High Court Draws Firm Line in Warranty Disputes

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The recent decision of the High Court in Veranova Bidco LP v Johnson Matthey Plc concerned the alleged breach of warranty in relation to a Share Purchase Agreement (SPA) for the sale of a pharmaceutical business. The SPA included a warranty that no key contract was being renegotiated in a way that would adversely affect the business. In fact, prior to signing, one of the company’s customers had invoked a price-match clause, relying on a competing offer at roughly half the existing price which the company would have to match in order to retain this customer’s business.

It was clear to the court that this warranty had been breached.

Disclosure Falls Short

The sellers attempted to argue that the issue had been adequately disclosed. However, it was found that the disclosure letter referred only in general terms to “increased competition” and “pricing discussions”.

Ultimately, the court held that the disclosures were insufficient on the basis that the SPA required disclosure to be detailed enough for a reasonable buyer to understand the nature and scope of the issue. Vague or generic statements were found not to meet that standard.

Just as significantly, the court confirmed that disclosure must be assessed strictly within the contractual framework, and that the buyer was unable to rely on statements made during due diligence calls or other informal exchanges to supplement the formal disclosures. The entire agreement and non-reliance clauses in the SPA reinforced this position.

A Breach Without a Remedy

Despite finding both a breach of warranty and inadequate disclosure, the buyer’s claim failed. The SPA limited warranty claims to cases involving fraud or wilful misconduct, meaning the buyer had to prove fraud to succeed. Ultimately, the buyer was unable to do so.

The High Bar for Corporate Fraud

A central issue was whether the sellers could be found to be fraudulent based on the knowledge of its executives. The buyer argued that it was enough to show that the relevant facts were known within the organisation, even if no single individual had the full picture.

The court rejected this approach. It was confirmed that corporate fraud requires proof of dishonesty on the part of at least one identifiable individual whose state of mind can be attributed to the company.

That individual must:

• know the facts which render the warranty false;
• understand the warranty sufficiently to recognise its significance; and
• know, or be reckless as to whether, the warranty is untrue.

Crucially, the court found that it is not permissible to aggregate the knowledge of multiple individuals to construct a dishonest state of mind. Absent an express contractual provision, collective knowledge is not sufficient.

The court distinguished this case from the previous decision in Synthos v Ineos, where aggregation was allowed because the SPA expressly deemed the knowledge of specified individuals to be that of the seller.

The court also emphasised that a failure to ensure that disclosure was complete or accurate, even if negligent, does not amount to dishonesty.

On the evidence, none of the relevant individuals were found to meet the threshold for fraud.

Practical Takeaways

This decision reinforces several key points for transactional practice:

• Be specific in disclosure: General wording is unlikely to suffice where material issues are concerned.
• Stick to the contract: Disclosure is judged against the SPA, not informal exchanges.
• Fraud is hard to prove: It requires evidence of conscious dishonesty by a specific individual, not collective or “pooled” knowledge.
• Draft with care: If parties intend knowledge to be aggregated, this must be expressly provided for.

In summary, Veranova reinforces that the contractual allocation of risk in an SPA will be strictly upheld. Clear breaches and imperfect disclosures will not, on their own, give rise to liability where claims are contractually confined to fraud. For buyers, the decision highlights the importance of negotiating robust protections and carefully framing attribution provisions. For sellers, it demonstrates the value of disciplined disclosure processes and well-drafted limitations. Above all, the case is a reminder that fraud remains a high threshold; one that cannot be met without clear, attributable evidence of dishonesty.