Veranova Bidco LP v Johnson Matthey PLC & Ors

In a sale of business, a warranty that a key contract is not being renegotiated is engaged where a customer has invoked a contractual price-match mechanism and negotiations are inevitable. The relevant adverse effect is assessed by reference to the reasonably foreseeable consequences of the negotiations, including the commercial context.

Fair disclosure must give a reasonable buyer sufficient detail to assess both the nature and scope of the matter. Unless the contract provides otherwise, material outside the agreed disclosure sources cannot be used to cure inadequate disclosure. A fraud exception to contractual warranty limitations requires conscious dishonesty by at least one individual whose state of mind is attributable to the seller. Knowledge of facts cannot be aggregated with another person's innocent state of mind.

The claimant bought the defendants' Health Business under a sale and purchase agreement dated 16 December 2021. The agreement contained an ordinary-course warranty and a key-contracts warranty, subject to disclosure qualifications and a fraud exception to contractual limitations.

Before signing, Alvogen had invoked a price-match clause after receiving a third-party offer to supply buprenorphine hydrochloride at about US$8/g. The offer was verified as bona fide before signature, but the disclosure letter referred only to general competitive pressure and ongoing pricing discussions.

The claimant alleged breach of warranty and fraudulent conduct by four senior executives. The issues were whether either warranty was false, whether the matter was fairly disclosed, and whether the fraud exception was satisfied.

1. Outcome. The claim was dismissed. The Ordinary and Usual Course Warranty was not false. The Key Contracts Warranty was false but was not adequately qualified by disclosure. None of the defendants' executives was guilty of fraud, wilful misconduct or conscious dishonesty.
2. Ordinary-course warranty. Price negotiations contemplated by an existing supply agreement, particularly where a price-match clause had operated previously, were within the ordinary and usual course. The warranty concerned the business's activities and did not ordinarily extend to uncompleted negotiations or the terms of a particular contract.
3. Key-contracts warranty. Alvogen's invocation of the price-match clause on 18 October 2021 initiated renegotiations. Given the proposed reduction from approximately US$16/g to US$8/g, the negotiations would have an adverse or detrimental effect unless mitigated. The warranty was therefore prima facie false.
4. Disclosure. The contractual test required fair disclosure with sufficient detail to allow a reasonable buyer to assess the nature and scope of the matter. The disclosure of general competition, price pressure and ongoing discussions did not disclose the specific US$8/g offer, its bona fide verification, or that matching it was necessary to retain Alvogen's business. The disclosure-letter deeming provision did not cure the omission. Extraneous statements could not be used to construe or qualify the agreed disclosure sources.
5. Fraud. Applying Raffeisen Zentralbank Österreich AG v The Royal Bank of Scotland [2010] EWHC 1392 (Comm) and related authorities, the claimant had to prove that an individual knew the facts making the warranty false, knew the warranty's nature and terms sufficiently to appreciate their relevance, and knew or was reckless as to falsity. The same individual had to possess the necessary dishonest state of mind. Innocent knowledge held by different individuals could not be combined to create fraud.
6. The claimant failed to prove the necessary knowledge and dishonesty in any executive. Reliance on an established disclosure process, or failure to check documents more closely, might amount to negligence but not fraud. The contractual limitation therefore barred the warranty claim.
7. Quantum. Loss did not arise for decision. If it had, the court would have preferred Mr Engert's evidence, subject to modelling 5% price erosion in the first ten years of the relevant scenario.