Liability of principal for agent's breach of warranty and misrepresentation in a share purchase agreement

In the recent case of Ivy Technology Ltd v Martin [2022] EWHC 1218 (Comm) the Commercial Court considered a claim by Ivy Technology in its claims for breach of warranty and fraudulent misrepresentation against Barry Martin and Paul Bell.

This case highlights the necessity for a purchaser to test the veracity of a seller's pre-contractual statements through a thorough due diligence process and to ensure that all parties relevant to the target business are party to the SPA.

Background 

The claim related to the sale by Martin and Bell of their online gambling business, known as ‘21Bet’, to Ivy Technology in 2019. The 21 Bet business was run by Martin but financed by Bell. The beneficial interest in the shares of 21 Bet was owned by Martin and Bell equally. During the course of negotiations of the share purchase agreement (SPA), Ivy was informed that Bell wanted to remain ‘in the shadows’. Negotiations were held between Martin and Ivy. Bell was not included as a party to the SPA.

In the SPA, Martin gave various warranties relating to the liabilities and financial position of 21 Bet. Following completion of the acquisition, Ivy discovered the 21 Bet business had significant outstanding liabilities, including amounts due to gaming authorities, HMRC and 21 Bet's landlord. Ivy also discovered a number of the business' expected income streams were either non-existent, or had ceased to exist. 

Ivy brought proceedings against Martin on the basis it purchased the business relying on fraudulent misrepresentations made by Martin about the business’ profitability during pre-contractual negotiations.  Even though the negotiations had been conducted almost exclusively by Martin, Ivy argued that the fraudulent representations had been made by Martin acting as Bell’s agent, as well as on his own behalf. 

Additionally, Ivy claimed breach of the SPA warranties and sought to establish primary liability on the part of both defendants for this claim on the basis that Martin entered into the SPA both as principal in respect of his own beneficial interest, and also as agent for Bell in respect of his beneficial interest in the shares. 

Relying on the fact that he had not been involved in the negotiations and was not named as a contracting party, Bell argued that any representations made by Martin had not been made on his behalf. Bell also argued that as he was not a party to the SPA, he was not liable for the breach of warranties claimed by Ivy. 

Commercial Court judgment

The Commercial Court upheld Ivy's claim for fraudulent misrepresentation. Martin had negotiated the deal on behalf of Bell even though Mr Bell was not a party to the SPA. The commercial substance of the transaction was "manifestly approved and adopted" by Bell. Bell may not have had any liability under the contract itself, but he was still liable for the misrepresentations made by Martin during the course of the pre-contractual negotiations.

As a principle of English law, where a principal authorises its agent to make a contract on its behalf, the contract is treated as made between the principal and the counterparty. The principal can sue and be sued on the contract - not as a third party, but as an unnamed principal party to the contract. Martin had sufficient authority to conduct negotiations on Bell's behalf and as such he was (as principal) liable for Martin's fraud. 

On the breach of warranty claim, the Commercial Court found that Ivy had failed to establish any recoverable damages for the breach.