Caveat Venditor?: Fraudulent Misrepresentation in Sale and Purchase Agreements

Sale and purchase agreements (SPAs) are notorious battlegrounds for negotiation. Buyers understandably devote significant time and resources to extracting information from sellers regarding the precise nature of any target business. This information is often central not only to a buyer’s decision to proceed with a share or asset purchase, but also to shaping the deal structure and, crucially, determining the consideration a buyer is prepared to pay.

Key information is provided by sellers throughout the SPA negotiation process – from pre-SPA discussions, through due diligence and the disclosure letter, to the warranties and indemnities ultimately included in the final SPA.

Despite this information-gathering process, it is not uncommon for unexpected issues to emerge post-completion, triggering buyer’s remorse and prompting buyers to consider how best to remedy their position.

This article explores the tools available to disgruntled buyers, focusing on warranty and misrepresentation claims, and in particular fraudulent misrepresentation claims (and the broadening basis on which such allegations can be made). 

While "caveat emptor" (“let the buyer beware”) remains a foundational principle in contracts of sale governed by English law, it is subject to important limitations. Most notably, it does not shield a seller from liability under warranties or for misrepresentation. Sellers would accordingly be equally wise to "beware" and to ensure the accuracy of the information they provide.

Warranties v representations

In an SPA, a warranty is a contractual statement of fact made by the seller about the condition, assets and liabilities of the target company. Warranties are commonly given in relation to the accuracy of the target company’s financial statements and accounts, legal compliance, taxation position and intellectual property rights, among other matters.

There is a legal distinction between “warranties of quality” (in practice most warranties fall into this category) e.g. “the accounts represent a true and fair view” or “there has been no material adverse change since the most recent management accounts” and “warranties of reasonable care” e.g. “the accounts were prepared with reasonable care and skill” which have a different measure of loss.” [1]

Breach of a warranty of quality is compensated on a contractual damages basis by comparing the position the buyer is actually in with the position the buyer would have been in but for the breach (i.e. had the warranty been true). The measure of damages is usually the difference between the value of the shares as warranted versus the actual market value of the shares at the point of acquisition.

In contrast, damages for breach of a warranty of reasonable care, again ordinarily (exceptions apply), are more akin to the tortious basis i.e. they put the buyer back in the position it should have been in if reasonable care had been taken. This is measured by the difference between the price actually paid and the price that would have been paid had the relevant figures been prepared with reasonable care. That said, if the buyer’s position is that but for the breach, it would never have bought the target company at all, then the true measure of loss is the “no transaction” basis i.e. the contractual measure as per warranties of quality – the difference between the price paid and value of shares acquired.[2]

This distinction can be significant in the quantification of a buyer’s loss and future claim and, therefore, the formulation of the buyer’s strategy to seek maximum relief and recovery.  

A representation is a statement of fact made by a seller to a buyer during the negotiation of an SPA to persuade the buyer to enter into it. A representation can (but need not) be recorded in the SPA itself. It may also be made before the contract is formed. If the representation is found to be false, it may give rise to tortious liability for misrepresentation. Specifically, a claim can be made in misrepresentation if:

1. The seller made a false representation to the buyer. This can be express or implied and made orally or in writing (for example, in response to a due diligence questionnaire, data request list or Q&A list). The general rule is that silence on the part of the seller cannot amount to a misrepresentation as there is no positive duty to disclose information to a buyer. Importantly, however, a buyer may have grounds on which to bring a misrepresentation claim if the seller fails to correct a factual statement that has since become untrue.
2. The statement was intended to induce the buyer to enter into the contract. 
3. The statement did induce the buyer to enter into the contract.
4. The buyer suffered loss. 

There are three sub-types of misrepresentation claim: innocent, negligent and fraudulent misrepresentation. This article focuses on fraudulent misrepresentation.

Fraudulent misrepresentation, founded in the tort of deceit, is the most serious type of misrepresentation claim that can be made. It requires the false representation to have been made knowingly, without belief in its truth, or recklessly as to its truth. It has recently been clarified [3] that a claimant does not need to be aware of a representation in order to bring a fraudulent misrepresentation claim, widening the circumstances in which such claims can be brought by a dissatisfied buyer.

The remedy for misrepresentation (whether fraudulent or not) is typically for the buyer to elect between recission of the contract or damages in lieu. In the case of fraudulent misrepresentation, there are further potential advantages to a claimant in that there is a rebuttable presumption of reliance and inducement in their favour and remoteness (foreseeability) of damages does not apply. A claimant will look to recover all direct losses even if unforeseen, as well as all indirect and consequential losses.

The measure of loss for fraudulent misrepresentation is, typically, the difference between the price paid and the true market value at the date of purchase and, crucially, can disregard any miscalculations or commercial decisions the buyer may have made i.e. it can compensate a buyer who made a bad bargain and overpaid. [4]

By way of example, imagine different scenarios where a buyer purchases 100% of the shares in a target company valued by the seller at £1million but which, based on fraudulent misrepresentations or breach of warranties, actually has a true market value worth 50% less at £500,000. Which is the better claim to bring?

Initial considerations for a disgruntled buyer 

When considering what claims to pursue, a buyer should first seek advice on the nature of any statements made by a seller and, specifically, whether these statements constitute warranties, actionable misrepresentations, or both.

This question has given rise to debate regarding whether a warranty can have a "dual quality", operating as both a warranty and a representation. The courts have taken a cautious approach, consistently holding that the mere inclusion of a warranty in an SPA does not automatically render it an actionable representation (unless explicitly stated otherwise). However, it has recently been confirmed that factual statements in disclosure letters — including draft disclosure letters — may, depending on their content, constitute actionable representations, notwithstanding that the primary purpose of a disclosure letter is to qualify the warranties given.[5]

A careful analysis of a seller’s statements at the outset of a matter is key. Whilst a misrepresentation claim is generally harder to prove than a warranty claim, there can be substantial advantages to bringing a claim on this basis rather than, or alongside, a warranty claim.

The advantages of fraudulent misrepresentation claims

Bringing a claim in misrepresentation (and particularly fraudulent misrepresentation) can sidestep contractual limitations commonly included in SPAs that limit the circumstances in which a warranty claim can be brought. By way of example: 

Notice periods and limitation periods

The general rule is that a contractual warranty claim must be brought within six years of the date of breach (unless the SPA was executed as a deed, in which case it must be brought within twelve years). However, SPAs commonly impose both:

• Strict contractual notice provisions i.e. specifying “how”, “when” and “to whom” notices must be served and setting a short time period in which to do so e.g. within 1 month which, if not complied with, could become a contractual bar on the ability to bring a genuine claim; and/or 
• Shorter limitation regimes than statute prescribes e.g. a regular warranty claim could be time barred unless commenced within 1-2 years of notification (or 3-4 years for a tax warranty claim).

These contractual limitations do not apply to fraudulent misrepresentation claims. Fraudulent misrepresentation claims also benefit from an extended limitation period under section 32 of the Limitation Act 1980, the effect of which is that time runs from discovery of the fraud (or when the claimant could have, with reasonable diligence, discovered it).

Disclosures

SPAs typically include a clause providing that a seller is not liable under the warranties to the extent the relevant facts were fairly and specifically “disclosed” – usually in a disclosure letter or via the deal data room (with disputes as to whether disclosure was sufficiently clear frequently arising). In contrast, disclosure is not usually an automatic defence to a misrepresentation claim.

Entire Agreement clauses

Parties have, historically, attempted to rely on “entire agreement” boilerplate clauses within the SPA to exclude (or limit to a pre-agreed level) any liability for non-fraudulent misrepresentation including pre-contractual representations. Attempts to include full exclusion clauses have been met with mixed success and the recent approach [6] of the courts is to be slow to uphold these clauses as fully excluding all liability unless the language is crystal clear that that was the parties’ intention. As a result, these clauses have expanded to include broader wording including “non-reliance” and “no representation” statements to exclude any liability for misrepresentation as far as possible. 

If such watertight clauses are negotiated into an SPA, it would exclude liability for ordinary misrepresentation claims. However, parties cannot contract out of fraud and therefore these exclusion / limitation clauses would have no legal effect on a claim in fraudulent misrepresentation.

Liability caps and de-minimis / de-maximus thresholds or deductibles

SPAs will also typically include maximum liability caps limiting the seller’s overall liability for a typical breach of warranty or a call under an indemnity under the SPA, usually calculated as a percentage of the total consideration or at a negotiated level. If the buyer’s potential claim exceeds that cap, it could be left with a significant shortfall.

It is also not uncommon for SPAs to have de-minimis and de-maximus thresholds that apply to the quantum of contractual claims that can be brought under the SPA i.e. stating only claims with a minimum value of £10,000 can be brought and/or setting a cap on the total value of aggregate claims up to a maximum level of, say, £500,000.

Again, a tort claim in fraudulent misrepresentation would take the buyer outside the remit of these contractual restraints. 

