When Hampson Industries PLC sold one of its subsidiaries in the early hours of 23 June 2010, there was an email on the chief executive officer's blackberry – apparently unread, although it was received on the previous afternoon - giving him formal notice that one of the subsidiary's main customers would be switching to another supplier by the end of August.

The email was the culmination of various communications since April between the CEO, Kim Ward, and the customer, Cummins Turbo Technologies, in which Cummins had consistently said that its decision to end the relationship was final. In all that time Mr Ward kept the information to himself. He did not tell the other Hampson directors or other colleagues who were handling the sale of the subsidiary – despite the fact that he knew Hampson was providing profit forecasts to potential buyers, and those forecasts assumed a solid upward trend of sales to Cummins over the next three years, representing about 34% of projected turnover.

Why did Mr Ward think this was unimportant? There may have been many reasons. The subsidiary was very small in the scheme of things for Hampson, a listed company with a market capitalisation at the time of £160m. The consideration was £2.5m. He claimed that he had suspected Cummins of posturing in order to get price-reductions – apparently a common tactic in the industry. In his recollection of the dialogue with Cummins their stance was rather less categorical. Anyway, even without Cummins the buyer might feel that there was enough value left in the business. As it turned out, the buyer was horrified when it learned of the facts and lost little time in suing for fraudulent misrepresentation. The court might have awarded damages; instead – and unusually – it found that the buyer was entitled to rescind the agreement (and in fact, Hampson had accepted that, if it lost, rescission was the appropriate remedy).

To establish fraudulent misrepresentation it must be shown that a false misrepresentation was made dishonestly: that is, knowingly, or without belief in its truth, or recklessly – in other words, careless as to whether it is true or false. The person making the representation must have done so with the intent that it should be acted upon by the recipient. The fact that Mr Ward was not part of the negotiating team and did not himself deliver the forecasts did not matter; neither did the fact that the forecasts were essentially statements of opinion, since there was a clear implication that Hampson had reasonable grounds to justify the opinion. It was a matter of showing that Mr Ward knew the forecasts were misleading and decided to stay silent in order that the buyer would rely on them. The standard of proof is the civil standard of the balance of probabilities (more likely than not, as opposed to the criminal standard, which is beyond all reasonable doubt), but since it is generally less likely than not that the CEO of a listed company would act in this way, powerful evidence of Mr Ward's knowledge and intention was required. In fact, the judge appears to have had no hesitation in finding the necessary degree of dishonesty on Mr Ward's part. The facts spoke for themselves.

Perhaps as much as anything the case illustrates the danger of overestimating the difficulty of proving dishonesty and assuming that, when it comes to evidence, there is usually a grey area because behaviour is open to interpretation and people have different recollections of the events. It may also be that Mr Ward placed too much faith in the fact that Hampson was able to drive a hard bargain in the sale agreement. The agreement contained no representations or warranties about customer-supplier relationships or the future potential of the business. Various boilerplate exclusion clauses precluded actions for innocent or negligent misrepresentation. No amount of boilerplate, however, can protect a seller in a case of fraudulent misrepresentation.

Erlson Precision Holdings Ltd v Hampson Industries PLC [2011] EWHC 1137 (Comm)

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 11/10/2011.