Whilst nurturing a cold on a congested day off work, Corporate Blawg has put his time to good use by finishing level 6 of the delightfully named “KillZone” (PS2). Since Corporate Blawg is not one to put the "fist" in pacifist, Corporate Blawg has also spent some gentle hours paddling in the pool of legal intrigue. As a result, Corporate Blawg now spills out a summary of the three Warranty World (new) classic cases, namely: New Hearts, Eurocopy, and Infiniteland.
For the average (and exceptional) corporate lawyer, these three cases pop up regularly as key points of interest, pinned issues of contention and small pricks of concern. Corporate Blawg now wants to knock them on the head (in a friendly, non-violent manner) here in his blog of knowledge.
In case you are wondering where the facts of the cases have gone, the answer would be to the dustbin of legal verbosity. The facts of legal cases are only relevant to waffling barristers on an academic ego-trip and/or academics with aspirations of village storytelling. What we need here are cold results, hard answers, and no fluffiness.
When negotiating a share-purchase agreement, the seller must disclose to the buyer all relevant information concerning the target business. Afterall, you wouldn’t buy a chocolate bar without reading the ingredients, would you? Perhaps not, but if that chocolate bar was worth £50million you might be more interested.
The seller will give a warranty in the share-purchase agreement that the information disclosed to the buyer is complete. All matters which may affect the value of the target business would be disclosed in what is imaginatively known as a “disclosure letter”. Such itsy-bitsy teeny-weeny yellow polka-dot detail is vital to both sides - it reassures the buyer that there has been a decent level of disclosure; and the seller knows that the level of nudity is not so indecent as to leave it exposed to either a price reduction or an indemnity claim after the deal.
Often the share-purchase agreement will contain a clause that there has been “full and fair disclosure”. This may be further clarified with additional wording. Picking the way between the brambles of language construction, the courts have tugged at the roots of such phrases that have so entangled business common sense.
Where a warranty requires “full” disclosure, more detail is required than simply indicating where the answers may lie. Lord Penrose, in the Scottish case, New Hearts Ltd v Cosmopolitan Investments Ltd [1997] 2 BCLC 249 stated that:
Mere reference to a source of information, which is in itself a complex document, within which the diligent enquirer might find relevant information will not satisfy the requirements of a clause providing for “fair disclosure with sufficient details to identify the nature and scope of the matter disclosed”.
It is not uncommon for the warranty to state that the disclosure letter will contain all material matters covered by the warranty, and that any other matters within the buyer’s actual knowledge will not affect the buyer’s claim for breach of warranty. However if the buyer agrees that all material facts are “fully, fairly and specifically disclosed” then this may prevent the buyer for bringing a claim under breach of warranty for what had been his actual knowledge at completion. This was basically the bone of contention in the preliminary ruling of Eurocopy plc v Teesdale [1992] BCLC.
Eurocopy was referred to in Infiniteland Limited, John Stewart Aviss v. Artisan Contracting Limited, Artisan (UK) Limited 2005 EWCA Civ 791, although it was held to be different on the facts. In the first instance of Infiniteland it was held that where a buyer’s agents were aware of a breach of warranty at completion, the buyer’s agents conveyed actual knowledge on the buyer. This is because the warranty had the following clause:
The rights and remedies of the Purchaser in respect of any breach of the Warranties shall not be affected....by any investigation made by it or on its behalf into the affairs of any Group Company (except to the extent that such investigation gives the Purchaser actual knowledge of the relevant facts and circumstances)...
The case was decided on its facts by the Court of Appeal. The ruling had the impact of lending support to the decision of Eurocopy (despite being distinguished on the facts). One issue, which remains unresolved is whether the "actual" knowledge of the buyer included the knowledge of its agents. The Court of Appeal was divided on this issue. Pill LJ disagreed with Chadwick LJ who had stated that:
In simple terms, as I understand conventional legal usage, "actual knowledge" connotes a person's own knowledge; as distinct from knowledge which the law attributes to him, either because he ought to have it ("constructive knowledge"), or because it is knowledge of his agent ("imputed knowledge"). The distinctions are well-established (see e.g. the judgments in Al Ajou v Dollar Land Holdings [1994] 2 All ER 685), even if the precise boundaries and demarcation lines may sometimes become blurred, particularly in the difficult area of corporate knowledge.
So, where does this leave us? In view of the cases above, sellers and buyers must ensure that clear wording is set out in the warranties to avoid the risk of putting money in the pockets of litigation lawyers. For either side, it would not be difficult to clarify whether "actual" knowledge includes agents and employees (for the seller) or excludes them (for the buyer). Ignoring this issue would be at either party's peril.
Corporate Blawg now has actual knowledge of a headache to add to his ills, so he will construct a deep herbal bath which he has imputed therapeutic qualities upon. Corporate Blawg warrants that he will feel much better after his fingers have turned to prunes and he has drunk his special toddy of lemon, honey, ginger and Oban whisky.
Interesting entry. Keep up the good work corporate blawg.
Hope you feel better soon!
Posted by: legal jargon | 26 October 2006 at 04:51 PM
Thanks Legal Jargon, I'm feeling better already!
Posted by: Corporate Blawg | 26 October 2006 at 06:26 PM