Welven Ltd v Soar Group Ltd & Anor

A contractual warranty is not necessarily a pre-contractual representation. Where a negotiated commercial agreement states that the purchaser has not relied on representations outside the contract, and confines remedies to contractual damages, negligent and innocent misrepresentation may be excluded. Fraudulent misrepresentation remains actionable.

Fraud requires a false representation made knowingly, without belief in its truth, or recklessly as to its truth, with an intention to deceive, reliance and inducement. Estimates in management accounts do not become fraudulent merely because later information produces different figures, particularly where the estimating methodology was disclosed and objectively reasonable. A price-reduction claim also requires proof that the alleged representation affected the transaction and the value received.

Welven claimed the unpaid deferred consideration under a share sale and purchase agreement by which Soar Group Ltd acquired Soar Engineering Group Ltd. Barry Aughey guaranteed Soar Group Ltd’s obligations. The defendants alleged that Welven had fraudulently, negligently or innocently misrepresented the financial condition of the acquired businesses, including the treatment of a customer deposit and stock figures in audited and management accounts.

The defendants’ counterclaim and warranty claims had been struck out. Their remaining case was confined to using alleged misrepresentation as a defence or set-off against the price. The central issues were whether the SPA permitted such claims, whether any actionable misrepresentation had been made, whether the defendants relied on it, and whether any reduction in price was justified.

1. Contractual allocation of remedies. Clause 13.2 of the SPA was a non-reliance provision which made clear that no relevant pre-contractual representations were being made, rather than merely excluding liability for representations already made. Schedule 4 contained contractual warranties, not pre-contractual representations. The Misrepresentation Act 1967 was therefore not engaged in relation to the defendants’ negligent or innocent misrepresentation case.
2. Alternative contractual conclusion. Even if representations had been made, clauses 7.5 and 20 of Schedule 5 excluded remedies for innocent and negligent misrepresentation, while preserving fraud claims. Those exclusions were reasonable. The SPA was negotiated at arm’s length between experienced, advised commercial parties and preserved a contractual damages remedy for breach of warranty.
3. Fraudulent misrepresentation. Applying the principles in Derry v Peek (1889) 14 App Cas 337, fraud required a knowingly false representation, a representation made without belief in its truth, or recklessness as to truth, together with an intention to deceive and reliance inducing the transaction. The evidence did not establish dishonesty by Welven, Mr Soar or Mr Mills.
4. The £65,000 Mivan deposit had been incorrectly reflected in the 2007 accounts, causing a misrepresentation and, on the evidence, negligence. It was not shown to be fraudulent, material to the transaction, or relied upon by the defendants. The defendants proceeded with the acquisition knowing that the Group was making substantial losses.
5. The management-account stock figures were estimates calculated using the established Materials Usage Policy. The existence of later differences, internal checking exercises, or more accurate year-end figures did not establish that the earlier estimates were knowingly false. The defendants had been informed that work in progress was estimated and that a physical stocktake would affect the completion accounts.
6. The defendants were not induced by the alleged financial misrepresentations. Their real commercial drivers included the properties, customer list, market share and UK presence. Any hypothetical price reduction would also have had to account for the value of what was acquired.
7. Welven was entitled to judgment for £1,250,000, subject to the appropriate net set-off arising under the related transaction. A draft order was to be prepared, with outstanding issues including costs to be dealt with if necessary.