UK: Only Fools Or Liars? Breach Of Warranty Claims

Last Updated: 3 April 2008
Article by Doug Hall

A corporate financier might say that only a fool or a liar would find themselves on the receiving end of a breach of warranty claim after the sale of a business.

Arguably, a well-organised, properly advised vendor should be able to sell a business and be reasonably certain that a claim from the purchaser will not follow. But forensic accountants see plenty of cases where a breach of warranty is alleged and a claim is made.

Some of these claims arise due to completing deals in a hurry, or where the commercial desire to 'do a deal' has overridden the need to properly secure both parties' positions through the transaction documentation. Purchasers who choose to claim generally come across a number of stumbling blocks, some of which we consider here.


The measure of damages in a breach of warranty case will be the difference between the value of the business sold as warranted and its actual value.

It is often assumed that the value of a business sold as warranted is equivalent to the consideration paid. However, sometimes the warranted information supports a lower valuation than the consideration paid. The purchaser may have paid more for a number of reasons, such as their own projections of what the company could achieve in the future.

Understanding what valuation the warranted information would have supported should be the starting point to assess the damages that the purchaser could credibly recover.

Bases of valuation

Arguments over how a business was valued when it was acquired are likely to become central to quantifying potential damages. This was highlighted in Senate Electrical Wholesalers Ltd v Alcatel Submarine Networks Ltd [1999]. The claimant pursued damages in excess of £26m but the Court of Appeal awarded none, even though the court found for a material breach of warranty following an overstatement of profits reported in warranted management accounts.

This decision should serve as a reminder that the eventual outcome of a breach of warranty case may be a finding of a breach, but no loss. An unattractive prospect considering the time and expense involved in bringing such an action.

The claimant's own accounts – having it both ways?

When one company purchases another, the directors of the acquiring company may perceive, after the event, that what they bought is not worth what they paid. But how do they disclose this information in their accounts?

Accounting standards dictate that the identified loss should be recognised in the acquiring company's audited financial statements. But this suggests to their audience, including the company's investors and the financial markets, that the directors made an error of judgment and bought an overpriced company.

The directors can only be vindicated if they pursue a claim for breach of warranty successfully and secure damages to compensate for their perceived overpayment.

This tension can lead claimants to try and have it both ways; they claim for the acquired business being worth less than warranted, but do not reflect this in their accounts. Particulars of claim in a breach of warranty case can therefore be completely at odds with the treatment of the transaction in the claimant's own audited financial statements.

This arose in Senate, where the claimant made what was described as a "massive" claim, but the audited financial statements indicated only a "modest" loss. The Court of Appeal commented: " hardly lies in the mouths of the directors or auditors of Senate to say that the accounts were wrong having regard to their statutory duties..."

One of the first courses of action for a defendant in a breach of warranty case should be to examine the financial statements of the acquiring company to see if they can identify such an obvious conflict with the particulars of claim.

Warranties over accounts

A variety of warranties may have been given on the results reported in the audited financial statements and management accounts of the company being sold. A number of these may turn out to be problematic for the warrantor when a claim is brought against them.

For example, giving a warranty that includes the word 'accurate' in relation to accounts is likely to leave the vendor exposed. This term is fundamentally incompatible with the basis on which accounts are prepared, which involve judgment rather than the absolute precision that the word 'accurate' implies.

Furthermore, giving warranties over management accounts can be dangerous for vendors, unless the management accounts in question are really of the standard that the warranty implies.

As this article highlights, claims for breach of warranty may not be as cut and dried as some claimants think.

Breach of Warranty

In-house seminar for lawyers

Smith & Williamson's Forensic Services team has had extensive experience of acting as experts and advising on claims for breach of warranty, both for claimants and defendants.

Using this experience we have developed an in-house seminar suitable for lawyers:

  • engaged in advising on the sale and purchase of businesses and companies
  • instructed by claimants and defendants in breach of warranty cases.

Our seminar covers:

  • relevant case law
  • the principles of calculating damages in breach of warranty cases
  • valuation issues
  • issues arising from examples of actual warranties
  • how best to enhance the chances of a successful claim for breach of warranty how best to defend a claim for breach of warranty.

This seminar typically runs for one hour, and is CPD-accredited with the Law Society and ILEX. It can be provided to groups of six or more (including contentious and non-contentious lawyers), free of charge, at your offices or at a location convenient to you.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions