4. Risk Allocation

Question 1

which covenants are implied where a sale is expressed to be made with full title guarantee?

Answer 1

the seller has the right to dispose of the property
the seller will do all it reasonably can, at its own expense to pass on to the buyer the title it purports to give
the property is free from all charges, encumbrances, and third party rights other than those which the seller is unaware and could not reasonably be expected to be aware

Question 2

what are warranties

Answer 2

contractual statements about what is to be acquired

Question 3

consequence of a warranty being untrue

Answer 3

buyer will have a claim for damages against the warrantor for breach of contract

Question 4

what damages are recoverable under hadley v baxendale

Answer 4

if it is not too remote:

loss flowing naturally from the breach
loss which was fairly and reasonably in the contemplation of the parties at the time they entered into the contract as the probable result of the breach

Question 5

what is the aim of contractual damages

Answer 5

put buyer in the position they would have been in if the contract had not been breached, subject to the duty to mitigate

Question 6

how is buyers loss calculated re wrong warranty

Answer 6

difference between value of shares if warranty had been true vs actual value

Question 7

what will the spa provide for re quantification of warranties

Answer 7

how the loss should be quantified e.g where profit levels have been warranted, parties may agree a formula specifying an appropriate multiplier to apply to any shortfall

Question 8

what is misrepresentation

Answer 8

false statement of fact made by one party to the contract to the other inducing the other party to enter into the contract

Question 9

buyer remedy for misrep

Answer 9

rescission - buyer has ability to rescind spa (puts parties back into pre-contract position)

Question 10

remedy for innocent or negligent misrep 2(2)

Answer 10

damages

Question 11

bars to rescission

Answer 11

impossible to restore parties to pre contract position
bona fide 3rd party rights have been acquired
innocent party knowing of rep takes action affirming the agreement
undue delay in seeking relief

Question 12

can an entire agreement clause exclude misrep

Answer 12

no thomas witter v tbp industries; express exclusion terms must be included in the contract axa sun

Question 13

what is a non reliance statement

Answer 13

estops buyer from claiming that it entered the agreement in reliance on pre contractual statements made by seller. subject to s3 misrep act reasonableness test

Question 14

difference between contractual and tortious damages

Answer 14

damages for contract breach is higher - calculates difference paid and actual market valuew

Question 15

what is the difference between a warranty and indemnity

Answer 15

warranty is an undertaking by seller that a particular state of affairs exists

indemnity is promise to reimburse buyer re a designated type of liability that may arise in the future (amount equalling actual liability)

Question 16

tax considerations for seller when paying re a warranty

Answer 16

s49 TCGA 1992 provides no tax allowance will be made

if liability crystallises, adjustment made to prie of target for CG purposes. if seller makes a payment capital tax adjusted:

• consideration seller is treated as having received at completion is reduced by amount paid out by warranty claim, reducing gain. seller entitled to refund
• buyers acquisition cost is reduced its potential gain on subsequent disposal is increased

Question 17

are payments made to buyer under indemnity tax chargeable

Answer 17

no Extra Statutory concession d33

Question 18

who gives warranties where there is more than one warrantor

Answer 18

buyer will insist on joint and severlal liability

Question 19

which doc sets out how liability is to be allocated

Answer 19

deed of contribution

Question 20

who will be unwilling to give warranties

Answer 20

minority shareholder
trustee

Question 21

solution for trustee

Answer 21

liability limited to net value for time being of the capital of the trust

Question 22

if buyer sells target soon after acquisition, can it assign benefit of warranties and indemnities to new buyer

Answer 22

yes - seller will insist on express provision prohibiting assignment

Question 23

how can buyer mitigate risk of potential liabilities stemming from warranties

Answer 23

guarantee over assets or third party or parent co
retention of purchase priceh

Question 24

how can buyer retain pp for certain period after completion

Answer 24

payment of retention into joint account
retention remitted to seller ona certain date after completion (eg 12 months)
where buyer makes a claim, seller paid after deducting amount of claim
buyer paid the amount of claim within a short period (eg 14 days)
payment of accrued interest on fund to parties in the same proportion they received retention
obligation on buyer to pursue any claims which may delay remittance of fund

Question 25

why will a buyer want to curtail sellers post completion activities

Answer 25

seller has detailed knowledge of target

Question 26

trego v hunt

Answer 26

courts refuse to imply a covenant by seller not to set up in competition

Question 27

implied restraints

Answer 27

not to use or disclose confidential info re business not to represent itself as successor to business or as carrying on the same business not to solicitor customers of business

Question 28

which express undertakings will buyer want to be included in spa

Answer 28

covenant not to engage or concern in any competing business for a specified period after completion covenant not to solicit or entice target customers away who have recently dealt with target for specified period covenant not to solicit from target employees for specified period undertaking not to use / disclose confidential info about target covenatn not to use name of target

Question 29

are restrictive covenants enforceable

Answer 29

to the extent that they are reasonable to protect a legitimate interest of buyer

Question 30

which factors do the courts consider relevant when determining whether a restrictive covenant is reasonable

Answer 30

duration of restraint geographical area of restraint activies restricted

Question 31

duration

Answer 31

buyer will seek to prevent sller from competing for between 1-5 years after completion.

Question 32

what is considered reasonable when dealing with a covenant restricting seller from setting business within a geographical area

Answer 32

must be closely related to area in which target operates

Question 33

can buyer prevent seller from carrying on activities

Answer 33

no- deemed excessive

Question 34

can buyer prevent seller from competing with other businesses the buyer owns or intends to acquire

Answer 34

no- ronbar clause preventing seller from carrying on a business 'similar to' that of target to be too wide

Question 35

what can buyer claim if restrictive covenants are reasonable

Answer 35

damages for breach

Question 36

what is the blue pencil test

Answer 36

where each restrained is contained in a different clause, and expressed to be separate or independent restrictions, even if court considers one too wide the other remains enforceable court strikes out certain parts of a clause leaving remaining parts tillman

Question 37

what if an agreement breaches s2 or 18 competition act 1998

Answer 37

anti competitive terms are unenforceable

Question 38

what does s2 competition act prohibit

Answer 38

agreements or other business arrangements between 2 or more undertakings which may affect trade in the UK and which have as their object or effect the prevention, restriction or distortion of competition within the UK

Question 39

what does s18 CA 1998 prohibit

Answer 39

activities of one or more undertakings which amount to abuse of dominant position within uk

Question 40

consequence of infringing uk competition law

Answer 40

voids restriction cma can impose fines of up to 10% of undertakings turnover parties may be ordered to modify agreement