Seller representation and warranty helped buyer recover loss for problems with product documentation
M&A Stories
September 2, 2021
Introduction:
When buying a business, representations and warranties in the purchase agreement are tailored to suit the specific type of business being acquired. In this case, we explore how a buyer of a manufacturing business used a seller representation and warranty to recover losses due to product documentation issues.
The Deal:
The buyer purchased the assets of a manufacturing business that specialized in chemical calibration devices, including permeation tubes and calibration gas standard generators. These products were crucial for customers to calibrate their chemical analyzers and detectors. The seller also provided standardized instruments, offering calibration devices for around 600 different chemicals, which could be customized as per customer requirements.
The Lawsuit:
After the deal was finalized, the buyer encountered problems with the product documentation. As a result, they took legal action against the seller and were awarded damages by a Galveston, Texas state jury. The seller appealed the decision to a Houston Texas intermediate appellate court but lost the appeal.
The Representation and Warranty:
The seller had made a specific representation and warranty regarding the product documentation. They claimed that each product had adequate manufacturing documentation, including drawings, specifications, manufacturing process descriptions, bill of material, assembly instructions, and test procedures. This assurance was vital for the buyer, given the technical nature of their products, where precise documentation was essential for successful assembly and calibration.
The Buyer’s Case:
The buyer explained that proper product documentation was crucial for their business, as customers relied on their technical products for calibration purposes. However, after the purchase, the buyer found that the representation made by the seller was untrue. They incurred costs of $17,550 due to missing information on equipment operation and product documentation for six systems or pieces of equipment.
Due Diligence Challenges:
The buyer revealed that it was difficult to uncover the product documentation problem during due diligence. They argued that some issues only came to light when they started manufacturing the products. While hiring a consultant to ensure accuracy was possible, it was deemed cost-prohibitive considering the vast number of products and chemicals involved. Instead, the buyer relied on the seller’s representation, assuming that adequate product documentation existed.
This case is referred to as McKinley v. Kin-Tek Analytical, Inc., No. 01-19-00642-CV, Court of Appeals of Texas, First District, Houston, (Opinion issued August 5, 2021).
Key Takeaway:
In mergers and acquisitions, sometimes a seller representation and warranty serve as the primary means of managing legal risks. Due diligence may not always uncover all potential issues, and buyers must carefully assess the assurances provided by sellers to protect themselves from unforeseen damages.
By John McCauley: I help people manage M&A legal risks.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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