Damages for an adverse event that never occurred

In 2015 the son of the founders of a family-owned waste management business, with the agreement of the family, managed its sale for ￡3.6m and negotiated warranties in a Share Purchase Agreement without consulting his Mum and Dad on the details of the warranties.??Subsequently, the whole family ended up in litigation with the purchaser suing for alleged breaches of these warranties and misrepresentations in responses to due diligence enquiries.??The warranties included assurances that the shareholders had no knowledge of anything that could result in a prosecution for breaches of the business’ operating Licence or?be grounds for the regulators to refuse to renew the Licence.??

The judge found that the regulators had been supplied with false information and there had been ‘a culture of lying’; there were persistent breaches of the Consent to discharge leachates (run-off from landfill); on a few occasions unprocessed cess waste was flushed directly into the public sewer accessed via a manhole in the yard referred to as ‘the magic hole’; and, occasionally, hard solids had been dug out of separator tanks and treated as dry waste instead of hazardous waste.??The judge found that these were breaches of warranty for which the shareholders were liable although there was no proof that the last two of these breaches had any causal relation to loss.

The purchaser claimed damages on the basis that the price paid would have been lower had the warranties not been broken and the true state of affairs been disclosed.??They argued that the true state of affairs, deliberately concealed from them, created a risk of regulatory or enforcement action by environmental regulators which adversely impacted the value of the business so they were entitled to repayment of part of the price paid.??

The family argued that this was bizarre because by the time of the trial, six years later, no regulatory/enforcement action had materialised.??The parents also argued that they had no personal liability as their son had negotiated the terms of the warranties and dealt with the due diligence enquiries without their involvement.??

The judge found that the argument that no discount was appropriate, because it was known that no risks to the business had materialised, should be rejected as it ‘relies impermissibly on hindsight’ and awarded ￡382k damages.??The family appealed unsuccessfully.??Restating well established principles the court concluded that damages for breach of a warranty given on a sale of shares are determined by comparing the actual value of the shares with the value they would have had if the warranty had been true on the date of purchase.??Events subsequent to the date of purchase cannot affect the value at the time of the transaction.

As to the parents, it was decided that?notwithstanding the finding that their son had control of the sale and they were innocent of his misrepresentations, they bore responsibility for them because he had been acting as their agent when agreeing the warranties with knowledge that they were false.

Predictable? Fair??

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