Karim & Anor v Wemyss

In a business sale, a seller seeking payment for work in progress must establish the contractual basis for any increase above figures agreed at completion. A buyer claiming on an express warranty may recover the contractual value difference, while a misrepresentation claim uses the tortious measure; the buyer may choose the more favourable proved measure.

A continuing pre-contractual representation can remain operative at completion. Difficulty in valuing loss does not defeat recovery where substantial loss is clear. The court must assess damages on the available evidence. A contractual entitlement to a reasonable amount for management time is not limited to salary cost. The appeal was allowed in part.

A solicitor’s practice was sold under a sale and purchase agreement. The seller claimed unpaid work in progress. The buyer counterclaimed for misrepresentation and breach of warranties concerning the practice’s profitability and undisclosed claims. His Honour Judge Cooke found breaches but awarded the buyer no damages for the profitability warranty and awarded limited sums for insurance premiums and management time.

The buyer appealed the construction of the work-in-progress provisions, the burden of proving any increased amount, the damages analysis, an insurance-premium finding, and the valuation of management time. The central issues were whether the work-in-progress schedule fixed the amount due, how contractual and tortious measures of loss applied, and whether damages could be assessed without expert valuation evidence.

Disposition. Lewison LJ gave the judgment, with Kitchin and Longmore LJJ agreeing. The appeal was allowed to the extent set out below.

1. Work in progress. The work-in-progress figures prepared and accepted at completion had contractual effect. The phrase requiring payment of an agreed apportioned amount referred to the amount already agreed, rather than an agreement to agree later. A seller claiming more had to justify each alteration file by file. The judge had reversed the burden of proof by requiring the buyer to establish that changes were unjustified.
2. Misrepresentation and warranty. The contractual and tortious measures differ. Contractual damages compare the true value of the business with its value if the warranty had been true. Tortious damages compare the price paid with the business’s true value. The buyer could rely on whichever measure produced the better result, subject to proof. The distinction was illustrated by Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158, Smith New Court Ltd v Citibank NA [1997] AC 254 and Harlingdon and Leinster Enterprises Ltd v Christopher Hull Fine Art Ltd [1991] 1 QB 564.
3. Continuing representation and valuation. The statement that the practice was on course for specified turnover and profit was a continuing representation up to completion. The present-tense warranty also required the information to remain true, complete and not misleading. Applying the principles in With v O'Flanagan [1936] Ch 575 and Cramaso LLP v Viscount Reidhaven's Trustees [2014] UKSC 9, liability was established. Turnover was not the relevant measure; profit-earning capacity was. Difficulty in quantifying loss did not prevent an award. Using the agreed goodwill price as the best available comparable, the court assessed warranty damages at £15,000.
4. Insurance premium and reputation loss. The court would not interfere with the trial judge’s assessment of the insurance increase. Appellate courts should not disturb findings of fact, evaluations or inferences unless compelled to do so, applying Fage UK Ltd v Chobani UK Ltd [2014] EWCA Civ 5. No separate award was made for alleged reputational loss.
5. Management time. The contractual entitlement to a reasonable amount for management time was not limited to the firm’s direct salary cost or lost fee-earning opportunity. Internal overheads and the value of the time could be considered, consistently with Nationwide BS v Dunlop Haywards (DHL) Ltd [2010] EWHC 254 (Comm). The award was increased from £1,800 to £3,600.

The seller’s award was reduced by £12,783. The buyer received £15,000 for breach of warranty and an additional £1,800 for management time. The net amount payable to the seller was reduced from £45,000 to £15,417.

• Court of Appeal (Civil Division): [2016] EWCA Civ 27. Appeal allowed to the indicated extent.
• Queen’s Bench Division, Birmingham District Registry Mercantile Court: HHJ Cooke, sitting as a High Court judge, gave judgment on 13 February 2014. The seller recovered sums for work in progress and insurance-related loss; the buyer’s profitability claim failed for want of proved loss, and limited management-time damages were awarded.