A recent court case has highlighted the risks faced by sellers when giving warranties to a buyer on a corporate transaction.

In the recent case of Cardamon Limited v MacAlister and another, the sellers of a company were ordered to pay damages to the buyer in the entire amount of the purchase price as a result of breaching warranties given by them in the sale agreement.

Following completion, significant cash injections were required in order for the business to continue running day-to-day, as it was discovered that the latest annual accounts contained material inaccuracies which had been carried forward from previous accounts. This amounted to a breach of warranty as to the truth, fairness, accuracy, and proper preparation of the target’s annual accounts for that year. The judge was satisfied that significant loss had been suffered by the buyer, and the award for damages was made.

It is noteworthy that in this case the buyer had chosen not to carry out any due diligence in order to quickly acquire the company for a low price, but this did not provide a defence to the seller for the inaccuracy of the warranties made.

This should serve as a salutary lesson to all sellers – sellers must accept liability for all warranties they give to a buyer in the sale agreement, including accounts warranties, regardless of the fact that the sellers had not personally prepared the accounts.

On every transaction, careful consideration must be given to the scope of the buyer’s due diligence exercise, and the quality of the information provided by a seller in response. Warranties from a seller can provide recourse for a buyer in the event that due diligence information proves to be inaccurate…but good legal advice is money well spent to guide a buyer or a seller through this vital part of the deal process.

Our corporate team has extensive experience of negotiating transaction documents and assisting with the due diligence process, including giving warranties and indemnities. Please get in touch with  Joshua Lodge or a member of our team for further information in relation to any aspects of a corporate transaction that you might be contemplating.

Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.

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