Exclusion of liability clauses or limitation of liability

SPAs will also typically contain widely drafted clauses to exclude a seller’s liability to the maximum extent permitted by law. In practice, you would therefore expect liability to only cover the buyer’s direct losses (albeit usually subject to some level of cap, as above) but with all indirect or consequential losses fully excluded e.g. loss of profits or business interruption costs, damage to goodwill and reputation etc.

A claim in fraudulent misrepresentation would however not be subject to any such contractual fetters, being founded in tort, and a buyer can potentially recover all indirect and consequential losses flowing from the fraud, providing causation can be proven.

In addition, a buyer may also be able to recover non-financial loss e.g. damages for distress and inconvenience and aggravated damages for injury to feelings or even exemplary (punitive) damages for fraud where the fraud was perpetrated with an intention to make a profit which would exceed any compensation payable to the claimant.

Fraudulent misrepresentation claims: a double-edged sword? 

From the above, it may seem as though a fraudulent misrepresentation claim is the best route of recourse for a disgruntled buyer. However, these claims are not without significant risks and should not be pursued lightly, for several reasons including the below: 

1. There are strict professional conduct obligations on both solicitors and barristers when pleading fraud. There needs to be a clear evidential basis on which to raise a fraudulent misrepresentation claim, and this must be set out with particularity in pleadings. Failure to plead fraud with sufficient particularity risks the claim being struck out, while bringing a fraud claim that is perceived as baseless or malicious carries a risk of serious reputational damage.
2. Whilst the standard of proof for fraud is technically the same as for other civil claims (in that fraud needs to be established on the balance of probabilities), in practice, given the seriousness of the allegations, fraud claims are likely to be subject to a heightened level of scrutiny.
3. Where an allegation of fraud is made unnecessarily, or the party raising it loses on the issue, the court will usually order that party to pay the other party's costs of dealing with it – even if the unsuccessful party is ultimately successful at trial on other grounds.
4. Commercial considerations may also weigh against pursuing a fraud claim. For example, it may not be in a buyer's interests to bring a fraud claim where the defendant is insured, as doing so may invalidate the applicable insurance policy. Alleging fraud may also eliminate any prospect of amicable settlement discussions with a defendant.

Taken together, these considerations mean that a fraudulent misrepresentation claim, whilst potentially powerful, should be approached with caution and only pursued where the evidential basis is strong.

Buyers (and sellers!) beware

Fraudulent misrepresentation is, on the face of it, an attractive claim for a disgruntled buyer, offering a route through the very protections that sellers expend significant time and resources negotiating into an SPA — including liability caps, notice provisions, disclosure defences and non-reliance clauses. Sellers should accordingly ensure that statements made throughout the negotiation process are accurate, since a well-founded allegation of dishonesty can unravel even the most carefully drafted protections. At the same time, sellers should remain alert to buyers seeking to "re-label" what are, in substance, ordinary warranty or misrepresentation claims as fraudulent, in order to sidestep contractual limitations.

Buyers, for their part, should treat a fraudulent misrepresentation claim as a powerful but double-edged sword: it is not a claim to be pleaded lightly, as a matter of convenience, or without a robust evidential basis, given the professional, cost and reputational consequences of an unsuccessful fraud allegation.

Ultimately, careful drafting and full, honest disclosure throughout the negotiation process remain the best protection for both sides. Caveat emptor, caveat venditor — in the world of SPA disputes, both buyer and seller should beware.

Our expertise

With offices in many of the world’s major financial centres, including London, Paris, Geneva, Zurich, Dubai, Hong Kong and Singapore, we are ideally placed to work with you to prevent, resolve and assist with SPA disputes as they arise, whatever the law, language, rules, industry sector, or subject matter of that dispute may be.

Whether you are a seller, buyer or other stakeholder, our strategically focused specialists will work alongside you through every aspect of any proceedings. Please contact the author or your usual Charles Russell Speechlys LLP contact if you would like to get in touch.

1. Lion Nathan Ltd v C-C Bottlers Ltd [1996] WLR 1438 (PC)
2. Esso Petroleum Co v Mardon [1976] QB 801 (CA)
3. Credit Suisse Life (Bermuda) Ltd v Ivanishvili [2025] UKPC 53
4. Glossop Cartons and Print Ltd and others v Contact (Print & Packaging) Ltd and others [2021] EWCA Civ 639, considered
5.  Veranova Bidco LP v Johnson Matthey PLC [2025] EWHC 707 (Comm)
6. Al-Hasawi v Nottingham Forest Football Club Ltd & Ors [2018] EWHC 2884 (Ch)