High Court rules on the proper construction of SPA warranty claims clause and attribution of fraud

The Hut Group Limited v Nobahar-Cookson & Anor [2014] EWHC 3842 (QB)


Under the terms of a share purchase agreement (SPA), the claimant (Buyer) bought from the defendants (Sellers) the entire issued share capital of the target company (Target). A portion of the purchase price was to be satisfied by the allotment to one of the Sellers of shares in the Buyer representing 12% of the combined company (Consideration Shares).

The Sellers provided fairly standard warranties that the Target’s management accounts had been prepared on a basis consistent with that used in the preparation of its statutory accounts; and fairly presented its assets and liabilities and profits and losses for the period to which the accounts related. The Buyers provided similar warranties in respect of the Consideration Shares.

Each party’s warranties were subject to the following limitations of liability in the event of a claim for breach:

  • The Seller’s liability would not be triggered unless the Buyer, as soon as reasonably practicable and in any event within 20 Business Days after “becoming aware of the matter”, served a notice of the claim which specified in “reasonable detail” the nature of the claim and the amount claimed.
  • The Buyer’s financial liability was limited to £7,240,000 except in relation to any claim “insofar as it results from the fraud of the Buyer”.

The claims

The Buyer brought claim for breach of the management accounts warranty. This was disputed by the Sellers, who contended that:

  • The Buyers had not served the requisite notice in time and so were barred from bringing a claim. The Sellers argued that the period of 20 business days within which to serve notice began to run when the Buyer became aware of the factual grounds for a breach of warranty claim, and not when it became aware that those grounds might constitute an actionable claim; and
  • Regardless of the breach of time limit, the notice of claim was invalid as it did not contain enough detail regarding the claim and amount claimed.

The Sellers counterclaimed for breach of the Buyer’s accounts and management accounts warranties in respect of the Consideration Shares. The Buyer admitted liability for the breach which had been caused by an accounting fraud carried out by its financial controller overstating the Buyer’s EBITDA by £5.6m.

While the parties eventually agreed that the method of calculating the Seller’s damages should be the discounted cashflow method to take into account the fact that the Consideration Shares comprised a minority interest in the Buyer, the Buyer argued that:

  • The value of the Consideration Shares was tied up with, and the Sellers still stood to gain from, any future flotation or trade sale. As such, they had suffered no or minimal loss as a result of the breach of warranty.
  • The fraud was attributable to its financial controller and not to it. The question of attribution depended on who could be regarded as representing the Buyer in the negotiation of the SPA. As the financial controller did not represent the Buyer, the fraud could not be attributable to it and so the cap of £7,240,000 on its liability remained in place.


On the facts, Blair J held that a breach of warranty concerning the management accounts of the Target had taken place. The judge rejected the Sellers’ defence that the Buyer’s notice of claim was faulty. In particular, the judge noted that:

  • The Buyer’s construction of the Seller’s liability limitation was correct such that “becoming aware of the matter” meant “becoming aware of the claim”. The 20 business day notice period would not start until the Buyer was aware that there existed an actionable claim. It was a matter of commercial sense that the Buyer would not be expected to notify the Seller of a claim before it was aware that the claim had any foundation.
  • The Buyer’s notice provided sufficient quantification and detail of the claim.

The parties agreed that damages for the Buyer would be quantified as the difference between the valuation of the Target given the incorrect management accounts and the valuation had the management accounts been correct. The parties also agreed that the valuation of the company based on the false management accounts should be based on a multiple of the Target’s EBITDA however the Buyer argued that a multiple lower than the transaction multiple should be used. This would have the effect of increasing the difference between the valuations and therefore increasing the Buyer’s damages. This was rejected by the judge on the grounds that a hypothetical reasonable seller and buyer would not revisit the multiple as well as the EBITDA reduction. Damages in the sum of £4,317,089 were awarded to the Buyer.

In relation to the Seller’s counterclaim, the judge found that the Seller suffered loss at the time of the breach. The fact that the Seller would realise the value in its minority stake on a flotation was irrelevant and the loss must be assessed at the time of the breach.

On the attribution of fraud, the judge found that the fraud could not be isolated to the financial controller because:

  • The financial controller was deeply involved in the transaction;
  • The financial controller was not the only person involved in the fraud; and
  • The financial controller was under pressure from his managers to produce figures and the atmosphere in the department was conducive to the perpetration of the fraud.

The Seller was awarded damages for its counterclaim in the sum of £10,800,000.