Representations and warranties exercised in spite of the awareness of defects by the beneficiary

November 9th 2015

There is profuse litigation regarding cases of exercise of representations and warranties agreements, the drafting of which is the result of an often fierce negotiation between the transferor, also guarantor and the transferee, beneficiary of the guarantee.

Here is a new illustration in a case where the transferor of all the shares of a company, which developed IT software, had granted representations and warranties to the transferee pursuant to which, in particular, he undertook to guarantee all the IT programs in all their versions, whether completed or not.

The transferee exercised this guarantee due to dysfunctions on the software developed by the company, for which he recognised the non-operational nature, insofar as the latest version of said software was not completed at the time of the transfer of the company’s shares.

The first judges had dismissed the transferee’s claim on the grounds that he had carried out an audit prior to purchasing the company’s shares and that he also operated on the IT sector.

The Cour de Cassation overruled this decision by indicating that the first judges had failed to comply with the terms of the guarantee agreement, which did not distinguish whether its beneficiary had awareness or not of the facts likely to significantly affect the assets in question.

Advice: attention needs to be given to the drafting used in the guarantee agreement, in particular with regard to the conditions of its exercise. On the contrary to the beneficiary of the guarantee, it shall be advisable for the guarantor to stipulate in the agreement that the events disclosed to the transferee, both concerning the audit operations made by the latter and the declarations made for his benefit by the transferor, may not be subject to the exercise of the guarantee.

Gérald Garcia

(Cass. Com May 12, 2015)