Promotional literature and directors' warranties
This article was written by Fiona Hayles, Associate in Wragge & Co LLP's FIRST Team and published in Mortgage Finance.
In Quest 4 Finance Ltd v Maxfield & Others, Quest provided short term finance to Mr Maxfield's company, Hilmax Engineering Ltd. Quest's literature, which Mr Maxfield had read and relied upon, stated that in entering into the finance agreement with Quest, Hilmax's directors would not be required to provide personal guarantees, but would simply be required to provide warranties to cover the event of any fraudulent acts knowingly committed. Mr Maxfield had made it clear to Quest that he and his fellow directors would not be prepared to provide personal guarantees, as they already had existing guarantee obligations elsewhere.
Hilmax subsequently entered into the loan agreement with Quest, and the directors signed documents warranting that Hilmax had complied and would continue to comply with the warranties it had provided to Quest under the loan agreement. The warranties provided by the directors included a declaration that they had placed no reliance on any advice or opinion of any person representing Quest.
Hilmax was subsequently placed into administration, which was a breach of warranty under the loan agreement, and Quest therefore claimed under the directors' warranties for the total amount due from Hilmax. The directors argued that the warranties should be set aside as they had been induced by Quest's misrepresentation that personal guarantees of Hilmax's directors would not be required and that the warranties actually provided by the directors would only cover fraudulent acts knowingly committed (i.e. that they would not be liable for the amount due from Hilmax unless a fraudulent act had been committed).
The Court held that the obligations contained in the directors' warranties were, in effect, personal guarantees, regardless of how those warranties were actually described: whether an obligation was a guarantee or not was a question of substance rather than of form. The representation that personal guarantees were not required contained within Quest's marketing brochure was therefore false and as such, amounted to a misrepresentation.
The misrepresentations in Quest's brochure were calculated to be relied upon, and had in fact been relied on by Hilmax's directors. On that basis, in the absence of fraud, Quest was not entitled to rely upon the warranties given by the directors to claim the total amount due and outstanding from Hilmax, and the warranties were set aside on the grounds of material misrepresentation.
An interesting case, showing the Court's increasing willingness to look at the whole wider circumstances of a transaction in order to determine the reality of the 'deal done'. This is of course of increasing importance in today's market where transactions are completed as part of a wider series of negotiations and discussions where the contents of one written contract will not necessarily reflect accurately what the parties to an agreement thought they had signed up to.
For further information about this published article, contact Kathryn Hobbs on +44 (0)121 685 2785, Rebecca Davies on +44 (0)121 685 3819, Gayle Biddle on +44 (0)121 685 2708 or Amy Richards on +44 (0)121 260 9973
This published article may contain information of general interest about current legal issues, but does not give legal advice.