Arbitration is an increasingly popular choice for resolving disputes arising from Share Purchase Agreements, offering key advantages such as confidentiality, flexibility, and international enforceability. This note highlights the main benefits of arbitrating disputes concerning Share Purchase Agreements and considers some of the most common claims brought under English law.
Benefits of Arbitration
The arbitration of Share Purchase Agreement disputes can offer significant advantages over domestic suits. One such advantage is that arbitrations are typically private, meaning that any sensitive information which is unearthed over the course of a arbitration proceedings will remain confidential.
Nowadays, it is also increasingly common for Share Purchase Agreements to involve buyers, sellers, and companies from different jurisdictions. Arbitration awards are unique because they benefit from widespread international recognition under the New York Convention. In principle, an arbitration award can be enforced with minimal friction in any one of the Convention’s 172 parties.
Arbitrations also offer unparalleled flexibility and are generally faster than civil proceedings. Parties to Share Purchase Agreements can choose the procedural and substantive rules applicable to the dispute and can tailor the arbitration process to fit their particular needs.
Breaches of Warranties
A common claim raised during the arbitration of Share Purchase Agreement disputes is one for breaches of warranties of quality.
A warranty of quality is a promise by one party to the other as to the existence of a certain state of affairs. In the case of a Share Purchase Agreement, these could, for example, be warranties made by a seller that the underlying business is free from any regulatory sanctions or that its books of account are accurate. If these warranties turn out to be wrong, the buyer will ordinarily have a claim against the seller.
Damages for such a claim amount to the difference between the value of the shares as warranted (usually what was actually paid by the buyer)[1] and the actual value of the shares received.[2] The amount recoverable, therefore, scales with the economic impact of a breach.
Whilst this measure of damages is settled law, parties seeking to make a claim for breaches of warranties in a Share Purchase Agreement must be on the lookout for any applicable limitation of liability clauses (sometimes called liability caps or warranty caps). As their name would suggest, these provisions limit the available damages to an amount specified in the contract.
Misrepresentations
Claims for the tort of misrepresentation are distinct but similar in nature.
A misrepresentation is a false statement of fact which a party relies on and is induced by. Broadly speaking, there are three kinds of misrepresentation:
- Fraudulent misrepresentation: the representor knows that his representation is false (or is reckless as to its truth).[3] Available remedies are damages or rescission (i.e., setting aside the contract and returning the parties to their pre-contractual positions).
- Negligent misrepresentation: a representor does not know that his representation is false but cannot prove that he “had reasonable ground to believe and did believe up to the time the contract was made the facts represented were true.”[4] Available remedies are damages or rescission.
- Innocent misrepresentation: a representor does not know that his representation is false. The remedy is rescission, but the court may award damages instead on a discretionary basis.[5]
Whilst rescission is an attractive remedy, it is not easily enforced. There are a number of bars to rescission, such as lapse of time, impossibility, and inadvertent effects on the rights of third parties.
Damages, therefore, may tend to be a more likely remedy. Damages available for misrepresentation amount to the difference between the amount paid and the value of the shares received.[6]
Notably, attempts by a party to limit its liability for misrepresentation may be unenforceable by virtue of Section 3(1) of the Misrepresentation Act 1967, which reads as follows:
(1)If a contract contains a term which would exclude or restrict—
(a)Any liability to which a party to a contract may be subject by reason of any misrepresentation made by him before the contract was made; or
(b) […]
that term shall be of no effect except in so far as it satisfies the requirements of reasonableness as stated in section 11(1) of the Unfair Contract Terms Act 1977; and it is for those claiming that the term satisfies that requirement to show that it does.
Breaches of Indemnities
An indemnity is a promise by one party to compensate the other on the occurrence of a specific contingency. For instance, a seller might promise to indemnify a buyer against any damages from lawsuits against the company that began from circumstances that occurred prior to the completion of the transaction.
Indemnities are subject to general rules on contractual interpretation, and, as such, a claim for breach of an indemnity will heavily depend on the wording of the relevant Share Purchase Agreement.[7]
A party claiming for breach of an indemnity must be careful to comply with a contract’s procedural requirements, such as any requirement to give notice within a certain time. Another important consideration is whether the indemnity covers consequential (also known as indirect) loss.
Conclusion
Arbitration of Share Purchase Agreement disputes can be complex, with claims often turning on nuanced issues of contract and tort. Arbitration offers a compelling forum for resolving such disputes thanks to its confidentiality, procedural flexibility, and global enforceability. However, whether a claim for breach of warranty, misrepresentation, or breach of indemnity succeeds will depend on the pre-contractual behaviour of the parties, the precise wording of the Share Purchase Agreements, and the specific facts of a case.
[1] See, e.g., Zayo Group International Limited v Michael Ainger [2017] EWHC 2542 (Comm), [117].
[2] Sameer Karim v Douglas MacDuff Wemyss [2016] EWCA Civ 27, [40].
[3] See, e.g., William Derry v Sir Henry William Peek [1889] UKHL 374 (Lord Herschell: “fraud is proved when it is shewn that a false representation has been made (1) knowingly, or (2) without belief in its truth, or (3) recklessly, careless whether it be true or false.”).
[4] Misrepresentation Act 1967, s 2(1). Where this defence is satisfied, a misrepresentation will sometimes be called “wholly innocent”.
[5] Misrepresentation Act 1967, s 2(2).
[6] Smith New Court Ltd. v Scrimgeour Vickers (H.L.(E.)) [1997] AC 254, 267A-C.
[7] See, e.g., Wood v Capita Insurance Services Limited [2017] UKSC 24.