When a downturn comes, buyers, in an M&A context, may look to claw back sums spent. One form of price adjustment is a claim under the warranties. With Brexit on the horizon, and the economy looking increasingly uncertain, there is a growing prospect of claims being brought. This article examines common pitfalls arising out of the contractual machinery used in notifying warranty claims. A valid notice tends to be required as a condition precedent or ‘gateway’ to a claim proceeding. Bluntly, those who get the notification wrong risk losing all recourse, with an otherwise strong claim becoming worthless.

Warranties are a series of statements contained in a transaction document – a sale and purchase agreement (SPA) regarding the target’s condition. They have two functions in particular: to provide comfort to the buyer on particular matters (if false and the target is worth less as a result, a claim may arise) and to encourage a seller to disclose known issues (disclosures will generally limit exposure under the warranties). This note focuses on the first of those functions.

Brexit is now just months away. Many businesses are exposed to currency fluctuations and risk arising out of cross-border aspects of their supply chain. Contracts which were once profitable could become onerous. All of this means that the fortunes of some businesses could deteriorate in the period following the UK’s departure from the EU. Those who have recently acquired such a business will be well advised to consider the content of the warranties carefully and whether a claim may be brought in order to achieve some form of ex post facto price adjustment. Accounting warranties might be a fertile area for such claims, with buyers carefully examining statements regarding the last audited accounts or management accounts or even regarding the absence of a material adverse change (MAC) since the last audited accounts.

Jan-Mar 2019 issue

Lewis Silkin LLP