16/09/2022

Court of Appeal clarifies rules for damages for breach of warranty and deceit involving hindsight

MDW Holdings Ltd v Norvill [2022] EWCA (Civ) 883

Damages – breach of warranty  – deceit – share sale – measure of damages – contingency – hindsight – Bwllfa principle – overriding compensatory principle

Andrew Ayres KC acted, with Laurie Scher, for MDW, the successful party in MDW Holdings Ltd v Norvill [2022] EWCA (Civ) 883.

The case concerned the purchase of shares in a waste management company, GDE, which (unknown to the buyers) had been operating in breach of environmental law and lying repeatedly to its regulators. The buyer, MDW, brought a claim for damages for deceit and for breach of warranty. MDW was successful in both causes of action in the High Court ([2021] EWHC 1135 (Ch)). The damages calculation included an element attributable to the “fragility of the goodwill” of the business caused by the lies to the regulators.

The sellers (James Norvill, and his parents Jane and Stephen Norvill) appealed to the Court of Appeal, arguing that the trial judge wrongly excluded hindsight when quantifying damages: they relied on the fact that, by the time of trial, it was known that the risk of major regulatory intervention had not occurred. MDW argued in response that the judge was right not to have taken this type of hindsight into account because, as at the date of the Share Purchase Agreement, the agreed date at which damages were to be assessed, there was actual impairment to the goodwill of the business.

This was the first time that the question of hindsight, in the context of damages for breach of warranties contained in a Share Purchase Agreement, has been considered by the Court of Appeal. The Court found unanimously in favour of MDW. Newey LJ drew together the threads of existing authorities and gave guidance on the use of hindsight:

• Where damages fall to be assessed in respect of an anticipatory breach of contract which was accepted, it is appropriate to consider what would have happened if the breach had not occurred and, in that context, events subsequent to the breach may be relevant.
• That principle has, however, no application where a party to a contract has, by failing to supply goods or services, committed an actual, rather than anticipatory, breach of contract.
• There is a strong case for saying that, in general at least, the position should be similar in relation to warranties given on a share sale. Events subsequent to the purchase cannot affect the value at the time of the transaction.
• If, none the less, there can be cases in which account can be taken of what happened subsequently as regards a contingency which existed on the date of assessment when determining what, if any, damages are payable for breach of a warranty on a share sale, they must be rare. They would doubtless involve situations in which the buyer might otherwise be said to have gained a “windfall”, but the mere fact that the value of the relevant shares has increased since the date of assessment cannot demonstrate such a “windfall”.
• There is no similar bar on using events subsequent to the date of assessment to cast light on events which had happened by that date.

MDW was also successful in its cross-appeal, concerning the correct measure of damages for deceit. The judgment sets a precedent as to how damages should be quantified where the parties would, had the truth been known, have come to a different bargain (rather than walking away from the deal). The question of whether such a deal might have been reached was remitted to the trial judge.

An application for permission to appeal has been filed by the sellers with the UK Supreme Court.

Representation

Andrew Ayres KC, leading Laurie Scher of Maitland Chambers, was instructed by Jason Williams and Gemma Thomas of Morgan LaRoche on behalf of MDW.

Read the full judgment.