Can a Seller Rely on Information that has been provided Outside of a Disclosure Letter?
Butcher v Pike – Case Overview
In the recent Court of Appeal case, Butcher v Pike [2021], the Court considered the issue of a buyer claiming that a clause in a share purchase agreement can be disapplied because of negligent non-disclosure and whether a seller can rely on information that has been provided outside of a disclosure letter as a defence to such claim.
In a transaction relating to the sale and purchase of shares in a private company, the share purchase agreement (SPA) is a written contract that documents the sale/purchase between the buyer and seller. A SPA contains a number of commercial terms and warranties (i.e. promises provided by the seller for the comfort of the buyer). The disclosure letter is another key document that is prepared during the transaction and includes general and specific disclosures relating to warranties in the SPA.
In Butcher v Pike, the sellers had sold their shares in a letting agency (the target company) and the target’s main business was to enable private landlords to advertise rental properties via internet platforms such as Rightmove and Zoopla. The buyer then claimed breach of warranty in the SPA which said the target was not in default of any agreement to which it was a party, because the target had, in fact, breached a restriction in the platforms’ contractual terms which prohibited it from advertising lettings on behalf of other commercial lettings agents.
The buyer acknowledged that it had not given the sellers notice of its warranty claim within the 6-month time limit imposed by the SPA, however, the buyer contested this was irrelevant because clause 6.2 in the SPA disapplied the limitation in relation to any warranty claim concerning “negligent non-disclosure”.
The buyer argued that there had been negligent non-disclosure because the applicable restriction in the platforms’ contractual terms was not expressly referred to in the disclosure letter. The sellers stated that they could rely upon disclosures made outside of the disclosure letter, and the buyer had in fact been informed of the platforms’ terms before entering into the SPA, and so could not claim there had been no disclosure.
The Decision
The Court of Appeal held that the judge was correct when ruling in favour of the sellers, and that clause 6.2 was not limited to disclosure through the disclosure letter alone. The Court then went on to say that there was no reference to the disclosure letter in clause 6.2, and because it was referred to elsewhere in the SPA, it was to be inferred that the absence of any reference in clause 6.2 was deliberate. The Court also said there was no sense in asking whether there had been negligent non-disclosure by reference to the disclosure letter if there had actually been disclosure in another communication. The intention of the disclosure letter was to confine the scope of the warranties for the sellers’ benefit, whereas the aim of clause 6.2, was to provide an exception to the limitations on liability for the buyer’s benefit.
Final Thoughts
Although the Court of Appeal found in the sellers’ favour, the disclosure letter is an important document to accompany an SPA as it enables the seller to inform the buyer of any potential issues that would otherwise make the warranties provided in the SPA untrue. By having these disclosures formally recorded, the disclosure letter better protects the seller from any breach of warranty claims, as the seller has disclosed the issues properly and given the buyer the information which is, or may be, inconsistent with the warranties referred to in the SPA.
Need Advice? We Can Help
If you need any advice regarding your business or the sale or purchase of shares in a private company, then please do get in touch with our experienced team, Elizabeth Clazie, Kimberley Clayton, or, Max Harnden at Gotelee Solicitors LLP, emails: elizabeth.clazie@gotelee.co.uk, kimberley.clayton@gotelee.co.uk & max.harnden@gotelee.co.uk, telephone numbers: 01473 298187, 01473 298168 & 01473 298139.
