The High Court recently handed down its judgment dismissing an application for summary judgment brought by the buyer of a software business against its founder seller relating to a software licensing dispute. The decision highlights the difficulties that buyers face in obtaining early determination of share purchase agreement (SPA) warranty claims; even where the contractual protections are well drafted and the underlying facts appear to favour the buyer strongly. Critically, it shows how gaps in due diligence can materially erode, or even eliminate, the value of an otherwise profitable business.
The decision is particularly relevant for founders and owners of technology businesses, where software licensing arrangements are often complex and where the individuals running the business may not always have detailed knowledge of the technical licensing position..
The Claimant company acquired the target company (the “Company”) a fleet and asset management software business from the Defendant, its founder, for a cash consideration of £50 million. The Company’s software incorporated a Microsoft database that was integral to the functioning of its product. While the Company held a Microsoft development licence entitling it to use Microsoft products to create its software, that licence did not extend to the hosting of the software for customers. Each hosted customer required a separate licence; which the Company had not obtained.
Following completion of the SPA, the Claimant discovered the licensing shortfall and brought proceedings alleging breach of two warranties in the SPA. The first warranty addressed whether the Company’s operations infringed third-party intellectual property rights. The second concerned whether the Company had obtained all necessary licences to carry on its business. Both warranties were qualified by the words “so far as the Seller is aware”.
The Claimant’s case was that the impact of the breaches was such that the Company’s business had no or only nominal value: making the claim a substantial one against the £50 million purchase price.
The awareness qualification was reinforced by a deeming provision. It provided that wherever a warranty was qualified by the awareness language, the seller’s knowledge would be deemed to extend to the best of his knowledge information and belief “after [he] has made due and careful enquiries” of two named individuals: the Company’s former IT director and another named employee.
The SPA also contained a limitation on the seller’s liability, capping it at £1 unless liability arose form “fraud, fraudulent misrepresentation, wilful concealment or dishonesty”.
The combined effect of these provisions meant that the Claimant needed to establish two things:
The Claimant applied for summary judgment on both issues – essentially asking the Court to find that the Defendant had no real prospects of successfully defending the claim which, if held to be the case, would have resulted in judgment being entered in favour of the Claimant. The judge acknowledged that the Claimant had a "strong case on the facts" but concluded that it was not sufficiently clear-cut to avoid a full trial.
On the awareness issue, the judge identified several factors that made the question unsuitable for early determination. The Defendant had relocated to Australia in 2012 and had stepped back from day-to-day management. He had relied on the Company's IT director and other senior employees to manage all IT-related matters, and no issue relating to Microsoft licensing for hosted customers had ever been raised: whether by Microsoft, by any customer, during the Company's ISO 27001 accreditation process, or during the Claimant's own pre-acquisition due diligence. The IT director's own evidence was that he had genuinely believed the Gold Partnership programme covered the hosted customer licensing, and it was only after a focused post-acquisition technology review that the issue came to light.
The judge emphasised that what constituted "due and careful enquiries" was highly fact-specific. In particular, there had been no specific due diligence focus on Microsoft hosting licences., It was therefore arguable that even if further enquiry had been required, it might not have revealed the problem given the IT director's own apparently genuine belief that the licensing was compliant.
On the fraud issue, the judge was more firmly satisfied that the Defendant had a reasonably arguable defence. The evidence suggested that the Defendant held a genuine, if mistaken, belief that the licensing arrangements were adequate, and the judge cautioned against assessing a seller's state of mind through the lens of litigation rather than considering how matters would have appeared at the time. The judge also rejected an argument that the deeming provision could be used to establish the seller's state of mind for the purposes of proving fraud, observing that such an interpretation would have the effect of "deeming fraud where there might be none."
This case is a reminder that prevention is almost always more effective, and less costly, than cure. This dispute has resulted in high-value, complex litigation that could have been avoided.
It also highlights a number of practical considerations for founders and owners of technology businesses, whether they are preparing for a sale or navigating a post-acquisition disputes.
Software licensing remains a key area of risk. The distinction between a development licence and a production or hosting licence is frequently overlooked, particularly in businesses that have grown organically. Where founders are not closely involved in the technical software licensing detail, there is a real risk that licensing arrangements are assumed to be in order without anyone having specifically verified the position. This case demonstrates that such assumptions can give rise to significant warranty exposure, even where they are honestly held and a pre-sale audit of licensing and IP arrangements could prove vital.
Awareness qualifications and deeming provisions remain powerful contractual tools, but they do not guarantee an early or straightforward outcome for the buyer. The Court’s analysis confirms that the question of what constituted “due and careful enquiries” cannot be separated from the seller’s actual role in the business, the breadth of the warranties, and the absence or presence of any prior warning signs.
For buyers, the decision is a reminder that summary judgment in warranty disputes remains difficult to obtain, even where the drafting is careful and the factual case appears compelling. Realistic case assessment and assessment of alternative dispute resolution such as mediation, are likely to serve buyers better than an assumption that the strength of the contract will always deliver an early result in the event of litigation.
Whether you are preparing for a transaction or already facing a dispute, early legal input can make a material difference to risk, strategy and outcome. Please get in touch with our commercial disputes team for further information.
