Daniel v Gregory & Ors

A total failure of consideration arises only where the entire consideration for a contractual promise has failed. Benefits already received, including rights, employment remuneration and other advantages, may constitute substantial consideration even if the principal promised transfer has not occurred.

Damages for breach of warranties in a share sale are assessed by the diminution in value of the shares caused by the breach. A purchaser cannot recover the whole price merely by asserting that the shares were worthless without valuation evidence.

A representation must be construed in its commercial context. A statement about future trading results is not, without clear wording, a warranty of the accuracy of earlier audited accounts.

Alan Daniel purchased shares in Rakecare Limited, whose subsidiary operated an insurance-broking business. The transaction involved an immediate purchase from Ronald Betteridge and an agreement to acquire Derek Gregory’s share over time. The businesses had breached accounting requirements concerning client money, and the sellers were liable for breach of warranty.

The Bournemouth County Court ordered Gregory to repay £25,000 paid towards his share, treating the agreement as having suffered a total failure of consideration. It also awarded Daniel damages for breach of warranty and £35,000 against Gregory Wright & Co in deceit based on an accountant’s comfort letter.

The appeals concerned whether there had been a total failure of consideration, the proper assessment of warranty damages, and whether the comfort letter was a false representation causing loss.

1. Gregory’s appeal. The court permitted amendment of the appellant’s notice and allowed the appeal against the orders requiring repayment of £25,000 and dismissing Gregory’s counterclaim. The agreement of 30 December 1992 was not confined to the eventual transfer of Gregory’s share. Daniel received valuable consideration through Gregory’s undertaking not to sell to another person, the arrangements for Daniel’s salary and company car, and the deferred purchase structure. The judge’s finding that Daniel had enjoyed those benefits was inconsistent with a total failure of consideration.
2. The court rejected the suggestion that repayment of the £25,000 could be treated as compensation for breach of warranty. Damages for breach of warranty in a share sale require an assessment of the diminution in value of the shares attributable to the breach. Daniel had provided no evidence permitting that valuation. His case that the shares were worthless, or that he would not have contracted had he known the true position, was not a warranty claim and did not justify a new trial.
3. Gregory Wright & Co’s appeal. The appeal against the £35,000 deceit award was allowed. A finding of dishonesty in one matter does not safely establish dishonesty in another. The comfort letter had to be construed in its commercial context. It represented that the trading results in the unaudited accounts for the year to 30 September 1992 were unlikely to differ from the previous year by more than five per cent. That representation was true on the expert accountancy evidence. The letter did not endorse or warrant the accuracy of the audited accounts to 30 September 1991, and it caused no loss in the sense alleged.
4. Lord Justices Pill and Longmore agreed with Lord Justice Chadwick. The orders were to be drawn up by counsel.

• Court of Appeal (Civil Division): Appeals by Derek Gregory and Gregory Wright & Co allowed. The orders requiring Gregory to repay £25,000 and dismissing his counterclaim were set aside, and the £35,000 deceit award against Gregory Wright & Co was also set aside.
• Bournemouth County Court: On 23 April 2001, Judge Anthony Thompson QC awarded Daniel £25,000 against Gregory, £6,264 against Gregory and Betteridge’s estate for breach of warranty, and £35,000 against Gregory Wright & Co in deceit; Gregory’s counterclaim was dismissed.