In the recent case of MDW Holdings Ltd v Norvill  EWCA (Civ) 883, the Court gave some helpful guidance on the rules for damages for breaches of warranty. It is a cautionary tale for shareholders looking to sell their shares and highlights the potential risks if warranties are provided and are later discovered to be false.
Facts of the case
MDW purchased shares in a waste management company – GDE. GDE’s business involved the collection, processing and disposal of waste and therefore was heavily regulated.
As part of the share purchase agreement, the sellers of the shares (the Norvills), warranted (amongst other things) that GDE had conducted its business in accordance with all applicable laws and regulations.
After the share purchase, MDW discovered that GDE had actually been operating in breach of environmental law and lying repeatedly to its regulator.
MDW therefore issued a claim against the Norvills and sought damages for deceit and breach of warranty. The claim included losses associated with the damage to the reputation/ goodwill of the business as at the date of share purchase agreement.
The claim was successful in the first instance and MDW was awarded £382,600 (the difference between the purchase price paid and the (revalued) value of the business at the date of the share purchase agreement).
The Norvills decided to appeal the decision on the basis that the trial judge wrongly excluded the issue of hindsight when quantifying damages.
They argued that the trial judge should have taken into account actual events that had occurred since the date of the share purchase agreement. For example, the fact that no reputational damage was caused, there were not any major regulatory interventions and GDE did not lose its permits or licences.
The Court of Appeal found unanimously in MDW’s favour. The Court agreed that the relevant date on which damages should be assessed was the date of the share purchase agreement. The Court commented that just because regulatory action had not been taken and significant reputational damage had not been suffered, that did not mean that the value of the company was not reduced as at the date of the share purchase agreement.
The Court of Appeal drew a distinction between anticipatory breaches of contract and actual breaches of contract. The Court indicated that where the breach is anticipatory the Court may take into account subsequent events. However, in the case of actual breaches, the Court should not apply hindsight.
This case demonstrates the importance of carefully reviewing any warranties being provided as part of a Share Purchase Agreement. As the seller, you should ensure that the warranties you are giving are factually correct otherwise you could be at risk of a significant damages claim.
If you are a buyer and you think that the seller has breached a warranty, it is important you seek legal advice promptly as there can often be strict time limits for the notification of such claims under the contract and you wouldn’t want to find you are out of time.