainty. The Hut Group (THG) purchased a sports nutrition company from Nobahar-Cookson (Trustee) for £58 million, £28 million of which was issued as consideration shares in THG to the Trustee. The share purchase agreement (SPA) specified that any claim THG wished to bring had to be served, specifying in “reasonable detail” the nature of the claim and as far as is practical the amount to be claimed, within 20 days of “becoming aware of the matter”.

THG claimed damages for breach of warranty relating to the Trustee’s management accounts, and the Trustee counterclaimed in relation to THG’s accounts. The Trustee alleged that THG had failed to serve their notice within 20 days. THG disputed this, arguing that they had served the notice when they became aware of a valid basis for a claim. It was held by the court that “becoming aware of the matter” was correctly construed by THG as meaning “becoming aware of the claim”, i.e. knowledge of a proper basis to bring a claim. The Court also considered who within THG had to “become aware” of the claim, and it was decided that it had to come to the attention of someone with knowledge of the SPA.

The Trustee’s secondary issue with the claim related to the fact that they did not believe it gave sufficient knowledge about the nature and amount of the claim and the end claim was for a substantially higher amount than in the notice. The court accepted that the notice provided all that was practicable as regards the quantum at an early stage and the contract did not require any more than that.

This case also considered whether fraud committed by the finance controller within THG could be attributed to THG, and therefore lead to liability. The court decided that the fraud was attributable to THG as the finance controller had helped to compile the accounts that had been used in the acquisition. Therefore the cap in the SPA on the buyer’s liability for warranty claims did not apply. This reinforces the need to remain vigilant against any potential fraud, as any fraud committed by an individual within the company could have disastrous consequences financially for the company.

In summary, the case has demonstrated the need for clear wording in warranty clauses (and indeed all clauses), as the courts will apply commercial sense to the interpretation. Having a warranty claim clause in itself is not sufficient, both parties should fully understand at what stage liability can arise, and what can be done to ensure the contract is adhered to. It has also reinforced the importance of being alert to any potential fraudulent activity carried out by any employee, as this can affect the entire company.

If you would like to discuss any of the issues raised in this article, please contact Chris Wills, head of our corporate law team, or Melanie Brown, author of the article.

The information provided in this article is for general information purposes only and does not constitute legal or other professional advice and cannot be relied upon as such. Any law quoted in this article is correct as at 17 June 2015. Appropriate legal advice should be sought for specific circumstances before any action is taken. Copyright © Murrell Associates Limited, June 2015.

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