Liability of non-contracting party for breach of warranty and misrepresentation claims

The High Court recently handed down a 200-page judgement in the case of Ivy Technology Ltd v Martin [2022], following a two-week trial. The High Court considered whether a seller of shares under a share purchase agreement (“SPA”), pursuant to which it purported to sell as the sole beneficial owner of 100% of the target shares, had contracted and made representations on behalf of another beneficial owner of some of the shares who was not included as a party to the transaction (“Transaction”). In its judgement, the court considered the relationship between agent and principal.

Factual background

The claimant Ivy Technology Limited (“Ivy”) entered into a SPA with the first defendant (M”) under which Ivy acquired shares in several corporate entities (“Target Companies”) which together comprised an online gambling business (“21 Bet”). In the period following the execution of the SPA. The SPA in its recitals recorded that M was the beneficial owner of, and held all the beneficial rights, title, and interest in, the shares in the Target Companies.

Under the terms of the SPA, M had given the following warranties:

  • the Target Companies had no liabilities or obligations that they could not pay when due, or which would otherwise have an adverse effect on any of its assets or business (no liabilities warranties);
  • the Target Companies’ accounts gave a true and fair view in all material aspects of the financial position of the Target Companies (financial position warranty); and
  • no event had occurred which had or might cause an adverse effect on the Target Companies or their business (financial position warranty).

Subsequent to signing the SPA, Ivy discovered that the business had significant outstanding liabilities. The expected income of the business was non-existent or had ceased to exist. As a result, Ivy needed to invest over £200,000, and eventually ceased trading and wound the business up.

Ivy brought proceedings for:

  • fraudulent misrepresentation, alleging that M and B (“B”) made fraudulent misrepresentations at the business meetings, and as M was authorised by B to act as his agent in relation to the Transaction, B was jointly liable as principal for M’s representations; and
  • breach of the no liabilities warranty and financial position warranty, on the basis that M entered into the SPA both as principal, and as agent for B.

Ivy submitted that M had been dealing with the shares as B’s agent in order for 50% of their beneficial interest to pass to Ivy under the SPA.

conclusion

Ivy argued that the fraudulent misrepresentations had been made by M acting as B’s agent, as well as on their behalf. B argued that as they were not named as a party to the SPA, and any representations made by M had not been made on B’s behalf. The Court found that even though B was not a party to the SPA, by attending one meeting B was liable for the misrepresentations made by M during the pre-contractual negotiations. The court held the view that, where the agent has authority to conduct negotiations, the principal will be liable for the agent’s authority.

practical take away

A principal is liable for all the acts of its agent, within the agent’s authority. Authority means, the agent’s actual, apparent (ostensible) or usual (customary) authority. It is an established principle of agency that where a disclosed principal (whether identified or unidentified), expressly or impliedly authorises its agent to make a contract on its behalf, the contract is treated as being made between the principal and the buyer. The principal can sue and be sued on the contract, not as a third party, but as an unnamed principal party to the contract, and a selling shareholder cannot avoid liability to the buyer by claiming to be unnamed.

In order to avoid liability in a principal, agency relationship, restrictions should be placed on the agent’s authority by the principal, which will relieve the principal of liability against third parties who have or ought to have notice of the extent of the agent’s authority.

If notice is absent, the principal will not be able to avoid liability for the acts or representations of the agent which fall within the apparent scope of its authority.

To view the full judgement please click here.

For more information, and any guidance or advice on commercial contract clauses, Cleveland and Co External in-house counsel™, your specialist outsourced legal team, are here to help.

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