IVY TECHNOLOGY LIMITED v BARRY MARTIN & Anor

In a business sale, a representation that projected earnings reflect current trading may be an actionable representation of existing fact, even where the figure was calculated by extrapolation. A representation made during negotiations generally continues until the contract is concluded unless clearly withdrawn or qualified.

A principal is liable for an agent’s fraudulent misrepresentation made within the scope of the agent’s actual or ostensible authority. Specific authority to act fraudulently is unnecessary where the agent was authorised to negotiate the transaction and make representations in doing so.

Restrictive covenants in a business sale must be no wider than reasonably necessary to protect legitimate interests. A court will not rescue an overbroad covenant through severance where the necessary narrowing has not been advanced and justified.

The claimant bought an online gambling business from the first defendant under a sale and purchase agreement. It alleged that the defendants had dishonestly represented that the business was profitable, self-sustaining and generating EBITDA of approximately £1.6 million. It also alleged that the second defendant was liable as principal for representations made by the first defendant.

The claimant pursued deceit, breach of warranties, breach of a non-compete covenant and unlawful means conspiracy. The second defendant was not named as seller in the agreement, although the claimant knew that he had a 50% beneficial interest in the business.

The judgment followed earlier freezing-order proceedings and an amendment appeal, including the Court of Appeal decision at [2020] EWCA Civ 1563. The central issues were whether the representations were made, false, relied upon and authorised, whether the second defendant was party to the agreement, and whether the contractual claims and conspiracy claims succeeded.

1. Deceit. The representations that the business was profitable, self-sustaining and generating EBITDA of approximately £1.6 million were representations of fact. The fact that one figure was derived by extrapolation did not prevent it from conveying a representation about the business’s actual trading performance. The representations continued through the negotiations and were not displaced by later balance sheets or access to some financial systems.
2. The representations were false. The business was heavily loss-making, unable to meet ordinary outgoings from its own revenue and dependent on regular funding arranged by the second defendant. Both defendants knew this. The claimant relied on the representations when valuing the business, negotiating and proceeding with the purchase. The opportunity to discover the truth through further investigation was no defence: the principles in Vald Nielsen Holding AS v Baldorino [2019] EWHC 1926 (Comm) and Standard Chartered Bank v Pakistan National Shipping Corp [2003] 1 AC 959 applied.
3. The second defendant personally made, or manifestly endorsed, the representation that the business was profitable at the Prague meeting. Alternatively, the first defendant had authority to make the representations on the second defendant’s behalf. Authority to negotiate the sale and make representations in that connection did not require specific authority to act fraudulently. However, the clear recitals and clause 15.12 of the agreement meant that the second defendant was not himself a party to the agreement.
4. The business was valueless at the date of the agreement. The deceit claim therefore succeeded against both defendants, with damages assessed on that basis. The warranty claims failed because the warranties did not amount to warranties of profitability and no recoverable loss was established on the warranted basis.
5. The non-compete covenant was unenforceable. Although the claimant had legitimate interests capable of protection, the covenant was too wide in its duration and scope, including its application to insignificant employees and consultants. The court declined to devise an unargued severance. The claimant also failed to prove loss from any breach. The conspiracy to make fraudulent representations succeeded; the conspiracy to breach the covenant failed.

The judgment was a first-instance decision, but it recorded earlier procedural stages:

1. Court of Appeal dismissed the second defendant’s appeal against an amendment order, holding that there was a real prospect of establishing contractual liability and that the factual matrix required investigation: [2020] EWCA Civ 1563.
2. High Court (Commercial Court) Teare J granted permission for an amendment concerning the second defendant’s alleged contractual liability but refused a further amendment concerning agency liability: [2020] EWHC 94 (Comm).
3. High Court (Commercial Court) Henshaw J determined the claims after trial. The deceit and fraudulent-representation conspiracy claims succeeded; the remaining claims failed.