UK: Don't Breach A Warranty Through Failure To Fulfil A Third Party Contract

Last Updated: 16 July 2013
Article by Geoff Mendelsohn and Ellen Hughes-Jones

When entering into a contract, one party may be asked to give warranties to the other party relating to a number of different aspects of the state of the company, including the status of and ability to perform any third party contracts that party may be involved in. The recent decision of the Court of Appeal in the case of Belfairs Management Limited v (1) Matthew Sutherland (2) Christie Jane Sutherland [2013] EWCA Civ 185 should be a warning to parties that they need to be careful when entering into such warranties in order to protect themselves from being found in breach of warranty at a later date.

The Belfairs case involved the sale in February 2008 of 60% of a company Waveform Solutions Limited ('Waveform'), by the husband-and-wife defendants Mr and Mrs Sutherland, to a company called Belfairs Management Limited ('Belfairs') for the sum of £2 million. Waveform, of which Mr and Mrs Sutherland were the only shareholders, was a supplier of communications and information technology, as well as a software developer that sold its own products. 

In late 2006 Waveform became involved in the NHS National Programme for IT. Its application was successful notwithstanding the fact that Mr Sutherland knew that some of Waveform's existing programmes were not up to the relevant NHS criteria. Mr Sutherland was keen to get additional investment for Waveform in order to enable it to fulfil its obligations under the NHS contract, and a share purchase agreement ('SPA') was entered into with Belfairs on 11 February 2008. The NHS contract itself was not signed until 29 February 2008, however it was referred to throughout 2007 in correspondence with Belfairs. Indeed, Waveform's valuation of £2 million was founded on the basis that, in the words of Belfairs' accountant, "the NHS contract is solid and continues".

By August 2008 it was apparent that Waveform was not going to meet the deadline of releasing the compliant product. In November 2008 Waveform entered into administration, followed by a creditors' voluntary liquidation in February 2009. Belfairs sought damages from the defendants for alleged deceit and breach of warranties in the SPA. 

The judge dismissed Belfairs' claim for deceit and held that the defendants were not in breach of the warranty in paragraph 16.1.5 of Schedule 3 of the SPA, which stated as follows:

16.1.5 The Company [Waveform] is not a party to any agreement, arrangement or commitment which ... cannot readily be fulfilled or performed by it on time.

Belfairs appealed against this finding that Waveform was not in breach of the paragraph 16.1.5 warranty. 

The Court of Appeal held firstly that, although at the date the SPA was signed, Waveform was not actually subject to any obligation or commitment under any NHS contract, all the parties (including Belfairs) knew the intention of Waveform to enter into such a contract with the NHS - indeed, the purpose of the sale to Belfairs was for Waveform to receive funding to sign up to the NHS contract. The Court of Appeal stated that "what counts is whether or not the reasonable person would regard [the] reference in paragraph 16.1 to any 'agreement' as including the NHS contract both parties expected to be signed shortly after the completion of the SPA and was in fact so signed. Everything appears to me to point to the conclusion that such contract would be regarded as so included. Its signing was at the very heart of the commercial deal between the respondents and [Belfairs]."

As to whether the warranty had been breached, the Court of Appeal held that it required an objective assessment of the achievability of the obligations of the NHS contract as at the date the SPA was signed, and remitted the question back to the judge at first instance.

The key principle of this judgment is that even though the NHS contract had not been signed at the date of the SPA, it was in the anticipation of the parties and accordingly fell within the warranty. 

It is therefore vital for parties giving warranties to ensure that they do not find themselves breaching warranties to fulfil or perform a third party contract, when such fulfilment or performance might be out of their hands. In this context, where the supplier's ability to deliver may be dependent on co-operation from the various PCTs and therefore outside of the supplier's control, extra consideration should be given to such warranties.

A link to the case can be found here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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