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SPA breach of warranty claim – interpreting a no material adverse change warranty

Published on 13 December 2023

Decision Inc Holdings Proprietary Ltd & Anor v Garbett & Anor [2023] EWCA Civ 1284

The question

How will the courts assess an alleged breach of a warranty that there had been no material adverse change in the financial prospects of a company?

The key takeaway

In assessing whether there had been a change in the company’s prospects, it was necessary to evaluate the company’s “prospects” using the two relevant dates (the Accounts Date and completion) as provided for in the SPA, and not focus on other dates not stated in the warranty, on historical information or on comparing different things (eg “the expectation that a reasonable buyer would have had” and the “actual” position) as at the same date. 

The background

In October 2018, Decision Holdings entered into a share purchase agreement (SPA) with Mr Garbett and Mr El-Mariesh (the Sellers), pursuant to which Decision Holdings agreed to acquire all the shares in a company specialising in the design of enterprise performance management software (the Company) from the Sellers. 

The SPA contained various warranties, including in clause 10.2, where the Sellers warranted that, “except as Disclosed”, each of the warranties set out in schedule 4 to the SPA was true on the date of the agreement and the completion date. Schedule 4 provided:


Since the Accounts Date:

19.1.2 there has been no material adverse change in the turnover, financial position or prospects of the Company



20.1 All financial and other records of the Company (‘Records’):

20.1.1 have been properly prepared and maintained;

20.1.2 constitute an accurate record of all matters required by law to appear in them, and in the case of the accounting records, comply with the requirements of section 386 and section 388 of the CA 2006;

20.1.3 do not contain any material inaccuracies or discrepancies; and

20.1.4 are in the possession of the Company”.

Clause 11 of the SPA imposed limitations on claims for breach of warranty, including an exclusion of the Sellers’ liability for any breach of warranty claims not notified “in writing summarising the nature of the claim (in so far as it is known to the buyer) and, as far as is reasonably practicable, the amount claimed” by the buyer within 24 months of completion. 

Prior to concluding the SPA, the Sellers supplied Decision Holdings with numerous positive pipeline documents (showing new and potential work) and a detailed profit forecast. Soon after the SPA was signed, Decision Holdings was sent the monthly accounts for the Company showing net losses after tax and overall poorer prospects. Revenues continued to be low with the company starting to make losses. Decision Holdings sent a formal notice alleging breach of warranties which the Sellers had given in the SPA. They later commenced breach of warranty proceedings alleging breach of warranties 19 and 20 on the basis that the Company’s records were defective, and that there had been a material adverse change in the turnover and in the prospects of the Company. 

The High Court found that the Sellers were liable to pay £1.31m in damages for breach of the no material adverse change warranty. The Sellers appealed. 

The main issues for the Court of Appeal (CA) were narrowed down to whether the High Court’s interpretation of, and approach to, the “prospects” limb of warranty 19 (the Prospects Warranty) was wrong and whether the formal notice given was adequate to notify the claim for the breach of the Prospects Warranty.

The decision

The CA overturned the decision of the court of first instance finding that its interpretation of, and approach to, the Prospects Warranty was wrong. 
Under the warranty the Sellers had warranted that there had been no material adverse change in the prospects of the Company from the date of the last accounts (31 December 2017). For the warranty to have been breached, therefore, the Company’s “prospects” must have worsened since 31 December 2017. It was necessary to evaluate the “prospects” at 31 December 2017 and those in October 2018, when the SPA was signed and completion occurred. Instead, the court had contrasted the actual position in October 2018 (not with that on 31 December 2017) but with the “expectation which a reasonable buyer would have had” derived from the agreed pricing structure for the transaction found in the SPA, which dated from October 2018, and so could not establish the Company’s prospects as at 31 December 2017. 

The court’s approach was also wrong because the Prospects Warranty was concerned with what the Company’s “prospects” in fact were on different dates (at 31 December 2017 and October 2018), not a comparison between different things (“the expectation that a reasonable buyer would have had” and the “actual” position) on the same date. It had also wrongly concluded that the Prospects Warranty had been breached by reference to what had already happened, not how the Company might fare in the coming period (ie the word “prospects” looks to the future). 

The High Court had equated “prospects” with expected levels of Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA). The CA acknowledged that the meaning to be attributed to “prospects” may be affected by the context in which the word is used and, where used contractually, could potentially vary from one contract to another. In the context of the SPA, “prospects” was not easy to construe but the CA was not persuaded that it simply referred to EBITDA because had the parties had EBITDA in mind, they could have specifically used that term. Also, EBITDA featured elsewhere in the SPA in a number of places and the word “prospects”, read naturally, meant “chances or opportunities for success” in a more general way.

The CA also overturned the High Court’s ruling regarding the validity of Decision Holdings’ notice of claim. According to the SPA, the notice was required to specify the claimed amount for each breach of warranty, not just a combined figure, as provided by Decision Holdings. The failure to adhere to this requirement rendered the notice defective, and consequently, the Sellers could not be held responsible for the alleged breach.

Why is this important?

Although the CA’s finding was heavily influenced by the circumstances of the case and the specific SPA warranties, it offers a working example of how the courts are likely to interpret a material adverse change clause. It also serves as a further warning as to the need to serve notices that meet the contractual requirements.

Any practical tips?

To provide greater certainty, consider defining what is meant by material adverse change in an SPA making it clear which dates or events apply to measuring whether a change has occurred. If financial metrics are the intended measure (eg because that is consistent with how the company/business has been valued), specify those that will apply.

As material adverse change clauses can be somewhat uncertain, consider including targeted warranties in the SPA to deal with undisclosed loss or liability, changes to forecasts, future work pipelines, etc.

Ensure that where a clause specifies that notice of a claim must include required information (here the notice had to include, as far as reasonably practicable, the “amount claimed” in respect of each breach of warranty claimed, not just a total figure), it is workable in practice, and that any notice is drafted strictly in accordance with its terms. Ideally, do not leave the notice until the very end of the contractual limitation period – which invites risk as to the content and valid service of the notice.


Winter 2023