Recent Court of Appeal guidance on damages for breach of warranty and deceit

In the context of a share sale, the Court of Appeal in MDW Holdings Ltd v Norvill & Ors [2022] EWCA Civ 883 confirmed that a defendant cannot usually reduce its liability for breach of warranty by showing that contingencies or risks at the time of the transaction did not in fact occur.

Background

MDW Holdings Limited (MDW) entered into a share purchase agreement (SPA) with the Norvills to purchase G.D. Environmental Services Limited (GDE), a waste management company. GDE’s business was dependent on certain consents and permits from environmental regulators. The SPA included warranties given by the sellers at completion that they had complied with all of the relevant environmental laws and permits. It later emerged they had failed to do so.

The High Court found the Norvills had acted in breach of warranty, made actionable misrepresentations in response to due diligence requests and were guilty of deceit. Liability was accepted, but the Norvills appealed against the judge’s assessment of damages.

The judge applied the general approach that damages for breach of warranty should be assessed by reference to the difference between (a) the value of the company on the basis that the warranties were true ('Warranty True') and (b) the actual value of the company given that the warranties were false ('Warranty False'). He reduced the ‘Warranty False’ value to reflect the reputational damage that the breaches, if known, would have caused to GDE’s business and the risks of such conduct. This reduction had the result of increasing the damages payable by the Norvills.

By the time of the trial, the reputational damage to GDE had not materialised. The sellers argued that by failing to take into account what had actually happened, the judge gave MDW an unjustified windfall.

Decision

The Court of Appeal agreed with the judge’s approach, finding that he was correct to disregard that no reputational damage actually occurred. The fact there was ultimately no damage to GDE’s reputation did not mean that the value of the company was not reduced at the time of the transaction, as a purchaser with knowledge of the breaches would have expected to pay less for the company.

The Court of Appeal held that, in general, when assessing damages, events subsequent to the purchase cannot affect the value of the shares at the time of the transaction. In reaching its decision, the court drew a distinction between cases of actual breach and anticipatory breach. In cases of anticipatory breach, where a party demonstrates an unwillingness to perform a contract, it may be relevant to consider subsequent events to determine whether, if that party had been willing to perform the contract, it would nevertheless have been excused from performance. This is not relevant to cases of actual breach.

The Court also confirmed the approach to assessing damages for deceit. A claimant induced to make a purchase they would not otherwise have made will be entitled to at least the difference between the price paid and the actual value of the property. However, a claimant who would have continued with the purchase at a lower price rather than pulling out of the transaction entirely will only be entitled to the difference between the price paid and the price that they would have paid if they had known the truth.

Key takeaways

This case is a useful reminder of the court’s approach to the assessment of damages for breach of SPA warranties: damages (i) are assessed at the date of breach, usually the date of the SPA or completion, and (ii) reflect the difference between the actual value of the shares and their value if the warranties had been true.

There is, however, still uncertainty in this area. Although events subsequent to the transaction are generally not relevant when assessing damages for breach of warranties, the Court acknowledged that there may be rare breach of warranty cases where account can be taken of subsequent events to consider whether a contingency occurred. The Court provided limited guidance on these cases, commenting that they would likely involve situations where the buyer would otherwise gain an unjustified “windfall”. However, the mere fact that the value of the shares has increased since the date of the SPA cannot demonstrate such a windfall, particularly so if the rise in value is attributable to steps taken by the purchaser since the transaction. The Court also commented that it is important to keep in mind any contractual allocation of risk made by the parties. Future cases may provide examples or further guidance on when such an exception could apply.

With thanks to Ella Dixon-Nuttall for her assistance in preparing this post.