The sale & purchase of businesses can be a very risky space. In this article we examine a recent case relating to a sale and purchase transaction, where a breach of warranty lead to an award of damages to the buyer of more than 3 times the selling price!
If you are engaged in or contemplating sale or acquisition activity, this case is essential reading – and highlights once again the importance of specialist professional advice, to ensure that the gain of selling is not overshadowed by the risks that could be created by the terms of the contract.
The case in question, Clark v Macourt  HCA 56, related to the sale of the assets of a fertility centre. The assets included among other things, a stock of frozen donated sperm.
In the sale and purchase contract, the vendor provided warranties that the identification of donors of the sperm complied with specified guidelines. Macourt provided a guarantee for those warranties.
Unfortunately, after the sale, the purchaser was unable to use some of the sperm as warranted. The only suitable replacement sperm the purchaser was able to acquire were located in the United States of America which cost about $1m. The purchaser then pursued the vendor, and Marcourt (as guarantor) for the losses – which it maintained were $1.2m.
The purchase price for the assets including the stock of frozen donated sperm was less than $400,000. But even though that the purchase price paid was far less than the amount of damages claimed, and the purchaser had been able to recoup the cost of acquiring the replacement asset by charging patients for the treatment, the court still upheld the damages claim of $1.2m – more than 3 times the selling price.
This case usefully sets out the approach to be taken in assessing damages for breach of a warranty. As a consequence, it highlights the need to ensure careful consideration in negotiating appropriate thresholds and caps are in place to limit the exposure of the seller of a business. It also highlights the dangers in acting as a guarantor to warranties.
From the purchaser’s viewpoint, this case serves as a good reminder to ensure the purchaser turns its mind to seek appropriate warranties that are critical to the success of any acquired business.
Aspect Legal offers a number of services to assist businesses in a sale or acquisition.
We also have a number of simple ways that you can interact with us with no obligation, including a free consultation service that provides a discussion of your business sale or acquisition plans.
If you are considering a sale or acquisition or if you have any tricky questions that you need a sounding board for – just give us a call on 02 8006 0830 or send an email through to us, and we will be in touch for a free initial discussion.