Breach of warranty-what is the loss?
The recent English case of MDW Holdings Limited v Norvill  looks again at key legal principles determining how damages should be assessed in a breach of warranty and deceit claim arising from a share purchase agreement.
The claimant purchased a waste management business pursuant to a sale purchase agreement (‘SPA’). The SPA contained various warranties provided by the sellers, guaranteed by them to be true and accurate at the date of the agreement.
The operation of this business relied on environmental consent and permits from environmental regulators. In the first instance, it was found that prior to the SPA the Sellers had repeatedly breached the applicable environmental laws by providing the regulators with false information.
As a result, the judge determined that the Sellers had breached the relevant warranties given in the SPA and that they were responsible for false representations that induced the claimant to enter into this agreement.
Damages were assessed in the usual way, determining the difference between the value of the company if the warranties were real (‘true value’) compared to the value with the false warranties (‘false value’). Both parties appealed based on the calculation of the damages.
The Sellers argued that the judge should not have taken into account risks that had yet to materialise. The business had faced no repercussions as a result of the false warranties given. They argued that by acting as if they had, this would result in a breach of the compensatory principle of damages by putting the claimant in a better position than that which they are entitled.
The Claimant argued that the judge should have applied the tortious principles of damages to the deceit claim. This would mean that the damages were calculated based on the purchase price, rather than the ‘true value’, in order to place the claimant in the position they would have been in had the tort not occurred.
It was held that had the buyer been aware of these breaches at the date of the SPA they would have reduced the purchase price accordingly.
Furthermore, for claims involving deceit, it was held that a defendant’s liability is not reduced by the fact that an eventuality, which reduced the value of the business at the date of assessment, did not occur.
The court agreed that the tortious principle of damages should be applied but the price that should be used is that which the buyer would have paid if there had been no deceit.
The Court of Appeal remitted the case to the High Court to decide if the buyer had known the truth, would they have proceeded with a lower purchase price, or not at all?
This case highlights that damages are determined on a case-by-case basis and courts should consider the situation at hand.
It further stresses the importance for the buyer of clearly documenting reasons for entering into a contract and if any particular warranties, terms or conditions are particularly key to their reasons.
If you would like further information or have questions, please contact Richard Gray.
**This information is for guidance purposes only and does not constitute, nor should be regarded, as a substitute for taking legal advice that is tailored to your circumstances.