Ruth Munn & Anor v ETL Holdings (UK) Limited

In assessing damages for breach of warranties on a share sale, the usual measure is the difference between the value warranted and the true value at the date of acquisition. Subsequent events are ordinarily disregarded, but may be considered where necessary to give effect to the compensatory principle and prevent a windfall. Such cases are rare and fact-specific.

The court must also address evidence that connected transactions formed part of a common settlement of related claims. A company’s recovery for breach of directors’ duties and a buyer’s contractual warranty claim may arise from separate causes of action, but that distinction does not resolve whether the parties’ subsequent dealings discharged or compensated the same loss.

Mrs Ruth Munn appealed, with Mr Kenneth MacGregor Munn also named as an appellant, against an order of Deputy Master Arkush assessing damages for breaches of warranties in a share purchase agreement. The warranties concerned an undisclosed inter-company debt and a dilapidations claim relating to Carston Holdings Limited.

The Deputy Master awarded ETL Holdings (UK) Limited damages, including approximately £1.24 million for the undisclosed debt. The appellants argued that ETL had already been compensated when Carston Holdings enforced a lien over their retained shares, settled the debt owed to Dormco and transferred the shares to ETL and an associated company. The central issues were whether those events formed part of a common settlement or connected transaction, and whether hindsight was required to avoid over-compensation.

1. Appeal allowed and matter remitted. The Deputy Master had not adequately addressed the evidence or the appellants’ case that the enforcement of the lien, payment to the Dormco liquidator and transfer of the retained shares formed part of a common intention to compromise the connected claims.
2. The court accepted that the company’s claim against Mr Munn for breach of directors’ duties and ETL’s contractual claim against the sellers were distinct causes of action. That distinction did not determine whether the same economic loss had been compensated through subsequent connected dealings.
3. The general rule is that damages for breach of a warranty on a share sale are assessed by reference to value at the date of acquisition. Subsequent events may nevertheless be considered where ignoring them would offend the compensatory principle and confer a windfall. Such cases are rare, and whether a windfall exists is fact-specific.
4. The relevant factual question was whether, with the benefit of hindsight, it was known that ETL had suffered no loss, or had already received compensation for the loss claimed. The Deputy Master failed to engage adequately with the evidence concerning the value of the retained shares, the settlement payment, the parties’ common management, the associated companies and the experts’ valuation evidence.
5. The Deputy Master also made a finding contrary to the experts’ apparent agreement without giving adequate reasons. The matter was therefore remitted to the Master of the Chancery Division, with a recommendation that it be reheard by a full-time Master.

• High Court (Chancery Division): Appeal from an order made by Deputy Master Arkush on 24 April 2023. The appeal was allowed and the damages assessment was remitted for rehearing.