Court of Appeal: No material adverse change.… BUT notice of breach of warranty ineffective in any event!

11 minute read
13 December 2023

The Court of Appeal has reversed the High Court decision handed down earlier this year in the case of Decision Inc Holdings Proprietary Ltd & Anor v Garbett & Anor [2023] EWCA Civ 1284, providing another useful insight into the court's interpretation of warranties relating to a company's financial position. Perhaps of more importance the decision also stresses the need to ensure all contractual notice provisions are adhered to, or else risk losing the right to bring a perfectly valid claim.


The dispute concerned the sale of a company specialising in the design of enterprise performance management software (the Company) pursuant to a Sale and Purchase Agreement entered into on 8 October 2018 (the SPA).

The nature of the business of the Company meant that it had a small number of relatively large projects ongoing at any one time and its future was dependent upon them winning new mandates from customers. Future business was assessed through pipelines that listed new business prospects. During discussions leading up to completion of the SPA the Sellers provided the Buyer with various pipeline and other financial documents illustrating the Company's financial position. The pipeline documents indicated an expectation that the Company would win substantial business from four key clients, with the July pipeline showing a total £21,554,000 of possible work.

The SPA contained various warranties concerning the Company's business and affairs as at the date of the SPA. These included:

  • that since the Accounts Date (31 December 2017)…. there "has been no material adverse change in the turnover, financial position or prospects" of the Company (the No MAC Warranty, and one which would generally be regarded as "buyer-friendly" drafting); and
  • that all financial and other records of the Company have been properly prepared and maintained and constitute an accurate record (the Accuracy of Records Warranty).

The SPA also contained a number of contractual limitations on the Sellers' liability (as is often the case), including a provision that excluded the Sellers' liability in respect of any claim for breach of warranty (a Claim) unless, the Buyer gave written notice of the Claim "…summarising the nature of the Claim (in so far as it is known to the Buyer) and, as far as is reasonably practicable, the amount claimed…" within 24 months of completion (the Notice Limitation).

Following completion it became clear that the Company's prospects were not as positive as the financial information provided by the Sellers had suggested.

The Claim

The Buyer gave notice of a warranty claim on 4 September 2020 (the Notice). The Notice identified claims under the No MAC Warranty, as well as under the Accuracy of Records Warranty – amounting to six claims in total. The Buyer did not provide a breakdown of the amount claimed in respect of each separate breach, rather the notice contained an aggregate figure for the total amount claimed. Proceedings were commenced a month later.

The Buyer alleged that (among other things) there had been a material adverse change in the Company's prospects since the Account Date (the Prospects Warranty), which was not properly reflected in the information provided by the Sellers.

The Sellers denied liability and instead counterclaimed for the issue of shares to the value of £787,000 – which had been provided for under the terms of the SPA. The Sellers also asserted that the Buyer had actual knowledge of the financial position and prospects of the Company at the relevant time and that the Notice was defective in any event.

The High Court Decision

Five out of six of the breach of warranty claims failed on their merits at first instance, but in relation to the Prospects Warranty the Judge found that the Buyer did not have actual knowledge of any change in the prospects of the Company when the SPA was entered into such that the warranty had been breached and the Buyer was entitled to recover damages for the loss suffered as a result. Furthermore the Judge held that the notice given by the Claimants had satisfied the requirements of the SPA.

The Defendants appealed to the Court of Appeal.

Court of Appeal Decision

The Court of Appeal reversed the decision of the High Court.

The High Court's interpretation of, and approach to, the Prospects Warranty were held to be wrong. In the Court of Appeal's view, the Judge had used the wrong dates and the wrong comparison to reach the wrong decision.

For there to have been a breach of warranty, the Company's prospects must have worsened since the Accounts Date, which meant the court had to review those prospects at the Accounts Date and compare them to the prospects at the date of the SPA.

The High Court had instead compared the actual position of the Company in October 2018 (i.e. at the time of the SPA), with the expectation a reasonable buyer would have had at that time. It was not therefore a comparison between the Company's "prospects" at the two relevant dates. Further, the exercise undertaken by the first instance Judge had not focussed on what the Company's "prospects" actually were but instead had brought in (wrongly), as part of the process, an assessment of what a buyer would have expected those "prospects" to be.

The Court of Appeal accepted, in the context of the SPA, that "prospects" was not easy to construe, however they did not accept that it simply equated with assessing the Company's earnings before interest, taxes, depreciation and amortization (EBITDA) at a fixed point in time.

They explained that as "prospects" look to the future, the concern must be with what might happen after the relevant date. By focusing on the EBITDA of the Company at the date of the SPA, the judge was wrongly assessing whether the warranty had been breached by reference to what had already happened, not how the Company might fare in the future. Read naturally (and in the context of this particular SPA) "prospects" should be understood to mean "chances or opportunities for success" in a more general way, and if the parties had meant EBITDA to be the right measure that should have been clearly expressed in the SPA.

Having determined that the Judge's conclusions on the application of the Prospects Warranty was incorrect, the Court of Appeal considered whether the Claims Notice was defective (as, if it was, there would be no further need to consider the claim or remit it for a re-trial as any attempt to amend the notice would be time-barred by the contractual limitation period). Whilst any SPA needs to be construed on its own terms, interestingly the Court of Appeal held that the Claims Notice had been defective in relation to the only potentially remaining claim (the breach of the Prospects Warranty) - because the Buyer had not included a separate amount claimed in respect of that alleged breach, instead providing an aggregate sum for the losses allegedly suffered as a result of all of the breaches.

The Judge at first instance had accepted the Buyer's position that it would not have been possible for them to allocate different values to different breaches, but the Court of Appeal did not accept this argument. The Court of Appeal preferred a construction of the Notice Limitation which required the Buyer to specify, for each breach of warranty (or at least the Prospects Warranty with which it was concerned), the amount claimed (as far as reasonably practicable).


This decision is yet another which highlights how difficult it can be for the Court (and therefore the parties) to assess in practice whether a "material adverse change" triggering a breach of warranty has occurred and the uncertainty inherent in that process (see our alert on the decision handed down by the Commercial Court in Finsbury Food Group Plc v Axis Corporate Capital UK Ltd for another example). In addition to ensuring that any MAC clause is clear, unambiguous and well drafted, careful consideration needs to be given in the context of a potential claim or dispute to the precise interpretation of that clause and what factual and expert evidence is required to support such a claim.

This was not a transaction in relation to which the Buyer had taken out buy-side Warranty & Indemnity insurance. It is worth noting that if it had, any such policy would be very likely to exclude cover for forward-looking warranties and/or the No MAC Warranty would have been qualified for the purposes of the policy so as to delete any reference to "prospects".

The decision also stresses (again) how important it is to ensure that contractual notice provisions are strictly adhered to (both as a matter of timing and content). They will differ between SPAs, and the level of detail specified at the drafting stage can have a significant impact on the availability of defences to any subsequent claims. Notice requirements should be followed to the letter as any failure could result in the right to bring a claim being lost – regardless of the merits of the claim in question.

Engaging with your legal team at an early stage, when investigating potential breaches of warranty and claims, can assist you in properly formulating the notice (which can then be key, years down the line, if your claim reaches trial). On the other side of the fence, Sellers should carefully scrutinize warranty claim notices when they are received to check for adherence to the SPA provisions.

If you have any queries on this alert, or in relation to Breach of Warranty claims generally please do not hesitate to contact Sean Adams, Samantha Holland or Catherine Naylor.

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