Disclosure outside the Disclosure Letter can still be relevant in warranty claims

The Court of Appeal has held that a purchaser could not rely on a provision relating to negligent non-disclosure in circumstances where the seller had in fact disclosed the information complained of, albeit outside the formal Disclosure Letter.

Background

In Butcher v Pike [2021] EWCA Civ 1407, the target company operated an online lettings agency. The purchasers claimed to be entitled to set off the deferred consideration of £100,000 provided for under the SPA against damages allegedly due to them for a breach of warranty. The warranty in question stated that the target company had not defaulted under any agreement to which it was a party. In reality, the defendants claimed that the company was in breach of contractual restrictions in its agreements with two online platforms which, on the defendants’ interpretation, prohibited it from advertising lettings on behalf of other agencies.

The SPA provided that the warranty was subject only to matters set out in the Disclosure Letter and to certain specified limitations on the sellers’ liability, including a requirement that any claim for breach of warranty should be notified to the sellers within six months of completion, unless it related to fraud, negligent non-disclosure, or certain taxation matters.

The issue

The purchasers accepted that they had not given notice of their claim within the six-month period, but argued that they did not need to do so because the claim related to a negligent non-disclosure. They sought summary judgment on the question of whether or not there had been such a non-negligent non-disclosure, on the basis that the target company’s activities on behalf of other agencies were not mentioned in the Disclosure Letter.

At first instance, the court rejected this argument, holding (amongst other matters) that the sellers could rely on disclosures made outside the Disclosure Letter. The judge reached this conclusion on the basis that the provision setting out the time limit made no reference to the Disclosure Letter, although it could have done so if this was the parties’ intention, as they had done when setting out the qualification to the warranties. Further, the two clauses served different purposes. One excepted certain matters from the scope of the warranties given by the sellers, while the other defined exceptions to their limitation of liability.

Given the court’s reasoning, summary judgment was refused. The purchasers appealed.

The decision on appeal

The Court of Appeal upheld the decision at first instance. Arnold LJ agreed with the reasons given by the judge, adding three observations of his own:

1. One of the key ingredients of negligence is that the defendant must be under a duty to the claimant. In this case, it was agreed that the sellers were under no duty to make any disclosure to the purchasers; any disclosure was for their own benefit, serving to limit the scope of the warranties they were giving. In these circumstances, it was difficult to understand what was meant by a “negligent non-disclosure”, but the court had to assume that the failure to define it by reference to the Disclosure Letter was intentional.
2. It would make little sense to ask whether or not there was a negligent non-disclosure in the Disclosure Letter if in fact the relevant information had been disclosed elsewhere, especially given that the qualification to the warranties (which referred to the Disclosure Letter) was intended to benefit the sellers, whereas the exception to the limitation provisions (which did not) was intended to benefit the purchasers.
3. The general rule that a limitation of liability will be narrowly construed did not assist the purchasers because the court was called upon to construe an exception to the limitation rather than the limitation itself.

Comment

Although this is a preliminary decision on a summary judgment application, it is favourable to sellers because it raises the possibility of relying on disclosures made outside the Disclosure Letter where the SPA contains general references to non-disclosure. Buyers should carefully review references to disclosure in an SPA to ensure that the wording specifies how a valid disclosure can be made, as ambiguity on this issue may favour the other party.

For further information, please email the authors or your usual CMS contact.