Buying a business can be a risky undertaking. Even if the normal due diligence work is done with great care, sometimes there can be skeletons in the cupboard, which can emerge to your detriment. It is a particularly risky business when the vendors are less than totally honest.
In a recent case, the purchaser of a business discovered, some time after having taken it over, that it had at its core corrupt practices which related to its major customer. The vendors of the business had, as one might expect, concealed what was going on. The purchaser claimed against the vendors for deceit, breach of contract and warranties and breaches under the Misrepresentation Act 1967.
The claim’s resolution by the court revolved around two issues. Firstly, to what extent a limitation clause could be relied upon in such circumstances and secondly, whether the buyer could claim for losses on an ‘opportunity cost’ basis.
The defendants sought to strike out the claims for misrepresentation and breach of contract because the sale agreement contained a limitation clause which required the purchaser to provide written particulars of any claim within two years of the sale, which was not done. The court rejected this defence on the basis that such a clause did not apply where the warranties were fraudulently given and the truth deliberately concealed.
This then brought into point the amount of the claim. This was calculated based on the loss to the purchaser, which had resulted from the false representations made by the defendant, of the opportunity of investing in another business. Had these representations not been made, the purchaser would have invested in a different business. The claim was therefore calculated with reference to the profits the purchaser would have earned had it bought the other business instead and the value of the other business that it would have acquired.
Interestingly, the Court approved of this reasoning and awarded damages of £8 million.
Such reasoning, if it becomes commonplace and can be backed up by sufficient evidence of the ‘opportunity cost’ loss suffered, could lead to claims being made which appear to have little relationship to the measured loss.
Partner Note
4 Eng Ltd. v Harper & Simpson, [2008] EWHC 915.